Edgar Filing: AMERICAN EXPRESS CO

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

Form 10-Q

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

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

SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from to

Commission file number 1-7657

AMERICAN EXPRESS COMPANY

(Exact name of registrant as specified in its charter)


New York				13-4922250
(State or other jurisdiction of incorporation or organization)				(I.R.S. Employer Identification No.)

200 Vesey Street, New York, NY				10285
(Address of principal executive offices)				(Zip Code)

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

None

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

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

Yes X No

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

Yes X No

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

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

Yes No _X_

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


Class				Outstanding at July 20, 2016
Common Shares (par value $0.20 per share)				923,780,898 shares

AMERICAN EXPRESS COMPANY

FORM 10-Q

INDEX


Part I.	Financial Information		Page No.

	Item 1.	Financial Statements

		Consolidated Statements of Income – Three Months Ended June 30, 2016 and 2015		1

		Consolidated Statements of Income – Six Months Ended June 30, 2016 and 2015		2

		Consolidated Statements of Comprehensive Income – Three and Six Months Ended June 30, 2016 and 2015		3

		Consolidated Balance Sheets – June 30, 2016 and December 31, 2015		4

		Consolidated Statements of Cash Flows – Six Months Ended June 30, 2016 and 2015		5

		Notes to Consolidated Financial Statements		6

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		33

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk		71

	Item 4.	Controls and Procedures		71

Part II.	Other Information

	Item 1.	Legal Proceedings		74

	Item 1A.	Risk Factors		75

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		76

	Item 5.	Other Information		77

	Item 6.	Exhibits		77

	Signatures			78

	Exhibit Index			E-1

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AMERICAN EXPRESS COMPANY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)



Three Months Ended June 30 (Millions, except per share amounts)	2016		2015

Revenues
Non-interest revenues
Discount revenue	$	4,824	$	4,946
Net card fees		715		667
Other fees and commissions		702		727
Other		545		521

Total non-interest revenues		6,786		6,861

Interest income
Interest on loans		1,818		1,776
Interest and dividends on investment securities		34		41
Deposits with banks and other		33		20

Total interest income		1,885		1,837

Interest expense
Deposits		150		109
Long-term debt and other		286		305

Total interest expense		436		414

Net interest income		1,449		1,423

Total revenues net of interest expense		8,235		8,284

Provisions for losses
Charge card		153		165
Card Member loans		285		285
Other		25		17

Total provisions for losses		463		467

Total revenues net of interest expense after provisions for losses		7,772		7,817

Expenses
Marketing and promotion		788		761
Card Member rewards		1,766		1,799
Card Member services and other		281		242
Salaries and employee benefits		1,451		1,250
Other, net		470		1,535

Total expenses		4,756		5,587

Pretax income		3,016		2,230
Income tax provision		1,001		757

Net income	$	2,015	$	1,473

Earnings per Common Share (Note 15):^(a)
Basic	$	2.11	$	1.43
Diluted	$	2.10	$	1.42

Average common shares outstanding for earnings per common share:
Basic		938		1,009
Diluted		941		1,013
Cash dividends declared per common share	$	0.29	$	0.29

(a)

Represents net income less (i) earnings allocated to participating share awards of $17 million and $11 million for the three months ended June 30, 2016 and 2015, respectively, and (ii) dividends on preferred shares of $19 million and $20 million for the three months ended June 30, 2016 and 2015, respectively.

See Notes to Consolidated Financial Statements.

AMERICAN EXPRESS COMPANY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)



Six Months Ended June 30 (Millions, except per share amounts)	2016		2015

Revenues
Non-interest revenues
Discount revenue	$	9,467	$	9,606
Net card fees		1,414		1,334
Other fees and commissions		1,382		1,435
Other		1,031		989

Total non-interest revenues		13,294		13,364

Interest income
Interest on loans		3,756		3,571
Interest and dividends on investment securities		70		82
Deposits with banks and other		64		41

Total interest income		3,890		3,694

Interest expense
Deposits		300		212
Long-term debt and other		561		612

Total interest expense		861		824

Net interest income		3,029		2,870

Total revenues net of interest expense		16,323		16,234

Provisions for losses
Charge card		322		339
Card Member loans		512		520
Other		63		28

Total provisions for losses		897		887

Total revenues net of interest expense after provisions for losses		15,426		15,347

Expenses
Marketing and promotion		1,515		1,370
Card Member rewards		3,469		3,439
Card Member services and other		563		503
Salaries and employee benefits		2,789		2,555
Other, net		1,890		2,934

Total expenses		10,226		10,801

Pretax income		5,200		4,546
Income tax provision		1,759		1,548

Net income	$	3,441	$	2,998

Earnings per Common Share (Note 15):^(a)
Basic	$	3.55	$	2.92
Diluted	$	3.54	$	2.90

Average common shares outstanding for earnings per common share:
Basic		949		1,013
Diluted		952		1,018
Cash dividends declared per common share	$	0.58	$	0.55

(a)

Represents net income less (i) earnings allocated to participating share awards of $28 million and $22 million for the six months ended June 30, 2016 and 2015, respectively, and (ii) dividends on preferred shares of $40 million and $20 million for the six months ended June 30, 2016 and 2015, respectively.

See Notes to Consolidated Financial Statements.

AMERICAN EXPRESS COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)



	Three Months Ended June 30,		Six Months Ended June 30,


(Millions)	2016	2015	2016	2015

Net income	$ 2,015	$ 1,473	$ 3,441	$ 2,998
Other comprehensive loss:
Net unrealized securities gains (losses), net of tax of: 2016, $2 and $2; 2015, $(10) and $(11)	5	(20)	7	(20)
Foreign currency translation adjustments, net of tax of: 2016, $100 and $61; 2015, $(48) and $40	(130)	11	(126)	(244)
Net unrealized pension and other postretirement benefit gains, net of tax of: 2016, $10 and $29; 2015, $(3) and $16	6	6	32	29

Other comprehensive loss	(119)	(3)	(87)	(235)

Comprehensive income	$ 1,896	$ 1,470	$ 3,354	$ 2,763

See Notes to Consolidated Financial Statements.

AMERICAN EXPRESS COMPANY

CONSOLIDATED BALANCE SHEETS

(Unaudited)



(Millions, except share data)	June 30, 2016		December 31, 2015

Assets
Cash and cash equivalents
Cash and due from banks	$	2,811	$	2,935
Interest-bearing deposits in banks (includes securities purchased under resale agreements: 2016, $129; 2015, $41)		30,379		19,569
Short-term investment securities		577		258

Total cash and cash equivalents		33,767		22,762
Card Member loans and receivables held for sale (includes gross loans and receivables available to settle obligations of consolidated variable interest entities: 2016, nil; 2015, $4,966)		—		14,992
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		44,800		43,671
Other receivables, less reserves: 2016, $50; 2015, $43		2,697		3,024
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		58,796		57,545
Other loans, less reserves: 2016, $36; 2015, $20		1,132		1,254
Investment securities		3,892		3,759
Premises and equipment, less accumulated depreciation and amortization: 2016, $4,855; 2015, $6,801		4,210		4,108
Other assets (includes restricted cash of consolidated variable interest entities: 2016, $35; 2015, $155)		10,348		10,069

Total assets	$	159,642	$	161,184

Liabilities and Shareholders’ Equity
Liabilities
Customer deposits	$	54,404	$	54,997
Travelers Cheques and other prepaid products		2,803		3,247
Accounts payable		11,729		11,822
Short-term borrowings (includes debt issued by a consolidated variable interest entity: 2016, nil; 2015, $100)		2,343		4,812
Long-term debt (includes debt issued by consolidated variable interest entities: 2016, $14,609; 2015, $13,602)		50,649		48,061
Other liabilities		17,002		17,572

Total liabilities		138,930		140,511

Commitments and Contingencies (Note 8)
Shareholders’ Equity
Preferred shares, $1.66^2/3 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		185		194
Additional paid-in capital		12,868		13,348
Retained earnings		10,280		9,665
Accumulated other comprehensive loss
Net unrealized securities gains, net of tax: 2016, $34; 2015, $32		65		58
Foreign currency translation adjustments, net of tax: 2016, $(39); 2015, $(100)		(2,170)		(2,044)
Net unrealized pension and other postretirement benefit losses, net of tax: 2016, $(194); 2015, $(223)		(516)		(548)

Total accumulated other comprehensive loss		(2,621)		(2,534)

Total shareholders’ equity		20,712		20,673

Total liabilities and shareholders’ equity	$	159,642	$	161,184

See Notes to Consolidated Financial Statements.

AMERICAN EXPRESS COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



Six Months Ended June 30 (Millions)	2016		2015

Cash Flows from Operating Activities
Net income	$	3,441	$	2,998
Adjustments to reconcile net income to net cash provided by operating activities:
Provisions for losses		897		887
Depreciation and amortization		536		514
Deferred taxes and other		(852)		146
Stock-based compensation		133		140
Changes in operating assets and liabilities, net of effects of acquisitions and dispositions:
Other receivables		293		(271)
Other assets		(107)		1,616
Accounts payable and other liabilities		(759)		(1,381)
Travelers Cheques and other prepaid products		(444)		(414)

Net cash provided by operating activities		3,138		4,235

Cash Flows from Investing Activities
Sales of available-for-sale investment securities		45		—
Maturities and redemptions of available-for-sale investment securities		567		991
Purchases of investments		(791)		(1,212)
Net decrease (increase) in Card Member receivables and loans, including held for sale^(a)		13,002		(569)
Purchase of premises and equipment, net of sales: 2016, $2; 2015, $32		(649)		(537)
Acquisitions/dispositions, net of cash acquired		(162)		(74)
Net decrease (increase) in restricted cash		126		(1,529)

Net cash provided by (used in) investing activities		12,138		(2,930)

Cash Flows from Financing Activities
Net (decrease) increase in customer deposits		(594)		3,017
Net (decrease) increase in short-term borrowings		(2,520)		1,033
Issuance of long-term debt		3,778		3,457
Principal payments on long-term debt		(1,558)		(8,410)
Issuance of American Express preferred shares		—		841
Issuance of American Express common shares		75		143
Repurchase of American Express common shares		(2,852)		(1,971)
Dividends paid		(601)		(533)

Net cash used in financing activities		(4,272)		(2,423)

Effect of foreign currency exchange rates on cash and cash equivalents		1		(99)

Net increase (decrease) in cash and cash equivalents		11,005		(1,217)
Cash and cash equivalents at beginning of period		22,762		22,288

Cash and cash equivalents at end of period	$	33,767	$	21,071

(a)	Refer to Note 2 for additional information.

See Notes to Consolidated Financial Statements

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The Company

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

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

•

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

•

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

•

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

•

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

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

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

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

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

Certain reclassifications of prior period amounts have been made to conform to the current period presentation. 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

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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)	2016		2015
U.S. Consumer Services^(a)	$	44,594	$	43,495
International Consumer and Network Services		6,600		7,072
Global Commercial Services		8,693		8,006

Card Member loans		59,887		58,573
Less: Reserve for losses		1,091		1,028

Card Member loans, net	$	58,796	$	57,545

Other loans, net^(b)	$	1,132	$	1,254

(a)

Includes approximately $25.3 billion and $23.6 billion of gross Card Member loans available to settle obligations of a consolidated variable interest entity (VIE) as of June 30, 2016 and December 31, 2015, respectively.

(b)

Other loans primarily represent loans to merchants. Other loans are presented net of reserves for losses of $36 million and $20 million as of June 30, 2016 and December 31, 2015, respectively.

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Card Member accounts receivable by segment and Other receivables as of June 30, 2016 and December 31, 2015 consisted of:



(Millions)	2016		2015
U.S. Consumer Services^(a)	$	10,587	$	11,807
International Consumer and Network Services		5,582		5,599
Global Commercial Services		29,054		26,727

Card Member receivables^(b)		45,223		44,133
Less: Reserve for losses		423		462

Card Member receivables, net	$	44,800	$	43,671

Other receivables, net^(c)	$	2,697	$	3,024

(a)

Includes $5.8 billion and $6.6 billion of gross Card Member receivables available to settle obligations of a consolidated VIE as of June 30, 2016 and December 31, 2015, respectively.

(b)

Includes approximately $12.7 billion and $11.9 billion of Card Member receivables outside the United States as of June 30, 2016 and December 31, 2015, respectively.

(c)

Other receivables primarily represent amounts related to (i) GNS partner banks for items such as royalty and franchise fees, (ii) certain merchants for billed discount revenue, and (iii) loyalty coalition partners for points issued, as well as program participation and servicing fees. Other receivables are presented net of reserves for losses of $50 million and $43 million as of June 30, 2016 and December 31, 2015, respectively.

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Card Member Loans and Card Member Receivables Aging

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



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


2016(Millions)
Card Member Loans:
U.S. Consumer Services	$	44,120	$	128	$	100	$	246	$	44,594
International Consumer and Network Services		6,491		33		23		53		6,600
Global Commercial Services
Global Small Business Services		8,547		27		20		50		8,644
Global Corporate Payments^(a)		(b)		(b)		(b)		1		49
Card Member Receivables:
U.S. Consumer Services	$	10,464	$	44	$	24	$	55	$	10,587
International Consumer and Network Services		5,503		24		15		40		5,582
Global Commercial Services
Global Small Business Services		13,516		64		39		87		13,706
Global Corporate Payments^(a)		(b)		(b)		(b)		111		15,348



			30-59		60-89		90+
			Days		Days		Days
			Past		Past		Past
2015(Millions)	Current		Due		Due		Due		Total
Card Member Loans:
U.S. Consumer Services	$	43,063	$	128	$	94	$	210	$	43,495
International Consumer and Network Services		6,961		34		25		52		7,072
Global Commercial Services
Global Small Business Services		7,867		26		18		40		7,951
Global Corporate Payments^(a)		(b)		(b)		(b)		1		55
Card Member Receivables:
U.S. Consumer Services	$	11,646	$	54	$	32	$	75	$	11,807
International Consumer and Network Services		5,515		24		18		42		5,599
Global Commercial Services
Global Small Business Services		12,734		69		45		102		12,950
Global Corporate Payments^(a)		(b)		(b)		(b)		124		13,777

(a)

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

(b)

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

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Credit Quality Indicators for Card Member Loans and Receivables

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



	2016							2015
	Net Write-Off Rate							Net Write-Off Rate
		Principal Only	^(a)	Principal, Interest, & Fees	^(a)	30+ Days Past Due as a % of Total			Principal Only	^(a)	Principal, Interest, & Fees	^(a)	30+ Days Past Due as a % of Total

Card Member Loans:
U.S. Consumer Services		1.5	%	1.7	%	1.1	%		1.4	%	1.7	%	0.9	%
International Consumer and Network Services		2.0	%	2.4	%	1.7	%		2.0	%	2.5	%	1.6	%
Global Small Business Services		1.3	%	1.6	%	1.1	%		1.3	%	1.5	%	0.9	%
Card Member Receivables:
U.S. Consumer Services		1.5	%	1.8	%	1.2	%		1.7	%	1.9	%	1.4	%
International Consumer and Network Services		2.2	%	2.4	%	1.4	%		2.0	%	2.2	%	1.5	%
Global Small Business Services		1.7	%	2.0	%	1.4	%		2.0	%	2.3	%	1.6	%



	2016					2015

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

Card Member Receivables:
Global Corporate Payments		0.09	%	0.7	%		0.10	%	0.7	%

(a)

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

Impaired Card Member Loans and Receivables

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

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following tables provide additional information with respect to the Company’s impaired Card Member loans and receivables. Impaired Card Member receivables are not significant for ICNS as of June 30, 2016 and December 31, 2015; therefore, the segment’s receivables are not included in the following tables.



	As of June 30, 2016

	Over 90 days						Accounts Classified
	Past Due &						as a TDR^(c)				Total		Unpaid
	Accruing			Non-					Out of		Impaired		Principal		Allowance
2016 (Millions)		Interest	^(a)		Accruals	^(b)		In Program^(d)		Program^(e)		Balance		Balance		for TDRs
Card Member Loans:
U.S. Consumer Services	$	162		$	141		$	174	$	116	$	593	$	545	$	52
International Consumer and Network Services		53			—			—		—		53		53		—
Global Commercial Services		29			32			28		24		113		104		10
Card Member Receivables:
U.S. Consumer Services		—			—			8		4		12		11		5
Global Commercial Services		—			—			18		7		25		25		14

Total	$	244		$	173		$	228	$	151	$	796	$	738	$	81



	As of December 31, 2015

	Over 90 days						Accounts Classified
	Past Due &						as a TDR^(c)				Total		Unpaid
	Accruing			Non-					Out of		Impaired		Principal		Allowance
2015 (Millions)		Interest	^(a)		Accruals	^(b)		In Program^(d)		Program^(e)		Balance		Balance		for TDRs
Card Member Loans:
U.S. Consumer Services	$	140		$	124		$	149	$	89	$	502	$	463	$	44
International Consumer and Network Services		52			—			—		—		52		51		—
Global Commercial Services		24			26			23		18		91		85		9
Card Member Receivables:
U.S. Consumer Services		—			—			11		3		14		14		8
Global Commercial Services		—			—			16		3		19		19		12

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

(a)

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

(b)

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

(c)

Accounts classified as a TDR include $19 million and $20 million that are over 90 days past due and accruing interest and $16 million and $18 million that are non-accruals as of June 30, 2016 and December 31, 2015, respectively.

(d)

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

(e)

Out of Program TDRs include $114 million and $84 million of Card Member accounts that have successfully completed a modification program and $37 million and $29 million of Card Member accounts that were not in compliance with the terms of the modification programs as of June 30, 2016 and December 31, 2015, respectively.

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table provides information with respect to the Company’s average balances of, and interest income recognized from, impaired Card Member loans and the average balances of impaired Card Member receivables for the three and six months ended June 30:



	Three Months Ended				Six Months Ended
	June 30, 2016				June 30, 2016

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

Card Member Loans:
U.S. Consumer Services	$	551	$	12	$	555	$	24
International Consumer and Network Services		54		4		53		8
Global Commercial Services		102		3		103		6
Card Member Receivables:
U.S. Consumer Services		13		—		12		—
Global Commercial Services		25		—		20		—

Total	$	745	$	19	$	743	$	38



	Three Months Ended				Six Months Ended
	June 30, 2015				June 30, 2015

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

Card Member Loans:
U.S. Consumer Services	$	582	$	11	$	578	$	22
International Consumer and Network Services		55		3		58		7
Global Commercial Services		109		3		106		5
Card Member Receivables:
U.S. Consumer Services		10		—		14		—
Global Commercial Services		17		—		24		—

Total	$	773	$	17	$	780	$	34

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Card Member Loans and Receivables Modified as TDRs

The following table provides additional information with respect to the USCS 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.

Three Months Ended

Six Months Ended

June 30, 2016

Average

Payment

Average

Payment

Number of

Outstanding

Interest Rate

Term

Number of

Outstanding

Interest Rate

Term

Accounts

Balances^(a)

Reduction

Extension

Accounts

Balances^(a)

Reduction

Extension

(in thousands)

($ in millions)

(% Points)

(# of Months)

(in thousands)

($ in millions)

(% Points)

(# of Months)

Troubled Debt Restructurings:

Card Member Loans

(b)

107

(b)

Card Member Receivables

(c)

Total

172

Three Months Ended

Six Months Ended

June 30, 2015

Average

Payment

Average

Payment

Number of

Outstanding

Interest Rate

Term

Number of

Outstanding

Interest Rate

Term

Accounts

Balances^(a)

Reduction

Extension

Accounts

Balances^(a)

Reduction

Extension

(in thousands)

($ in millions)

(% Points)

(# of Months)

(in thousands)

($ in millions)

(% Points)

(# of Months)

Troubled Debt Restructurings:

Card Member Loans

(b)

150

(b)

Card Member Receivables

(c)

Total

104

224

(a)

Represents the outstanding balance immediately prior to modification. The outstanding balance includes principal, fees and accrued interest on Card Member loans and principal and fees on Card Member receivables. Modifications did not reduce the principal balance.

(b)

For Card Member loans, there have been no payment term extensions.

(c)

The Company does not offer interest rate reduction programs for Card Member receivables as the receivables are non-interest bearing.

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table provides information with respect to the USCS and GCS Card Member loans and receivables modified as TDRs that subsequently defaulted within 12 months of modification 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.



	Three Months Ended				Six Months Ended
	June 30, 2016				June 30, 2016
			Aggregated				Aggregated
			Outstanding				Outstanding
	Number of		Balances		Number of		Balances
	Accounts		Upon Default^(a)		Accounts		Upon Default^(a)
	(in thousands)		($ in millions)		(in thousands)		($ in millions)
Troubled Debt Restructurings That Subsequently Defaulted:
Card Member Loans		1	$	9		2	$	18
Card Member Receivables		1		1		2		2

Total		2	$	10		4	$	20




	Three Months Ended				Six Months Ended
	June 30, 2015				June 30, 2015
			Aggregated				Aggregated
			Outstanding				Outstanding
	Number of		Balances		Number of		Balances
	Accounts		Upon Default^(a)		Accounts		Upon Default^(a)
	(in thousands)		($ in millions)		(in thousands)		($ in millions)
Troubled Debt Restructurings That Subsequently Defaulted:
Card Member Loans		3	$	15		5	$	25
Card Member Receivables		1		1		2		2

Total		4	$	16		7	$	27

(a)

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

4. Reserves for Losses

Reserves for losses relating to Card Member 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.

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Changes in Card Member Loans Reserve for Losses

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



(Millions)	2016		2015
Balance, January 1	$	1,028	$	1,201
Provisions^(a)		512		520
Net write-offs
Principal^(b)		(437)		(502)
Interest and fees^(b)		(80)		(85)
Other^(c)		68		(2)

Balance, June 30	$	1,091	$	1,132

(a)

Provisions for principal, interest and fee reserve components.

(b)

Consists of principal write-offs, less recoveries of $179 million and $212 million, including net write-offs from TDRs of $17 million and $22 million, for the six months ended June 30, 2016 and 2015, respectively. Recoveries of interest and fees were de minimis.

(c)

Includes foreign currency translation adjustments of $(2) million and $(8) million and other adjustments of $3 million and $6 million for the six months ended June 30, 2016 and 2015, respectively. The six months ended June 30, 2016 also includes reserves of $7 million in the first quarter and $60 million in the second quarter associated with $20 million and $245 million of retained Card Member loans, respectively, reclassified from HFS to held for investment during those periods as a result of the respective sales of the JetBlue Airways Corporation (JetBlue) and Costco Wholesale Corporation in the United States (Costco) cobrand card portfolios.

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:



(Millions)	2016		2015
Card Member loans evaluated individually for impairment^(a)	$	342	$	279
Related reserves ^(a)	$	62	$	53

Card Member loans evaluated collectively for impairment^(b)	$	59,545	$	58,294
Related reserves ^(b)	$	1,029	$	975

(a)

Represents loans modified as a TDR and related reserves.

(b)

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

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:



(Millions)	2016		2015
Balance, January 1	$	462	$	465
Provisions^(a)		322		339
Net write-offs^(b)		(359)		(370)
Other^(c)		(2)		(14)

Balance, June 30	$	423	$	420

(a)

Provisions for principal and fee reserve components.

(b)

Consists of principal and fee components, less recoveries of $202 million and $201 million, including net write-offs from TDRs of $16 million and $42 million, for the six months ended June 30, 2016 and 2015, respectively.

(c)

Includes foreign currency translation adjustments of $(1) million and $(7) million and other adjustments of $(1) million and $(7) million for the six months ended June 30, 2016 and 2015, respectively.

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Card Member Receivables Evaluated Individually and Collectively for Impairment

The following table presents Card Member receivables evaluated individually and collectively for impairment, and related reserves, as of June 30, 2016 and December 31, 2015:



(Millions)	2016		2015
Card Member receivables evaluated individually for impairment^(a)	$	37	$	33
Related reserves ^(a)	$	19	$	20

Card Member receivables evaluated collectively for impairment	$	45,186	$	44,100
Related reserves ^(b)	$	404	$	442

(a)

Represents receivables modified as a TDR and related reserves.

(b)

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

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:




	2016								2015
Description of Securities (Millions)	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
State and municipal obligations	$	2,530	$	72	$	—	$	2,602	$	2,813	$	85	$	(5)	$	2,893
U.S. Government agency obligations		2		—		—		2		2		—		—		2
U.S. Government treasury obligations		354		14		—		368		406		4		(1)		409
Corporate debt securities		26		1		—		27		29		1		—		30
Mortgage-backed securities ^(a)		111		5		—		116		117		4		—		121
Equity securities		1		—		—		1		1		—		—		1
Foreign government bonds and obligations		718		9		—		727		250		6		(1)		255
Other ^(b)		50		—		(1)		49		50		—		(2)		48

Total	$	3,792	$	101	$	(1)	$	3,892	$	3,668	$	100	$	(9)	$	3,759

(a)

Represents mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae.

(b)

Other comprises investments in various mutual funds.

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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:




	2016								2015
	Less than 12 months				12 months or more				Less than 12 months				12 months or more
			Gross				Gross				Gross				Gross
Description of Securities (Millions)	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
State and municipal obligations	$	—	$	—	$	—		—	$	100	$	(3)	$	13	$	(2)
U.S. Government treasury obligations		—		—		—		—		253		(1)		—		—
Foreign government bonds and obligations		—		—		—		—		99		(1)		—		—
Other		—		—		33		(1)		—		—		33		(2)

Total	$	—	$	—	$	33	$	(1)	$	452	$	(5)	$	46	$	(4)

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:



	Less than 12 months						12 months or more						Total
Ratio of Fair Value to Amortized Cost	Number of		Estimated		Gross Unrealized		Number of		Estimated		Gross Unrealized		Number of		Estimated		Gross Unrealized
(Dollars in millions)	Securities		Fair Value		Losses		Securities		Fair Value		Losses		Securities		Fair Value		Losses
2016:
90%–100%		—	$	—	$	—		24	$	36	$	(1)		24	$	36	$	(1)
Less than 90%		—		—		—		—		—		—		—		—		—

Total as of June 30, 2016		—	$	—	$	—		24	$	36	$	(1)		24	$	36	$	(1)



2015:
90%–100%		52	$	450	$	(5)		15	$	37	$	(2)		67	$	487	$	(7)
Less than 90%		—		—		—		2		9		(2)		2		9		(2)

Total as of December 31, 2015		52	$	450	$	(5)		17	$	46	$	(4)		69	$	496	$	(9)

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:



			Estimated
(Millions)	Cost		Fair Value
Due within 1 year	$	815	$	817
Due after 1 year but within 5 years		172		177
Due after 5 years but within 10 years		413		435
Due after 10 years		2,341		2,413

Total^(a)	$	3,741	$	3,842

(a)

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

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

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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:



(Millions)	2016		2015
Charge Trust	$	2	$	2
Lending Trust		33		153

Total	$	35	$	155

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.

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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:



(Millions)	2016		2015
U.S.:
Interest bearing	$	53,666	$ 54,102
Non-interest bearing (includes Card Member credit balances of: 2016, $311 million; 2015, $389 million)		343	478
Non-U.S.:
Interest bearing		89	82
Non-interest bearing (includes Card Member credit balances of: 2016, $293 million; 2015, $323 million)		306	335

Total customer deposits	$	54,404	$ 54,997

Customer deposits by deposit type as of June 30, 2016 and December 31, 2015 were as follows:



(Millions)	2016		2015
U.S. retail deposits:
Savings accounts – Direct	$	30,221	$ 29,023
Certificates of deposit:
Direct		287	281
Third-party (brokered)		13,460	13,856
Sweep accounts – Third-party (brokered)		9,698	10,942
Other retail deposits:
Non-U.S. deposits and U.S. non-interest bearing deposits		134	183
Card Member credit balances — U.S. and non-U.S.		604	712

Total customer deposits	$	54,404	$ 54,997

The scheduled maturities of certificates of deposit as of June 30, 2016 were as follows:



(Millions)	U.S.		Non-U.S.		Total
2016	$	2,030	$	5	$	2,035
2017		3,657		5		3,662
2018		3,197		—		3,197
2019		2,332		—		2,332
2020		2,517		—		2,517
After 5 years		14		—		14

Total	$	13,747	$	10	$	13,757

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:



(Millions)	2016		2015
U.S.	$	113	$ 105
Non-U.S.		3	1

Total	$	116	$ 106

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

8. Contingencies

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

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

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

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

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

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

9. Derivatives and Hedging Activities

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

In relation to the Company’s credit risk, under the terms of the derivative agreements it has with its various counterparties, the Company is not required to either immediately settle any outstanding liability balances or post collateral upon the occurrence of a specified credit risk-related event. Based on the assessment of credit risk of the Company’s derivative counterparties as of 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:



	Other Assets Fair Value				Other Liabilities Fair Value
(Millions)	2016		2015		2016		2015
Derivatives designated as hedging instruments:
Interest rate contracts
Fair value hedges	$	452	$	236	$	—	$	9
Foreign exchange contracts
Net investment hedges		216		191		141		57

Total derivatives designated as hedging instruments		668		427		141		66
Derivatives not designated as hedging instruments:
Foreign exchange contracts, including certain embedded derivatives^(a)		475		117		248		135

Total derivatives, gross		1,143		544		389		201
Less: Cash collateral netting^(b)		(361)		(155)		—		—
Derivative asset and derivative liability netting^(c)		(169)		(107)		(169)		(107)

Total derivatives, net^(d)	$	613	$	282	$	220	$	94

(a)

Includes foreign currency derivatives embedded in certain operating agreements.

(b)

Represents the offsetting of derivative instruments and the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from derivative instrument(s) executed with the same counterparty under an enforceable master netting arrangement. The Company received non-cash collateral from a counterparty in the form of security interests in U.S. Treasury securities with a fair value of $30 million as of June 30, 2016, none of which was sold or repledged. Such non-cash collateral economically reduced the Company’s risk exposure to $583 million but did not reduce the net exposure on the Company’s Consolidated Balance Sheets. The Company did not have any such non-cash collateral as of December 31, 2015. Additionally, the Company posted $159 million and $149 million as of June 30, 2016 and December 31, 2015, respectively, as initial margin on its centrally cleared interest rate swaps; such amounts are recorded within Other receivables on the Consolidated Balance Sheets and are not netted against the derivative balances.

(c)

Represents the amount of netting of derivative assets and derivative liabilities executed with the same counterparty under an enforceable master netting arrangement.

(d)

The Company has no individually significant derivative counterparties and therefore, no significant risk exposure to any single derivative counterparty. The total net derivative assets and derivative liabilities are presented within Other assets and Other liabilities on the Consolidated Balance Sheets.

A majority of the Company’s derivative assets and liabilities as of 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.

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Fair Value Hedges

The Company is exposed to interest rate risk associated with its fixed-rate long-term debt. The Company uses interest rate swaps to economically convert certain fixed-rate debt obligations to floating-rate obligations at the time of issuance. The Company hedged $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)
	Gains (losses) recognized in income
	Derivative contract					Hedged item					Net hedge
		Amount					Amount				ineffectiveness
Derivative relationship	Income Statement Line Item	2016		2015		Income Statement Line Item	2016		2015		2016		2015
Interest rate contracts	Other expenses	$	61	$	(89)	Other expenses	$	(53)	$	85	$	8	$	(4)



Six Months Ended June 30 (Millions)
	Gains (losses) recognized in income
	Derivative contract					Hedged item					Net hedge
		Amount					Amount				ineffectiveness
Derivative relationship	Income Statement Line Item	2016		2015		Income Statement Line Item	2016		2015		2016		2015
Interest rate contracts	Other expenses	$	226	$	(26)	Other expenses	$	(224)	$	29	$	2	$	3

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.

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table summarizes the impact on the Consolidated Statements of Income associated with the Company’s net investment hedges for the three and six months ended June 30:



Three Months Ended June 30: (Millions)
	Gains (losses) recognized in income
		Amount reclassified from AOCI into income					Net hedge ineffectiveness
Description	Income Statement Line Item	2016		2015		Income Statement Line Item	2016		2015
Net investment hedges:

Foreign exchange contracts	Other, net expenses	$	5	$	—	Other, net expenses	$	—	$	1

Six Months Ended June 30: (Millions)
	Gains (losses) recognized in income
		Amount reclassified from AOCI into income					Net hedge ineffectiveness
Description	Income Statement Line Item	2016		2015		Income Statement Line Item	2016		2015
Net investment hedges:

Foreign exchange contracts	Other, net expenses	$	5	$	—	Other, net expenses	$	—	$	1

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.

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

10. Fair Values

Financial Assets and Financial Liabilities Carried at Fair Value

The following table summarizes the Company’s financial assets and financial liabilities measured at fair value on a recurring basis, categorized by GAAP’s valuation hierarchy, as of June 30, 2016 and December 31, 2015:



	2016								2015
(Millions)	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
Assets:
Investment securities:^(a)
Equity securities	$	1	$	1	$	—	$	—	$	1	$	1	$	—	$	—
Debt securities and other		3,891		368		3,523		—		3,758		409		3,349		—
Derivatives^(a)		1,143		—		1,143		—		544		—		544		—

Total assets		5,035		369		4,666		—		4,303		410		3,893		—

Liabilities:
Derivatives^(a)		389		—		389		—		201		—		201		—

Total liabilities	$	389	$	—	$	389	$	—	$	201	$	—	$	201	$	—

(a)

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

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table summarizes the estimated fair values of the Company’s financial assets and financial liabilities that are not required to be carried at fair value on a recurring basis, as of 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.



	Carrying Value		Corresponding Fair Value Amount
2016 (Billions)	Carrying Value		Total			Level 1		Level 2			Level 3
Financial Assets:
Financial assets for which carrying values equal or approximate fair value
Cash and cash equivalents	$	34	$	34		$	33	$	1	^(a)	$	—
Other financial assets^(b)		48		48			—		48			—
Financial assets carried at other than fair value
Loans, net		60		61	^(c)		—		—			61

Financial Liabilities:
Financial liabilities for which carrying values equal or approximate fair value		63		63			—		63			—
Financial liabilities carried at other than fair value
Certificates of deposit^(d)		14		14			—		14			—
Long-term debt	$	51	$	52	^(c)	$	—	$	52		$	—



	Carrying Value		Corresponding Fair Value Amount
2015 (Billions)	Carrying Value		Total			Level 1		Level 2			Level 3
Financial Assets:
Financial assets for which carrying values equal or approximate fair value
Cash and cash equivalents	$	23	$	23		$	22	$	1	^(a)	$	—
Other financial assets^(b)		47		47			—		47			—
Financial assets carried at other than fair value
Card Member loans and receivables HFS^(e)		15		15			—		—			15
Loans, net		59		60	^(c)		—		—			60

Financial Liabilities:
Financial liabilities for which carrying values equal or approximate fair value		67		67			—		67			—
Financial liabilities carried at other than fair value
Certificates of deposit^(d)		14		14			—		14			—
Long-term debt	$	48	$	49	^(c)	$	—	$	49		$	—

(a)

Reflects time deposits and short-term investments.

(b)

Includes Card Member receivables (including fair values of Card Member receivables of $5.8 billion and $6.7 billion held by a consolidated VIE as of June 30, 2016 and December 31, 2015, respectively), Other receivables, restricted cash and other miscellaneous assets.

(c)

Includes the fair values of Card Member loans of $25.3 billion and $23.5 billion and long-term debt of $14.7 billion and $13.6 billion held by a consolidated VIE as of June 30, 2016 and December 31, 2015, respectively.

(d)

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

(e)

Does not include any fair value associated with the Card Member account relationships. Refer to Note 2 for additional information.

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Nonrecurring Fair Value Measurements

The Company has certain assets that are subject to measurement at fair value on a nonrecurring basis. For these assets, measurement at fair value in periods subsequent to their initial recognition is applicable if determined to be impaired. During the 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:



	Maximum potential undiscounted future payments^(a) (Billions)				Related liability^(b) (Millions)
Type of Guarantee	2016		2015		2016		2015
Return and Merchant Protection	$	44	$	42	$	41	$	49
Other^(c)		6		6		44		37

Total	$	50	$	48	$	85	$	86

(a)

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

(b)

Included in Other liabilities on the Consolidated Balance Sheets.

(c)

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

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 Unrealized
Gains (Losses) on
Investment
Securities

Foreign Currency
Translation
Adjustments

Net Unrealized
Pension and Other
Postretirement
Benefit (Losses)
Gains

Accumulated Other
Comprehensive
(Loss) Income

Balances as of March 31, 2016

(2,040)

(522)

(2,502)

Net unrealized gains

–

Increase (decrease) due to amounts reclassified into earnings

–

Net translation loss of investments in foreign operations

–

(265)

–

(265)

Net gains related to hedges of investments in foreign operations

–

135

–

135

Pension and other postretirement benefit gains

–

Net change in accumulated other comprehensive loss

(130)

(119)

Balances as of June 30, 2016

(2,170)

(516)

(2,621)

Six Months Ended June 30, 2016 (Millions), net of tax

Net Unrealized
Gains (Losses) on
Investment
Securities

Foreign Currency
Translation
Adjustments

Net Unrealized
Pension and Other
Postretirement
Benefit (Losses)
Gains

Accumulated Other
Comprehensive
(Loss) Income

Balances as of December 31, 2015

(2,044)

(548)

(2,534)

Net unrealized gains

–

Decrease due to amounts reclassified into earnings

(2)

–

(2)

Net translation loss of investments in foreign operations

–

(169)

–

(169)

Net gains related to hedges of investments in foreign operations

–

Pension and other postretirement benefit gains

–

Net change in accumulated other comprehensive loss

(126)

(87)

Balances as of June 30, 2016

(2,170)

(516)

(2,621)

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Three Months Ended June 30, 2015 (Millions), net of tax	Net Unrealized Gains (Losses) on Investment Securities		Foreign Currency Translation Adjustments		Net Unrealized Pension and Other Postretirement Benefit (Losses) Gains		Accumulated Other Comprehensive (Loss) Income
Balances as of March 31, 2015	$	96	$	(1,754)	$	(493)	$	(2,151)

Net unrealized loss		(20)		–		–		(20)

Decrease due to amounts reclassified into earnings		–		(1)		–		(1)

Net translation gain of investments in foreign operations		–		45		–		45

Net losses related to hedges of investments in foreign operations		–		(33)		–		(33)

Pension and other postretirement benefit gains		–		–		6		6

Net change in accumulated other comprehensive loss		(20)		11		6		(3)

Balances as of June 30, 2015	$	76	$	(1,743)	$	(487)	$	(2,154)



Six Months Ended June 30, 2015 (Millions), net of tax	Net Unrealized Gains (Losses) on Investment Securities		Foreign Currency Translation Adjustments		Net Unrealized Pension and Other Postretirement Benefit (Losses) Gains		Accumulated Other Comprehensive (Loss) Income
Balances as of December 31, 2014	$	96	$	(1,499)	$	(516)	$	(1,919)

Net unrealized loss		(20)		–		–		(20)

Decrease due to amounts reclassified into earnings		–		(1)		–		(1)

Net translation loss of investments in foreign operations		–		(405)		–		(405)

Net gains related to hedges of investments in foreign operations		–		162		–		162

Pension and other postretirement benefit gains		–		–		29		29

Net change in accumulated other comprehensive loss		(20)		(244)		29		(235)

Balances as of June 30, 2015	$	76	$	(1,743)	$	(487)	$	(2,154)

The following table presents the effects of reclassifications out of AOCI and into the Consolidated Statements of Income:

Gains (losses) recognized in earnings

Three Months Ended

Six Months Ended

June 30,

Income Statement

Amount

Description (Millions)

Line Item

2016

2015

2016

2015

Available-for-sale securities

Reclassifications for previously unrealized net
gains on investment securities

Other non-interest revenues

–

Related income tax expense

Income tax provision

–

(2)

–

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

–

Foreign currency translation adjustments

Reclassification of realized losses on
translation adjustments and related hedges

Other expenses

–

Related income tax benefit

Income tax provision

–

Reclassification of foreign currency
translation adjustments

–

Total

–

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

13. Non-Interest Revenue and Expense Detail

The following is a detail of Other fees and commissions:



	Three Months Ended June 30,				Six Months Ended June 30,
(Millions)	2016		2015		2016		2015
Foreign currency conversion fee revenue	$	207	$	222	$	403	$	433
Delinquency fees		192		194		392		389
Loyalty coalition-related fees		104		88		198		179
Travel commissions and fees		87		95		167		184
Service fees		79		95		157		182
Other^(a)		33		33		65		68

Total Other fees and commissions	$	702	$	727	$	1,382	$	1,435

(a)

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

The following is a detail of Other revenues:



	Three Months Ended June 30,				Six Months Ended June 30,
(Millions)	2016		2015		2016		2015
Global Network Services partner revenues	$	197	$	155	$	342	$	318
Gross realized gains on sale of investment securities		–		–		4		–
Other^(a)		348		366		685		671

Total Other revenues	$	545	$	521	$	1,031	$	989

(a)

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

The following is a detail of Other expenses:



	Three Months Ended June 30,				Six Months Ended June 30,
(Millions)	2016		2015		2016		2015
Professional services	$	628	$	655	$	1,232	$	1,279
Occupancy and equipment		438		415		903		849
Communications		80		85		163		173
Card and merchant-related fraud losses		57		83		115		183
Gain on sale of HFS portfolios^(a)		(1,091)		—		(1,218)		—
Other^(b)		358		297		695		450

Total Other expenses	$	470	$	1,535	$	1,890	$	2,934

(a)

Refer to Note 2 for additional information.

(b)

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

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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:



	Three Months Ended June 30,				Six Months Ended June 30,
(Millions, except per share amounts)	2016		2015		2016		2015
Numerator:
Basic and diluted:
Net income	$	2,015	$	1,473	$	3,441	$	2,998
Preferred dividends		(19)		(20)		(40)		(20)

Net income available to common shareholders		1,996		1,453		3,401		2,978
Earnings allocated to participating share awards^(a)		(17)		(11)		(28)		(22)

Net income attributable to common shareholders	$	1,979	$	1,442	$	3,373	$	2,956

Denominator:^(a)
Basic: Weighted-average common stock		938		1,009		949		1,013
Add: Weighted-average stock options ^(b)		3		4		3		5

Diluted		941		1,013		952		1,018

Basic EPS	$	2.11	$	1.43	$	3.55	$	2.92
Diluted EPS	$	2.10	$	1.42	$	3.54	$	2.90

(a)

The Company’s unvested restricted stock awards, which include the right to receive non-forfeitable dividends or dividend equivalents, are considered participating securities. Calculations of EPS under the two-class method exclude from the numerator any dividends paid or owed on participating securities and any undistributed earnings considered to be attributable to participating securities. The related participating securities are similarly excluded from the denominator.

(b)

The dilutive effect of unexercised stock options excludes from the computation of EPS 2.5 million and 0.6 million of options for the three months ended June 30, 2016 and 2015, respectively, and 1.7 million and 0.5 million of options for the six months ended June 30, 2016 and 2015, respectively, because inclusion of the options would have been anti-dilutive.

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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)	USCS		ICNS		GCS		GMS		Corporate & Other^(a)		Consolidated

Non-interest revenues	$	2,069	$	1,242	$	2,280	$	1,087	$	108	$	6,786
Interest income		1,278		234		310		1		62		1,885
Interest expense		139		58		104		(61)		196		436
Total revenues net of interest expense		3,208		1,418		2,486		1,149		(26)		8,235
Net income (loss)		1,067		228		576		373		(229)		2,015

Total assets (billions)		81		35		46		24		(26)		160

Total equity (billions)	$	7	$	3	$	8	$	2	$	1	$	21



Six Months Ended June 30, 2016 (Millions, except where indicated)	USCS		ICNS		GCS		GMS		Corporate & Other^(a)		Consolidated

Non-interest revenues	$	4,098	$	2,382	$	4,470	$	2,128	$	216	$	13,294
Interest income		2,669		461		631		1		128		3,890
Interest expense		279		112		199		(120)		391		861
Total revenues net of interest expense		6,488		2,731		4,902		2,249		(47)		16,323
Net income (loss)		1,761		416		1,061		730		(527)		3,441

Total assets (billions)		81		35		46		24		(26)		160

Total equity (billions)	$	7	$	3	$	8	$	2	$	1	$	21



Three Months Ended June 30, 2015 (Millions, except where indicated)	USCS		ICNS		GCS		GMS		Corporate & Other^(a)		Consolidated

Non-interest revenues	$	2,176	$	1,163	$	2,285	$	1,130	$	107	$	6,861
Interest income		1,252		237		289		1		58		1,837
Interest expense		121		58		91		(49)		193		414
Total revenues net of interest expense		3,307		1,342		2,483		1,180		(28)		8,284
Net income (loss)		613		193		550		369		(252)		1,473

Total assets (billions)		84		29		46		17		(19)		157

Total equity (billions)	$	8	$	3	$	7	$	2	$	2	$	22



Six Months Ended June 30, 2015 (Millions, except where indicated)	USCS		ICNS		GCS		GMS		Corporate & Other^(a)		Consolidated

Non-interest revenues	$	4,207	$	2,308	$	4,460	$	2,200	$	189	$	13,364
Interest income		2,525		482		567		1		119		3,694
Interest expense		235		121		180		(108)		396		824
Total revenues net of interest expense		6,497		2,669		4,847		2,309		(88)		16,234
Net income (loss)		1,272		390		1,067		738		(469)		2,998

Total assets (billions)		84		29		46		17		(19)		157

Total equity (billions)	$	8	$	3	$	7	$	2	$	2	$	22

(a)

Corporate & Other includes adjustments and eliminations for intersegment activity.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Business Introduction

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

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

•

Charge and credit card products

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Network services

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

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

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Expense management products and services

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Other lending products, including merchant financing

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Travel-related services

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Stored-value/prepaid products

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

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

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

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

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

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

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

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

GBT JV transition services agreement, earnings from equity method investments (including the GBT JV) 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,

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.

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



	Three Months Ended										Six Months Ended
(Millions, except percentages and	June 30,						Change				June 30,						Change
per share amounts)	2016			2015			2016 vs. 2015 2016							2015			2016 vs. 2015
Total revenues net of interest expense	$	8,235		$	8,284		$	(49)	(1)	%	$	16,323		$	16,234		$	89	1	%
Provisions for losses		463			467			(4)	(1)			897			887			10	1
Expenses		4,756			5,587			(831)	(15)			10,226			10,801			(575)	(5)
Net income		2,015			1,473			542	37			3,441			2,998			443	15
Earnings per common share — diluted^(a)	$	2.10		$	1.42		$	0.68	48	%	$	3.54		$	2.90		$	0.64	22	%
Return on average equity^(b)		26.4	%		28.1	%						26.4	%		28.1	%
Return on average tangible common equity ^(c)		34.5	%		35.4	%						34.5	%		35.4	%

(a)

Earnings per common share — diluted was reduced by the impact of (i) earnings allocated to participating share awards and other items of $17 million and $11 million for the three months ended June 30, 2016 and 2015, respectively, and $28 million and $22 million for the six months ended June 30, 2016 and 2015, respectively, and (ii) dividends on preferred shares of $19 million and $20 million for the three months ended June 30, 2016 and 2015, respectively, and $40 million and $20 million for the six months ended June 30, 2016 and 2015, respectively.

(b)

Return on average equity (ROE) is computed by dividing (i) one-year period net income ($5.6 billion and $5.9 billion for June 30, 2016 and 2015, respectively) by (ii) one-year average total shareholders’ equity ($21.2 billion and $21.1 billion for June 30, 2016 and 2015, respectively).

(c)

Return on average tangible common equity (ROTCE), a non-GAAP measure, is computed in the same manner as ROE except the computation of average tangible common equity, a non-GAAP measure, excludes from average total shareholders’ equity, average goodwill and other intangibles of $3.7 billion and $3.8 billion as of June 30, 2016 and 2015, respectively, and average preferred shares of $1.6 billion and $0.7 billion as of June 30, 2016 and 2015, respectively. We believe ROTCE is a useful measure of the profitability of our business.

Table 2: Total Revenue Net of Interest Expense Summary



	Three Months Ended								Six Months Ended
	June 30,				Change				June 30,				Change
(Millions, except percentages)	2016		2015		2016 vs. 2015				2016		2015		2016 vs. 2015
Discount revenue	$	4,824	$	4,946	$	(122)	(2)	%	$	9,467	$	9,606	$	(139)	(1)	%
Net card fees		715		667		48	7			1,414		1,334		80	6
Other fees and commissions		702		727		(25)	(3)			1,382		1,435		(53)	(4)
Other		545		521		24	5			1,031		989		42	4

Total non-interest revenues		6,786		6,861		(75)	(1)			13,294		13,364		(70)	(1)

Total interest income		1,885		1,837		48	3			3,890		3,694		196	5
Total interest expense		436		414		22	5			861		824		37	4

Net interest income		1,449		1,423		26	2			3,029		2,870		159	6

Total revenues net of interest expense	$	8,235	$	8,284	$	(49)	(1)	%	$	16,323	$	16,234	$	89	1	%

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.

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



	Three Months Ended								Six Months Ended
	June 30,				Change				June 30,				Change
(Millions, except percentages)	2016		2015		2016 vs. 2015				2016		2015		2016 vs. 2015
Charge card	$	153	$	165	$	(12)	(7)	%	$	322	$	339	$	(17)	(5)	%
Card Member loans		285		285		—	—			512		520		(8)	(2)
Other		25		17		8	47			63		28		35	#

Total provisions for losses^(a)	$	463	$	467	$	(4)	(1)	%	$	897	$	887	$	10	1	%

# Denotes a variance greater than 100 percent.

(a)

For the three and six months ended June 30, 2016, provisions for losses does not reflect the HFS portfolios.

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



	Three Months Ended								Six Months Ended
	June 30,				Change				June 30,				Change
(Millions, except percentages)	2016		2015		2016 vs. 2015				2016		2015		2016 vs. 2015
Marketing and promotion	$	788	$	761	$	27	4	%	$	1,515	$	1,370	$	145	11	%
Card Member rewards		1,766		1,799		(33)	(2)			3,469		3,439		30	1
Card Member services and other		281		242		39	16			563		503		60	12
Total marketing, promotion, rewards, Card Member services and other		2,835		2,802		33	1			5,547		5,312		235	4
Salaries and employee benefits		1,451		1,250		201	16			2,789		2,555		234	9
Other, net^(a)		470		1,535		(1,065)	(69)			1,890		2,934		(1,044)	(36)
Total expenses	$	4,756	$	5,587	$	(831)	(15)	%	$	10,226	$	10,801	$	(575)	(5)	%

(a)

Effective December 1, 2015, Other, net included the valuation allowance adjustment associated with the HFS portfolios.

Expenses

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,

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.

Table 5: Selected Card-Related Statistical Information



	As of or for the Three Months Ended June 30,						Change 2016 vs.		As of or for the Six Months Ended June 30,						Change 2016 vs.
	2016			2015			2015		2016			2015			2015
Card billed business: (billions)
United States	$	185.1		$	181.8			2 %	$	361.4		$	351.2			3 %
Outside the United States		84.2			80.2			5		161.7			156.4			3

Worldwide	$	269.3		$	262.0			3	$	523.1		$	507.6			3

Total cards-in-force: (millions)
United States		47.0			55.3			(15)		47.0			55.3			(15)
Outside the United States		61.2			58.5			5		61.2			58.5			5

Worldwide		108.2			113.8			(5)		108.2			113.8			(5)

Basic cards-in-force: (millions)
United States		37.0			42.8			(14)		37.0			42.8			(14)
Outside the United States		50.5			48.2			5		50.5			48.2			5

Worldwide		87.5			91.0			(4)		87.5			91.0			(4)

Average basic Card Member spending: (dollars)^(a)
United States	$	4,672		$	4,616			1	$	8,941		$	8,936			—
Outside the United States		3,319			3,297			1		6,404			6,426			—
Worldwide Average		4,313			4,272			1		8,280			8,277			—
Card Member loans: (billions)^(b)
United States		53.2			61.8			(14)		53.2			61.8			(14)
Outside the United States		6.7			7.2			(8)		6.7			7.2			(8)

Worldwide	$	59.9		$	69.0			(13)	$	59.9		$	69.0			(13)

Average discount rate		2.43	%		2.49	%		(2)		2.43	%		2.49	%		(2)
Average fee per card (dollars)^(a)	$	42		$	39			8	$	41		$	39			5
Average fee per card adjusted (dollars)^(a)	$	46		$	43			7 %	$	45		$	44			2 %

(a)

Average basic Card Member spending and average fee per card are computed from proprietary card activities only. Average fee per card is computed based on net card fees divided by average worldwide proprietary cards-in-force. The average fee per card adjusted, which is a non-GAAP measure, is computed in the same manner, but excludes deferred direct acquisition costs. The amount of deferred costs recognized was $74 million and $61 million for the three months ended June 30, 2016 and 2015, respectively, and $142 million and $145 million for the six months ended June 30, 2016 and 2015, respectively. We present the average fee per card adjusted because we believe this metric presents a useful indicator of card fee pricing across a range of our proprietary card products.

(b)

Effective December 1, 2015, does not reflect the HFS portfolios.

Table 6: Billed Business Growth



Three Months Ended
June 30, 2016
	Percentage Increase (Decrease)	Percentage Increase (Decrease) Assuming No Changes in FX Rates	^(a)