The American Express Company, often abbreviated Amex, AmEx, AX or Amexco, is a global provider of financial services based in New York City, USA. The company is best known for its charge card, credit card, and traveler's cheque businesses.
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 June 30, 2016
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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)
200 Vesey Street, New York, NY
10285
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).
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):
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
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Revenues
Non-interest revenues
Discount revenue
Net card fees
Other fees and commissions
Other
Total non-interest revenues
Interest income
Interest on loans
Interest and dividends on investment securities
Deposits with banks and other
Total interest income
Interest expense
Deposits
Long-term debt and other
Total interest expense
Net interest income
Total revenues net of interest expense
Provisions for losses
Charge card
Card Member loans
Total provisions for losses
Total revenues net of interest expense after provisions for losses
Expenses
Marketing and promotion
Card Member rewards
Card Member services and other
Salaries and employee benefits
Other, net
Total expenses
Pretax income
Income tax provision
Net income
Earnings per Common Share (Note 15): (a)
Basic
Diluted
Average common shares outstanding for earnings per common share:
Cash dividends declared per common share
See Notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended
June 30,
Six Months Ended
Other comprehensive loss:
Net unrealized securities gains (losses), net of tax of: 2016, $2 and $2; 2015, $(10) and $(11)
Foreign currency translation adjustments, net of tax of: 2016, $100 and $61; 2015, $(48) and $40
Net unrealized pension and other postretirement benefit gains, net of tax of: 2016, $10 and $29; 2015, $(3) and $16
Other comprehensive loss
Comprehensive income
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CONSOLIDATED BALANCE SHEETS
2016
Assets
Cash and cash equivalents
Cash and due from banks
Interest-bearing deposits in banks (includes securities purchased under resale agreements:2016, $129; 2015, $41)
Short-term investment securities
Total cash and cash equivalents
Card Member loans and receivables held for sale (includes gross loans and receivables available to settle obligations of consolidated variable interest entities: 2016, nil; 2015, $4,966)
Accounts receivable
Card Member receivables (includes gross receivables available to settle obligations of a consolidated variable interest entity: 2016, $5,828; 2015, $6,649), less reserves: 2016, $423; 2015, $462
Other receivables, less reserves: 2016, $50; 2015, $43
Loans
Card Member loans (includes gross loans available to settle obligations of a consolidated variable interest entity:2016, $25,334; 2015, $23,559), less reserves: 2016, $1,091; 2015, $1,028
Other loans, less reserves: 2016, $36; 2015, $20
Investment securities
Premises and equipment, less accumulated depreciation and amortization: 2016, $4,855; 2015, $6,801
Other assets (includes restricted cash of consolidated variable interest entities: 2016, $35; 2015, $155)
Total assets
Liabilities and Shareholders’ Equity
Liabilities
Customer deposits
Travelers Cheques and other prepaid products
Accounts payable
Short-term borrowings (includes debt issued by a consolidated variable interest entity: 2016, nil; 2015, $100)
Long-term debt (includes debt issued by consolidated variable interest entities: 2016, $14,609; 2015, $13,602)
Other liabilities
Total liabilities
Commitments and Contingencies (Note 8)
Shareholders’ Equity
Preferred shares, $1.662/3 par value, authorized 20 million shares; issued and outstanding 1,600 shares as of June 30, 2016 and December 31, 2015
Common shares, $0.20 par value, authorized 3.6 billion shares; issued and outstanding 925 million shares as of June 30, 2016 and 969 million shares as of December 31, 2015
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Net unrealized securities gains, net of tax: 2016, $34; 2015, $32
Foreign currency translation adjustments, net of tax: 2016, $(39); 2015, $(100)
Net unrealized pension and other postretirement benefit losses, net of tax: 2016, $(194); 2015, $(223)
Total accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash Flows from Operating Activities
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Deferred taxes and other
Stock-based compensation
Changes in operating assets and liabilities, net of effects of acquisitions and dispositions:
Other receivables
Other assets
Accounts payable and other liabilities
Net cash provided by operating activities
Cash Flows from Investing Activities
Sales of available-for-sale investment securities
Maturities and redemptions of available-for-sale investment securities
Purchases of investments
Net decrease (increase) in Card Member receivables and loans, including held for sale (a)
Purchase of premises and equipment, net of sales: 2016, $2; 2015, $32
Acquisitions/dispositions, net of cash acquired
Net decrease (increase) in restricted cash
Net cash provided by (used in) investing activities
Cash Flows from Financing Activities
Net (decrease) increase in customer deposits
Net (decrease) increase in short-term borrowings
Issuance of long-term debt
Principal payments on long-term debt
Issuance of American Express preferred shares
Issuance of American Express common shares
Repurchase of American Express common shares
Dividends paid
Net cash used in financing activities
Effect of foreign currency exchange rates on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
See Notes to Consolidated Financial Statements
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The Company
American Express Company (the Company) is a global services company that provides customers with access to products, insights and experiences that enrich lives and build business success. The Company’s principal products and services are charge and credit payment card products and travel-related services offered to consumers and businesses around the world. Business travel-related services are offered through the non-consolidated joint venture, American Express Global Business Travel (GBT JV). The Company’s various products and services are sold globally to diverse customer groups, including consumers, small businesses, mid-sized companies and large corporations. These products and services are sold through various channels, including direct mail, online applications, in-house and third-party sales forces and direct response advertising.
Effective for the first quarter of 2016, the Company realigned its segment presentation to reflect the organizational changes announced during the fourth quarter of 2015. Prior periods have been restated to conform to the new reportable operating segments, which are as follows:
Corporate functions and certain other businesses and operations are included in Corporate & Other.
The accompanying Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (the Annual Report). If not materially different, certain footnote disclosures included therein have been omitted from this Quarterly Report on Form 10-Q.
The interim consolidated financial information in this report has not been audited. In the opinion of management, all adjustments, which consist of normal recurring adjustments necessary for a fair statement of the interim period consolidated financial information, have been made. Results of operations reported for interim periods are not necessarily indicative of results for the entire year.
The preparation of Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosures of contingent assets and liabilities. These accounting estimates reflect the best judgment of management, but actual results could differ.
Certain reclassifications of prior period amounts have been made to conform to the current period presentation. During 2016, the Company determined that in the Consolidated Statements of Cash Flows for the comparative periods ended June 30, 2015, September 30, 2015 and December 31, 2015, certain
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activities related to long-term debt repayments were misclassified between financing activities and operating activities. There is no impact to the Consolidated Statements of Income or Consolidated Balance Sheets. The Company has evaluated the effects of these misclassifications and concluded that none are material to any of its previously issued quarterly or annual Consolidated Financial Statements. Nevertheless, the Company has elected to revise prospectively the comparative periods mentioned above. For the six months ended June 30, 2015, this revision resulted in a $66 million decrease to both Net cash used in financing activities and Net cash provided by operating activities. In addition, travel commissions and fees, which were separately disclosed on the Consolidated Statements of Income historically, are now included within Other fees and commissions.
Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board (FASB) issued new accounting guidance on revenue recognition. The guidance establishes the principles to apply to determine the amount and timing of revenue recognition, specifying the accounting for certain costs related to revenue, and requiring additional disclosures about the nature, amount, timing and uncertainty of revenues and related cash flows. The guidance, as amended, supersedes most of the current revenue recognition requirements, and is effective January 1, 2018, with early adoption as of January 1, 2017, permitted. The Company does not intend to adopt the new standard early and continues to evaluate the impact this guidance, including the method of implementation, will have on its financial position, results of operations and cash flows, among other items.
In January 2016, the FASB issued new accounting guidance on the recognition and measurement of financial assets and financial liabilities. The guidance, which is effective January 1, 2018, makes targeted changes to current GAAP, specifically to the classification and measurement of equity securities, and to certain disclosure requirements associated with the fair value of financial instruments. The Company continues to evaluate the impact this guidance will have on its financial position, results of operations and cash flows, among other items.
In February 2016, the FASB issued new accounting guidance on leases. The guidance, which is effective January 1, 2019, with early adoption permitted, requires virtually all leases to be recognized on the Consolidated Balance Sheets. The Company continues to evaluate the impact this guidance will have on its financial position, results of operations and cash flows, among other items.
In March 2016, the FASB issued new accounting guidance on employee share-based payments. The guidance, which is effective January 1, 2017, with early adoption permitted, simplifies various aspects of the accounting for share-based payment transactions, including the income tax consequences, accounting for award forfeitures, and classification on the Consolidated Statements of Cash Flows. The Company continues to evaluate the impact this guidance will have on its financial position, results of operations and cash flows, among other items.
In June 2016, the FASB issued new accounting guidance for recognition of credit losses on financial instruments, which is effective January 1, 2020, with early adoption permitted on January 1, 2019. The guidance introduces a new credit reserving model known as the Current Expected Credit Loss (CECL) model, which is based on expected losses, and differs significantly from the incurred loss approach used today. The CECL model requires measurement of expected credit losses not only based on historical experience and current conditions, but also by including reasonable and supportable forecasts incorporating forward-looking information and will likely result in earlier recognition of credit reserves. The Company is currently evaluating the impact the new guidance will have on its financial position, results of operations and cash flows; however, it is expected that the new CECL model will alter the assumptions used in
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calculating credit losses on Card Member loans and receivables, among other financial instruments, and may result in material changes to the Company’s credit reserves.
2. Business Events
During the first half of 2016, the Company completed the sales of substantially all of its outstanding Card Member loans and receivables held for sale (HFS) and recognized gains, as an expense reduction, in Other expenses, of $127 million and $1.1 billion during the three months ended March 31, 2016 and June 30, 2016, respectively. In addition, the Company reclassified $245 million and $1 million of retained Card Member loans and receivables HFS back to Card Member loans and Card Member receivables held for investment, respectively. The impact of the sales, including the recognition of the proceeds received and the reclassification of the retained Card Member loans and receivables, is reported within the investing section of the Consolidated Statements of Cash Flows as a net decrease in Card Member receivables and loans, including held for sale.
3. Loans and Accounts Receivable
The Company’s lending and charge payment card products result in the generation of Card Member loans and Card Member receivables, respectively. This Note is presented excluding amounts associated with the Card Member loans and receivables HFS as of December 31, 2015; the Company did not have any Card Member loans and receivables HFS as of June 30, 2016.
Card Member loans by segment and Other loans as of June 30, 2016 and December 31, 2015 consisted of:
(Millions)
U.S. Consumer Services(a)
International Consumer and Network Services
Global Commercial Services
Less: Reserve for losses
Card Member loans, net
Other loans, net(b)
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Card Member accounts receivable by segment and Other receivables as of June 30, 2016 and December 31, 2015 consisted of:
U.S. Consumer Services (a)
Card Member receivables (b)
Card Member receivables, net
Other receivables, net (c)
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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 June 30, 2016 and December 31, 2015:
2016(Millions)
Card Member Loans:
U.S. Consumer Services
Global Small Business Services
Global Corporate Payments(a)
Card Member Receivables:
2015(Millions)
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Credit Quality Indicators for Card Member Loans and Receivables
The following tables present the key credit quality indicators as of or for the six months ended June 30:
Principal
Only
(a)
Principal,
Interest, &
Fees
Past Due
as a % of
Total
a % ofChargeVolume
Past Billing
as a % of Receivables
Global Corporate Payments
Impaired Card Member Loans and Receivables
Impaired loans and receivables are individual larger balance or homogeneous pools of smaller balance loans and receivables for which it is probable that the Company will be unable to collect all amounts due according to the original contractual terms of the Card Member agreement. In certain cases, these Card Member loans and receivables are included in one of the Company’s various Troubled Debt Restructuring (TDR) modification programs.
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The following tables provide additional information with respect to the Company’s impaired Card Member loans and receivables. Impaired Card Member receivables are not significant for ICNS as of June 30, 2016 and December 31, 2015; therefore, the segment’s receivables are not included in the following tables.
2016 (Millions)
2015 (Millions)
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The following table provides information with respect to the Company’s average balances of, and interest income recognized from, impaired Card Member loans and the average balances of impaired Card Member receivables for the three and six months ended June 30:
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Card Member Loans and Receivables Modified as TDRs
The following table provides additional information with respect to the USCS and GCS Card Member loans and receivables modified as TDRs for the three and six months ended June 30, 2016 and 2015. The ICNS Card Member loans and receivables modifications were not significant; therefore, this segment is not included in the following TDR disclosures.
Troubled Debt Restructurings:
Card Member Loans
Card Member Receivables
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The following table provides information with respect to the USCS and GCS Card Member loans and receivables modified as TDRs that subsequently defaulted within 12 months of modification during the three and six months ended June 30, 2016 and 2015. A Card Member is considered in default of a modification program after one and up to two consecutive missed payments, depending on the terms of the modification program. For all Card Members that defaulted from a modification program, the probability of default is factored into the reserves for Card Member loans and receivables.
Troubled Debt Restructurings That Subsequently Defaulted:
4. Reserves for Losses
Reserves for losses relating to Card Member loans and receivables represent management’s best estimate of the probable inherent losses in the Company’s outstanding portfolio of loans and receivables, as of the balance sheet date. Management’s evaluation process requires certain estimates and judgments.
This Note is presented excluding amounts associated with the Card Member loans and receivables HFS as of December 31, 2015; the Company did not have any Card Member loans and receivables HFS as of June 30, 2016.
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Changes in Card Member Loans Reserve for Losses
The following table presents changes in the Card Member loans reserve for losses for the six months ended June 30:
Balance, January 1
Provisions(a)
Net write-offs
Principal(b)
Interest and fees(b)
Other(c)
Balance, June 30
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 June 30, 2016 and December 31, 2015:
Card Member loans evaluated individually for impairment(a)
Related reserves (a)
Card Member loans evaluated collectively for impairment(b)
Related reserves (b)
Changes in Card Member Receivables Reserve for Losses
The following table presents changes in the Card Member receivables reserve for losses for the six months ended June 30:
Net write-offs(b)
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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 June 30, 2016 and December 31, 2015:
Card Member receivables evaluated individually for impairment(a)
Card Member receivables evaluated collectively for impairment
5. Investment Securities
Investment securities principally include debt securities the Company classifies as available-for-sale and carries at fair value on the Consolidated Balance Sheets, with unrealized gains (losses) recorded in Accumulated Other Comprehensive Loss (AOCI), net of income taxes. Realized gains and losses are recognized on a trade-date basis in the Consolidated Statements of Income upon disposition of the securities using the specific identification method.
The following is a summary of investment securities as of June 30, 2016 and December 31, 2015:
Description ofSecurities (Millions)
State and municipal obligations
U.S. Government agency obligations
U.S. Government treasury obligations
Corporate debt securities
Mortgage-backed securities (a)
Equity securities
Foreign government bonds and obligations
Other (b)
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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 June 30, 2016 and December 31, 2015:
Description of Securities (Millions)
The following table summarizes the gross unrealized losses due to temporary impairments by ratio of fair value to amortized cost as of June 30, 2016 and December 31, 2015:
(Dollars in millions)
2016:
90%–100%
Less than 90%
Total as of June 30, 2016
2015:
Total as of December 31, 2015
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 June 30, 2016 were as follows:
Due within 1 year
Due after 1 year but within 5 years
Due after 5 years but within 10 years
Due after 10 years
Total(a)
The expected payments on state and municipal obligations and mortgage-backed securities may not coincide with their contractual maturities because the issuers have the right to call or prepay certain obligations.
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6. Asset Securitizations
The Company periodically securitizes Card Member loans and receivables arising from its card business, including Card Member loans and receivables HFS, through the transfer of those assets to securitization trusts. The trusts then issue debt securities to third-party investors, collateralized by the transferred assets.
The following table provides information on the restricted cash held by the American Express Issuance Trust II (the Charge Trust) and the American Express Credit Account Master Trust (the Lending Trust, collectively the Trusts) as of June 30, 2016 and December 31, 2015, included in Other assets on the Consolidated Balance Sheets:
Charge Trust
Lending Trust
These amounts relate to collections of Card Member loans and receivables to be used by the Trusts to fund future expenses and obligations, including interest on debt securities, credit losses and upcoming debt maturities.
American Express Travel Related Services Company, Inc. (TRS), in its role as servicer of the Trusts, has the power to direct the most significant activity of the Trusts, which is the collection of the underlying Card Member loans and receivables. In addition, TRS directly and indirectly (through its consolidated subsidiaries) holds all of the variable interests in both Trusts, with the exception of the debt securities issued to third-party investors. As of June 30, 2016, TRS’ direct and indirect ownership of variable interests was $13.9 billion for the Lending Trust and $2.5 billion for the Charge Trust. These variable interests held by TRS provide it with the right to receive benefits and the obligation to absorb losses, which could be significant to both the Lending Trust and the Charge Trust. Based on these considerations, TRS is the primary beneficiary of both Trusts and therefore consolidates both Trusts.
Under the respective terms of the Charge Trust and the Lending Trust agreements, the occurrence of certain triggering events associated with the performance of the assets of each Trust could result in payment of trust expenses, establishment of reserve funds, or, in a worst-case scenario, early amortization of debt securities. During the six months ended June 30, 2016 and the year ended December 31, 2015, no such triggering events occurred.
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7. Customer Deposits
As of June 30, 2016 and December 31, 2015, customer deposits were categorized as interest bearing or non-interest bearing, as follows:
2015
U.S.:
Interest bearing
Non-interest bearing (includes Card Member credit balances of: 2016, $311 million; 2015, $389 million)
Non-U.S.:
Non-interest bearing (includes Card Member credit balances of: 2016, $293 million; 2015, $323 million)
Total customer deposits
Customer deposits by deposit type as of June 30, 2016 and December 31, 2015 were as follows:
U.S. retail deposits:
Savings accounts – Direct
Certificates of deposit:
Direct
Third-party (brokered)
Sweep accounts – Third-party (brokered)
Other retail deposits:
Non-U.S. deposits and U.S. non-interest bearing deposits
Card Member credit balances — U.S. and non-U.S.
The scheduled maturities of certificates of deposit as of June 30, 2016 were as follows:
2017
2018
2019
2020
After 5 years
As of June 30, 2016 and December 31, 2015, certificates of deposit in denominations of $250,000 or more, in the aggregate, were as follows:
U.S.
Non-U.S.
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8. Contingencies
In the ordinary course of business, the Company and its subsidiaries are subject to various claims, investigations, examinations, pending and potential legal actions, and other matters relating to compliance with laws and regulations (collectively, legal proceedings). The Company discloses its material legal proceedings under Part II, Item 1. “Legal Proceedings” in this Quarterly Report on Form 10-Q and Part I, Item 3. “Legal Proceedings” in the Annual Report.
The Company has recorded reserves for certain of its outstanding legal proceedings. A reserve is recorded when it is both (a) probable that a loss has occurred and (b) the amount of loss can be reasonably estimated. There may be instances in which an exposure to loss exceeds the recorded reserve. The Company evaluates, on a quarterly basis, developments in legal proceedings that could cause an increase or decrease in the amount of the reserve that has been previously recorded, or a revision to the disclosed estimated range of possible losses, as applicable.
The Company’s legal proceedings range from cases brought by a single plaintiff to class actions with millions of putative class members. These legal proceedings involve various lines of business of the Company and a variety of claims (including, but not limited to, common law tort, contract, antitrust and consumer protection claims), some of which present novel factual allegations and/or unique legal theories. While some matters pending against the Company specify the damages claimed by the plaintiff or class, many seek an unspecified amount of damages or are at very early stages of the legal process. Even when the amount of damages claimed against the Company are stated, the claimed amount may be exaggerated and/or unsupported. As a result, some matters have not yet progressed sufficiently through discovery and/or development of important factual information and legal issues to enable the Company to estimate an amount of loss or a range of possible loss, while other matters have progressed sufficiently such that the Company is able to estimate an amount of loss or a range of possible loss.
For those disclosed material legal proceedings where a loss is reasonably possible in future periods, whether in excess of a related reserve for legal contingencies or where there is no such reserve, and for which the Company is able to estimate a range of possible loss, the current estimated range is zero to $350 million in excess of any reserves related to those matters. This range represents management’s estimate based on currently available information and does not represent the Company’s maximum loss exposure; actual results may vary significantly. As such proceedings evolve, including the merchant claims described under “Legal Proceedings” in the Annual Report, the Company may need to increase its range of possible loss or reserves for legal contingencies.
Based on its current knowledge, and taking into consideration its litigation-related liabilities, the Company believes it is not a party to, nor are any of its properties the subject of, any legal proceeding that would have a material adverse effect on the Company’s consolidated financial condition or liquidity. However, in light of the uncertainties involved in such matters, it is possible that the outcome of legal proceedings, including the possible resolution of merchant claims, could have a material impact on the Company’s results of operations.
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9. Derivatives and Hedging Activities
The Company uses derivative financial instruments (derivatives) to manage exposures to various market risks. These instruments derive their value from an underlying variable or multiple variables, including interest rates, foreign exchange rates, and equity index or price, and are carried at fair value on the Consolidated Balance Sheets. These instruments enable end users to increase, reduce or alter exposure to various market risks and, for that reason, are an integral component of the Company’s market risk management. The Company does not transact in derivatives for trading purposes.
In relation to the Company’s credit risk, under the terms of the derivative agreements it has with its various counterparties, the Company is not required to either immediately settle any outstanding liability balances or post collateral upon the occurrence of a specified credit risk-related event. Based on the assessment of credit risk of the Company’s derivative counterparties as of June 30, 2016 and December 31, 2015, the Company does not have derivative positions that warrant credit valuation adjustments.
The following table summarizes the total fair value, excluding interest accruals, of derivative assets and liabilities as of June 30, 2016 and December 31, 2015:
Derivatives designated as hedging instruments:
Interest rate contracts
Fair value hedges
Foreign exchange contracts
Net investment hedges
Total derivatives designated as hedging instruments
Derivatives not designated as hedging instruments:
Foreign exchange contracts, including certain embedded derivatives(a)
Total derivatives, gross
Less: Cash collateral netting(b)
Derivative asset and derivative liability netting(c)
Total derivatives, net(d)
A majority of the Company’s derivative assets and liabilities as of June 30, 2016 and December 31, 2015 are subject to master netting agreements with its derivative counterparties. The Company has no derivative amounts subject to enforceable master netting arrangements that are not offset on the Consolidated Balance Sheets.
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Fair Value Hedges
The Company is exposed to interest rate risk associated with its fixed-rate long-term debt. The Company uses interest rate swaps to economically convert certain fixed-rate debt obligations to floating-rate obligations at the time of issuance. The Company hedged $20.3 billion and $18.8 billion of its fixed-rate debt to floating-rate debt using interest rate swaps as of June 30, 2016 and December 31, 2015, respectively.
The following table summarizes the impact on the Consolidated Statements of Income associated with the Company’s fair value hedges for the three and six months ended June 30:
Three Months Ended June 30 (Millions)
Derivative
relationship
Interest rate
contracts
Other expenses
Six Months Ended June 30 (Millions)
The Company also recognized a net reduction in interest expense on long-term debt of $59 million and $71 million for the three months ended June 30, 2016 and 2015, respectively, and $118 million and $140 million for the six months ended June 30, 2016 and 2015, respectively, primarily related to the net settlements (interest accruals) on the Company’s interest rate derivatives designated as fair value hedges.
Net Investment Hedges
The effective portion of the gain or (loss) on net investment hedges, net of taxes, recorded in AOCI as part of the cumulative translation adjustment, was $ 135 million and $(34) million for the three months ended June 30, 2016 and 2015, respectively, and $43 million and $161 million for the six months ended June 30, 2016 and 2015, respectively, with any ineffective portion recognized in Other expenses during the period of change.
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The following table summarizes the impact on the Consolidated Statements of Income associated with the Company’s net investment hedges for the three and six months ended June 30:
Three Months Ended June 30: (Millions)
Description
Net investment hedges:
Six Months Ended June 30: (Millions)
Derivatives Not Designated as Hedges
The changes in the fair value of derivatives that are not designated as hedges are intended to offset the related foreign exchange gains or losses of the underlying foreign currency exposures. The changes in the fair value of the derivatives and the related underlying foreign currency exposures resulted in net gains of $6 million and $8 million for the three months ended June 30, 2016 and 2015, respectively, and a net loss of $8 million and a net gain of $105 million for the six months ended June 30, 2016 and 2015, respectively, and are recognized in Other expenses.
Related to its derivatives not designated as hedges, the Company previously disclosed in Note 9 to the Consolidated Financial Statements in its Quarterly Report on Form 10-Q for the period ended June 30, 2015, a gain of $40 million for the three months ended June 30, 2015, and a loss of $4 million for the six months ended June 30, 2015. These amounts should have been disclosed as gains of $87 million and $381 million, respectively, which are the amounts used to calculate the above-referenced net gains of $8 million and $105 million. These changes to the previously disclosed amounts have no impact on the Consolidated Statements of Income, Balance Sheets or Cash Flows.
The changes in the fair value of an embedded derivative are nil and a gain of $4 million for the three months ended June 30, 2016 and 2015, respectively, and gains of $6 million and $3 million for the six months ended June 30, 2016 and 2015, respectively, and are recognized in Card Member services and other expense.
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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 June 30, 2016 and December 31, 2015:
Assets:
Investment securities:(a)
Debt securities and other
Derivatives(a)
Liabilities:
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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 June 30, 2016 and December 31, 2015. The fair values of these financial instruments are estimates based upon the market conditions and perceived risks as of June 30, 2016 and December 31, 2015, and require management judgment. These figures may not be indicative of future fair values, nor can the fair value of the Company be estimated by aggregating the amounts presented.
2016 (Billions)
Financial Assets:
Financial assets for which carrying values equal or approximate fair value
Other financial assets(b)
Financial assets carried at other than fair value
Loans, net
Financial Liabilities:
Financial liabilities for which carrying values equal or approximate fair value
Financial liabilities carried at other than fair value
Certificates of deposit(d)
Long-term debt
2015 (Billions)
Card Member loans and receivables HFS(e)
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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 six months ended June 30, 2016, the Company did not have any material assets that were measured at fair value due to impairment. During the year ended December 31, 2015, the Company recorded a $384 million impairment charge, consisting of a $219 million write-down of the entire balance of goodwill in the Prepaid Services business and a $165 million write-down of technology and other assets to fair value.
11. Guarantees
The Company provides Card Member protection plans that cover losses associated with purchased products, as well as certain other guarantees and indemnifications in the ordinary course of business.
In relation to its maximum potential undiscounted future payments as shown in the table that follows, to date the Company has not experienced any significant losses related to guarantees or indemnifications. The Company’s initial recognition of these instruments is at fair value. In addition, the Company establishes reserves when a loss is probable and the amount can be reasonably estimated.
The following table provides information related to such guarantees and indemnifications as of June 30, 2016 and December 31, 2015:
Type of Guarantee
Return and Merchant Protection
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12. Changes In Accumulated Other Comprehensive Loss
AOCI is comprised of items that have not been recognized in earnings but may be recognized in earnings in the future when certain events occur. Changes in each component for the three and six months ended June 30, 2016 and 2015 were as follows:
Three Months Ended June 30, 2016 (Millions), net of tax
Net UnrealizedPension and OtherPostretirementBenefit (Losses)Gains
Balances as of March 31, 2016
Net unrealized gains
Increase (decrease) due to amounts reclassified into earnings
Net translation loss of investments in foreign operations
Net gains related to hedges of investments in foreign operations
Pension and other postretirement benefit gains
Net change in accumulated other comprehensive loss
Balances as of June 30, 2016
Six Months Ended June 30, 2016 (Millions), net of tax
Balances as of December 31, 2015
Decrease due to amounts reclassified into earnings
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Three Months Ended June 30, 2015 (Millions), net of tax
Balances as of March 31, 2015
Net unrealized loss
Net translation gain of investments in foreign operations
Net losses related to hedges of investments in foreign operations
Balances as of June 30, 2015
Six Months Ended June 30, 2015 (Millions), net of tax
Balances as of December 31, 2014
The following table presents the effects of reclassifications out of AOCI and into the Consolidated Statements of Income:
Description (Millions)
Line Item
Available-for-sale securities
Reclassifications for previously unrealized netgains on investment securities
Related income tax expense
Reclassification to net income related toavailable-for-sale securities
–
Foreign currency translation adjustments
Reclassification of realized losses ontranslation adjustments and related hedges
Related income tax benefit
Reclassification of foreign currencytranslation adjustments
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13. Non-Interest Revenue and Expense Detail
The following is a detail of Other fees and commissions:
Foreign currency conversion fee revenue
Delinquency fees
Loyalty coalition-related fees
Travel commissions and fees
Service fees
Other(a)
Total Other fees and commissions
The following is a detail of Other revenues:
Global Network Services partner revenues
Gross realized gains on sale of investment securities
Total Other revenues
The following is a detail of Other expenses:
Professional services
Occupancy and equipment
Communications
Card and merchant-related fraud losses
Gain on sale of HFS portfolios(a)
Other(b)
Total Other expenses
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14. Income Taxes
The effective tax rate was 33.2 percent and 33.9 percent for the three months ended June 30, 2016 and 2015, respectively, and 33.8 percent and 34.0 percent for the six months ended June 30, 2016 and 2015, respectively. The tax rates in all periods primarily reflected the level of pretax income in relation to recurring permanent tax benefits and the geographic mix of business.
The Company is under continuous examination by the Internal Revenue Service (IRS) and tax authorities in other countries and states in which the Company has significant business operations. The tax years under examination and open for examination vary by jurisdiction. The IRS has completed its field examination of the Company’s federal tax returns for years through 2007; however, refund claims for certain years continue to be reviewed by the IRS. In addition, the Company is currently under examination by the IRS for the years 2008 through 2014.
The Company believes it is reasonably possible that its unrecognized tax benefits could decrease within the next 12 months by as much as $237 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 $237 million of unrecognized tax benefits, approximately $21 million relates to amounts that if recognized would be recorded in shareholders’ equity and would not impact the Company’s results of operations or its effective tax rate.
15. Earnings Per Common Share (EPS)
The computations of basic and diluted EPS were as follows:
(Millions, except per share amounts)
Numerator:
Basic and diluted:
Preferred dividends
Net income available to common shareholders
Earnings allocated to participating share awards(a)
Net income attributable to common shareholders
Denominator: (a)
Basic: Weighted-average common stock
Add: Weighted-average stock options(b)
Basic EPS
Diluted EPS
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For the three and six months ended June 30, 2016 and 2015, the Company met specified performance measures related to the $750 million of Subordinated Debentures issued in 2006, and maturing in 2036. If the performance measures were not achieved in any given quarter, the Company would be required to issue common shares and apply the proceeds to make interest payments.
16. Reportable Operating Segments
The Company is a global services company that is principally engaged in businesses comprising four reportable operating segments: USCS, ICNS, GCS and GMS. Corporate functions and certain other businesses and operations are included in Corporate & Other.
The following table presents certain selected financial information for the Company’s reportable operating segments and Corporate & Other:
Three Months Ended June 30, 2016 (Millions, except where indicated)
Net income (loss)
Total assets (billions)
Total equity (billions)
Six Months Ended June 30, 2016 (Millions, except where indicated)
Three Months Ended June 30, 2015 (Millions, except where indicated)
Six Months Ended June 30, 2015 (Millions, except where indicated)
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Business Introduction
When we use the terms “American Express,” “the Company,” “we,” “our” or “us,” we mean American Express Company and its subsidiaries on a consolidated basis, unless we state or the context implies otherwise.
We are a global services company that provides our customers with access to products, insights and experiences that enrich lives and build business success. Our principal products and services are charge and credit payment card products and travel-related services offered to consumers and businesses around the world. Business travel-related services are offered through our non-consolidated joint venture, American Express Global Business Travel (GBT JV). Our range of products and services includes:
Our various products and services are sold globally to diverse customer groups, including consumers, small businesses, mid-sized companies and large corporations. These products and services are sold through various channels, including direct mail, online applications, in-house and third-party sales forces and direct response advertising.
We compete in the global payments industry with charge, credit and debit card networks, issuers and acquirers, as well as evolving and growing alternative payment providers. As the payments industry continues to evolve, we face increasing competition from non-traditional players that leverage new technologies and customers’ existing accounts and relationships to create payment or other fee-based solutions.
Our products and services generate the following types of revenue for the Company:
Other revenue, which represents revenues arising from contracts with partners of our Global Network Services (GNS) business (including commissions and signing fees), insurance premiums earned from Card Member travel and other insurance programs, prepaid card-related revenues, revenues related to the
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GBT JV transition services agreement, earnings from equity method investments (including the GBT JV) and other miscellaneous revenue and fees.
Effective for the first quarter of 2016, we realigned our segment presentation to reflect the organizational changes announced during the fourth quarter of 2015. Prior periods have been restated to conform to the new reportable operating segments, which are: U.S. Consumer Services (USCS), International Consumer and Network Services (ICNS), Global Commercial Services (GCS) and Global Merchant Services (GMS), with corporate functions and certain other businesses and operations included in Corporate & Other. Refer to Note 1 to the Consolidated Financial Statements for additional information.
Forward-Looking Statements and Non-GAAP Measures
Certain of the statements in this Form 10-Q are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Refer to the “Cautionary Note Regarding Forward-Looking Statements” section. We prepare our Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America (GAAP). However, certain information included within this Form 10-Q constitute non-GAAP financial measures. Our calculations of non-GAAP financial measures may differ from the calculations of similarly titled measures by other companies.
Bank Holding Company
American Express Company is a bank holding company under the Bank Holding Company Act of 1956 and The Board of Governors of the Federal Reserve System (the Federal Reserve) is our primary federal regulator. As such, we are subject to the Federal Reserve’s regulations, policies and minimum capital standards.
Business Environment
For the quarter ended June 30, 2016, earnings included a gain of $1.1 billion ($677 million after-tax) from the previously announced sale of our Costco Wholesale Corporation (Costco) U.S. cobrand card portfolio, a $232 million ($151 million after-tax) restructuring charge related to our on-going cost reduction efforts, together with a continued elevated level of spending on growth initiatives. During the quarter, we continued to make progress on our key initiatives to accelerate growth, including driving new card acquisitions across our global consumer and commercial portfolios, expanding merchant coverage and driving strong momentum across our lending growth initiatives. In addition, we used our capital strength to repurchase $1.7 billion of outstanding shares.
The year-over-year growth in worldwide billings for the second quarter, adjusted for foreign currency exchange rates, slowed versus the first quarter as a result of a continued slowdown in Costco-related volumes leading up to the date of the portfolio sale. International volumes continued to be strong and performance remained relatively consistent sequentially across most regions.
Revenues net of interest expense decreased modestly as compared to the prior year. Similar to last quarter, we experienced a year-over-year decline in the discount rate from the continued expansion of OptBlue and merchant negotiations, including those resulting from the regulatory changes in the EU that went into effect late last year. Discount revenue growth was also impacted by an increase in contra-discount revenues as compared to the prior year, primarily related to cash rebate rewards. In addition, in the prior year both the discount rate and discount revenue benefited from certain merchant rebate accruals.
Net interest income grew, as compared to the prior year, although growth slowed sequentially due primarily to the sales of the Costco and JetBlue cobrand card portfolios as well as the continued decline in Costco loans prior to the portfolio sale in June. Card member loans were down in the second quarter of 2016 compared to the prior year, reflecting the sales of the two cobrand card portfolios in the first half of this year. Excluding the Card Member loans related to the Costco and JetBlue portfolios from the prior year,
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worldwide loan growth during the quarter was sequentially consistent, with a portion of the growth coming from increased usage of other American Express cards by former Costco cobrand Card Members. We continue to believe there are opportunities to increase our share of lending from both existing customers and high quality prospects without significantly changing our overall credit risk profile.
Provision expenses were down modestly and credit quality remained strong during the quarter. The prior period included credit costs associated with the Costco and JetBlue cobrand card portfolios subsequently classified as held for sale; the credit costs associated with the Costco portfolio for the current quarter were reported in Other expense. We expect some modest upward pressure on our write-off rates, due primarily to the seasoning of loans related to new Card Members.
Total expenses decreased significantly as compared to the prior year, reflecting the Costco cobrand portfolio sale gain, which was classified as an expense reduction in Other expense. Excluding the Costco portfolio sale gain and the restructuring charge during the current quarter, total expenses grew modestly and reflect a continued elevated level of investment spending on growth initiatives. We expect our investment spending during 2016, including marketing and promotion, will be at a higher level than 2015. Rewards expense declined in the second quarter driven by a shift in volumes to cash rebate products for which the rewards costs are classified as contra-discount revenue.
Relative to the first half of the year, we continue to anticipate earnings will be lower during the second half of the year due to the end of our relationship with Costco in the U.S. and our higher level of spending on growth initiatives. Overall, we remain focused on accelerating revenue growth, optimizing investments and resetting our cost base.
See “Certain legislative, regulatory and other developments” in “Other Matters” for information on the potential impacts of an adverse decision in the Department of Justice (DOJ) case and related merchant litigations on our business, as well as other legislative and regulatory changes that could have a material adverse effect on our results of operations and financial condition.
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American Express Company
Consolidated Results of Operations
Refer to the “Glossary of Selected Terminology” for the definitions of certain key terms and related information appearing within this section.
Effective December 1, 2015, we transferred the Card Member loans and receivables related to our cobrand partnerships with JetBlue and Costco in the United States (the HFS portfolios) to Card Member loans and receivables HFS (included in the USCS and GCS segments) on the Consolidated Balance Sheets, the sales of which were completed on March 18, 2016 and June 17, 2016, respectively. For the periods from December 1, 2015 through the sale completion dates, the primary impacts beyond the HFS classification on the Consolidated Balance Sheets were to provisions for losses and credit metrics, which do not reflect amounts related to these HFS loans and receivables, as credit costs were reported in Other expenses through a valuation allowance adjustment. Other, non-credit related metrics (i.e., billed business, cards-in-force, net interest yield) reflect amounts related to the HFS portfolios through the sale completion dates. Refer to Note 2 to the Consolidated Financial Statements for additional information.
The relative strengthening of the U.S. dollar over the periods of comparison has had an impact on our results of operations. Where meaningful in describing our performance, foreign currency-adjusted amounts, which exclude the impact of changes in the foreign exchange (FX) rates, have been provided.
Table 1: Summary of Financial Performance
per share amounts)
Earnings per common share — diluted(a)
Return on average equity(b)
Return on average tangible common equity(c)
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Table 2: Total Revenue Net of Interest Expense Summary
(Millions, except percentages)
Total Revenues Net of Interest Expense
Discount revenue decreased $122 million or 2 percent and $139 million or 1 percent for the three and six months ended June 30, 2016, compared to the same periods in the prior year. The decreases were primarily driven by a decrease in the average discount rate and increases in contra discount revenues, including higher cash rebate rewards due to new Card Member acquisition offers, partially offset by growth in billed business. Billed business increased 3 percent for both the three and six months ended June 30, 2016, compared to the same periods in the prior year. U.S. billed business increased 2 percent and 3 percent for the three and six months ended June 30, 2016, respectively, with a decline in Costco cobrand card volumes and the sale of the Costco cobrand card portfolio in the current year negatively impacting billed business growth in both periods. Non-U.S. billed business increased 5 percent and 3 percent in the same respective periods (10 percent and 9 percent on an FX-adjusted basis).1
The average discount rate was 2.43 percent for both the three and six months ended June 30, 2016 and 2.49 percent for both the three and six months ended June 30, 2015. The decrease was driven in part by a prior-year benefit related to certain merchant rebate accruals, growth of the OptBlue program, and merchant negotiations, including those resulting from the recent European regulatory changes. We expect the average discount rate will likely decline by a greater amount during 2016 than 2015 due to the further expansion of OptBlue, a greater impact from international regulatory changes and continued competitive pressures. More broadly, overall changes in the mix of spending by location and industry, merchant incentives and concessions, volume related pricing discounts, strategic investments, certain pricing initiatives, competition, pricing regulation (including regulation of competitors’ interchange rates) and other factors will likely result in continued erosion of our discount rate over time. See Tables 5, 6 and 7 for more details on billed business performance and the average discount rate.
Net card fees increased $48 million or 7 percent and $80 million or 6 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, primarily driven by growth in the Platinum, Gold and Delta portfolios.
Other fees and commissions decreased $25 million or 3 percent and $53 million or 4 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, and remained relatively flat on an FX-adjusted basis for both periods.1
Other revenues increased $24 million or 5 percent and $42 million or 4 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, primarily driven by a contractual payment from a GNS partner in the second quarter of 2016, as well as higher revenues from our
1 The foreign currency adjusted information assumes a constant exchange rate between the periods being compared for purposes of currency translation into U.S. dollars (i.e., assumes the foreign exchange rates used to determine results for the current period apply to the corresponding period against which such results are being compared). FX-adjusted revenues and expenses constitute non-GAAP measures. 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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Prepaid Services business, partially offset by lower revenues earned related to the GBT JV transition services agreement.
Interest income increased $48 million or 3 percent and $196 million or 5 percent for the three and six months ended June 30, 2016, compared to the same periods in the prior year, primarily reflecting a modestly higher yield and an increase in average Card Member loans (including Card Member loans HFS), in the six month period, partially offset by the impact from the sales of the HFS portfolio.
Interest expense increased $22 million or 5 percent and $37 million or 4 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, primarily driven by higher average customer deposit balances, partially offset by lower average long-term debt.
Table 3: Provisions for Losses Summary
Total provisions for losses(a)
# Denotes a variance greater than 100 percent.
Provisions for Losses
Charge card provision for losses decreased $12 million or 7 percent and $17 million or 5 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, primarily driven by a higher reserve release in the current year.
Card Member loans provision for losses remained flat and decreased $8 million or 2 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, as the current year periods do not reflect the HFS portfolios as related credit costs were reported in Other expenses through a valuation allowance adjustment, the decrease from which was offset by strong momentum in our lending growth initiatives.
Other provision for losses increased $8 million and $35 million for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, primarily driven by higher net write-offs in merchant financing loans as a result of growth in the portfolio.
Table 4: Expenses Summary
Total marketing, promotion, rewards,Card Member services and other
Other, net(a)
Marketing and promotion expenses increased $27 million or 4 percent and $145 million or 11 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year,
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driven by elevated levels of spending on growth initiatives, predominantly within the USCS and ICNS segments.
Card Member rewards expenses decreased $33 million or 2 percent and increased $30 million or 1 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year.
The decrease for the three-month period was primarily driven by lower cobrand rewards expense of $67 million, reflecting the decline in spending on Costco cobrand cards, as well as a shift in volumes to cash rebate products for which the rewards costs are classified as contra-discount revenue, partially offset by increased spending volumes across other cobrand card products. The lower cobrand rewards expense was partially offset by higher Membership Rewards expense of $34 million, primarily driven by an increase in new points earned as a result of higher spending volumes and growth in the Ultimate Redemption Rate (URR).
The increase for the six months ended was primarily driven by higher Membership Rewards expense of $83 million, primarily driven by an increase in new points earned as a result of higher spending volumes, partially offset by lower cobrand rewards expense of $53 million as a result of the above mentioned decline in spending on Costco cobrand cards and the shift in volumes to cash rebate products.
The Membership Rewards URR for current program participants was 95 percent (rounded down) at June 30, 2016, compared to 95 percent (rounded up) at June 30, 2015.
Card Member services and other expenses increased $39 million or 16 percent and $60 million or 12 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, driven by increased usage of travel-related benefits.
Salaries and employee benefits expenses increased $201 million or 16 percent and $234 million or 9 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, driven by restructuring in the current year.
Other expenses decreased $1.1 billion or 69 percent and $1.0 billion or 36 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year. The decreases in both periods were driven by the gain on the sale of the Costco Card Member loans and receivables HFS portfolio and lower fraud expenses, partially offset by the impact of the transfer of the HFS portfolios to Card Member loans and receivables HFS effective December 2015, as related credit costs were reported in Other expenses through a valuation allowance adjustment. The decrease in the six-month period also includes the gain on the sale of the JetBlue Card Member loans HFS portfolio, partially offset by the benefit in the prior year from both the reassessment of the functional currency of certain UK legal entities and other FX-related activity.
Income Taxes
The effective tax rate was 33.2 percent and 33.8 percent for the three and six months ended June 30, 2016, respectively, and 33.9 percent and 34.0 percent for the three and six months ended June 30, 2015, respectively. The tax rates in all periods primarily reflected the level of pretax income in relation to recurring permanent tax benefits and the geographic mix of business. Additionally, the effective tax rate in the current-year periods reflected the resolution of certain prior years’ tax items.
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Table 5: Selected Card-Related Statistical Information
Change2016
vs.
Card billed business: (billions)
United States
Outside the United States
Worldwide
Total cards-in-force: (millions)
Basic cards-in-force: (millions)
Average basic Card Member spending:(dollars)(a)
Worldwide Average
Card Member loans:(billions)(b)
Average discount rate
Average fee per card(dollars)(a)
Average fee per card adjusted(dollars)(a)
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Table 6: Billed Business Growth
Increase(Decrease)
FX Rates
Worldwide(b)
Total billed business
Proprietary billed business
GNS billed business(c)
Airline-related volume (8% of worldwide billed business)
United States(b)
Billed business
Proprietary consumer card billed business(d)
Proprietary small business and corporate services billed business(e)
T&E-related volume (26% of U.S. billed business)
Non-T&E-related volume
Airline-related volume (7% of U.S. billed business)
Outside the United States(b)
Japan, Asia Pacific & Australia billed business
Latin America & Canada billed business
Europe, the Middle East & Africa billed business
Proprietary consumer card billed business(c)
41
Table 7: Billed Business Growth
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Table 8: Selected Credit-Related Statistical Information
(Millions, except percentages and where indicated)
Worldwide Card Member receivables:(a)
Total receivables (billions)
Loss reserves:
Beginning balance
Provisions (b)
Net write-offs (c)
Ending balance
% of receivables
Net write-off rate — principal only(d)
Net write-off rate — principal and fees(d)
30+ days past due as a % of total (d)
Net loss ratio as a % of charge volume — GCP
90+ days past billing as a % of total — GCP
Worldwide Card Member loans:(a)
Total loans (billions)
Net write-offs — principal only(c)
Net write-offs — interest and fees(c)
Other (e)
Ending reserves — principal
Ending reserves — interest and fees
% of loans
% of past due
Average loans (billions)(a)
Net write-off rate — principal, interest and fees (d)
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Table 9: Net Interest Yield on Card Member Loans
Exclude:
Interest expense not attributable to the Company’s Card Member loan portfolio
Interest income not attributable to the Company’s Card Member loan portfolio
Adjusted net interest income(a)
Average loans including HFS loan portfolios (billions)
Net interest income divided by average loans
Net interest yield on Card Member loans (a)
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Business Segment Results
Table 10: USCS Selected Income Statement Data
Marketing, promotion, rewards, Card Member services and other
Salaries and employee benefits and other operating expenses
Pretax segment income
Segment income
Effective tax rate
USCS issues a wide range of proprietary consumer cards and provides services to consumers in the United States, including consumer travel services.
Non-interest revenues decreased $107 million or 5 percent and $109 million or 3 percent for the three and six months ended June 30, 2016, compared to the same periods in the prior year, primarily driven by lower discount revenue as a result of higher cash rebate rewards due to new Card Member acquisition offers, and a decline in the discount rate, which was partially offset by growth in billed business of 2 percent for the six months ended June 30, 2016. Billed business was relatively flat for the three months ended June 30, 2016, compared to the same period in the prior year, with a decline in Costco cobrand card volumes and the sale of the Costco cobrand card portfolio in the current year negatively impacting billed business growth for both the three and six months ended June 30, 2016. The decrease in discount revenue was partially offset by an increase in net card fees, resulting from growth in the Platinum, Gold and Delta portfolios.
Net interest income increased $8 million or 1 percent and $100 million or 4 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, primarily reflecting a modestly higher yield and an increase in average Card Member loans (including Card Member loans HFS), in the six month period, partially offset by the impact from the sales of the HFS portfolios and higher interest expense.
Overall, provisions for losses decreased $6 million or 2 percent and $9 million or 2 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, as the current year periods do not reflect provisions for the HFS portfolios as related credit costs were reported in Other expenses through a valuation allowance adjustment, the decrease from which was partially offset by strong momentum in our lending growth initiatives and higher net write-offs.
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Marketing, promotion, rewards, Card Member services and other expenses were relatively flat and increased $141 million or 5 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year. In the three-month period, increases in marketing and promotion expense and Card Member services and other expenses of $22 million and $19 million, respectively, were offset by a $38 million decrease in rewards expense. The increase for the six-month period was primarily driven by a $103 million increase in marketing and promotion expense, reflecting elevated levels of spending on growth initiatives, and a $40 million increase in Card Member services expense, driven by increased usage of new benefits.
Salaries and employee benefits and other operating expenses decreased $855 million and $946 million for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, primarily driven by the gain on the sale of the Costco Card Member loans and receivables HFS portfolio, partially offset by restructuring in the current year. The decrease in the six-month period also includes the gain on the sale of the JetBlue Card Member loans HFS portfolio.
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Table 11: USCS Selected Statistical Information
Card billed business (billions)
Total cards-in-force
Basic cards-in-force
Average basic Card Member spending (dollars)
Total segment assets(billions)(a)
Segment capital (billions)
Return on average segment capital (b)
Return on average tangible segment capital(b)
Card Member receivables: (c)
Net write-off rate – principal only(d)
Net write-off rate – principal and fees(d)
30+ days past due as a % of total
Card Member loans: (c)
Average loans (billions)
Net write-off rate – principal, interest and fees(d)
30+ days past due loans as a % of total
Calculation of Net Interest Yield on
Card Member loans:
Adjusted net interest income(e)
Net interest yield on Card Member loans(e)
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Table 12: ICNS Selected Income Statement Data
ICNS issues a wide range of proprietary consumer cards outside the United States and enters into partnership agreements with third-party card issuers and acquirers, licensing the American Express brand and extending the reach of the global network. It also provides travel services to consumers outside the United States.
Non-interest revenues increased $79 million or 7 percent and $74 million or 3 percent, for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, primarily driven by higher discount revenue, due to an increase in both proprietary and non-proprietary (i.e., GNS) billed business, higher net card fees and a contractual payment from a GNS partner in the second quarter of 2016. Total billed business increased 5 percent and 4 percent for the three and six months ended June 30, 2016, respectively (10 percent for both periods on an FX-adjusted basis), compared to the same periods in the prior year, primarily due to increased proprietary and GNS cards-in-force, with a relatively consistent level of average spend per card.2 Refer to Tables 6 and 7 for additional information on billed business by region.
Interest income decreased $3 million or 1 percent and $21 million or 4 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, reflecting the impact of changes in FX rates year-over-year. FX-adjusted interest income increased 9 percent and 7 percent, respectively, primarily driven by higher average FX-adjusted loan balances. 2
Interest expense was relatively flat and decreased $9 million or 7 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, reflecting the impact of changes in FX rates year-over-year. FX-adjusted interest expense increased 9 percent and 6 percent, respectively, driven by higher funding costs. 2
2 Refer to footnote 1 on page 37 for details regarding foreign currency adjusted information.
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Provisions for losses increased $2 million or 3 percent and $3 million or 2 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, driven by higher net write-offs.
Marketing, promotion, rewards, Card Member services and other expenses increased $18 million or 4 percent and $52 million or 6 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, primarily driven by elevated levels of spending on growth initiatives.
Salaries and employee benefits and other operating expenses increased $21 million or 4 percent and was relatively flat (and increased 7 percent and 3 percent on an FX-adjusted basis) for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, primarily driven by restructuring in the current year.3
The effective tax rate in all periods reflects the recurring permanent tax benefit related to the segment’s ongoing funding activities outside the United States, which is allocated to ICNS under the Company’s internal tax allocation process. The effective tax rate for 2016 also reflects the allocated share of tax benefits related to the resolution of certain prior years’ items. In addition, the effective tax rate in each of the periods reflects the impact of recurring permanent tax benefits on varying levels of pretax income.
3 Refer to footnote 1 on page 37 for details regarding foreign currency adjusted information.
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Table 13: ICNS Selected Statistical Information
Proprietary
GNS
Proprietary basic cards-in-force
Average proprietary basic Card Member spending (dollars)
Return on average segment capital(b)
Calculation of Net Interest Yield on Card Member loans:
Net interest yield on Card Member loans (e)
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Table 14: GCS Selected Income Statement Data
GCS issues a wide range of proprietary corporate and small business cards and provides payment and expense management services globally. In addition, GCS provides financing products for qualified merchants.
Non-interest revenues were relatively flat for both the three and six months ended June 30, 2016, compared to the same periods in the prior year. Billed business increased 4 percent for both the three and six months ended June 30, 2016, compared to the same periods in the prior year. These increases in billed business were offset by higher contra revenues, primarily due to higher cash rebate rewards, as well as the benefit related to certain merchant rebate accruals in the prior year.
Net interest income increased $8 million or 4 percent and $45 million or 12 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, primarily driven by higher average loan balances, including HFS, partially offset by higher interest expense.
Provisions for losses increased $3 million or 2 percent and $12 million or 4 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, primarily driven by higher net write-offs in the merchant financing loan portfolio, partially offset by lower net write-offs in the Card Member receivables portfolio.
Marketing, promotion, rewards, Card Member services and other expenses increased $32 million or 4 percent and $75 million or 5 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, primarily driven by higher Card Member rewards expense, due to higher spending volumes, and increased marketing and promotion expense.
Salaries and employee benefits and other operating expenses decreased $93 million or 13 percent and $37 million or 3 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, primarily due to the gain on the sale of the Costco Card Member loans and receivables HFS portfolio, partially offset by a restructuring charge in the current year, and higher operating expenses, including technology development and professional fees.
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Table 15: GCS Selected Statistical Information
Card Member receivables(billions)(c)
Card Member loans(billions)(c)
Card Member receivables:
Total receivables - GCP (billions)
90+ days past billing as a % of total - GCP(d)
Net loss ratio (as a % of charge volume) - GCP
Total receivables - GSBS(billions)(c)
Net write-off rate (principal only) - GSBS(e)
Net write-off rate (principal and fees) - GSBS(e)
30+ days past due as a % of total - GSBS
Total loans - GSBS (billions)
Average loans - GSBS (billions)
Net write-off rate (principal, interest and fees) - GSBS (e)
Adjusted net interest income (f)
Net interest yield on Card Member loans(f)
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Global Merchant Services
Table 16: GMS Selected Income Statement Data
GMS operates a global payments network that processes and settles proprietary and non-proprietary card transactions. GMS acquires merchants and provides multi-channel marketing programs and capabilities, services and data, leveraging the Company’s global closed-loop network. GMS also operates loyalty coalition businesses in certain countries around the world.
Non-interest revenues decreased $43 million or 4 percent and $72 million or 3 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, primarily driven by higher contra revenues, as well as a decrease in the discount rate, partially offset by a 3 percent increase in global billed business for both periods.
Net interest income increased $12 million or 24 percent and $12 million or 11 percent for the three and six months ended June 30, 2016, compared to the same periods in the prior year, reflecting a higher interest expense credit relating to internal transfer pricing and funding rates, which resulted in a net benefit for GMS due to its merchant payables.
Marketing, promotion, rewards, Card Member services and other expenses decreased $18 million or 24 percent and $16 million or 12 percent for the three months and six months ended June 30, 2016, compared to the same periods in the prior year, primarily driven by higher marketing and promotion expenses related to our loyalty coalition business in the prior year.
Salaries and employee benefits and other operating expenses decreased $21 million or 4 percent and $39 million or 4 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, primarily due to the growth of the OptBlue program, which does not entail merchant acquirer payments.
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Table 17: GMS Selected Statistical Information
Loyalty Coalition revenue
Total segment assets(a)(billions)
Corporate & Other
Corporate functions and certain other businesses, including our Prepaid Services business and other operations, are included in Corporate & Other.
Corporate & Other net expense decreased to $229 million for the three months ended June 30, 2016, compared to $252 million for the three months ended June 30, 2015 and increased to $527 million for the six months ended June 30, 2016, compared to $469 million for the six months ended June 30, 2015. The increase for the six-month period was primarily driven by the benefit in the first quarter of the prior year from both the reassessment of the functional currency of certain UK legal entities and other FX-related activity, as well as restructuring in the current year, partially offset by higher income from our Prepaid Services business.
Results for both periods disclosed included net interest expense related to maintaining the liquidity pool discussed in “Consolidated Capital Resources and Liquidity – Liquidity Management”, as well as interest expense related to other corporate indebtedness.
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Consolidated Capital Resources and Liquidity
Our balance sheet management objectives are to maintain:
Transitional Basel III
The following table presents our regulatory risk-based capital ratios and leverage ratios and those of our significant bank subsidiaries, American Express Centurion Bank (AECB) and American Express Bank, FSB (FSB), as well as additional ratios widely utilized in the marketplace, as of June 30, 2016.
Table 18: Regulatory Risk-Based Capital and Leverage Ratios
Risk-Based Capital
Common Equity Tier 1
American Express
AECB
FSB
Tier 1
Tier 1 Leverage
Supplementary Leverage Ratio(b)
Common Equity to Risk-Weighted Assets
Tangible Common Equity to Risk-Weighted Assets(c)
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Table 19: Regulatory Risk-Based Capital Components and Risk Weighted Assets
Tier 1 Capital
Tier 2 Capital(a)
Total Capital
Risk Weighted Assets
Average Total Assets to calculate the Tier 1 Leverage Ratio
Total Leverage Exposure to calculate SLR
We seek to maintain capital levels and ratios in excess of the minimum regulatory requirements and finance such capital in a cost efficient manner; failure to maintain minimum capital levels could affect our status as a financial holding company and cause the regulatory agencies with oversight of American Express, AECB and FSB to take actions that could limit our business operations.
Our primary source of equity capital has been the generation of net income. Historically, capital generated through net income and other sources, such as the exercise of stock options by employees, has exceeded the annual growth in our capital requirements. To the extent capital has exceeded business, regulatory and rating agency requirements, we have historically returned excess capital to shareholders through our regular common share dividend and share repurchase program.
We maintain certain flexibility to shift capital across our businesses as appropriate. For example, we may infuse additional capital into subsidiaries to maintain capital at targeted levels in consideration of debt ratings and regulatory requirements. These infused amounts can affect the capital profile and liquidity levels at the American Express parent company level. We do not currently intend or foresee a need to shift capital from non-U.S. subsidiaries with permanently reinvested earnings to a U.S. parent company.
The following are definitions for our regulatory risk-based capital ratios and leverage ratio, which are calculated as per standard regulatory guidance:
Risk-Weighted Assets — Assets are weighted for risk according to a formula used by the Federal Reserve to conform to capital adequacy guidelines. On- and off-balance sheet items are weighted for risk, with off-balance sheet items converted to balance sheet equivalents, using risk conversion factors, before being allocated a risk-adjusted weight. The off-balance sheet items comprise a minimal part of the overall calculation.
Common Equity Tier 1 Risk-Based Capital Ratio — Calculated as Common Equity Tier 1 capital, divided by risk-weighted assets. Common Equity Tier 1 is the sum of common shareholders’ equity, adjusted for ineligible goodwill and intangible assets, certain deferred tax assets, as well as certain other comprehensive income items as follows: net unrealized gains/losses on securities and derivatives, and net unrealized pension and other postretirement benefit losses, all net of tax and subject to transition provisions.
Tier 1 Risk-Based Capital Ratio — Calculated as Tier 1 capital divided by risk-weighted assets. Tier 1 capital is the sum of Common Equity Tier 1 capital, our perpetual preferred stock and third-party non-controlling interests in consolidated subsidiaries adjusted for capital to be held by insurance subsidiaries and deferred tax assets from net operating losses not deducted from Common Equity Tier 1 capital.
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Total Risk-Based Capital Ratio — Calculated as the sum of Tier 1 capital and Tier 2 capital, divided by risk-weighted assets. Tier 2 capital is the sum of the allowance for receivable and loan losses (limited to 1.25 percent of risk-weighted assets) and $600 million of subordinated notes adjusted for capital held by insurance subsidiaries.
Tier 1 Leverage Ratio — The Tier 1 leverage ratio is calculated by dividing Tier 1 capital by our average total consolidated assets for the most recent quarter. Average total consolidated assets as of June 30, 2016 were $156.6 billion.
Supplementary Leverage Ratio – The supplementary leverage ratio is calculated by dividing Tier 1 capital by total leverage exposure under Basel III. Leverage exposure, which reflects average total consolidated assets with adjustments for Tier 1 capital deductions, average off-balance sheet derivatives exposures, securities purchased under agreements to resell and credit equivalents of undrawn commitments that are both conditionally and unconditionally cancellable. Total leverage exposure for supplementary leverage ratio purposes as of June 30, 2016 was $186.0 billion.
The following is a definition for Tangible Common Equity to Risk-Weighted Assets ratio, which is widely used in the marketplace, although it may be calculated differently by different companies:
Common Equity and Tangible Common Equity to Risk-Weighted Assets Ratios— Common equity equals our shareholders’ equity of $20.7 billion as of June 30, 2016, less preferred shares of $1.6 billion. Tangible common equity, a non-GAAP measure, equals common equity less goodwill and other intangibles of $3.6 billion as of June 30, 2016. We believe presenting the ratio of tangible common equity to risk-weighted assets is a useful measure of evaluating the strength of our capital position.
Fully Phased-in Basel III
Basel III, when fully phased-in, will require bank holding companies and their bank subsidiaries to maintain more capital than prior requirements, with a greater emphasis on common equity. The following table presents our estimates for our regulatory risk-based capital ratios and leverage ratios had Basel III been fully phased-in as of June 30, 2016. These ratios are calculated using the Standardized Approach for determining risk-weighted assets. As noted previously, we are currently taking steps toward Basel III Advanced Approaches implementation in the United States. We believe the presentation of these ratios is helpful to investors by showing the impact of future regulatory capital standards on our capital and leverage ratios.
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Table 20: Estimated Fully Phased-in Basel III Capital and Leverage Ratios
Estimated Common Equity Tier 1 Ratio under Fully Phased-In Basel III(a)
Estimated Tier 1 Capital Ratio under Fully Phased-In Basel III (a)
Estimated Tier 1 Leverage Ratio under Fully Phased-In Basel III(b)
Estimated Supplementary Leverage Ratio under Fully Phased-In Basel III
Estimated Risk-Weighted Assets under Fully Phased-In Basel III(c)
Estimated Average Total Assets to calculate the Tier 1 Leverage Ratio(b)
Estimated Total Leverage Exposure to calculate SLR under Fully Phased-In Basel III (d)
The Basel capital standards establish minimum requirements for the Tier 1 risk-based capital ratios that are 1.5 percent higher than the minimum requirements for Common Equity Tier 1 risk-based capital ratios. This difference between Tier 1 capital, which includes common equity and qualifying preferred securities, and Common Equity Tier 1 is also present in the minimum capital requirements within Comprehensive Capital Analysis and Review (CCAR). We issued $1.6 billion of preferred shares to help finance a portion of the Tier 1 capital requirements in excess of common equity requirements.
Our $750 million of subordinated debentures, which prior to 2014, were fully included in Tier 2 capital (but not in Tier 1 capital), do not meet the requirements of Tier 2 capital under Basel III. The phase-out of the subordinated debentures from Tier 2 capital began in the first quarter of 2014 and was fully phased out on January 1, 2016. At our option, the subordinated debentures are redeemable for cash on or after September 1, 2016 at 100 percent of the principal amount plus any accrued but unpaid interest. We currently intend to exercise this redemption option, subject to business and market conditions. As previously mentioned, we issued $600 million of subordinated notes, which qualify as Tier 2 capital under Basel rules.
The following table presents a comparison of our Common Equity Tier 1 and Tier 1 risk-based capital under Transitional Basel III rules to our estimated Common Equity Tier 1 and Tier 1 risk-based capital under Fully Phased-in Basel III rules as of June 30, 2016.
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Table 21: Transitional Basel III versus Fully Phased-in Basel III
(Billions)
Risk-Based Capital under Transitional Basel III
Adjustments related to:
AOCI
Transition provisions for intangible assets
Estimated Common Equity Tier 1 (CET1) and Tier 1 Risk-Based Capital under Fully Phased-in Basel III
Fully Phased-in Basel III Risk-Weighted Assets — Reflects our Basel III risk-weighted assets, with all transition provisions fully phased in. This includes incremental risk weighting applied to deferred tax assets and significant investments in unconsolidated financial institutions, as well as exposures to past due accounts, equities and sovereigns.
Fully Phased-in Basel III Tier 1 Leverage Ratio — Calculated by dividing Fully Phased-in Basel III Tier 1 capital by our average total consolidated assets.
Fully Phased-in Basel III Supplementary Leverage Ratio — Calculated by dividing Fully Phased-in Basel III Tier 1 capital by our Fully Phased-in total leverage exposure for supplementary leverage ratio purposes under Fully Phased-in Basel III.
Share Repurchases and Dividends
We return capital to common shareholders through dividends and share repurchases. The share repurchases reduce common shares outstanding and more than offset the issuance of new shares as part of employee compensation plans.
During the three and six months ended June 30, 2016, we returned $2.0 billion and $3.4 billion, respectively, to our shareholders in the form of common stock dividends ($0.3 billion and $0.6 billion, respectively) and share repurchases ($1.7 billion and $2.8 billion, respectively). We repurchased 27 million common shares at an average price of $64.05 in the second quarter of 2016. These dividend and share repurchase amounts represent approximately 96 percent and 97 percent of total capital generated during the three and six-month periods, respectively.
In addition, during the three months ended June 30, 2016, we had $750 million of non-cumulative perpetual preferred shares (the “Series B Preferred Shares”) and $850 million of non-cumulative perpetual preferred shares (the “Series C Preferred Shares”) outstanding. Dividends declared and paid on Series B Preferred Shares during the second quarter of 2016 were $19 million.
On June 29, 2016, we were informed that the Federal Reserve did not object to our capital plan to return capital to shareholders through share repurchases of up to $3.3 billion during the period beginning with the third quarter of 2016 through and including the second quarter of 2017, as well as an increase in our quarterly dividend to $0.32 per share, from $0.29 per share, beginning with the third quarter 2016 dividend declaration, subject to approval by our Board of Directors. The timing and amount of common shares purchased under our authorized capital plan will depend on various factors, including our business plans, financial performance and market conditions. To facilitate repurchases, we may, from time to time, make purchases pursuant to one or more trading plans under Rule 10b5-1under the Securities Exchange Act of 1934, as amended, which allows us to repurchase common shares during periods when we might otherwise be prevented from doing so under applicable law or because of self-imposed trading blackout periods.
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Funding Strategy
Our principal funding objective is to maintain broad and well-diversified funding sources to allow us to meet our maturing obligations, cost-effectively finance current and future asset growth in our global businesses as well as to maintain a strong liquidity profile.
During the three months ended June 30, 2016, we issued $1.75 billion of senior unsecured notes from American Express Credit Corporation with a maturity of five years and a coupon of 2.25 percent.
Summary of Consolidated Debt
We had the following consolidated debt and customer deposits outstanding as of June 30, 2016, and December 31, 2015:
Table 22: Consolidated Debt
Short-term borrowings
Total debt
Total debt and customer deposits
Management does not currently expect to make any significant changes to our funding programs in order to satisfy Basel III’s Liquidity Coverage Ratio (LCR) standard based upon our current understanding of the requirements, which may be subject to change as we receive additional clarification and implementation guidance from regulators relating to the requirements and as the interpretation of requirements evolves over time.
Our equity capital and funding strategies are designed, among other things, to maintain appropriate and stable unsecured debt ratings from the major credit rating agencies: Moody’s Investor Services (Moody’s), Standard & Poor’s (S&P), Fitch Ratings (Fitch) and Dominion Bond Rating Services (DBRS). Such ratings help support our access to cost-effective unsecured funding as part of our overall funding strategy. Our asset-backed securitization activities are rated separately.
Table 23: Unsecured Debt Ratings
Credit Agency
American Express Entity
Short-TermRatings
Long-TermRatings
Outlook
Downgrades in the ratings of our unsecured debt or asset securitization program securities could result in higher funding costs, as well as higher fees related to borrowings under our unused lines of credit. Declines in credit ratings could also reduce our borrowing capacity in the unsecured debt and asset securitization capital markets. We believe our funding mix including the proportion of U.S. retail deposits insured by the
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Federal Deposit Insurance Corporation (FDIC), should reduce the impact that credit rating downgrades would have on our funding capacity and costs.
Deposit Programs
We held the following deposits as of June 30, 2016 and December 31, 2015:
Table 24: Customer Deposits
Savings accounts — Direct
Certificates of deposit:(a)
Sweep accounts — Third-party (brokered)
Non-U.S. deposits and U.S. non-interest bearing
Card Member credit balances - U.S. and non-U.S.
Asset Securitization Programs
We periodically securitize Card Member loans and receivables arising from our card business, as the securitization market provides us with cost-effective funding. Securitization of Card Member loans and receivables is accomplished through the transfer of those assets to a trust, which in turn issues securities collateralized by the transferred assets to third-party investors. The proceeds from issuance are distributed to us, through our wholly owned subsidiaries, as consideration for the transferred assets.
The loans and receivables being securitized are reported as Card Member loans and receivables on our Consolidated Balance Sheets, and the related securities issued to third-party investors are reported as long-term debt.
Under the respective terms of the securitization trust agreements, the occurrence of certain triggering events associated with the performance of the assets of each trust could result in payment of trust expenses, establishment of reserve funds, or in a worst-case scenario, early amortization of debt securities. During the three months ended June 30, 2016, no such triggering events occurred.
As previously disclosed, we completed the sale of substantially all of our outstanding Costco cobrand Card Member loans and receivables HFS during the three months ended June 30, 2016, resulting in the removal of $3.6 billion of Costco cobrand Card Member loans from the American Express Credit Account Master Trust (the Lending Trust) and the removal of $29 million of Costco cobrand Card Member receivables from the American Express Issuance Trust II (the Charge Trust) on June 17, 2016. In connection with obtaining the necessary affirmations with respect to the removal of the Card Member loans, the Lending Trust acquired additional accounts and approximately $3.0 billion of related Card Member loans on June 1, 2016. The Lending Trust issued two series of investor certificates on June 7, 2016, structured to provide credit enhancement to certain outstanding series of Lending Trust investor certificates.
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Liquidity Management
We incur liquidity risk that arises in the course of offering our products and services. Our liquidity objective is to maintain access to a diverse set of on- and off-balance sheet liquidity sources. We seek to maintain liquidity sources, even in the event we are unable to raise new funds under our regular funding programs during a substantial weakening in economic conditions, in amounts sufficient to meet our expected future financial obligations and our businesses’ requirements for liquidity for a period of at least twelve months. Our liquidity risk policy sets out our objectives and approach to managing liquidity risk.
The liquidity risks that we are exposed to could arise from a wide variety of scenarios. Our liquidity management strategy thus includes a number of elements, including, but not limited to:
The amount and type of liquidity resources we maintain can vary over time, based upon the results of stress scenarios required under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) and other regulatory measures of liquidity, such as the LCR, as well as additional stress scenarios required under our liquidity risk policy. The Company was in compliance with the liquidity requirements to which it is subject, including the LCR, for the three months ended June 30, 2016.
The investment income we receive on liquidity resources, such as cash, is less than the interest expense on the sources of funding for these balances. The net interest costs to maintain these resources have been substantial. The level of future net interest costs depends on the amount of liquidity resources we maintain and the difference between our cost of funding these amounts and their investment yields.
Securitized Borrowing Capacity
As of June 30, 2016, we maintained our committed, revolving, secured borrowing facility, with a maturity date of July 15, 2018, that gives us the right to sell up to $3.0 billion face amount of eligible AAA notes from the Charge Trust. We also maintained our committed, revolving, secured borrowing facility, with a maturity date of September 15, 2017, that gives us the right to sell up to $2.0 billion face amount of eligible AAA certificates from the Lending Trust. Both facilities are used in the ordinary course of business to fund seasonal working capital needs, as well as to further enhance our contingent funding resources. As of June 30, 2016, $2.0 billion was drawn on the Charge Trust facility. No amounts were drawn on the Lending Trust facility.
Federal Reserve Discount Window
As insured depository institutions, the Banks may borrow from the Federal Reserve Bank of San Francisco, subject to the amount of qualifying collateral that they may pledge. The Federal Reserve has indicated that both credit and charge card receivables are a form of qualifying collateral for secured borrowings made through the discount window. Whether specific assets will be considered qualifying collateral and the amount that may be borrowed against the collateral, remain at the discretion of the Federal Reserve.
We had approximately $53 billion as of June 30, 2016 in U.S. credit card loans and charge card receivables that could be sold over time through our securitization trusts or pledged in return for secured borrowings to provide further liquidity, subject in each case to applicable market conditions and eligibility criteria.
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Committed Bank Credit Facilities
In addition to the secured borrowing facilities described earlier in this section, we maintained a committed syndicated bank credit facility as of June 30, 2016 of $3.0 billion, which expires on December 9, 2018. As of June 30, 2016, no amounts were drawn on this facility.
Certain Other Off-Balance Sheet Arrangements
As of June 30, 2016, we had approximately $231 billion of unused credit available to Card Members as part of established lending product agreements. Total unused credit available to Card Members does not represent potential future cash requirements, as a significant portion of this unused credit will likely not be drawn. Our charge card products generally have no pre-set limit, and therefore are not reflected in unused credit available to Card Members.
Cash Flows
The following table summarizes our cash flow activity for the six months ended June 30.
Table 25: Cash Flows
Total cash provided by (used in):
Operating activities
Investing activities
Financing activities
Effect of foreign currency exchange rates on cash and cash equivalents and other
Net increase in cash and cash equivalents
Our cash flows from operating activities primarily include net income adjusted for (i) non-cash items included in net income and (ii) changes in the balances of operating assets and liabilities, which can vary significantly in the normal course of business due to the amount and timing of payments.
For the six months ended June 30, 2016 and 2015, net cash provided by operating activities was $3.1 billion and $4.2 billion, respectively, driven by net income of $3.4 billion and $3.0 billion, respectively, adjusted for non-cash items including changes in provisions for losses, depreciation and amortization, deferred taxes, and stock-based compensation. The decrease in the current period, as compared to the six months ended June 30, 2015, primarily resulted from offsetting impacts from movements in Other assets and Accounts payable and Other liabilities as a result of normal business operating activities.
Our cash flows from investing activities primarily include changes in Card Member receivables and loans, including Card Member loans and receivables HFS, along with gains on sales related thereto, as well as changes in our available for sale investment securities portfolio.
For the six months ended June 30, 2016, and 2015, net cash provided by (used in) investing activities was $12.1 billion and ($2.9) billion, respectively. The increase in the current period, as compared to the six months ended June 30, 2015, was primarily driven by the sales of the JetBlue and Costco HFS portfolios.
Our cash flows from financing activities primarily include issuing and repaying debt, changes in customer deposits, issuing and repurchasing our common shares, and paying dividends.
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For the six months ended June 30, 2016, and 2015, net cash used in financing activities was $4.3 billion and $2.4 billion, respectively. The increase in the current period, as compared to the six months ended June 30, 2015, primarily resulted from a net decrease in short-term borrowings and customer deposits in the current year period as compared to the prior year period, as well as higher common share repurchases in the current year period, partially offset by lower net repayments of long-term debt repayments in the current year, as compared to the same period in the prior year.
OTHER MATTERS
Certain Legislative, Regulatory and Other Developments
As a participant in the financial services industry, and as a bank holding company, we are subject to comprehensive examination and supervision by the Federal Reserve and to a range of laws and regulations that impact our business and operations. In light of the current environment of additional regulation, enhanced supervision efforts and increased regulatory investigations and enforcement, compliance requirements and expenditures have risen for financial services firms, including us, and we expect compliance requirements and expenditures will continue to rise in the future.
In addition, legislators and regulators in various countries in which we operate have focused on the operation of card networks, including through antitrust actions, legislation and rules to change certain practices or pricing of card issuers, merchant acquirers and payment networks, and, in some cases, to establish broad and ongoing regulatory oversight regimes for payment systems. Regulators and legislators have focused on the fees merchants pay to accept cards, including the way bankcard network members collectively set the “interchange” (that is, the fee paid by the bankcard merchant acquirer to the card issuer in payment networks like Visa and MasterCard), as well as the rules, contract terms and practices governing merchant card acceptance. Although, unlike the Visa and MasterCard networks, the American Express network does not have interchange fees or collectively set fees or rules, antitrust actions and government regulation relating to merchant pricing or terms of merchant rules and contracts could affect all networks directly or indirectly , as well as adversely impact consumers and merchants. Among other things, lower interchange and/or merchant discount revenue may lead card issuers to look for other sources of revenue from consumers such as higher annual card fees or interest charges, as well as to reduce costs by scaling back or eliminating rewards, services or benefits to cardholders and merchants. Broad regulatory oversight over payment systems can also include, in some cases, requirements for international card networks to localize aspects of their operations, such as processing infrastructure, which could increase our costs and diminish the value of our closed loop. The development and enforcement of payment system regulatory regimes generally continue to grow and may adversely affect our ability to compete effectively and maintain and extend our global network.
In certain countries, such as Australia and certain Member States in the EU, merchants are permitted by law to surcharge card purchases. While surcharging continues to be actively considered in certain jurisdictions, the benefits to customers have not been apparent in countries that have allowed it, and in some cases regulators are addressing concerns about excessive surcharging by merchants. Surcharging, particularly where it disproportionately impacts American Express Card Members, which is known as differential surcharging, as well as other steering practices that are permitted by regulation in some countries could have a material adverse effect on us if it becomes widespread. The Reserve Bank of Australia allows us and other networks to limit a merchant’s right to surcharge to “the reasonable cost of card acceptance.” As discussed below, the Reserve Bank of Australia recently amended its rules to limit surcharging in Australia to the merchant’s actual cost of card acceptance. In the EU, in those Member States that permit surcharging, the Consumer Rights Directive prohibits merchants from surcharging card purchases more than the cost of acceptance.
On June 23, 2016, the United Kingdom held a referendum in which voters approved an exit from the European Union, commonly referred to as “Brexit,” which has caused and may continue to cause
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significant volatility in capital and currency markets worldwide. The full impact of Brexit, however, remains uncertain. A process of negotiation, which is likely to take two years or longer, will determine the future terms of the U.K.’s relationship with the European Union. It is unclear at this stage what financial, trade and legal implications the withdrawal of the U.K. from the European Union would have and how such withdrawal would affect us.
European Union Payments Legislation
In 2015, the European Union adopted legislation in two parts, covering a wide range of topics across the payments industry. The first part was an EU-wide regulation on interchange fees (the Interchange Fee Regulation); the second consisted of revisions to the Payment Services Directive (the PSD2).
The Interchange Fee Regulation was formally adopted in April 2015. The substantive terms as adopted include the following:
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The PSD2 was adopted on November 25, 2015, and was published in the Official Journal of the European Union on December 23, 2015. Each Member State has until January 2018 to transpose the PSD2 into national law.
Among other terms, the published text of PSD2 includes provisions that will (i) further regulate surcharging so that transactions falling in scope of the interchange caps could not be surcharged, but transactions falling outside the scope of the caps could be surcharged up to cost, subject potentially to the decision of an individual Member State to prohibit surcharging altogether; and (ii) require all networks, including “three party” payment networks that operate with licensing arrangements, such as our GNS business, to establish objective, proportionate and non-discriminatory criteria under which a financial institution may access the network, for example, as a licensed issuer or acquirer. The potential surcharging regulation may increase instances of differential surcharging of our cards, prompt customer and merchant confusion as to which transactions may be surcharged and lead to Card Member dissatisfaction. The access requirements will undermine the flexibility and discretion we have had to date in deciding with whom to partner in our GNS business and, together with requirements in the Interchange Fee Regulation, may undermine the value of our GNS business in Europe.
Australia Payments Regulation
Following a formal review of the regulatory framework for card payments in Australia, the Reserve Bank of Australia adopted new regulations on May 26, 2016, including the following:
The inclusion of our GNS business under interchange regulation may undermine our ability to attract and retain GNS partners. While the discount rates we agree to with merchants do not include an interchange
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component and are therefore not capped, the interchange caps, once effective, will likely exert downward pressure on merchant fees across the industry, including our discount rates.
Dodd-Frank Wall Street Reform and Consumer Protection Act
Dodd-Frank contains a wide array of provisions intended to govern the practices and oversight of financial institutions and other participants in the financial markets. Among other matters, the law created an independent Consumer Financial Protection Bureau (the CFPB), which has broad rulemaking authority over providers of credit, savings, payment and other consumer financial products and services with respect to certain federal consumer financial laws. Moreover, the CFPB has examination and enforcement authority with respect to certain federal consumer financial laws for providers of consumer financial products and services, including certain of our subsidiaries. The CFPB is directed to prohibit “unfair, deceptive or abusive” acts or practices, and to ensure that all consumers have access to fair, transparent and competitive markets for consumer financial products and services.
The review of products and practices to prevent unfair, deceptive or abusive conduct will be a continuing focus of the CFPB and regulators more broadly, as well as our own internal reviews. Internal and regulatory reviews have resulted in, and are likely to continue to result in, changes to our practices, products and procedures. Such reviews are also likely to continue to result in increased costs related to regulatory oversight, supervision and examination, and additional restitution to our Card Members and may result in additional regulatory actions, including civil money penalties.
On May 5, 2016, the CFPB issued a proposed rule that, if enacted, would, among other changes, require that our consumer arbitration clause not apply to cases filed in court as class actions, unless and until class certification is denied or the class claims are dismissed. The CFPB has set a 90-day period for comment, with the rule becoming effective 211 days after enactment and applying to all agreements entered into after that date.
Antitrust Litigation
The U.S. DOJ and certain states’ attorneys general brought an action against us in 2010 alleging that the provisions in our card acceptance agreements with merchants that prohibit merchants from engaging in various actions to discriminate against our card products violate the U.S. antitrust laws. The trial court has ruled that the challenged provisions violate U.S. antitrust laws and issued an injunction, effective July 20, 2015, prohibiting us from enforcing certain elements of such provisions in the United States. We appealed this judgment and on December 18, 2015, the Court of Appeals for the Second Circuit stayed the trial court’s judgment pending the issuance of its appellate decision. We are also vigorously defending similar antitrust claims initiated by merchants in other court and arbitration proceedings. See Part I, Item 3. “Legal Proceedings” in our Annual Report on Form 10-K for the year ended December 31, 2015 (the 2015 Form 10-K) for descriptions of the DOJ action and related cases. It is possible that significantly increased merchant steering or other actions impairing the Card Member experience, or the resolution of one or any combination of these merchant claims for damages, could have a material adverse effect on our business. See Part I, Item 1A, “Risk Factors” in the 2015 Form 10-K for information on the potential impacts of an adverse decision in the DOJ case and related merchant litigations on our business.
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Refer to the Recently Issued Accounting Standards section of Note 1 to the Consolidated Financial Statements.
Glossary of Selected Terminology
Adjusted net interest income — A non-GAAP measure that represents net interest income attributable to our Card Member loans and loans HFS (which includes, on a GAAP basis, interest that is deemed uncollectible), excluding the impact of interest expense and interest income not attributable to our Card Member loans. The Company believes adjusted net interest income is useful to investors because it is a component of net interest yield on Card Member loans.
Asset securitizations — Asset securitization involves the transfer and sale of loans or receivables to a special-purpose entity created for the securitization activity, typically a trust. The trust, in turn, issues securities, commonly referred to as asset-backed securities that are secured by the transferred loans or receivables. The trust uses the proceeds from the sale of such securities to pay the purchase price for the underlying loans or receivables. The loans and receivables of our Charge Trust and Lending Trust (together, the Trusts) being securitized are reported as assets, and the securities issued by the Trusts are reported as liabilities on our Consolidated Balance Sheets.
Average discount rate — This calculation is generally designed to reflect pricing at merchants accepting general-purpose American Express cards. It represents the percentage of billed business (generated from both proprietary and GNS Card Member spending) retained by us from merchants we acquire, or for merchants acquired by a third party on our behalf, net of amounts retained by such third party.
Basic cards-in-force — Proprietary basic consumer cards-in-force includes basic cards issued to the primary account owner, (i.e., not including additional supplemental cards issued on accounts). Proprietary basic small business and corporate cards-in-force includes both basic and supplemental cards issued. Non-proprietary basic cards-in-force includes cards that are issued and outstanding under network partnership agreements, except for supplemental cards and retail cobrand Card Member accounts which have had no out-of-store spending activity during the prior twelve-month period.
Billed business — Includes activities (including cash advances) related to proprietary cards, cards issued under network partnership agreements (non-proprietary billed business), corporate payment services and certain insurance fees charged on proprietary cards. In-store spending activity within retail cobrand portfolios in GNS, from which we earn no revenue, is not included in non-proprietary billed business. Card billed business is included in the United States or outside the United States based on where the issuer is located.
Capital ratios — Represents the minimum standards established by the regulatory agencies as a measure to determine whether the regulated entity has sufficient capital to absorb on- and off-balance sheet losses beyond current loss accrual estimates. Refer to the Capital Strategy section under “Consolidated Capital Resources and Liquidity” for further related definitions under Transitional Basel III and Fully Phased-in Basel III.
Card Member — The individual holder of an issued American Express-branded charge, credit and certain prepaid cards.
Card Member loans — Represents the outstanding amount due from Card Members for charges made on their American Express credit cards, as well as any interest charges and card-related fees. Card Member loans also include revolving balances on certain American Express charge card products.
Card Member loans and receivables HFS — Beginning as of December 1, 2015 and continuing until a sale is completed, represents Card Member loans and receivables related to our cobrand partnerships with Costco in the United States and JetBlue. The JetBlue and Costco portfolio sales were completed on March 18 and June 17, 2016, respectively.
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Card Member receivables — Represents the outstanding amount due from Card Members for charges made on their American Express charge cards, as well as any card-related fees.
Charge cards — Represents cards that generally carry no pre-set spending limits and are primarily designed as a method of payment and not as a means of financing purchases. Charge Card Members generally must pay the full amount billed each month. No finance charges are assessed on charge cards. Each charge card transaction is authorized based on its likely economics reflecting a Card Member’s most recent credit information and spend patterns. Some charge card accounts have an additional lending-on-charge feature that allows revolving certain balances.
Credit cards — Represents cards that have a range of revolving payment terms, grace periods, and rate and fee structures.
Discount revenue — Represents revenue earned from fees generally charged to merchants who have entered into a card acceptance agreement. The discount fee generally is deducted from our payment for Card Member purchases. Discount revenue is reduced by incentive payments made to merchants, payments to third-party card issuing partners, cash-back reward costs and statement credits, corporate incentive payments and other similar items.
Interest expense — Includes interest incurred primarily to fund Card Member loans and receivables, general corporate purposes and liquidity needs, and is recognized as incurred. Interest expense is divided principally into two categories: (i) deposits, which primarily relates to interest expense on deposits taken from customers and institutions, and (ii) debt, which primarily relates to interest expense on our long-term financing and short-term borrowings, (e.g., commercial paper, federal funds purchased, bank overdrafts and other short-term borrowings), as well as the realized impact of derivatives hedging interest rate risk on our long-term debt.
Interest income — Includes (i) interest on loans, (ii) interest and dividends on investment securities and (iii) interest income on deposits with banks and other.
Interest on loans — Assessed using the average daily balance method for Card Member loans and loans HFS. Unless the loan is classified as non-accrual, interest is recognized based upon the principal amount outstanding in accordance with the terms of the applicable account agreement until the outstanding balance is paid or written off.
Interest and dividends on investment securities — Primarily relates to our performing fixed-income securities. Interest income is recognized as earned using the effective interest method, which adjusts the yield for security premiums and discounts, fees and other payments, so a constant rate of return is recognized on the outstanding balance of the related investment security throughout its term. Amounts are recognized until securities are in default or when it is likely that future interest payments will not be made as scheduled.
Interest income on deposits with banks and other — Recognized as earned, and primarily relates to the placement of cash in excess of near-term funding requirements in interest-bearing time deposits, overnight sweep accounts, and other interest-bearing demand and call accounts.
Liquidity Coverage Ratio — Represents the proposed minimum standards being established by the regulatory agencies as a measure to determine whether the regulated entity has sufficient liquidity to meet liquidity needs in periods of financial and economic stress.
Merchant acquisition — Represents our process of entering into agreements with merchants to accept American Express-branded cards.
Net card fees — Represents the card membership fees earned during the period. These fees are recognized as revenue over the covered card membership period (typically one year), net of the provision for projected refunds for Card Membership cancellation and deferred acquisition costs.
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Net interest yield on Card Member loans —A non-GAAP measure that is computed by dividing adjusted net interest income by average loans, computed on an annualized basis. Reserves and net write-offs related to uncollectible interest are recorded through provisions for losses, and are thus not included in the net interest yield calculation. The Company believes net interest yield on Card Member loans is useful to investors because it provides a measure of profitability of the Company’s Card Member loan portfolio.
Net loss ratio — Represents the ratio of GCP charge card write-offs, consisting of principal (resulting from authorized transactions) and fee components, less recoveries, on Card Member receivables expressed as a percentage of gross amounts billed to corporate Card Members.
Net write-off rate — principal only — Represents the amount of proprietary consumer or small business Card Member loans or receivables written off, consisting of principal (resulting from authorized transactions), less recoveries, as a percentage of the average loan or receivables balance during the period.
Net write-off rate — principal, interest and fees — Includes, in the calculation of the net write-off rate, amounts for interest and fees in addition to principal for Card Member loans and fees in addition to principal for Card Member receivables.
Operating expenses — Represents salaries and employee benefits, professional services, occupancy and equipment, communications and other expenses.
Return on average equity — Calculated by dividing one-year period net income by one-year average total shareholders’ equity.
Return on average segment capital — Calculated by dividing one-year period segment income by one-year average segment capital.
Return on average tangible segment capital — Computed in the same manner as the return on average segment capital, except the computation of average tangible segment capital excludes from average segment capital, average goodwill and other intangibles.
Segment capital — Represents the capital allocated to a segment based upon specific business operational needs, risk measures, and regulatory capital requirements.
Total cards-in-force — Represents the number of cards that are issued and outstanding. Non-proprietary cards-in-force includes all cards that are issued and outstanding under network partnership agreements, except for retail cobrand Card Member accounts which have no out-of-store spending activity during the prior twelve-month period.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk to earnings or asset and liability values resulting from movements in market prices. Our market risk exposures include (i) interest rate risk due to changes in the relationship between interest rates on our assets (such as loans, receivables and investment securities) and on our liabilities (such as debt and deposits); and (ii) foreign exchange risk related to earnings, transactions and investments in currencies other than the U.S. dollar. There were no material changes in these market risks since December 31, 2015.
ITEM 4. CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective and designed to ensure that the information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the requisite time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Cautionary Note Regarding Forward-looking Statements
This report includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which are subject to risks and uncertainties. The forward-looking statements, which address our expected business and financial performance, among other matters, contain words such as “believe,” “expect,” “estimate,” “anticipate,” “intend,” “plan,” “aim,” “will,” “may,” “should,” “could,” “would,” “likely,” and similar expressions. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. We undertake no obligation to update or revise any forward-looking statements. Factors that could cause actual results to differ materially from these forward-looking statements, include, but are not limited to, the following:
our ability to grow in the future, as well as our earnings expectations for the second half of 2016, which will depend in part on the following: revenues growing consistently with current expectations, which could be impacted by, among other things, weakening economic conditions in the United States or internationally, a decline in consumer confidence impacting the willingness and ability of Card Members to sustain spending, a further decline in airfare and gas prices, a further strengthening of the U.S. dollar, a greater erosion of the average discount rate than expected, a greater impact on discount revenue from cash back, GNS volumes and cobrand partner and client incentive payments, continued cautious spending by large and global corporate Card Members and lower spending on new cards acquired than estimated; our success in addressing competitive pressures and implementing strategies and business initiatives, including growing profitable spending from new and existing Card Members, increasing penetration among middle market and small business clients, expanding our international footprint, growing loyalty coalitions and increasing merchant acceptance; the impact of any future restructuring charges or other contingencies, including, but not limited to, litigation-related expenses, impairments, the imposition of fines or civil money penalties, an increase in Card Member reimbursements and changes in reserves; credit performance remaining consistent with current
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expectations; continued growth of Card Member loans; the ability to continue to realize benefits from restructuring actions and operating leverage at levels consistent with current expectations; the amount we spend on growth initiatives; changes in interest rates beyond current expectations; the impact of regulation and litigation, which could affect the profitability of our business activities, limit our ability to pursue business opportunities, require changes to business practices or alter our relationships with partners, merchants and Card Members; our tax rate remaining in line with current expectations, which could be impacted by, among other things, our geographic mix of income being weighted more to higher tax jurisdictions than expected, changes in tax laws and regulation (including the adoption of the Treasury regulations under Section 385 of the U.S. Internal Revenue Code as currently proposed) and unfavorable tax audits and other unanticipated tax items; the impact of accounting changes and reclassifications; and our ability to continue executing the share repurchase program;
our ability to execute against our lending strategy and grow Card Member loans held as well as non-card loans, without changing the overall risk profile of the Company, which may be affected by increasing competition, brand perceptions and reputation, our ability to manage risk in a growing Card
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Member loan portfolio, and the behavior of Card Members and their actual spending and borrowing patterns, which in turn may be driven by our ability to issue new and enhanced card products, offer attractive non-card lending products, attract new customers, reduce Card Member attrition and capture a greater share of existing Card Members’ spending and borrowings;
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A further description of these uncertainties and other risks can be found in the 2015 Form 10-K and our other reports filed with the Securities and Exchange Commission.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of business, we and our 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”). We believe we have meritorious defenses to each of these legal proceedings and intend to defend them vigorously. Some of these proceedings are at preliminary stages and seek an indeterminate amount of damages.
We believe we are not a party to, nor are any of our properties the subject of, any legal proceeding that would have a material adverse effect on our consolidated financial condition or liquidity. However, in light of the uncertainties involved in such matters, it is possible that the outcome of legal proceedings, including the possible resolution of merchant claims described in our 2015 Form 10-K, could have a material impact on our results of operations. In addition, it is possible that significantly increased merchant steering or other actions impairing the Card Member experience as a result of the DOJ case described in our 2015 Form 10-K could have a material adverse effect on our business. Certain legal proceedings involving us or our subsidiaries are further described in this section and others, for which there have been no subsequent material developments since the filing of our 2015 Form 10-K, are described in such report.
For those legal proceedings described in this section and in the 2015 Form 10-K where a loss is reasonably possible in future periods, whether in excess of a related reserve for legal contingencies or where there is no such reserve, and for which we are able to estimate a range of possible loss, the current estimated range is zero to $350 million in excess of any reserves related to those matters. This range represents our estimate based on currently available information and does not represent our maximum loss exposure; actual results may vary significantly. As such proceedings evolve, including the merchant claims, we may need to increase our range of possible loss or reserves for legal contingencies. For additional information, see Note 8 to our Consolidated Financial Statements.
We are a defendant in a class action captioned Kaufman v. American Express Travel Related Services, which was filed on February 14, 2007, and is pending in the United States District Court for the Northern District of Illinois. Plaintiffs’ principal allegation is that our gift cards violated consumer protection statutes because consumers allegedly had difficulty spending small residual amounts on the gift cards prior to the imposition of monthly service fees. The Court preliminarily certified a settlement class consisting of (with some exceptions) “all purchasers, recipients and holders of all gift cards issued by American Express from January 1, 2002 through the date of preliminary approval of the settlement.” On March 2, 2016, the court granted final approval of the class-wide settlement. Notices of appeal have been filed.
On July 30, 2015, plaintiff Plumbers and Steamfitters Local 137 Pension Fund, on behalf of themselves and other purchasers of American Express stock, filed a suit, captioned Plumbers and Steamfitters Local 137 Pension Fund v. American Express Co., Kenneth I. Chenault and Jeffrey C. Campbell, for violation of federal securities law, alleging that the Company deliberately issued false and misleading statements to, and omitted important information from, the public relating to the financial importance of the Costco cobrand relationship to the Company, including, but not limited to, the decision to accelerate negotiations to renew
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the cobrand agreement. The plaintiff seeks damages and injunctive relief. The Company moved to dismiss the amended complaint on March 21, 2016.
On October 16, 2015, a putative class action, captioned Houssain v. American Express Company, et al., was filed in the United States District Court for the Southern District of New York under the Employee Retirement Income Security Act of 1974 (ERISA) relating to disclosures of the Costco cobrand relationship. On May 10, 2016, the plaintiff filed an amended complaint naming certain officers of the Company as defendants and alleging that the defendants violated certain ERISA fiduciary obligations by, among other things, allowing the investment of American Express Retirement Savings Plan (Plan) assets in American Express common stock when American Express common stock was not a prudent investment and misrepresenting and failing to disclose material facts to Plan participants in connection with the administration of the Plan. The amended complaint seeks, among other remedies, an unspecified amount of damages. The defendants moved to dismiss the amended complaint on May 31, 2016.
On March 8, 2016, plaintiffs B&R Supermarket, Inc. d/b/a Milam’s Market and Grove Liquors LLC, on behalf of themselves and others, filed a suit, captioned B&R Supermarket, Inc. d/b/a Milam’s Market, et al. v. Visa Inc., et al., for violations of the Sherman Antitrust Act, the Clayton Antitrust Act, California’s Cartwright Act and unjust enrichment in the United States District Court for the Northern District of California, against American Express Company, other credit and charge card networks, other issuing banks and EMVCo, LLC. Plaintiffs allege that the defendants, through EMVCo, conspired to shift liability for fraudulent, faulty and otherwise rejected consumer credit card transactions from themselves to merchants after the implementation of EMV chip payment terminals. Plaintiffs seek damages and injunctive relief. On June 24, 2016, the court granted our motion to transfer the claims against us to New York. The court also granted plaintiffs’ leave to file an amended complaint. The amended complaint, which was filed on July 15, 2016, names additional plaintiff merchants and continues to name American Express Company as a defendant. We intend to defend the claims vigorously.
ITEM 1A. RISK FACTORS
For a discussion of our risk factors, see Part I, Item 1A. “Risk Factors” of the 2015 Form 10-K. There are no material changes from the risk factors set forth in the 2015 Form 10-K. However, the risks and uncertainties that we face are not limited to those set forth in the 2015 Form 10-K. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business and the trading price of our securities.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) ISSUER PURCHASES OF SECURITIES
The table below sets forth the information with respect to purchases of the Company’s common stock made by or on behalf of the Company during the three months ended June 30, 2016.
Purchased
Maximum
Numberof Shares thatMay Yet Be Purchased Underthe Plans orPrograms
April 1-30, 2016
Repurchase program(a)
Employee transactions(b)
May 1-31, 2016
June 1-30, 2016
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ITEM 5. OTHER INFORMATION
Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which added Section 13(r) to the Exchange Act, an issuer is required to disclose in its annual or quarterly reports, as applicable, whether it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with individuals or entities designated pursuant to certain Executive Orders. Disclosure is generally required even where the activities, transactions or dealings were conducted outside the United States by non-U.S. affiliates in compliance with applicable law, and whether or not the activities are sanctionable under U.S. law.
During the second quarter of 2016, American Express Global Business Travel (GBT) obtained approximately 20 visas from Iranian embassies and consulates around the world in connection with certain travel arrangements on behalf of GBT clients. In addition, American Express Global Business Travel España, a joint venture of GBT, booked two reservations at a hotel that may be owned, directly or indirectly, or may otherwise be affiliated with, the Government of Iran. GBT had negligible gross revenues and net profits attributable to these transactions. GBT believes these transactions were permissible pursuant to certain exemptions from U.S. sanctions for travel-related transactions under the International Emergency Economic Powers Act, as amended. GBT has informed us that it intends to continue to engage in these activities on a limited basis so long as such activities are permitted under U.S. law.
In addition, a travel company that may be considered an affiliate of ours, American Express Nippon Travel Agency, Inc. (“Nippon Travel Agency”), has informed us that during the second quarter of 2016 it obtained 44 visas from the Iranian embassy in Japan in connection with certain travel arrangements on behalf of clients. Nippon Travel Agency had negligible gross revenues and net profits attributable to these transactions. Nippon Travel Agency has informed us that it intends to continue to engage in this activity so long as such activity is permitted under U.S. law.
ITEM 6. EXHIBITS
The list of exhibits required to be filed as exhibits to this report are listed on page E-1 hereof, under “Exhibit Index” which is incorporated herein by reference.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
/s/ Jeffrey C. Campbell
/s/ Linda Zukauckas
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EXHIBIT INDEX
The following exhibits are filed as part of this Quarterly Report:
E-1