Form 10-Q AMERICAN EXPRESS CO For: Jun 30

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2016

or

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

SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from                  to                 

Commission file number 1-7657

AMERICAN EXPRESS COMPANY

(Exact name of registrant as specified in its charter)

 

New York				13-4922250
(State or other jurisdiction of incorporation or organization)				(I.R.S. Employer Identification No.)
200 Vesey Street, New York, NY				10285
(Address of principal executive offices)				(Zip Code)

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

None

 

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

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

Yes   X         No             

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

Yes   X         No             

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

 

Large accelerated filer		x		Accelerated filer		¨
Non-accelerated filer		¨  (Do not check if a smaller reporting company)		Smaller reporting company		¨

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

Yes               No _X_     

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

 

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

 

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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

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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.

 

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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.

 

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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.

 

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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, $1.662/3 par value, authorized 20 million shares; issued and outstanding 1,600 shares as of June 30, 2016 and December 31, 2015			—				—
Common shares, $0.20 par value, authorized 3.6 billion shares; issued and outstanding 925 million shares as of June 30, 2016 and 969 million shares as of December 31, 2015			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.

 

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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

 

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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

 

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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

 

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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.

 

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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.

 

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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.

 

10

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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.

 

11

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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.

 

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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

 

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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

June 30, 2016

Average

Average

Average

Payment

Average

Payment

Number of

Outstanding

Interest Rate

Term

Number of

Outstanding

Interest Rate

Term

Accounts

Balances(a)

Reduction

Extension

Accounts

Balances(a)

Reduction

Extension

(in thousands)

($ in millions)

(% Points)

(# of Months)

(in thousands)

($ in millions)

(% Points)

(# of Months)

Troubled Debt Restructurings:

Card Member Loans

7

$

50

10

(b)

15

$

107

11

(b)

Card Member Receivables

2

27

(c)

17

5

65

(c)

17

Total

9

$

77

20

$

172

Three Months Ended

Six Months Ended

June 30, 2015

June 30, 2015

Average

Average

Average

Payment

Average

Payment

Number of

Outstanding

Interest Rate

Term

Number of

Outstanding

Interest Rate

Term

Accounts

Balances(a)

Reduction

Extension

Accounts

Balances(a)

Reduction

Extension

(in thousands)

($ in millions)

(% Points)

(# of Months)

(in thousands)

($ in millions)

(% Points)

(# of Months)

Troubled Debt Restructurings:

Card Member Loans

10

$

70

10

(b)

21

$

150

11

(b)

Card Member Receivables

3

34

(c)

12

6

74

(c)

12

Total

13

$

104

27

$

224

 

(a)

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

(b)

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

(c)

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

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

19

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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

 

20

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AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

8. Contingencies

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

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

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

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

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

 

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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.

 

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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.

 

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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.

 

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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.

 

25

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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)						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)						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.

 

26

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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.

 

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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		$	60			$	(2,040)			$	(522)			$	(2,502)
Net unrealized gains			5				–				–				5
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			–				–				6				6
Net change in accumulated other comprehensive loss			5				(130)				6				(119)
Balances as of June 30, 2016		$	65			$	(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		$	58			$	(2,044)			$	(548)			$	(2,534)
Net unrealized gains			9				–				–				9
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			–				43				–				43
Pension and other postretirement benefit gains			–				–				32				32
Net change in accumulated other comprehensive loss			7				(126)				32				(87)
Balances as of June 30, 2016		$	65			$	(2,170)			$	(516)			$	(2,621)

 

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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,

June 30,

Income Statement

Amount

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

$

–

$

–

$

4

$

–

Related income tax expense

Income tax provision

–

–

(2)

–

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

–  –

–

2  –

–

Foreign currency translation adjustments

Reclassification of realized losses on translation adjustments and related hedges

Other expenses

–

1

–

1

Related income tax benefit

Income tax provision

–

–

–

–

Reclassification of foreign currency translation adjustments

–

1

–

1

Total

$

–

$

1

$

2

$

1

 

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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).

 

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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.

 

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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.

 

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ITEM 2.

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

Business Introduction

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

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

 

•

Charge and credit card products

 

•

Network services

 

•

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

 

•

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

 

•

Expense management products and services

 

•

Other lending products, including merchant financing

 

•

Travel-related services

 

•

Stored-value/prepaid products

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

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

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

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

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

Forward-Looking Statements and Non-GAAP Measures

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

Bank Holding Company

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

Business Environment

For the quarter ended June 30, 2016, earnings included a gain of $1.1 billion ($677 million after-tax) from the previously announced sale of our Costco Wholesale Corporation (Costco) U.S. cobrand card portfolio, a $232 million ($151 million after-tax) restructuring charge related to our on-going cost reduction efforts, together with a continued elevated level of spending on growth initiatives. During the quarter, we continued to make progress on our key initiatives to accelerate growth, including driving new card acquisitions across our global consumer and commercial portfolios, expanding merchant coverage and driving strong momentum across our lending growth initiatives. In addition, we used our capital strength to repurchase $1.7 billion of outstanding shares.

The year-over-year growth in worldwide billings for the second quarter, adjusted for foreign currency exchange rates, slowed versus the first quarter as a result of a continued slowdown in Costco-related volumes leading up to the date of the portfolio sale. International volumes continued to be strong and performance remained relatively consistent sequentially across most regions.

Revenues net of interest expense decreased modestly as compared to the prior year. Similar to last quarter, we experienced a year-over-year decline in the discount rate from the continued expansion of OptBlue and merchant negotiations, including those resulting from the regulatory changes in the EU that went into effect late last year. Discount revenue growth was also impacted by an increase in contra-discount revenues as compared to the prior year, primarily related to cash rebate rewards. In addition, in the prior year both the discount rate and discount revenue benefited from certain merchant rebate accruals.

Net interest income grew, as compared to the prior year, although growth slowed sequentially due primarily to the sales of the Costco and JetBlue cobrand card portfolios as well as the continued decline in Costco loans prior to the portfolio sale in June. Card member loans were down in the second quarter of 2016 compared to the prior year, reflecting the sales of the two cobrand card portfolios in the first half of this year. Excluding the Card Member loans related to the Costco and JetBlue portfolios from the prior year,

 

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worldwide loan growth during the quarter was sequentially consistent, with a portion of the growth coming from increased usage of other American Express cards by former Costco cobrand Card Members. We continue to believe there are opportunities to increase our share of lending from both existing customers and high quality prospects without significantly changing our overall credit risk profile.

Provision expenses were down modestly and credit quality remained strong during the quarter. The prior period included credit costs associated with the Costco and JetBlue cobrand card portfolios subsequently classified as held for sale; the credit costs associated with the Costco portfolio for the current quarter were reported in Other expense. We expect some modest upward pressure on our write-off rates, due primarily to the seasoning of loans related to new Card Members.

Total expenses decreased significantly as compared to the prior year, reflecting the Costco cobrand portfolio sale gain, which was classified as an expense reduction in Other expense. Excluding the Costco portfolio sale gain and the restructuring charge during the current quarter, total expenses grew modestly and reflect a continued elevated level of investment spending on growth initiatives. We expect our investment spending during 2016, including marketing and promotion, will be at a higher level than 2015. Rewards expense declined in the second quarter driven by a shift in volumes to cash rebate products for which the rewards costs are classified as contra-discount revenue.

Relative to the first half of the year, we continue to anticipate earnings will be lower during the second half of the year due to the end of our relationship with Costco in the U.S. and our higher level of spending on growth initiatives. Overall, we remain focused on accelerating revenue growth, optimizing investments and resetting our cost base.

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

 

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American Express Company

Consolidated Results of Operations

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

Effective December 1, 2015, we transferred the Card Member loans and receivables related to our cobrand partnerships with JetBlue and Costco in the United States (the HFS portfolios) to Card Member loans and receivables HFS (included in the USCS and GCS segments) on the Consolidated Balance Sheets, the sales of which were completed on March 18, 2016 and June 17, 2016, respectively. For the periods from December 1, 2015 through the sale completion dates, the primary impacts beyond the HFS classification on the Consolidated Balance Sheets were to provisions for losses and credit metrics, which do not reflect amounts related to these HFS loans and receivables, as credit costs were reported in Other expenses through a valuation allowance adjustment. Other, non-credit related metrics (i.e., billed business, cards-in-force, net interest yield) reflect amounts related to the HFS portfolios through the sale completion dates. Refer to Note 2 to the Consolidated Financial Statements for additional information.

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

Table 1: Summary of Financial Performance

 

		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.

 

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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.

 

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Prepaid Services business, partially offset by lower revenues earned related to the GBT JV transition services agreement.

Interest income increased $48 million or 3 percent and $196 million or 5 percent for the three and six months ended June 30, 2016, compared to the same periods in the prior year, primarily reflecting a modestly higher yield and an increase in average Card Member loans (including Card Member loans HFS), in the six month period, partially offset by the impact from the sales of the HFS portfolio.

Interest expense increased $22 million or 5 percent and $37 million or 4 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, primarily driven by higher average customer deposit balances, partially offset by lower average long-term debt.

Table 3: Provisions for Losses Summary

 

		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,

 

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driven by elevated levels of spending on growth initiatives, predominantly within the USCS and ICNS segments.

Card Member rewards expenses decreased $33 million or 2 percent and increased $30 million or 1 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year.

The decrease for the three-month period was primarily driven by lower cobrand rewards expense of $67 million, reflecting the decline in spending on Costco cobrand cards, as well as a shift in volumes to cash rebate products for which the rewards costs are classified as contra-discount revenue, partially offset by increased spending volumes across other cobrand card products. The lower cobrand rewards expense was partially offset by higher Membership Rewards expense of $34 million, primarily driven by an increase in new points earned as a result of higher spending volumes and growth in the Ultimate Redemption Rate (URR).

The increase for the six months ended was primarily driven by higher Membership Rewards expense of $83 million, primarily driven by an increase in new points earned as a result of higher spending volumes, partially offset by lower cobrand rewards expense of $53 million as a result of the above mentioned decline in spending on Costco cobrand cards and the shift in volumes to cash rebate products.

The Membership Rewards URR for current program participants was 95 percent (rounded down) at June 30, 2016, compared to 95 percent (rounded up) at June 30, 2015.

Card Member services and other expenses increased $39 million or 16 percent and $60 million or 12 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, driven by increased usage of travel-related benefits.

Salaries and employee benefits expenses increased $201 million or 16 percent and $234 million or 9 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, driven by restructuring in the current year.

Other expenses decreased $1.1 billion or 69 percent and $1.0 billion or 36 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year. The decreases in both periods were driven by the gain on the sale of the Costco Card Member loans and receivables HFS portfolio and lower fraud expenses, partially offset by the impact of the transfer of the HFS portfolios to Card Member loans and receivables HFS effective December 2015, as related credit costs were reported in Other expenses through a valuation allowance adjustment. The decrease in the six-month period also includes the gain on the sale of the JetBlue Card Member loans HFS portfolio, partially offset by the benefit in the prior year from both the reassessment of the functional currency of certain UK legal entities and other FX-related activity.

Income Taxes

The effective tax rate was 33.2 percent and 33.8 percent for the three and six months ended June 30, 2016, respectively, and 33.9 percent and 34.0 percent for the three and six months ended June 30, 2015, respectively. The tax rates in all periods primarily reflected the level of pretax income in relation to recurring permanent tax benefits and the geographic mix of business. Additionally, the effective tax rate in the current-year periods reflected the resolution of certain prior years’ tax items.

 

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Table 5: Selected Card-Related Statistical Information

 

		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.

 

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Table 6: Billed Business Growth

 

				Three Months Ended
				June 30, 2016
					Percentage Increase (Decrease)				Percentage Increase (Decrease) Assuming No Changes in FX Rates	(a)
Worldwide(b)
Total billed business					3	%			4	%
Proprietary billed business					2				3
GNS billed business(c)					5				11
Airline-related volume (8% of worldwide billed business)					(4)				(3)
United States(b)
Billed business					2
Proprietary consumer card billed business(d)					—
Proprietary small business and corporate services billed business(e)					4
T&E-related volume (26% of U.S. billed business)					(1)
Non-T&E-related volume					3
Airline-related volume (7% of U.S. billed business)					(8)
Outside the United States(b)
Billed business					5				10
Japan, Asia Pacific & Australia billed business					12				13
Latin America & Canada billed business					(9)				6
Europe, the Middle East & Africa billed business					3				6
Proprietary consumer card billed business(c)					4				8
Proprietary small business and corporate services billed business(e)					3	%			6	%

 

(a)

The foreign currency adjusted information assumes a constant exchange rate between the periods being compared for purposes of currency translation into U.S. dollars (i.e., assumes the foreign exchange rates used to determine results for the current period apply to the corresponding period against which such results are being compared).

(b)

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

(c)

Included in the ICNS segment.

(d)

Included in the USCS segment.

(e)

Included in the GCS segment.

 

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Table 7: Billed Business Growth

 

				Six Months Ended
				June 30, 2016
					Percentage Increase (Decrease)				Percentage Increase (Decrease) Assuming No Changes in FX Rates	(a)
Worldwide(b)
Total billed business					3	%			5	%
Proprietary billed business					3				4
GNS billed business(c)					5				12
Airline-related volume (8% of worldwide billed business)					(4)				(2)
United States(b)
Billed business					3
Proprietary consumer card billed business(d)					2
Proprietary small business and corporate services billed business(e)					4
T&E-related volume (26% of U.S. billed business)					—
Non-T&E-related volume					4
Airline-related volume (7% of U.S. billed business)					(6)
Outside the United States(b)
Billed business					3				9
Japan, Asia Pacific & Australia billed business					10				13
Latin America & Canada billed business					(11)				5
Europe, the Middle East & Africa billed business					3				7
Proprietary consumer card billed business(c)					3				8
Proprietary small business and corporate services billed business(e)					—	%			5	%

 

(a)

Refer to Note (a) in Table 6.

(b)

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

(c)

Included in the ICNS segment.

(d)

Included in the USCS segment.

(e)

Included in the GCS segment.

 

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Table 8: Selected Credit-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.
(Millions, except percentages and where indicated)			2016				2015				2015								2016				2015				2015
Worldwide Card Member receivables: (a)
Total receivables (billions)		$	45.2			$	44.9				1	%						$	45.2			$	44.9				1	%
Loss reserves:
Beginning balance		$	446			$	429				4							$	462			$	465				(1)
Provisions (b)			153				165				(7)								322				339				(5)
Net write-offs (c)			(173)				(171)				1								(359)				(370)				(3)
Other			(3)				(3)				—								(2)				(14)				(86)
Ending balance		$	423			$	420				1							$	423			$	420				1
% of receivables			0.9	%			0.9	%											0.9	%			0.9	%
Net write-off rate — principal only (d)			1.6	%			1.7	%											1.7	%			1.9	%
Net write-off rate — principal and fees (d)			1.8	%			1.9	%											2.0	%			2.1	%
30+ days past due as a % of total (d)			1.3	%			1.5	%											1.3	%			1.5	%
Net loss ratio as a % of charge volume — GCP			0.09	%			0.09	%											0.09	%			0.10	%
90+ days past billing as a % of total — GCP			0.7	%			0.7	%											0.7	%			0.7	%
Worldwide Card Member loans: (a)
Total loans (billions)		$	59.9			$	69.0				(13)							$	59.9			$	69.0				(13)
Loss reserves:
Beginning balance		$	1,012			$	1,130				(10)							$	1,028			$	1,201				(14)
Provisions (b)			285				285				—								512				520				(2)
Net write-offs — principal only (c)			(223)				(243)				(8)								(437)				(502)				(13)
Net write-offs — interest and fees (c)			(40)				(42)				(5)								(80)				(85)				(6)
Other (e)			57				2				#								68				(2)				#
Ending balance		$	1,091			$	1,132				(4)							$	1,091			$	1,132				(4)
Ending reserves — principal		$	1,037			$	1,076				(4)							$	1,037			$	1,076				(4)
Ending reserves — interest and fees		$	54			$	56				(4)							$	54			$	56				(4)
% of loans			1.8	%			1.6	%											1.8	%			1.6	%
% of past due			160	%			171	%											160	%			171	%
Average loans (billions)(a)		$	58.8			$	68.0				(13)	%						$	58.2			$	68.0				(14)	%
Net write-off rate — principal only (d)			1.5	%			1.4	%											1.5	%			1.5	%
Net write-off rate — principal, interest and fees (d)			1.8	%			1.7	%											1.8	%			1.7	%
30+ days past due as a % of total (d)			1.1	%			1.0	%											1.1	%			1.0	%

 

#

Denotes a variance greater than 100 percent.

 

(a)

Refer to Table 5 footnote (b).

(b)

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

(c)

Write-offs, less recoveries.

(d)

We present a net write-off rate based on principal losses only (i.e., excluding interest and/or fees) to be consistent with industry convention. In addition, because we consider uncollectible interest and/or fees in our reserves for credit losses, a net write-off rate including principal, interest and/or fees is also presented. The net write-off rates and 30+ days past due as a percentage of total relate to USCS, ICNS and Global Small Business Services (GSBS) Card Member receivables.

(e)

Includes reserves associated with Card Member loans reclassified from HFS to held for investment. Refer to Changes in Card Member loans reserve for losses under Note 4 to our Consolidated Financial Statements for additional information.

 

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Table 9: Net Interest Yield on Card Member Loans

 

		Three Months Ended June 30,								Six Months Ended June 30,
(Millions, except percentages and where indicated)		2016				2015				2016				2015
Net interest income		$	1,449			$	1,423			$	3,029			$	2,870
Exclude:
Interest expense not attributable to the Company’s Card Member loan portfolio			247				248				485				494
Interest income not attributable to the Company’s Card Member loan portfolio			(102)				(91)				(205)				(177)
Adjusted net interest income (a)		$	1,594			$	1,580			$	3,309			$	3,187
Average loans including HFS loan portfolios (billions)		$	67.6			$	68.0			$	69.2			$	68.0
Net interest income divided by average loans			8.6	%			8.4	%			8.8	%			8.4	%
Net interest yield on Card Member loans (a)			9.5	%			9.3	%			9.6	%			9.5	%

 

(a)

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

 

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Business Segment Results

U.S. Consumer Services

Table 10: USCS Selected Income Statement Data

 

		Three Months Ended June 30,								Change								Six Months Ended June 30,								Change
(Millions, except percentages)		2016				2015				2016 vs. 2015								2016				2015				2016 vs. 2015
Revenues
Non-interest revenues		$	2,069			$	2,176			$	(107)				(5)	%		$	4,098			$	4,207			$	(109)				(3)	%
Interest income			1,278				1,252				26				2				2,669				2,525				144				6
Interest expense			139				121				18				15				279				235				44				19
Net interest income			1,139				1,131				8				1				2,390				2,290				100				4
Total revenues net of interest expense			3,208				3,307				(99)				(3)				6,488				6,497				(9)				—
Provisions for losses			237				243				(6)				(2)				427				436				(9)				(2)
Total revenues net of interest expense after provisions for losses			2,971				3,064				(93)				(3)				6,061				6,061				—				—
Expenses
Marketing, promotion, rewards, Card Member services and other			1,369				1,366				3				—				2,717				2,576				141				5
Salaries and employee benefits and other operating expenses			(96)				759				(855)				#				559				1,505				(946)				(63)
Total expenses			1,273				2,125				(852)				(40)				3,276				4,081				(805)				(20)
Pretax segment income			1,698				939				759				81				2,785				1,980				805				41
Income tax provision			631				326				305				94				1,024				708				316				45
Segment income		$	1,067			$	613			$	454				74	%		$	1,761			$	1,272			$	489				38	%
Effective tax rate			37.2	%			34.7	%											36.8	%			35.8	%

 

#

Denotes a variance greater than 100 percent.

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

Non-interest revenues decreased $107 million or 5 percent and $109 million or 3 percent for the three and six months ended June 30, 2016, compared to the same periods in the prior year, primarily driven by lower discount revenue as a result of higher cash rebate rewards due to new Card Member acquisition offers, and a decline in the discount rate, which was partially offset by growth in billed business of 2 percent for the six months ended June 30, 2016. Billed business was relatively flat for the three months ended June 30, 2016, compared to the same period in the prior year, with a decline in Costco cobrand card volumes and the sale of the Costco cobrand card portfolio in the current year negatively impacting billed business growth for both the three and six months ended June 30, 2016. The decrease in discount revenue was partially offset by an increase in net card fees, resulting from growth in the Platinum, Gold and Delta portfolios.

Net interest income increased $8 million or 1 percent and $100 million or 4 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, primarily reflecting a modestly higher yield and an increase in average Card Member loans (including Card Member loans HFS), in the six month period, partially offset by the impact from the sales of the HFS portfolios and higher interest expense.

Overall, provisions for losses decreased $6 million or 2 percent and $9 million or 2 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, as the current year periods do not reflect provisions for the HFS portfolios as related credit costs were reported in Other expenses through a valuation allowance adjustment, the decrease from which was partially offset by strong momentum in our lending growth initiatives and higher net write-offs.

 

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Marketing, promotion, rewards, Card Member services and other expenses were relatively flat and increased $141 million or 5 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year. In the three-month period, increases in marketing and promotion expense and Card Member services and other expenses of $22 million and $19 million, respectively, were offset by a $38 million decrease in rewards expense. The increase for the six-month period was primarily driven by a $103 million increase in marketing and promotion expense, reflecting elevated levels of spending on growth initiatives, and a $40 million increase in Card Member services expense, driven by increased usage of new benefits.

Salaries and employee benefits and other operating expenses decreased $855 million and $946 million for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, primarily driven by the gain on the sale of the Costco Card Member loans and receivables HFS portfolio, partially offset by restructuring in the current year. The decrease in the six-month period also includes the gain on the sale of the JetBlue Card Member loans HFS portfolio.

 

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Table 11: USCS Selected Statistical Information

 

		As of or for the								Change				As of or for the								Change
		Three Months Ended								2016				Six Months Ended								2016
		June 30,								vs.				June 30,								vs.
(Millions, except percentages and where indicated)		2016				2015				2015				2016				2015				2015
Card billed business (billions)		$	93.4			$	93.6				—	%		$	182.4			$	179.3				2	%
Total cards-in-force			31.8				39.1				(19)				31.8				39.1				(19)
Basic cards-in-force			22.6				27.3				(17)				22.6				27.3				(17)
Average basic Card Member spending (dollars)		$	3,417			$	3,472				(2)			$	6,523			$	6,635				(2)
Total segment assets (billions)(a)		$	81.3			$	84.4				(4)			$	81.3			$	84.4				(4)
Segment capital (billions)		$	6.8			$	7.9				(13)			$	6.8			$	7.9				(13)
Return on average segment capital (b)			38.9	%			31.2	%							38.9	%			31.2	%
Return on average tangible segment capital (b)			40.7	%			32.4	%							40.7	%			32.4	%
Card Member receivables: (c)
Total receivables (billions)		$	10.6			$	10.8				(2)			$	10.6			$	10.8				(2)
Net write-off rate – principal only (d)			1.3	%			1.2	%							1.5	%			1.7	%
Net write-off rate – principal and fees (d)			1.6	%			1.4	%							1.8	%			1.9	%
30+ days past due as a % of total			1.2	%			1.4	%							1.2	%			1.4	%
Card Member loans: (c)
Total loans (billions)		$	44.6			$	51.8				(14)	%		$	44.6			$	51.8				(14)	%
Average loans (billions)		$	43.5			$	51.1				(15)	%		$	43.1			$	51.1				(16)	%
Net write-off rate – principal only (d)			1.5	%			1.4	%							1.5	%			1.4	%
Net write-off rate – principal, interest and fees (d)			1.7	%			1.6	%							1.7	%			1.7	%
30+ days past due loans as a % of total			1.1	%			0.9	%							1.1	%			0.9	%
Calculation of Net Interest Yield on
Card Member loans:
Net interest income		$	1,139			$	1,131							$	2,390			$	2,290
Exclude:
Interest expense not attributable to the Company’s Card Member loan portfolio			20				18								39				35
Interest income not attributable to the Company’s Card Member loan portfolio			(5)				(3)								(10)				(7)
Adjusted net interest income (e)		$	1,154			$	1,146							$	2,419			$	2,318
Average loans including HFS loan portfolios (billions)		$	50.8			$	51.1							$	52.3			$	51.1
Net interest income divided by average loans			9.0	%			8.9	%							9.1	%			9.0	%
Net interest yield on Card Member loans(e)			9.1	%			9.0	%							9.3	%			9.2	%

 

(a)

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

(b)

Return on average segment capital is calculated by dividing (i) one-year period segment income ($2.8 billion and $2.4 billion for the twelve months ended June 30, 2016 and 2015, respectively) by (ii) one-year average segment capital ($7.3 billion and $7.6 billion for the twelve months ended June 30, 2016 and 2015, respectively). Return on average tangible segment capital, a non-GAAP measure, is computed in the same manner as return on average segment capital except the computation excludes from average segment capital average goodwill and other intangibles of $339 million and $280 million as of June 30, 2016 and 2015, respectively. We believe the return on average tangible segment capital is a useful measure of the profitability of our business.

(c)

Refer to Table 5 footnote (b).

(d)

Refer to Table 8 footnote (d).

(e)

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

 

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International Consumer and Network Services

Table 12: ICNS Selected Income Statement Data

 

		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
Revenues
Non-interest revenues		$	1,242			$	1,163			$	79				7	%		$	2,382			$	2,308			$	74				3	%
Interest income			234				237				(3)				(1)				461				482				(21)				(4)
Interest expense			58				58				—				—				112				121				(9)				(7)
Net interest income			176				179				(3)				(2)				349				361				(12)				(3)
Total revenues net of interest expense			1,418				1,342				76				6				2,731				2,669				62				2
Provisions for losses			78				76				2				3				149				146				3				2
Total revenues net of interest expense after provisions for losses			1,340				1,266				74				6				2,582				2,523				59				2
Expenses
Marketing, promotion, rewards, Card Member services and other			500				482				18				4				981				929				52				6
Salaries and employee benefits and other operating expenses			567				546				21				4				1,073				1,076				(3)				—
Total expenses			1,067				1,028				39				4				2,054				2,005				49				2
Pretax segment income			273				238				35				15				528				518				10				2
Income tax provision			45				45				—				—				112				128				(16)				(13)
Segment income		$	228			$	193			$	35				18	%		$	416			$	390			$	26				7	%
Effective tax rate			16.5	%			18.9	%											21.2	%			24.7	%

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

Non-interest revenues increased $79 million or 7 percent and $74 million or 3 percent, for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, primarily driven by higher discount revenue, due to an increase in both proprietary and non-proprietary (i.e., GNS) billed business, higher net card fees and a contractual payment from a GNS partner in the second quarter of 2016. Total billed business increased 5 percent and 4 percent for the three and six months ended June 30, 2016, respectively (10 percent for both periods on an FX-adjusted basis), compared to the same periods in the prior year, primarily due to increased proprietary and GNS cards-in-force, with a relatively consistent level of average spend per card.² Refer to Tables 6 and 7 for additional information on billed business by region.

Interest income decreased $3 million or 1 percent and $21 million or 4 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, reflecting the impact of changes in FX rates year-over-year. FX-adjusted interest income increased 9 percent and 7 percent, respectively, primarily driven by higher average FX-adjusted loan balances. ²

Interest expense was relatively flat and decreased $9 million or 7 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, reflecting the impact of changes in FX rates year-over-year. FX-adjusted interest expense increased 9 percent and 6 percent, respectively, driven by higher funding costs. ²

 

 

² Refer to footnote 1 on page 37 for details regarding foreign currency adjusted information.

 

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Provisions for losses increased $2 million or 3 percent and $3 million or 2 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, driven by higher net write-offs.

Marketing, promotion, rewards, Card Member services and other expenses increased $18 million or 4 percent and $52 million or 6 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, primarily driven by elevated levels of spending on growth initiatives.

Salaries and employee benefits and other operating expenses increased $21 million or 4 percent and was relatively flat (and increased 7 percent and 3 percent on an FX-adjusted basis) for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, primarily driven by restructuring in the current year.³

The effective tax rate in all periods reflects the recurring permanent tax benefit related to the segment’s ongoing funding activities outside the United States, which is allocated to ICNS under the Company’s internal tax allocation process. The effective tax rate for 2016 also reflects the allocated share of tax benefits related to the resolution of certain prior years’ items. In addition, the effective tax rate in each of the periods reflects the impact of recurring permanent tax benefits on varying levels of pretax income.

 

 

 

 

 

³ Refer to footnote 1 on page 37 for details regarding foreign currency adjusted information.

 

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Table 13: ICNS Selected Statistical Information

 

		As of or for the								Change				As of or for the								Change
		Three Months Ended								2016				Six Months Ended								2016
		June 30,								vs.				June 30,								vs.
(Millions, except percentages and where indicated)		2016				2015				2015				2016				2015				2015
Card billed business (billions)
Proprietary		$	26.5			$	25.5				4	%		$	51.2			$	49.9				3	%
GNS			43.8				41.5				5				84.3				80.1				5
Total		$	70.3			$	67.0				5			$	135.5			$	130.1				4
Total cards-in-force
Proprietary			15.0				14.5				3				15.0				14.5				3
GNS			48.0				45.5				5				48.0				45.5				5
Total			63.0				60.0				5				63.0				60.0				5
Proprietary basic cards-in-force			10.3				9.9				4				10.3				9.9				4
Average proprietary basic Card Member spending (dollars)		$	2,609			$	2,600				—			$	5,066			$	5,047				—
Total segment assets (billions)(a)		$	35.0			$	28.9				21			$	35.0			$	28.9				21
Segment capital (billions)		$	2.6			$	3.1				(16)			$	2.6			$	3.1				(16)
Return on average segment capital (b)			25.5	%			24.8	%							25.5	%			24.8	%
Return on average tangible segment capital (b)			34.3	%			34.1	%							34.3	%			34.1	%
Card Member receivables: (c)
Total receivables (billions)		$	5.6			$	5.5				1			$	5.6			$	5.5				1
Net write-off rate – principal only (d)			2.2	%			2.1	%							2.2	%			2.0	%
Net write-off rate – principal and fees(d)			2.3	%			2.3	%							2.4	%			2.2	%
30+ days past due loans as a % of total			1.4	%			1.5	%							1.4	%			1.5	%
Card Member loans: (c)
Total loans (billions)		$	6.6			$	7.2				(8)			$	6.6			$	7.2				(8)
Average loans (billions)		$	6.8			$	7.0				(4)	%		$	6.8			$	7.1				(5)	%
Net write-off rate – principal only (d)			2.1	%			2.0	%							2.0	%			2.0	%
Net write-off rate – principal, interest and fees (d)			2.5	%			2.5	%							2.4	%			2.5	%
30+ days past due loans as a % of total			1.7	%			1.6	%							1.7	%			1.6	%
Calculation of Net Interest Yield on Card Member loans:
Net interest income		$	176			$	179							$	349			$	361
Exclude:
Interest expense not attributable to the Company’s Card Member loan portfolio			10				14								21				28
Interest income not attributable to the Company’s Card Member loan portfolio			(4)				(6)								(7)				(9)
Adjusted net interest income (e)		$	182			$	187							$	363			$	380
Average loans (billions)		$	6.8			$	7.0							$	6.8			$	7.1
Net interest income divided by average loans			10.4	%			10.2	%							10.3	%			10.1	%
Net interest yield on Card Member loans (e)			10.8	%			10.7	%							10.8	%			10.7	%

 

(a)

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

(b)

Return on average segment capital is calculated by dividing (i) one-year period segment income ($711 million and $688 million for the twelve months ended June 30, 2016 and 2015, respectively) by (ii) one-year average segment capital ($2.8 billion for both the twelve months ended June 30, 2016 and 2015). Return on average tangible segment capital, a non-GAAP measure, is computed in the same manner as return on average segment capital except the computation excludes from average segment capital average goodwill and other intangibles of $0.7 billion and $0.8 billion as of June 30, 2016 and 2015, respectively. We believe return on average tangible segment capital is a useful measure of the profitability of our business.

(c)

Refer to Table 5 footnote (b).

(d)

Refer to Table 8 footnote (d).

(e)

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

 

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Global Commercial Services

Table 14: GCS Selected Income Statement Data

 

		Three Months Ended June 30,																Six Months Ended June 30,
										Change																Change
(Millions, except percentages)		2016				2015				2016 vs. 2015								2016				2015				2016 vs. 2015
Revenues
Non-interest revenues		$	2,280			$	2,285			$	(5)				—	%		$	4,470			$	4,460			$	10				—	%
Interest income			310				289				21				7				631				567				64				11
Interest expense			104				91				13				14				199				180				19				11
Net interest income			206				198				8				4				432				387				45				12
Total revenues net of interest expense			2,486				2,483				3				—				4,902				4,847				55				1
Provisions for losses			139				136				3				2				299				287				12				4
Total revenues net of interest expense after provisions for losses			2,347				2,347				—				—				4,603				4,560				43				1
Expenses
Marketing, promotion, rewards, Card Member services and other			841				809				32				4				1,607				1,532				75				5
Salaries and employee benefits and other operating expenses			596				689				(93)				(13)				1,325				1,362				(37)				(3)
Total expenses			1,437				1,498				(61)				(4)				2,932				2,894				38				1
Pretax segment income			910				849				61				7				1,671				1,666				5				—
Income tax provision			334				299				35				12				610				599				11				2
Segment income		$	576			$	550			$	26				5	%		$	1,061			$	1,067			$	(6)				(1)	%
Effective tax rate			36.7	%			35.2	%											36.5	%			36.0	%

GCS issues a wide range of proprietary corporate and small business cards and provides payment and expense management services globally. In addition, GCS provides financing products for qualified merchants.

Non-interest revenues were relatively flat for both the three and six months ended June 30, 2016, compared to the same periods in the prior year. Billed business increased 4 percent for both the three and six months ended June 30, 2016, compared to the same periods in the prior year. These increases in billed business were offset by higher contra revenues, primarily due to higher cash rebate rewards, as well as the benefit related to certain merchant rebate accruals in the prior year.

Net interest income increased $8 million or 4 percent and $45 million or 12 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, primarily driven by higher average loan balances, including HFS, partially offset by higher interest expense.

Provisions for losses increased $3 million or 2 percent and $12 million or 4 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, primarily driven by higher net write-offs in the merchant financing loan portfolio, partially offset by lower net write-offs in the Card Member receivables portfolio.

Marketing, promotion, rewards, Card Member services and other expenses increased $32 million or 4 percent and $75 million or 5 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, primarily driven by higher Card Member rewards expense, due to higher spending volumes, and increased marketing and promotion expense.

Salaries and employee benefits and other operating expenses decreased $93 million or 13 percent and $37 million or 3 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, primarily due to the gain on the sale of the Costco Card Member loans and receivables HFS portfolio, partially offset by a restructuring charge in the current year, and higher operating expenses, including technology development and professional fees.

 

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Table 15: GCS Selected Statistical Information

 

		As of or for the								Change				As of or for the								Change
		Three Months Ended								2016				Six Months Ended								2016
		June 30,								vs.				June 30,								vs.
(Millions, except percentages and where indicated)		2016				2015				2015				2016				2015				2015
Card billed business (billions)		$	104.3			$	100.4				4	%		$	202.8			$	195.9				4	%
Total cards-in-force			13.4				14.7				(9)				13.4				14.7				(9)
Basic cards-in-force			13.4				14.7				(9)				13.4				14.7				(9)
Average basic Card Member spending (dollars)		$	7,060			$	6,811				4			$	13,592			$	13,299				2
Total segment assets (billions)(a)		$	46.2			$	45.9				1			$	46.2			$	45.9				1
Segment capital (billions)		$	7.7			$	7.1				8			$	7.7			$	7.1				8
Return on average segment capital (b)			28.1	%			35.2	%							28.1	%			35.2	%
Return on average tangible segment capital (b)			38.9	%			49.2	%							38.9	%			49.2	%
Card Member receivables (billions)(c)		$	29.1			$	28.6				2			$	29.1			$	28.6				2
Card Member loans (billions)(c)		$	8.7			$	10.0				(13)			$	8.7			$	10.0				(13)
Card Member receivables:
Total receivables - GCP (billions)		$	15.3			$	15.9				(3)			$	15.3			$	15.9				(3)
90+ days past billing as a % of total - GCP (d)			0.7	%			0.7	%							0.7	%			0.7	%
Net loss ratio (as a % of charge volume) - GCP			0.09	%			0.09	%							0.09	%			0.10	%
Total receivables - GSBS (billions)(c)		$	13.7			$	12.8				7			$	13.7			$	12.8				7
Net write-off rate (principal only) - GSBS (e)			1.6	%			1.9	%							1.7	%			2.0	%
Net write-off rate (principal and fees) - GSBS (e)			1.9	%			2.1	%							2.0	%			2.3	%
30+ days past due as a % of total - GSBS			1.4	%			1.6	%							1.4	%			1.6	%
Card Member loans: (c)
Total loans - GSBS (billions)		$	8.6			$	9.9				(13)			$	8.6			$	9.9				(13)
Average loans - GSBS (billions)		$	8.5			$	9.8				(14)	%		$	8.3			$	9.7				(15)	%
Net write-off rate (principal only) - GSBS (e)			1.3	%			1.3	%							1.3	%			1.3	%
Net write-off rate (principal, interest and fees) - GSBS (e)			1.6	%			1.5	%							1.6	%			1.5	%
30+ days past due as a % of total - GSBS			1.1	%			0.9	%							1.1	%			0.9	%
Calculation of Net Interest Yield on Card Member loans:
Net interest income		$	206			$	198							$	432			$	387
Exclude:
Interest expense not attributable to the Company’s Card Member loan portfolio			80				72								152				143
Interest income not attributable to the Company’s Card Member loan portfolio			(29)				(22)								(57)				(42)
Adjusted net interest income (f)		$	257			$	248							$	527			$	488
Average loans including HFS loan portfolios (billions)		$	10.0			$	9.9							$	10.1			$	9.7
Net interest income divided by average loans			8.2	%			8.0	%							8.5	%			8.0	%
Net interest yield on Card Member loans (f)			10.3	%			10.0	%							10.5	%			10.1	%

 

(a)

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

(b)

Return on average segment capital is calculated by dividing (i) one-year period segment income ($2.0 billion and $2.4 billion for the twelve months ended June 30, 2016 and 2015, respectively) by (ii) one-year average segment capital ($7.2 billion and $6.9 billion for the twelve months ended June 30, 2016 and 2015, respectively). Return on average tangible segment capital, a non-GAAP measure, is computed in the same manner as return on average segment capital except the computation excludes from average segment capital average goodwill and other intangibles of $2.0 billion as of both June 30, 2016 and 2015. We believe return on average tangible segment capital is a useful measure of the profitability of our business.

(c)

Refer to Table 5 footnote (b).

(d)

For GCP Card Member receivables, 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.

(e)

Refer to Table 8 footnote (d).

(f)

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

 

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Global Merchant Services

Table 16: GMS Selected Income Statement Data

 

		Three Months Ended June 30,								Change								Six Months Ended June 30,								Change
(Millions, except percentages)		2016				2015				2016 vs. 2015								2016				2015				2016 vs. 2015
Revenues
Non-interest revenues		$	1,087			$	1,130			$	(43)				(4)	%		$	2,128			$	2,200			$	(72)				(3)	%
Interest income			1				1				—				—				1				1				—				—
Interest expense			(61)				(49)				(12)				24				(120)				(108)				(12)				11
Net interest income			62				50				12				24				121				109				12				11
Total revenues net of interest expense			1,149				1,180				(31)				(3)				2,249				2,309				(60)				(3)
Provisions for losses			5				8				(3)				(38)				13				14				(1)				(7)
Total revenues net of interest expense after provisions for losses			1,144				1,172				(28)				(2)				2,236				2,295				(59)				(3)
Expenses
Marketing, promotion, rewards, Card Member services and other			58				76				(18)				(24)				116				132				(16)				(12)
Salaries and employee benefits and other operating expenses			489				510				(21)				(4)				952				991				(39)				(4)
Total expenses			547				586				(39)				(7)				1,068				1,123				(55)				(5)
Pretax segment income			597				586				11				2				1,168				1,172				(4)				—
Income tax provision			224				217				7				3				438				434				4				1
Segment income		$	373			$	369			$	4				1	%		$	730			$	738			$	(8)				(1)	%
Effective tax rate			37.5	%			37.0	%											37.5	%			37.0	%

GMS operates a global payments network that processes and settles proprietary and non-proprietary card transactions. GMS acquires merchants and provides multi-channel marketing programs and capabilities, services and data, leveraging the Company’s global closed-loop network. GMS also operates loyalty coalition businesses in certain countries around the world.

Non-interest revenues decreased $43 million or 4 percent and $72 million or 3 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, primarily driven by higher contra revenues, as well as a decrease in the discount rate, partially offset by a 3 percent increase in global billed business for both periods.

Net interest income increased $12 million or 24 percent and $12 million or 11 percent for the three and six months ended June 30, 2016, compared to the same periods in the prior year, reflecting a higher interest expense credit relating to internal transfer pricing and funding rates, which resulted in a net benefit for GMS due to its merchant payables.

Marketing, promotion, rewards, Card Member services and other expenses decreased $18 million or 24 percent and $16 million or 12 percent for the three months and six months ended June 30, 2016, compared to the same periods in the prior year, primarily driven by higher marketing and promotion expenses related to our loyalty coalition business in the prior year.

Salaries and employee benefits and other operating expenses decreased $21 million or 4 percent and $39 million or 4 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, primarily due to the growth of the OptBlue program, which does not entail merchant acquirer payments.

 

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Table 17: GMS Selected Statistical Information

 

		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.
(Millions, except percentages and where indicated)		2016				2015				2015				2016				2015				2015
Loyalty Coalition revenue		$	104			$	88				18	%		$	198			$	179				11	%
Average discount rate			2.43	%			2.49	%							2.43	%			2.49	%
Total segment assets(a)(billions)		$	24.1			$	17.4				39	%		$	24.1			$	17.4				39	%
Segment capital (billions)		$	2.4			$	2.3				5	%		$	2.4			$	2.3				5	%
Return on average segment capital(b)			61.9	%			68.0	%							61.9	%			68.0	%
Return on average tangible segment capital(b)			77.9	%			89.5	%							77.9	%			89.5	%

 

(a)

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

(b)

Return on average segment capital is calculated by dividing (i) one-year period segment income ($1.5 billion for both the twelve months ended June 30, 2016 and 2015) by (ii) one-year average segment capital ($2.4 billion and $2.2 billion for the twelve months ended June 30, 2016 and 2015, respectively). Return on average tangible segment capital, a non-GAAP measure, is computed in the same manner as return on average segment capital except the computation excludes from average segment capital average goodwill and other intangibles of $495 million and $521 million as of June 30, 2016 and 2015, respectively. We believe return on average tangible segment capital is a useful measure of the profitability of our business.

Corporate & Other

Corporate functions and certain other businesses, including our Prepaid Services business and other operations, are included in Corporate & Other.

Corporate & Other net expense decreased to $229 million for the three months ended June 30, 2016, compared to $252 million for the three months ended June 30, 2015 and increased to $527 million for the six months ended June 30, 2016, compared to $469 million for the six months ended June 30, 2015. The increase for the six-month period was primarily driven by the benefit in the first quarter of the prior year from both the reassessment of the functional currency of certain UK legal entities and other FX-related activity, as well as restructuring in the current year, partially offset by higher income from our Prepaid Services business.

Results for both periods disclosed included net interest expense related to maintaining the liquidity pool discussed in “Consolidated Capital Resources and Liquidity – Liquidity Management”, as well as interest expense related to other corporate indebtedness.

 

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Consolidated Capital Resources and Liquidity

Our balance sheet management objectives are to maintain:

 

•

A solid and flexible equity capital profile;

 

•

A broad, deep and diverse set of funding sources to finance our assets and meet operating requirements; and

 

•

Liquidity programs that enable us to continuously meet expected future financing obligations and business requirements for at least a twelve-month period, even in the event we are unable to continue to raise new funds under our traditional funding programs during a substantial weakening in economic conditions.

Transitional Basel III

The following table presents our regulatory risk-based capital ratios and leverage ratios and those of our significant bank subsidiaries, American Express Centurion Bank (AECB) and American Express Bank, FSB (FSB), as well as additional ratios widely utilized in the marketplace, as of June 30, 2016.

Table 18: Regulatory Risk-Based Capital and Leverage Ratios

 

		Basel III Standards             2016(a)				Ratios as of June 30,               2016
Risk-Based Capital
Common Equity Tier 1			5.1	%
American Express							13.5	%
AECB							17.1
FSB							20.2
Tier 1			6.6
American Express							14.7
AECB							17.1
FSB							20.2
Total			8.6
American Express							16.4
AECB							18.4
FSB							22.2
Tier 1 Leverage			4.0
American Express							11.5
AECB							17.4
FSB							14.3
Supplementary Leverage Ratio(b)			3.0	%
American Express							9.7
AECB							13.6
FSB							11.2
Common Equity to Risk-Weighted Assets
American Express							15.6
Tangible Common Equity to Risk-Weighted Assets(c)
American Express							12.7	%

 

(a)

Transitional Basel III minimum and conservation buffer as defined by the Federal Reserve for calendar year 2016 for Advanced Approaches institutions.

(b)

The minimum supplementary leverage ratio (SLR) requirement of 3 percent is effective January 1, 2018.

(c)

Tangible Common Equity to Risk-Weighted Assets, a non-GAAP measure, is calculated by dividing shareholders’ equity of $20.7 billion as of June 30, 2016, less preferred shares of $1.6 billion and goodwill and other intangibles of $3.6 billion, by risk-weighted assets of $122.5 billion. We believe presenting the ratio of Tangible Common Equity to Risk-Weighted Assets is a useful measure of evaluating the strength of our capital position. Tangible Common Equity to Risk-Weighted Assets ratio is widely used in the marketplace, although it may be calculated differently by different companies.

 

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Table 19: Regulatory Risk-Based Capital Components and Risk Weighted Assets

 

($ in Billions)		June 30, 2016
Risk-Based Capital
Common Equity Tier 1		$	16.5
Tier 1 Capital			18.0
Tier 2 Capital(a)			2.1
Total Capital			20.1
Risk Weighted Assets			122.5
Average Total Assets to calculate the Tier 1 Leverage Ratio			156.6
Total Leverage Exposure to calculate SLR		$	186.0

 

(a)

Tier 2 capital is the sum of the allowance for receivable and loan losses (limited to 1.25 percent of risk-weighted assets) and $600 million of subordinated notes adjusted for capital held by insurance subsidiaries.

We seek to maintain capital levels and ratios in excess of the minimum regulatory requirements and finance such capital in a cost efficient manner; failure to maintain minimum capital levels could affect our status as a financial holding company and cause the regulatory agencies with oversight of American Express, AECB and FSB to take actions that could limit our business operations.

Our primary source of equity capital has been the generation of net income. Historically, capital generated through net income and other sources, such as the exercise of stock options by employees, has exceeded the annual growth in our capital requirements. To the extent capital has exceeded business, regulatory and rating agency requirements, we have historically returned excess capital to shareholders through our regular common share dividend and share repurchase program.

We maintain certain flexibility to shift capital across our businesses as appropriate. For example, we may infuse additional capital into subsidiaries to maintain capital at targeted levels in consideration of debt ratings and regulatory requirements. These infused amounts can affect the capital profile and liquidity levels at the American Express parent company level. We do not currently intend or foresee a need to shift capital from non-U.S. subsidiaries with permanently reinvested earnings to a U.S. parent company.

The following are definitions for our regulatory risk-based capital ratios and leverage ratio, which are calculated as per standard regulatory guidance:

Risk-Weighted Assets — Assets are weighted for risk according to a formula used by the Federal Reserve to conform to capital adequacy guidelines. On- and off-balance sheet items are weighted for risk, with off-balance sheet items converted to balance sheet equivalents, using risk conversion factors, before being allocated a risk-adjusted weight. The off-balance sheet items comprise a minimal part of the overall calculation.

Common Equity Tier 1 Risk-Based Capital Ratio — Calculated as Common Equity Tier 1 capital, divided by risk-weighted assets. Common Equity Tier 1 is the sum of common shareholders’ equity, adjusted for ineligible goodwill and intangible assets, certain deferred tax assets, as well as certain other comprehensive income items as follows: net unrealized gains/losses on securities and derivatives, and net unrealized pension and other postretirement benefit losses, all net of tax and subject to transition provisions.

Tier 1 Risk-Based Capital Ratio — Calculated as Tier 1 capital divided by risk-weighted assets. Tier 1 capital is the sum of Common Equity Tier 1 capital, our perpetual preferred stock and third-party non-controlling interests in consolidated subsidiaries adjusted for capital to be held by insurance subsidiaries and deferred tax assets from net operating losses not deducted from Common Equity Tier 1 capital.

 

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Total Risk-Based Capital Ratio — Calculated as the sum of Tier 1 capital and Tier 2 capital, divided by risk-weighted assets. Tier 2 capital is the sum of the allowance for receivable and loan losses (limited to 1.25 percent of risk-weighted assets) and $600 million of subordinated notes adjusted for capital held by insurance subsidiaries.

Tier 1 Leverage Ratio — The Tier 1 leverage ratio is calculated by dividing Tier 1 capital by our average total consolidated assets for the most recent quarter. Average total consolidated assets as of June 30, 2016 were $156.6 billion.

Supplementary Leverage Ratio – The supplementary leverage ratio is calculated by dividing Tier 1 capital by total leverage exposure under Basel III. Leverage exposure, which reflects average total consolidated assets with adjustments for Tier 1 capital deductions, average off-balance sheet derivatives exposures, securities purchased under agreements to resell and credit equivalents of undrawn commitments that are both conditionally and unconditionally cancellable. Total leverage exposure for supplementary leverage ratio purposes as of June 30, 2016 was $186.0 billion.

The following is a definition for Tangible Common Equity to Risk-Weighted Assets ratio, which is widely used in the marketplace, although it may be calculated differently by different companies:

Common Equity and Tangible Common Equity to Risk-Weighted Assets Ratios — Common equity equals our shareholders’ equity of $20.7 billion as of June 30, 2016, less preferred shares of $1.6 billion. Tangible common equity, a non-GAAP measure, equals common equity less goodwill and other intangibles of $3.6 billion as of June 30, 2016. We believe presenting the ratio of tangible common equity to risk-weighted assets is a useful measure of evaluating the strength of our capital position.

Fully Phased-in Basel III

Basel III, when fully phased-in, will require bank holding companies and their bank subsidiaries to maintain more capital than prior requirements, with a greater emphasis on common equity. The following table presents our estimates for our regulatory risk-based capital ratios and leverage ratios had Basel III been fully phased-in as of June 30, 2016. These ratios are calculated using the Standardized Approach for determining risk-weighted assets. As noted previously, we are currently taking steps toward Basel III Advanced Approaches implementation in the United States. We believe the presentation of these ratios is helpful to investors by showing the impact of future regulatory capital standards on our capital and leverage ratios.

 

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Table 20: Estimated Fully Phased-in Basel III Capital and Leverage Ratios

 

($ in Billions)		June 30,       2016
Estimated Common Equity Tier 1 Ratio under Fully Phased-In Basel III(a)			12.9%
Estimated Tier 1 Capital Ratio under Fully Phased-In Basel III (a)			14.2
Estimated Tier 1 Leverage Ratio under Fully Phased-In Basel III(b)			11.2
Estimated Supplementary Leverage Ratio under Fully Phased-In Basel III			9.4%
Estimated Risk-Weighted Assets under Fully Phased-In Basel III(c)		$	123.7
Estimated Average Total Assets to calculate the Tier 1 Leverage Ratio(b)			156.3
Estimated Total Leverage Exposure to calculate SLR under Fully Phased-In Basel III (d)		$	185.7

 

(a)

The Fully Phased-in Basel III Common Equity Tier 1 and Tier 1 risk-based capital ratios, non-GAAP measures, are calculated as Common Equity Tier 1 or Tier 1 capital under Fully Phased-in Basel III rules, as applicable, divided by risk-weighted assets under Fully Phased-in Basel III rules. Refer to Table 21 for a reconciliation of Common Equity Tier 1 and Tier 1 capital under Fully Phased-in Basel III rules to Common Equity Tier 1 and Tier 1 capital under Transitional Basel III rules.

(b)

The Fully Phased-in Basel III Tier 1 and supplementary leverage ratios, non-GAAP measures, are calculated by dividing Fully Phased-in Basel III Tier 1 capital by our average total assets and Fully Phased-in total leverage exposure for supplementary leverage ratio purposes under Fully Phased-in Basel III, respectively.

(c)

Estimated Fully Phased-in Basel III risk-weighted assets, a non-GAAP measure, reflect our Basel III risk-weighted assets, with all transition provisions fully phased in. This includes incremental risk weighting applied to deferred tax assets and significant investments in unconsolidated financial institutions, as well as exposures to past due accounts, equities and sovereigns.

(d)

Estimated Fully Phased-in Basel III Leverage Exposure, a non-GAAP measure, reflects average total consolidated assets with adjustments for Tier 1 capital deductions on a fully phased-in basis, off-balance sheet derivatives, undrawn conditionally and unconditionally cancellable commitments and other off-balance sheet liabilities.

The Basel capital standards establish minimum requirements for the Tier 1 risk-based capital ratios that are 1.5 percent higher than the minimum requirements for Common Equity Tier 1 risk-based capital ratios. This difference between Tier 1 capital, which includes common equity and qualifying preferred securities, and Common Equity Tier 1 is also present in the minimum capital requirements within Comprehensive Capital Analysis and Review (CCAR). We issued $1.6 billion of preferred shares to help finance a portion of the Tier 1 capital requirements in excess of common equity requirements.

Our $750 million of subordinated debentures, which prior to 2014, were fully included in Tier 2 capital (but not in Tier 1 capital), do not meet the requirements of Tier 2 capital under Basel III. The phase-out of the subordinated debentures from Tier 2 capital began in the first quarter of 2014 and was fully phased out on January 1, 2016. At our option, the subordinated debentures are redeemable for cash on or after September 1, 2016 at 100 percent of the principal amount plus any accrued but unpaid interest. We currently intend to exercise this redemption option, subject to business and market conditions. As previously mentioned, we issued $600 million of subordinated notes, which qualify as Tier 2 capital under Basel rules.

The following table presents a comparison of our Common Equity Tier 1 and Tier 1 risk-based capital under Transitional Basel III rules to our estimated Common Equity Tier 1 and Tier 1 risk-based capital under Fully Phased-in Basel III rules as of June 30, 2016.

 

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Table 21: Transitional Basel III versus Fully Phased-in Basel III

 

(Billions)		CET 1				Tier 1
Risk-Based Capital under Transitional Basel III		$	16.5			$	18.0
Adjustments related to:
AOCI			(0.2)				(0.2)
Transition provisions for intangible assets			(0.3)				(0.3)
Other			(0.1)				—
Estimated Common Equity Tier 1 (CET1) and Tier 1 Risk-Based Capital under Fully Phased-in Basel III		$	15.9			$	17.5

Fully Phased-in Basel III Risk-Weighted Assets — Reflects our Basel III risk-weighted assets, with all transition provisions fully phased in. This includes incremental risk weighting applied to deferred tax assets and significant investments in unconsolidated financial institutions, as well as exposures to past due accounts, equities and sovereigns.

Fully Phased-in Basel III Tier 1 Leverage Ratio — Calculated by dividing Fully Phased-in Basel III Tier 1 capital by our average total consolidated assets.

Fully Phased-in Basel III Supplementary Leverage Ratio — Calculated by dividing Fully Phased-in Basel III Tier 1 capital by our Fully Phased-in total leverage exposure for supplementary leverage ratio purposes under Fully Phased-in Basel III.

Share Repurchases and Dividends

We return capital to common shareholders through dividends and share repurchases. The share repurchases reduce common shares outstanding and more than offset the issuance of new shares as part of employee compensation plans.

During the three and six months ended June 30, 2016, we returned $2.0 billion and $3.4 billion, respectively, to our shareholders in the form of common stock dividends ($0.3 billion and $0.6 billion, respectively) and share repurchases ($1.7 billion and $2.8 billion, respectively). We repurchased 27 million common shares at an average price of $64.05 in the second quarter of 2016. These dividend and share repurchase amounts represent approximately 96 percent and 97 percent of total capital generated during the three and six-month periods, respectively.

In addition, during the three months ended June 30, 2016, we had $750 million of non-cumulative perpetual preferred shares (the “Series B Preferred Shares”) and $850 million of non-cumulative perpetual preferred shares (the “Series C Preferred Shares”) outstanding. Dividends declared and paid on Series B Preferred Shares during the second quarter of 2016 were $19 million.

On June 29, 2016, we were informed that the Federal Reserve did not object to our capital plan to return capital to shareholders through share repurchases of up to $3.3 billion during the period beginning with the third quarter of 2016 through and including the second quarter of 2017, as well as an increase in our quarterly dividend to $0.32 per share, from $0.29 per share, beginning with the third quarter 2016 dividend declaration, subject to approval by our Board of Directors. The timing and amount of common shares purchased under our authorized capital plan will depend on various factors, including our business plans, financial performance and market conditions. To facilitate repurchases, we may, from time to time, make purchases pursuant to one or more trading plans under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, which allows us to repurchase common shares during periods when we might otherwise be prevented from doing so under applicable law or because of self-imposed trading blackout periods.

 

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Funding Strategy

Our principal funding objective is to maintain broad and well-diversified funding sources to allow us to meet our maturing obligations, cost-effectively finance current and future asset growth in our global businesses as well as to maintain a strong liquidity profile.

During the three months ended June 30, 2016, we issued $1.75 billion of senior unsecured notes from American Express Credit Corporation with a maturity of five years and a coupon of 2.25 percent.

Summary of Consolidated Debt

We had the following consolidated debt and customer deposits outstanding as of June 30, 2016, and December 31, 2015:

Table 22: Consolidated Debt

 

(Billions)		June 30, 2016				December 31, 2015
Short-term borrowings		$	2.3			$	4.8
Long-term debt			50.6				48.1
Total debt			52.9				52.9
Customer deposits			54.4				55.0
Total debt and customer deposits		$	107.3			$	107.9

Management does not currently expect to make any significant changes to our funding programs in order to satisfy Basel III’s Liquidity Coverage Ratio (LCR) standard based upon our current understanding of the requirements, which may be subject to change as we receive additional clarification and implementation guidance from regulators relating to the requirements and as the interpretation of requirements evolves over time.

Our equity capital and funding strategies are designed, among other things, to maintain appropriate and stable unsecured debt ratings from the major credit rating agencies: Moody’s Investor Services (Moody’s), Standard & Poor’s (S&P), Fitch Ratings (Fitch) and Dominion Bond Rating Services (DBRS). Such ratings help support our access to cost-effective unsecured funding as part of our overall funding strategy. Our asset-backed securitization activities are rated separately.

Table 23: Unsecured Debt Ratings

 

Credit Agency		American Express Entity		Short-Term Ratings		Long-Term Ratings		Outlook
DBRS		All rated entities		R-1 (middle)		A (high)		Stable
Fitch		All rated entities		F1		A		Negative
Moody’s		TRS and rated operating subsidiaries (a)		Prime-1		A2		Stable
Moody’s		American Express Company		Prime-2		A3		Stable
S&P		TRS and rated operating subsidiaries (a) (b)		A-2		A-		Stable
S&P		American Express Company		A-2		BBB+		Stable

 

(a)

American Express Travel Related Services Company, Inc.

(b)

S&P does not provide a rating for TRS short-term debt.

Downgrades in the ratings of our unsecured debt or asset securitization program securities could result in higher funding costs, as well as higher fees related to borrowings under our unused lines of credit. Declines in credit ratings could also reduce our borrowing capacity in the unsecured debt and asset securitization capital markets. We believe our funding mix including the proportion of U.S. retail deposits insured by the

 

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Federal Deposit Insurance Corporation (FDIC), should reduce the impact that credit rating downgrades would have on our funding capacity and costs.

Deposit Programs

We held the following deposits as of June 30, 2016 and December 31, 2015:

Table 24: Customer Deposits

 

(Billions)		June 30, 2016				December 31, 2015
U.S. retail deposits:
Savings accounts — Direct		$	30.2			$	29.0
Certificates of deposit:(a)
Direct			0.3				0.3
Third-party (brokered)			13.5				13.9
Sweep accounts — Third-party (brokered)			9.7				10.9
Other retail deposits:
Non-U.S. deposits and U.S. non-interest bearing			0.1				0.2
Card Member credit balances - U.S. and non-U.S.			0.6				0.7
Total customer deposits		$	54.4			$	55.0

 

(a)

The weighted average remaining maturity and weighted average rate at issuance on the total portfolio of U.S. retail CDs, issued through direct and third-party programs, were 25.7 months and 1.91 percent, respectively, as of June 30, 2016.

Asset Securitization Programs

We periodically securitize Card Member loans and receivables arising from our card business, as the securitization market provides us with cost-effective funding. Securitization of Card Member loans and receivables is accomplished through the transfer of those assets to a trust, which in turn issues securities collateralized by the transferred assets to third-party investors. The proceeds from issuance are distributed to us, through our wholly owned subsidiaries, as consideration for the transferred assets.

The loans and receivables being securitized are reported as Card Member loans and receivables on our Consolidated Balance Sheets, and the related securities issued to third-party investors are reported as long-term debt.

Under the respective terms of the securitization trust agreements, the occurrence of certain triggering events associated with the performance of the assets of each trust could result in payment of trust expenses, establishment of reserve funds, or in a worst-case scenario, early amortization of debt securities. During the three months ended June 30, 2016, no such triggering events occurred.

As previously disclosed, we completed the sale of substantially all of our outstanding Costco cobrand Card Member loans and receivables HFS during the three months ended June 30, 2016, resulting in the removal of $3.6 billion of Costco cobrand Card Member loans from the American Express Credit Account Master Trust (the Lending Trust) and the removal of $29 million of Costco cobrand Card Member receivables from the American Express Issuance Trust II (the Charge Trust) on June 17, 2016. In connection with obtaining the necessary affirmations with respect to the removal of the Card Member loans, the Lending Trust acquired additional accounts and approximately $3.0 billion of related Card Member loans on June 1, 2016. The Lending Trust issued two series of investor certificates on June 7, 2016, structured to provide credit enhancement to certain outstanding series of Lending Trust investor certificates.

 

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Liquidity Management

We incur liquidity risk that arises in the course of offering our products and services. Our liquidity objective is to maintain access to a diverse set of on- and off-balance sheet liquidity sources. We seek to maintain liquidity sources, even in the event we are unable to raise new funds under our regular funding programs during a substantial weakening in economic conditions, in amounts sufficient to meet our expected future financial obligations and our businesses’ requirements for liquidity for a period of at least twelve months. Our liquidity risk policy sets out our objectives and approach to managing liquidity risk.

The liquidity risks that we are exposed to could arise from a wide variety of scenarios. Our liquidity management strategy thus includes a number of elements, including, but not limited to:

 

•

Maintaining diversified funding sources (refer to the “Funding Strategy” section for more details);

 

•

Maintaining unencumbered liquid assets and off-balance sheet liquidity sources;

 

•

Projecting cash inflows and outflows under a variety of economic and market scenarios;

 

•

Establishing clear objectives for liquidity risk management, including compliance with regulatory requirements;

 

•

Incorporating liquidity risk management as appropriate into our capital adequacy framework.

The amount and type of liquidity resources we maintain can vary over time, based upon the results of stress scenarios required under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) and other regulatory measures of liquidity, such as the LCR, as well as additional stress scenarios required under our liquidity risk policy. The Company was in compliance with the liquidity requirements to which it is subject, including the LCR, for the three months ended June 30, 2016.

The investment income we receive on liquidity resources, such as cash, is less than the interest expense on the sources of funding for these balances. The net interest costs to maintain these resources have been substantial. The level of future net interest costs depends on the amount of liquidity resources we maintain and the difference between our cost of funding these amounts and their investment yields.

Securitized Borrowing Capacity

As of June 30, 2016, we maintained our committed, revolving, secured borrowing facility, with a maturity date of July 15, 2018, that gives us the right to sell up to $3.0 billion face amount of eligible AAA notes from the Charge Trust. We also maintained our committed, revolving, secured borrowing facility, with a maturity date of September 15, 2017, that gives us the right to sell up to $2.0 billion face amount of eligible AAA certificates from the Lending Trust. Both facilities are used in the ordinary course of business to fund seasonal working capital needs, as well as to further enhance our contingent funding resources. As of June 30, 2016, $2.0 billion was drawn on the Charge Trust facility. No amounts were drawn on the Lending Trust facility.

Federal Reserve Discount Window

As insured depository institutions, the Banks may borrow from the Federal Reserve Bank of San Francisco, subject to the amount of qualifying collateral that they may pledge. The Federal Reserve has indicated that both credit and charge card receivables are a form of qualifying collateral for secured borrowings made through the discount window. Whether specific assets will be considered qualifying collateral and the amount that may be borrowed against the collateral, remain at the discretion of the Federal Reserve.

We had approximately $53 billion as of June 30, 2016 in U.S. credit card loans and charge card receivables that could be sold over time through our securitization trusts or pledged in return for secured borrowings to provide further liquidity, subject in each case to applicable market conditions and eligibility criteria.

 

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Committed Bank Credit Facilities

In addition to the secured borrowing facilities described earlier in this section, we maintained a committed syndicated bank credit facility as of June 30, 2016 of $3.0 billion, which expires on December 9, 2018. As of June 30, 2016, no amounts were drawn on this facility.

Certain Other Off-Balance Sheet Arrangements

As of June 30, 2016, we had approximately $231 billion of unused credit available to Card Members as part of established lending product agreements. Total unused credit available to Card Members does not represent potential future cash requirements, as a significant portion of this unused credit will likely not be drawn. Our charge card products generally have no pre-set limit, and therefore are not reflected in unused credit available to Card Members.

Cash Flows

The following table summarizes our cash flow activity for the six months ended June 30.

Table 25: Cash Flows

 

Cash Flows from Operating Activities

Our cash flows from operating activities primarily include net income adjusted for (i) non-cash items included in net income and (ii) changes in the balances of operating assets and liabilities, which can vary significantly in the normal course of business due to the amount and timing of payments.

For the six months ended June 30, 2016 and 2015, net cash provided by operating activities was $3.1 billion and $4.2 billion, respectively, driven by net income of $3.4 billion and $3.0 billion, respectively, adjusted for non-cash items including changes in provisions for losses, depreciation and amortization, deferred taxes, and stock-based compensation. The decrease in the current period, as compared to the six months ended June 30, 2015, primarily resulted from offsetting impacts from movements in Other assets and Accounts payable and Other liabilities as a result of normal business operating activities.

Cash Flows from Investing Activities

Our cash flows from investing activities primarily include changes in Card Member receivables and loans, including Card Member loans and receivables HFS, along with gains on sales related thereto, as well as changes in our available for sale investment securities portfolio.

For the six months ended June 30, 2016, and 2015, net cash provided by (used in) investing activities was $12.1 billion and ($2.9) billion, respectively. The increase in the current period, as compared to the six months ended June 30, 2015, was primarily driven by the sales of the JetBlue and Costco HFS portfolios.

Cash Flows from Financing Activities

Our cash flows from financing activities primarily include issuing and repaying debt, changes in customer deposits, issuing and repurchasing our common shares, and paying dividends.

 

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For the six months ended June 30, 2016, and 2015, net cash used in financing activities was $4.3 billion and $2.4 billion, respectively. The increase in the current period, as compared to the six months ended June 30, 2015, primarily resulted from a net decrease in short-term borrowings and customer deposits in the current year period as compared to the prior year period, as well as higher common share repurchases in the current year period, partially offset by lower net repayments of long-term debt repayments in the current year, as compared to the same period in the prior year.

OTHER MATTERS

Certain Legislative, Regulatory and Other Developments

As a participant in the financial services industry, and as a bank holding company, we are subject to comprehensive examination and supervision by the Federal Reserve and to a range of laws and regulations that impact our business and operations. In light of the current environment of additional regulation, enhanced supervision efforts and increased regulatory investigations and enforcement, compliance requirements and expenditures have risen for financial services firms, including us, and we expect compliance requirements and expenditures will continue to rise in the future.

In addition, legislators and regulators in various countries in which we operate have focused on the operation of card networks, including through antitrust actions, legislation and rules to change certain practices or pricing of card issuers, merchant acquirers and payment networks, and, in some cases, to establish broad and ongoing regulatory oversight regimes for payment systems. Regulators and legislators have focused on the fees merchants pay to accept cards, including the way bankcard network members collectively set the “interchange” (that is, the fee paid by the bankcard merchant acquirer to the card issuer in payment networks like Visa and MasterCard), as well as the rules, contract terms and practices governing merchant card acceptance. Although, unlike the Visa and MasterCard networks, the American Express network does not have interchange fees or collectively set fees or rules, antitrust actions and government regulation relating to merchant pricing or terms of merchant rules and contracts could affect all networks directly or indirectly , as well as adversely impact consumers and merchants. Among other things, lower interchange and/or merchant discount revenue may lead card issuers to look for other sources of revenue from consumers such as higher annual card fees or interest charges, as well as to reduce costs by scaling back or eliminating rewards, services or benefits to cardholders and merchants. Broad regulatory oversight over payment systems can also include, in some cases, requirements for international card networks to localize aspects of their operations, such as processing infrastructure, which could increase our costs and diminish the value of our closed loop. The development and enforcement of payment system regulatory regimes generally continue to grow and may adversely affect our ability to compete effectively and maintain and extend our global network.

In certain countries, such as Australia and certain Member States in the EU, merchants are permitted by law to surcharge card purchases. While surcharging continues to be actively considered in certain jurisdictions, the benefits to customers have not been apparent in countries that have allowed it, and in some cases regulators are addressing concerns about excessive surcharging by merchants. Surcharging, particularly where it disproportionately impacts American Express Card Members, which is known as differential surcharging, as well as other steering practices that are permitted by regulation in some countries could have a material adverse effect on us if it becomes widespread. The Reserve Bank of Australia allows us and other networks to limit a merchant’s right to surcharge to “the reasonable cost of card acceptance.” As discussed below, the Reserve Bank of Australia recently amended its rules to limit surcharging in Australia to the merchant’s actual cost of card acceptance. In the EU, in those Member States that permit surcharging, the Consumer Rights Directive prohibits merchants from surcharging card purchases more than the cost of acceptance.

On June 23, 2016, the United Kingdom held a referendum in which voters approved an exit from the European Union, commonly referred to as “Brexit,” which has caused and may continue to cause

 

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significant volatility in capital and currency markets worldwide. The full impact of Brexit, however, remains uncertain. A process of negotiation, which is likely to take two years or longer, will determine the future terms of the U.K.’s relationship with the European Union. It is unclear at this stage what financial, trade and legal implications the withdrawal of the U.K. from the European Union would have and how such withdrawal would affect us.

European Union Payments Legislation

In 2015, the European Union adopted legislation in two parts, covering a wide range of topics across the payments industry. The first part was an EU-wide regulation on interchange fees (the Interchange Fee Regulation); the second consisted of revisions to the Payment Services Directive (the PSD2).

The Interchange Fee Regulation was formally adopted in April 2015. The substantive terms as adopted include the following:

 

●

Price caps – Interchange fees on consumer card transactions in the EU are capped as of December 2015, generally at 20 basis points for debit and prepaid cards and 30 basis points for credit and charge cards, with the possibility of lower caps in some instances. Although we do not have interchange fees and “three party” networks such as American Express are exempt from the application of the caps, the regulation provides that “three party” networks should be treated as “four party” networks (such as Visa and MasterCard, which have interchange fees) when they license third-party providers to issue cards and/or acquire merchants or when they issue cards with a cobrand partner or through an agent. This means, for example, the caps will apply to elements of the financial arrangements agreed to between us and each of our GNS partners in the EU, which may undermine our ability to attract and retain GNS partners. While the discount rates we agree to with merchants are not capped, the interchange caps have exerted, and will likely continue to exert, downward pressures on merchant fees across the industry, including our discount rates. We have brought a legal challenge and seek a ruling from the EU Court of Justice to invalidate the application of price caps in circumstances where three party networks issue cards with a cobrand partner or through an agent. The Interchange Fee Regulation excludes commercial card transactions from the scope of the caps.

 

●

Card acceptance terms –“Anti-steering” and honor-all-cards rules across all card networks, including non-discrimination and honor-all-cards provisions in our card acceptance agreements, are prohibited with some exceptions. Removal of these provisions creates significant risk of customer confusion and Card Member dissatisfaction, which would result in harm to the American Express brand. The prohibition on “anti-steering rules” took effect immediately upon effectiveness of the regulation; the prohibition on honor-all-cards rules took effect in June 2016.

 

●

Network licensing – In December 2015, the geographic scope of the network licenses that we agree to with our GNS partners in the EU was amended to cover the entire EU in order to meet the requirements of the regulation. This allows GNS partners to actively pursue their American Express business throughout the EU, including countries where we or other GNS partners are present, and may undermine the value of licenses granted to some GNS partners to date, which have been subject to varying levels of exclusivity to incentivize development of the American Express business in relation to a particular country.

 

●

Separation of network processing – From June 2016, card networks are required to separate their network processing functions (in which transactions between different issuers and acquirers are processed for authorization, clearing and settlement). This provision does not generally apply to “three party” payment networks, such as American Express, but may be deemed applicable, for example, where a different GNS issuer and acquirer is involved in a transaction, which represent a very small percentage of transactions on our network.

 

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●

Co-badging of cards – From June 2016, a single card may bear the brand of multiple networks and be used to process transactions on any of those networks. Merchants may install automatic mechanisms in point-of-sale equipment to prioritize selection of a particular network, subject to override by the cardholder. These provisions may harm the American Express brand insofar as GNS issuing partners will be able to offer multiple networks on a single card and merchants may program their point-of-sale equipment to prioritize selection of another network on such cards.

The PSD2 was adopted on November 25, 2015, and was published in the Official Journal of the European Union on December 23, 2015. Each Member State has until January 2018 to transpose the PSD2 into national law.

Among other terms, the published text of PSD2 includes provisions that will (i) further regulate surcharging so that transactions falling in scope of the interchange caps could not be surcharged, but transactions falling outside the scope of the caps could be surcharged up to cost, subject potentially to the decision of an individual Member State to prohibit surcharging altogether; and (ii) require all networks, including “three party” payment networks that operate with licensing arrangements, such as our GNS business, to establish objective, proportionate and non-discriminatory criteria under which a financial institution may access the network, for example, as a licensed issuer or acquirer. The potential surcharging regulation may increase instances of differential surcharging of our cards, prompt customer and merchant confusion as to which transactions may be surcharged and lead to Card Member dissatisfaction. The access requirements will undermine the flexibility and discretion we have had to date in deciding with whom to partner in our GNS business and, together with requirements in the Interchange Fee Regulation, may undermine the value of our GNS business in Europe.

Australia Payments Regulation

Following a formal review of the regulatory framework for card payments in Australia, the Reserve Bank of Australia adopted new regulations on May 26, 2016, including the following:

 

●

Interchange caps – as of July 1, 2017, the interchange fee paid on Visa and MasterCard credit transactions must not exceed a weighted-average benchmark of 0.50 percent across all transactions, with a maximum interchange fee cap of 0.80 percent for each individual credit card transaction.

 

●

The inclusion of our GNS business in Australia under interchange regulation, which subjects GNS payments to bank partners to the same interchange caps and regulations that apply to Visa and MasterCard credit card transactions in Australia, effective 1 July 2017.

 

●

Broadening the definition of interchange fees to include any fees paid by networks to card-issuing banks as incentives to issue cards, as well as any other net payments made to card issuers.

 

●

Increasing the frequency of periodic weighted-average benchmark calculations from every three years to quarterly to confirm compliance with the interchange caps. In determining compliance, all transactions at Australian merchants (including commercial card transactions, but excluding those on foreign-issued cards) will be taken into consideration.

 

●

Changing the rules on merchant surcharging to limit surcharging to the actual cost of card acceptance paid to the merchant acquirer, as recorded on the merchant statement issued by the merchant acquirer; the changes take effect as of September 1, 2016 for large merchants and September 1, 2017 for other merchants.

The inclusion of our GNS business under interchange regulation may undermine our ability to attract and retain GNS partners. While the discount rates we agree to with merchants do not include an interchange

 

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component and are therefore not capped, the interchange caps, once effective, will likely exert downward pressure on merchant fees across the industry, including our discount rates.

Dodd-Frank Wall Street Reform and Consumer Protection Act

Dodd-Frank contains a wide array of provisions intended to govern the practices and oversight of financial institutions and other participants in the financial markets. Among other matters, the law created an independent Consumer Financial Protection Bureau (the CFPB), which has broad rulemaking authority over providers of credit, savings, payment and other consumer financial products and services with respect to certain federal consumer financial laws. Moreover, the CFPB has examination and enforcement authority with respect to certain federal consumer financial laws for providers of consumer financial products and services, including certain of our subsidiaries. The CFPB is directed to prohibit “unfair, deceptive or abusive” acts or practices, and to ensure that all consumers have access to fair, transparent and competitive markets for consumer financial products and services.

The review of products and practices to prevent unfair, deceptive or abusive conduct will be a continuing focus of the CFPB and regulators more broadly, as well as our own internal reviews. Internal and regulatory reviews have resulted in, and are likely to continue to result in, changes to our practices, products and procedures. Such reviews are also likely to continue to result in increased costs related to regulatory oversight, supervision and examination, and additional restitution to our Card Members and may result in additional regulatory actions, including civil money penalties.

On May 5, 2016, the CFPB issued a proposed rule that, if enacted, would, among other changes, require that our consumer arbitration clause not apply to cases filed in court as class actions, unless and until class certification is denied or the class claims are dismissed. The CFPB has set a 90-day period for comment, with the rule becoming effective 211 days after enactment and applying to all agreements entered into after that date.

Antitrust Litigation

The U.S. DOJ and certain states’ attorneys general brought an action against us in 2010 alleging that the provisions in our card acceptance agreements with merchants that prohibit merchants from engaging in various actions to discriminate against our card products violate the U.S. antitrust laws. The trial court has ruled that the challenged provisions violate U.S. antitrust laws and issued an injunction, effective July 20, 2015, prohibiting us from enforcing certain elements of such provisions in the United States. We appealed this judgment and on December 18, 2015, the Court of Appeals for the Second Circuit stayed the trial court’s judgment pending the issuance of its appellate decision. We are also vigorously defending similar antitrust claims initiated by merchants in other court and arbitration proceedings. See Part I, Item 3. “Legal Proceedings” in our Annual Report on Form 10-K for the year ended December 31, 2015 (the 2015 Form 10-K) for descriptions of the DOJ action and related cases. It is possible that significantly increased merchant steering or other actions impairing the Card Member experience, or the resolution of one or any combination of these merchant claims for damages, could have a material adverse effect on our business. See Part I, Item 1A, “Risk Factors” in the 2015 Form 10-K for information on the potential impacts of an adverse decision in the DOJ case and related merchant litigations on our business.

 

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Recently Issued Accounting Standards

Refer to the Recently Issued Accounting Standards section of Note 1 to the Consolidated Financial Statements.

Glossary of Selected Terminology

Adjusted net interest income — A non-GAAP measure that represents net interest income attributable to our Card Member loans and loans HFS (which includes, on a GAAP basis, interest that is deemed uncollectible), excluding the impact of interest expense and interest income not attributable to our Card Member loans. The Company believes adjusted net interest income is useful to investors because it is a component of net interest yield on Card Member loans.

Asset securitizations — Asset securitization involves the transfer and sale of loans or receivables to a special-purpose entity created for the securitization activity, typically a trust. The trust, in turn, issues securities, commonly referred to as asset-backed securities that are secured by the transferred loans or receivables. The trust uses the proceeds from the sale of such securities to pay the purchase price for the underlying loans or receivables. The loans and receivables of our Charge Trust and Lending Trust (together, the Trusts) being securitized are reported as assets, and the securities issued by the Trusts are reported as liabilities on our Consolidated Balance Sheets.

Average discount rate — This calculation is generally designed to reflect pricing at merchants accepting general-purpose American Express cards. It represents the percentage of billed business (generated from both proprietary and GNS Card Member spending) retained by us from merchants we acquire, or for merchants acquired by a third party on our behalf, net of amounts retained by such third party.

Basic cards-in-force — Proprietary basic consumer cards-in-force includes basic cards issued to the primary account owner, (i.e., not including additional supplemental cards issued on accounts). Proprietary basic small business and corporate cards-in-force includes both basic and supplemental cards issued. Non-proprietary basic cards-in-force includes cards that are issued and outstanding under network partnership agreements, except for supplemental cards and retail cobrand Card Member accounts which have had no out-of-store spending activity during the prior twelve-month period.

Billed business — Includes activities (including cash advances) related to proprietary cards, cards issued under network partnership agreements (non-proprietary billed business), corporate payment services and certain insurance fees charged on proprietary cards. In-store spending activity within retail cobrand portfolios in GNS, from which we earn no revenue, is not included in non-proprietary billed business. Card billed business is included in the United States or outside the United States based on where the issuer is located.

Capital ratios — Represents the minimum standards established by the regulatory agencies as a measure to determine whether the regulated entity has sufficient capital to absorb on- and off-balance sheet losses beyond current loss accrual estimates. Refer to the Capital Strategy section under “Consolidated Capital Resources and Liquidity” for further related definitions under Transitional Basel III and Fully Phased-in Basel III.

Card Member — The individual holder of an issued American Express-branded charge, credit and certain prepaid cards.

Card Member loans — Represents the outstanding amount due from Card Members for charges made on their American Express credit cards, as well as any interest charges and card-related fees. Card Member loans also include revolving balances on certain American Express charge card products.

Card Member loans and receivables HFS — Beginning as of December 1, 2015 and continuing until a sale is completed, represents Card Member loans and receivables related to our cobrand partnerships with Costco in the United States and JetBlue. The JetBlue and Costco portfolio sales were completed on March 18 and June 17, 2016, respectively.

 

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Card Member receivables — Represents the outstanding amount due from Card Members for charges made on their American Express charge cards, as well as any card-related fees.

Charge cards — Represents cards that generally carry no pre-set spending limits and are primarily designed as a method of payment and not as a means of financing purchases. Charge Card Members generally must pay the full amount billed each month. No finance charges are assessed on charge cards. Each charge card transaction is authorized based on its likely economics reflecting a Card Member’s most recent credit information and spend patterns. Some charge card accounts have an additional lending-on-charge feature that allows revolving certain balances.

Credit cards — Represents cards that have a range of revolving payment terms, grace periods, and rate and fee structures.

Discount revenue — Represents revenue earned from fees generally charged to merchants who have entered into a card acceptance agreement. The discount fee generally is deducted from our payment for Card Member purchases. Discount revenue is reduced by incentive payments made to merchants, payments to third-party card issuing partners, cash-back reward costs and statement credits, corporate incentive payments and other similar items.

Interest expense — Includes interest incurred primarily to fund Card Member loans and receivables, general corporate purposes and liquidity needs, and is recognized as incurred. Interest expense is divided principally into two categories: (i) deposits, which primarily relates to interest expense on deposits taken from customers and institutions, and (ii) debt, which primarily relates to interest expense on our long-term financing and short-term borrowings, (e.g., commercial paper, federal funds purchased, bank overdrafts and other short-term borrowings), as well as the realized impact of derivatives hedging interest rate risk on our long-term debt.

Interest income — Includes (i) interest on loans, (ii) interest and dividends on investment securities and (iii) interest income on deposits with banks and other.

Interest on loans — Assessed using the average daily balance method for Card Member loans and loans HFS. Unless the loan is classified as non-accrual, interest is recognized based upon the principal amount outstanding in accordance with the terms of the applicable account agreement until the outstanding balance is paid or written off.

Interest and dividends on investment securities — Primarily relates to our performing fixed-income securities. Interest income is recognized as earned using the effective interest method, which adjusts the yield for security premiums and discounts, fees and other payments, so a constant rate of return is recognized on the outstanding balance of the related investment security throughout its term. Amounts are recognized until securities are in default or when it is likely that future interest payments will not be made as scheduled.

Interest income on deposits with banks and other — Recognized as earned, and primarily relates to the placement of cash in excess of near-term funding requirements in interest-bearing time deposits, overnight sweep accounts, and other interest-bearing demand and call accounts.

Liquidity Coverage Ratio — Represents the proposed minimum standards being established by the regulatory agencies as a measure to determine whether the regulated entity has sufficient liquidity to meet liquidity needs in periods of financial and economic stress.

Merchant acquisition — Represents our process of entering into agreements with merchants to accept American Express-branded cards.

Net card fees — Represents the card membership fees earned during the period. These fees are recognized as revenue over the covered card membership period (typically one year), net of the provision for projected refunds for Card Membership cancellation and deferred acquisition costs.

 

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Net interest yield on Card Member loans —A non-GAAP measure that is computed by dividing adjusted net interest income by average loans, computed on an annualized basis. Reserves and net write-offs related to uncollectible interest are recorded through provisions for losses, and are thus not included in the net interest yield calculation. The Company believes net interest yield on Card Member loans is useful to investors because it provides a measure of profitability of the Company’s Card Member loan portfolio.

Net loss ratio — Represents the ratio of GCP charge card write-offs, consisting of principal (resulting from authorized transactions) and fee components, less recoveries, on Card Member receivables expressed as a percentage of gross amounts billed to corporate Card Members.

Net write-off rate — principal only — Represents the amount of proprietary consumer or small business Card Member loans or receivables written off, consisting of principal (resulting from authorized transactions), less recoveries, as a percentage of the average loan or receivables balance during the period.

Net write-off rate — principal, interest and fees — Includes, in the calculation of the net write-off rate, amounts for interest and fees in addition to principal for Card Member loans and fees in addition to principal for Card Member receivables.

Operating expenses — Represents salaries and employee benefits, professional services, occupancy and equipment, communications and other expenses.

Return on average equity — Calculated by dividing one-year period net income by one-year average total shareholders’ equity.

Return on average segment capital — Calculated by dividing one-year period segment income by one-year average segment capital.

Return on average tangible segment capital — Computed in the same manner as the return on average segment capital, except the computation of average tangible segment capital excludes from average segment capital, average goodwill and other intangibles.

Segment capital — Represents the capital allocated to a segment based upon specific business operational needs, risk measures, and regulatory capital requirements.

Total cards-in-force — Represents the number of cards that are issued and outstanding. Non-proprietary cards-in-force includes all cards that are issued and outstanding under network partnership agreements, except for retail cobrand Card Member accounts which have no out-of-store spending activity during the prior twelve-month period.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk to earnings or asset and liability values resulting from movements in market prices. Our market risk exposures include (i) interest rate risk due to changes in the relationship between interest rates on our assets (such as loans, receivables and investment securities) and on our liabilities (such as debt and deposits); and (ii) foreign exchange risk related to earnings, transactions and investments in currencies other than the U.S. dollar. There were no material changes in these market risks since December 31, 2015.

ITEM 4. CONTROLS AND PROCEDURES

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective and designed to ensure that the information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the requisite time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Cautionary Note Regarding Forward-looking Statements

This report includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which are subject to risks and uncertainties. The forward-looking statements, which address our expected business and financial performance, among other matters, contain words such as “believe,” “expect,” “estimate,” “anticipate,” “intend,” “plan,” “aim,” “will,” “may,” “should,” “could,” “would,” “likely,” and similar expressions. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. We undertake no obligation to update or revise any forward-looking statements. Factors that could cause actual results to differ materially from these forward-looking statements, include, but are not limited to, the following:

 

●

our ability to grow in the future, as well as our earnings expectations for the second half of 2016, which will depend in part on the following: revenues growing consistently with current expectations, which could be impacted by, among other things, weakening economic conditions in the United States or internationally, a decline in consumer confidence impacting the willingness and ability of Card Members to sustain spending, a further decline in airfare and gas prices, a further strengthening of the U.S. dollar, a greater erosion of the average discount rate than expected, a greater impact on discount revenue from cash back, GNS volumes and cobrand partner and client incentive payments, continued cautious spending by large and global corporate Card Members and lower spending on new cards acquired than estimated; our success in addressing competitive pressures and implementing strategies and business initiatives, including growing profitable spending from new and existing Card Members, increasing penetration among middle market and small business clients, expanding our international footprint, growing loyalty coalitions and increasing merchant acceptance; the impact of any future restructuring charges or other contingencies, including, but not limited to, litigation-related expenses, impairments, the imposition of fines or civil money penalties, an increase in Card Member reimbursements and changes in reserves; credit performance remaining consistent with current

 

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expectations; continued growth of Card Member loans; the ability to continue to realize benefits from restructuring actions and operating leverage at levels consistent with current expectations; the amount we spend on growth initiatives; changes in interest rates beyond current expectations; the impact of regulation and litigation, which could affect the profitability of our business activities, limit our ability to pursue business opportunities, require changes to business practices or alter our relationships with partners, merchants and Card Members; our tax rate remaining in line with current expectations, which could be impacted by, among other things, our geographic mix of income being weighted more to higher tax jurisdictions than expected, changes in tax laws and regulation (including the adoption of the Treasury regulations under Section 385 of the U.S. Internal Revenue Code as currently proposed) and unfavorable tax audits and other unanticipated tax items; the impact of accounting changes and reclassifications; and our ability to continue executing the share repurchase program;

 

●

the actual amount to be spent on growth initiatives, including on marketing and promotion, as well as the timing of any such spending, which will be based in part on management’s assessment of competitive opportunities; overall business performance; prior commitments; contractual obligations with business partners and other fixed costs relative to revenue levels; management’s ability to identify attractive investment opportunities and make such investments, which could be impacted by business, regulatory or legal complexities; and our ability to realize efficiencies, optimize investment spending and control expenses to fund such spending;

 

●

our ability to reduce our overall cost base, which will depend in part on the timing and financial impact of current and future reengineering plans (including whether we will recognize restructuring charges in future periods), which could be impacted by factors such as our inability to mitigate the operational and other risks posed by potential staff reductions, our inability to develop and implement technology resources to realize cost savings, underestimating hiring needs related to some of the job positions being eliminated and other employee needs not currently anticipated, lower than expected attrition rates and higher than expected redeployment rates; our ability to reduce annual operating expenses, which could be impacted by, among other things, the factors identified below; and our ability to optimize and lower marketing and promotion expenses, which could be impacted by higher advertising and Card Member acquisition costs, competitive pressures that may require additional expenditures or limit our ability to reduce costs, the availability of opportunities to invest at a higher level due to favorable business results and changes in macroeconomic conditions;

 

●

the ability to reduce annual operating expenses, which could be impacted by increases in significant categories of operating expenses, such as consulting or professional fees, including as a result of increased litigation, compliance or regulatory-related costs, technology costs or fraud costs; our ability to develop, implement and achieve substantial benefits from reengineering plans; higher than expected employee levels; the impact of changes in foreign currency exchange rates on costs; the payment of civil money penalties, disgorgement, restitution, non-income tax assessments and litigation-related settlements; impairments of goodwill or other assets; management’s decision to increase or decrease spending in such areas as technology, business and product development and sales forces depending on overall business performance; greater than expected inflation or merit increases; our ability to balance expense control and investments in the business; the impact of accounting changes and reclassifications; and the level of M&A activity and related expenses;

 

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our lending write-off rates changing differently than current expectations, which will depend in part on changes in the level of loan balances, delinquency rates of Card Members, loans related to new Card Members performing as expected, unemployment rates, the volume of bankruptcies and recoveries of previously written-off loans;

 

●

our ability to execute against our lending strategy and grow Card Member loans held as well as non-card loans, without changing the overall risk profile of the Company, which may be affected by increasing competition, brand perceptions and reputation, our ability to manage risk in a growing Card

 

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Member loan portfolio, and the behavior of Card Members and their actual spending and borrowing patterns, which in turn may be driven by our ability to issue new and enhanced card products, offer attractive non-card lending products, attract new customers, reduce Card Member attrition and capture a greater share of existing Card Members’ spending and borrowings;

 

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the possibility that we will not fully execute on our plans for OptBlue to significantly increase merchant coverage, which will depend in part on the success of OptBlue merchant acquirers in signing merchants to accept American Express, which could be impacted by the pricing set by the merchant acquirers, the value proposition offered to small merchants and the efforts of OptBlue merchant acquirers to sign merchants for American Express acceptance, as well as the willingness of Card Members to use American Express cards at small merchants and of those merchants to accept American Express cards;

 

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uncertainty relating to the ultimate outcome of the antitrust lawsuit filed against us by the DOJ and certain state attorneys general, including the success or failure of our appeal and the impact on existing private merchant cases and potentially additional litigation and/or arbitrations;

 

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changes affecting our ability or desire to return capital to shareholders through dividends and share repurchases, which will depend on factors such as approval of our capital plans by our primary regulators, the amount we spend on acquisitions and results of operations and capital needs in any given period;

 

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changes in global economic and business conditions, consumer and business spending, the availability and cost of capital, unemployment rates, geopolitical conditions (including potential impacts resulting from the proposed exit of the U.K. from the European Union), foreign currency rates and interest rates, all of which may significantly affect spending on American Express cards, delinquency rates, loan balances and other aspects of our business and results of operations;

 

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changes in capital and credit market conditions, including sovereign creditworthiness, which may significantly affect our ability to meet our liquidity needs, expectations regarding capital and liquidity ratios, access to capital and cost of capital, including changes in interest rates; changes in market conditions affecting the valuation of our assets; or any reduction in our credit ratings or those of our subsidiaries, which could materially increase the cost and other terms of our funding, restrict our access to the capital markets or result in contingent payments under contracts;

 

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legal and regulatory developments wherever we do business, including with regard to broad payment system regulatory regimes, such as in Europe and Australia, consumer financial product protection actions by the CFPB and other regulators and the stricter regulation of large, interconnected financial institutions, which could make fundamental changes to many of our business practices or materially affect our capital or liquidity requirements, results of operations, or ability to pay dividends or repurchase our stock; potential actions by the FDIC and credit rating agencies applicable to securitization trusts, which could impact our ABS program; or potential changes to the taxation of our businesses, the allowance of deductions for significant expenses, or the incidence of consumption taxes on our transactions, products and services;

 

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changes in the substantial and increasing worldwide competition in the payments industry, including competitive pressure that may impact the prices we charge merchants that accept our cards, competition for cobrand relationships and the success of marketing, promotion or rewards programs;

 

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changes in the financial condition and creditworthiness of our business partners, such as bankruptcies, restructurings or consolidations, involving merchants that represent a significant portion of our business, such as the airline industry, or our partners in GNS or financial institutions that we rely on for routine funding and liquidity, which could materially affect our financial condition or results of operations; and

 

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factors beyond our control such as fire, power loss, disruptions in telecommunications, severe weather conditions, natural disasters, health pandemics, terrorism, cyber attacks or fraud, which could significantly affect spending on American Express cards, delinquency rates, loan balances and travel-related spending or disrupt our global network systems and ability to process transactions.

A further description of these uncertainties and other risks can be found in the 2015 Form 10-K and our other reports filed with the Securities and Exchange Commission.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In the ordinary course of business, we and our subsidiaries are subject to various claims, investigations, examinations, pending and potential legal actions, and other matters relating to compliance with laws and regulations (collectively, “legal proceedings”). We believe we have meritorious defenses to each of these legal proceedings and intend to defend them vigorously. Some of these proceedings are at preliminary stages and seek an indeterminate amount of damages.

We believe we are not a party to, nor are any of our properties the subject of, any legal proceeding that would have a material adverse effect on our consolidated financial condition or liquidity. However, in light of the uncertainties involved in such matters, it is possible that the outcome of legal proceedings, including the possible resolution of merchant claims described in our 2015 Form 10-K, could have a material impact on our results of operations. In addition, it is possible that significantly increased merchant steering or other actions impairing the Card Member experience as a result of the DOJ case described in our 2015 Form 10-K could have a material adverse effect on our business. Certain legal proceedings involving us or our subsidiaries are further described in this section and others, for which there have been no subsequent material developments since the filing of our 2015 Form 10-K, are described in such report.

For those legal proceedings described in this section and in the 2015 Form 10-K where a loss is reasonably possible in future periods, whether in excess of a related reserve for legal contingencies or where there is no such reserve, and for which we are able to estimate a range of possible loss, the current estimated range is zero to $350 million in excess of any reserves related to those matters. This range represents our estimate based on currently available information and does not represent our maximum loss exposure; actual results may vary significantly. As such proceedings evolve, including the merchant claims, we may need to increase our range of possible loss or reserves for legal contingencies. For additional information, see Note 8 to our Consolidated Financial Statements.

We are a defendant in a class action captioned Kaufman v. American Express Travel Related Services, which was filed on February 14, 2007, and is pending in the United States District Court for the Northern District of Illinois. Plaintiffs’ principal allegation is that our gift cards violated consumer protection statutes because consumers allegedly had difficulty spending small residual amounts on the gift cards prior to the imposition of monthly service fees. The Court preliminarily certified a settlement class consisting of (with some exceptions) “all purchasers, recipients and holders of all gift cards issued by American Express from January 1, 2002 through the date of preliminary approval of the settlement.” On March 2, 2016, the court granted final approval of the class-wide settlement. Notices of appeal have been filed.

On July 30, 2015, plaintiff Plumbers and Steamfitters Local 137 Pension Fund, on behalf of themselves and other purchasers of American Express stock, filed a suit, captioned Plumbers and Steamfitters Local 137 Pension Fund v. American Express Co., Kenneth I. Chenault and Jeffrey C. Campbell, for violation of federal securities law, alleging that the Company deliberately issued false and misleading statements to, and omitted important information from, the public relating to the financial importance of the Costco cobrand relationship to the Company, including, but not limited to, the decision to accelerate negotiations to renew

 

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the cobrand agreement. The plaintiff seeks damages and injunctive relief. The Company moved to dismiss the amended complaint on March 21, 2016.

On October 16, 2015, a putative class action, captioned Houssain v. American Express Company, et al., was filed in the United States District Court for the Southern District of New York under the Employee Retirement Income Security Act of 1974 (ERISA) relating to disclosures of the Costco cobrand relationship. On May 10, 2016, the plaintiff filed an amended complaint naming certain officers of the Company as defendants and alleging that the defendants violated certain ERISA fiduciary obligations by, among other things, allowing the investment of American Express Retirement Savings Plan (Plan) assets in American Express common stock when American Express common stock was not a prudent investment and misrepresenting and failing to disclose material facts to Plan participants in connection with the administration of the Plan. The amended complaint seeks, among other remedies, an unspecified amount of damages. The defendants moved to dismiss the amended complaint on May 31, 2016.

On March 8, 2016, plaintiffs B&R Supermarket, Inc. d/b/a Milam’s Market and Grove Liquors LLC, on behalf of themselves and others, filed a suit, captioned B&R Supermarket, Inc. d/b/a Milam’s Market, et al. v. Visa Inc., et al., for violations of the Sherman Antitrust Act, the Clayton Antitrust Act, California’s Cartwright Act and unjust enrichment in the United States District Court for the Northern District of California, against American Express Company, other credit and charge card networks, other issuing banks and EMVCo, LLC. Plaintiffs allege that the defendants, through EMVCo, conspired to shift liability for fraudulent, faulty and otherwise rejected consumer credit card transactions from themselves to merchants after the implementation of EMV chip payment terminals. Plaintiffs seek damages and injunctive relief. On June 24, 2016, the court granted our motion to transfer the claims against us to New York. The court also granted plaintiffs’ leave to file an amended complaint. The amended complaint, which was filed on July 15, 2016, names additional plaintiff merchants and continues to name American Express Company as a defendant. We intend to defend the claims vigorously.

ITEM 1A. RISK FACTORS

For a discussion of our risk factors, see Part I, Item 1A. “Risk Factors” of the 2015 Form 10-K. There are no material changes from the risk factors set forth in the 2015 Form 10-K. However, the risks and uncertainties that we face are not limited to those set forth in the 2015 Form 10-K. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business and the trading price of our securities.

 

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(c)    ISSUER PURCHASES OF SECURITIES

The table below sets forth the information with respect to purchases of the Company’s common stock made by or on behalf of the Company during the three months ended June 30, 2016.

 

 

(a)

On May 12, 2015, the Company announced the authorization to repurchase up to 150 million shares of common stock from time to time, in accordance with the capital distribution plans approved by the Federal Reserve and subject to market conditions. The authorization replaced the prior repurchase authorization and does not have an expiration date.

 

(b)

Includes: (i) shares surrendered by holders of employee stock options who exercised options (granted under the Company’s incentive compensation plans) in satisfaction of the exercise price and/or tax withholding obligation of such holders and (ii) restricted shares withheld (under the terms of grants under the Company’s incentive compensation plans) to offset tax withholding obligations that occur upon vesting and release of restricted shares. The Company’s incentive compensation plans provide that the value of the shares delivered or attested to, or withheld, be based on the price of the Company’s common stock on the date the relevant transaction occurs.

 

(c)

Share purchases under publicly announced programs are made pursuant to open market purchases or privately negotiated transactions (including employee benefit plans) as market conditions warrant and at prices the Company deems appropriate.

 

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ITEM 5. OTHER INFORMATION

Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which added Section 13(r) to the Exchange Act, an issuer is required to disclose in its annual or quarterly reports, as applicable, whether it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with individuals or entities designated pursuant to certain Executive Orders. Disclosure is generally required even where the activities, transactions or dealings were conducted outside the United States by non-U.S. affiliates in compliance with applicable law, and whether or not the activities are sanctionable under U.S. law.

During the second quarter of 2016, American Express Global Business Travel (GBT) obtained approximately 20 visas from Iranian embassies and consulates around the world in connection with certain travel arrangements on behalf of GBT clients. In addition, American Express Global Business Travel España, a joint venture of GBT, booked two reservations at a hotel that may be owned, directly or indirectly, or may otherwise be affiliated with, the Government of Iran. GBT had negligible gross revenues and net profits attributable to these transactions. GBT believes these transactions were permissible pursuant to certain exemptions from U.S. sanctions for travel-related transactions under the International Emergency Economic Powers Act, as amended. GBT has informed us that it intends to continue to engage in these activities on a limited basis so long as such activities are permitted under U.S. law.

In addition, a travel company that may be considered an affiliate of ours, American Express Nippon Travel Agency, Inc. (“Nippon Travel Agency”), has informed us that during the second quarter of 2016 it obtained 44 visas from the Iranian embassy in Japan in connection with certain travel arrangements on behalf of clients. Nippon Travel Agency had negligible gross revenues and net profits attributable to these transactions. Nippon Travel Agency has informed us that it intends to continue to engage in this activity so long as such activity is permitted under U.S. law.

ITEM 6. EXHIBITS

The list of exhibits required to be filed as exhibits to this report are listed on page E-1 hereof, under “Exhibit Index” which is incorporated herein by reference.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

				AMERICAN EXPRESS COMPANY
						(Registrant)
Date: July 26, 2016				By		/s/ Jeffrey C. Campbell
						Jeffrey C. Campbell
						Executive Vice President and
						Chief Financial Officer
Date: July 26, 2016				By		/s/ Linda Zukauckas
						Linda Zukauckas
						Executive Vice President and
						Corporate Comptroller
						(Principal Accounting Officer)

 

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EXHIBIT INDEX

The following exhibits are filed as part of this Quarterly Report:

 

Exhibit		Description
10.1		American Express Company 2016 Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K (Commission File No. 1-7657), dated May 2, 2016).
10.2		Form of nonqualified stock option award agreement for executive officers under the American Express Company 2016 Incentive Compensation Plan (for awards made after May 2, 2016).
10.3		Form of restricted stock unit award agreement for executive officers under the American Express Company 2016 Incentive Compensation Plan (for awards made after May 2, 2016).
12		Computation in Support of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends.
31.1		Certification of Kenneth I. Chenault pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
31.2		Certification of Jeffrey C. Campbell pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
32.1		Certification of Kenneth I. Chenault pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Jeffrey C. Campbell pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

 

E-1

EXHIBIT 10.2

AMERICAN EXPRESS COMPANY

2016 INCENTIVE COMPENSATION PLAN

 

 

[                     ] NONQUALIFIED STOCK OPTION AWARD AGREEMENT (BAND 99)

 

 

This [                     ] Nonqualified Stock Option Award Agreement (Band 99) sets forth the terms and conditions of the Nonqualified Stock Options granted by American Express Company pursuant to the Company’s 2016 Incentive Compensation Plan to select employees in Band 99 during [                     ]. Capitalized terms used herein have the meanings given such terms herein or by Appendix A.

Additional specific terms of a Participant’s Option under this Agreement are set forth in the Participant’s Award Communication, which shall include the Date of Grant, the Number of Shares, the Vesting Date and any additional terms applicable to such Option.

For Options granted in special situations (such as grants to newly hired or promoted Participants), the vesting and/or performance requirement, if any, and references to the Date of Grant or the Vesting Date applicable to the Participant’s Option may vary from the terms set forth in this Agreement, as specified in the Participant’s Award Communication, which terms shall apply instead of the terms set forth in this Agreement. If a Participant’s Award Communication provides for vesting of the Number of Shares in installments, references to the Vesting Date shall refer to the date an installment vests and references to Earned Shares shall refer to the portion of the Number of Shares that vest on a given Vesting Date, as applicable, and each installment will be treated separately under this Agreement as necessary to give effect to the intent thereof.

Section 1. Vesting. 

(a) Vesting Date.    Subject to Section 1(b), Section 1(c) and the other terms of this Agreement, a Participant’s Option shall vest and become exercisable for the Number of Shares on the Vesting Date.

(b) Continued Employment Requirement.    Except as otherwise provided by Section 3, Section 4 or Section 5, the vesting of a Participant’s Option is subject to and conditioned upon the Participant’s continued Employment at all times during the period beginning with the Date of Grant and ending on the Vesting Date.

(c) Performance Requirement.    Except as otherwise provided by Section 3, Section 5 or the Participant’s Award Communication, the vesting of a Participant’s Option is subject to and conditioned upon the Company achieving [                     ] over the period beginning [                     ] and ending on [                     ].

 

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(d) Forfeiture and Cancellation.    If a Participant’s Option does not vest pursuant to Section 1(a), Section 3, Section 4 or Section 5, the Option shall be forfeited and cancelled by the Company.

Section 2. Exercise. 

(a) Exercise of Option.    At any time or times after a Participant’s Option has vested and become exercisable, and before the earlier of the Expiration Date and the forfeiture or termination of the Option, the Participant may exercise the Option as to any number of shares, which, when added to the number of shares as to which the Participant has theretofore exercised the Option, if any, will not exceed the Number of Shares, so long as all of the following conditions are satisfied:

(i) Employment on Exercise Date.    Except as otherwise provided by Section 3, Section 4, Section 5 or a Participant’s Award Communication, a Participant must have remained in continuous Employment from the Date of Grant through the date of exercise of the Participant’s Option.

(ii) Payment of Exercise Price.    At the time of exercise of the Participant’s Option, a Participant must pay the Exercise Price for the shares being acquired pursuant to such exercise, by one of the following methods or any combination thereof: (A) paying in cash in United States dollars (which may be in the form of a check); (B) tendering shares owned by the Participant which have a Fair Market Value equal to the Exercise Price for the shares being acquired; or (C) if permitted by the Committee, by authorizing a third party to sell, on behalf of the Participant, the appropriate number of shares otherwise issuable to the Participant upon the exercise of the Option and to remit to the Company a sufficient portion of the sale proceeds to pay the Exercise Price for the shares being acquired and any Tax-Related Items that have to be withheld in connection with any transaction related to the Option. Any fractional shares otherwise required to be withheld or surrendered will be rounded up to the next nearest whole share.

(iii) Responsibility for Taxes.    The Participant acknowledges that, regardless of any action taken by the Company or, if different, the Participant’s employer (the “Employer”), the ultimate liability for all Tax-Related Items is and remains the Participant’s responsibility and may exceed the amount actually withheld by the Company or the Employer. The Participant further acknowledges that the Company and/or the Employer (i) make no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the Option, including, but not limited to, the grant, vesting or exercise of the Option, the subsequent sale of any shares acquired pursuant to such exercise and the receipt of any dividends; and (ii) do not commit to and are under no obligation to structure the terms of the grant or any aspect of the Option to reduce or eliminate the Participant’s liability for Tax-Related Items or achieve any particular tax result. Further, if the Participant is subject to Tax-Related Items in more than one jurisdiction, the Participant acknowledges that the Company and/or the Employer (or former employer, as applicable) may be required to withhold or account for Tax-Related Items in more than one jurisdiction.

 

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Prior to the relevant taxable or tax withholding event, as applicable, the Participant agrees to make adequate arrangements satisfactory to the Company and/or the Employer to satisfy all Tax-Related Items. In this regard, the Company and/or the Employer, or their respective agents, at their discretion, may satisfy, or allow the Participant to satisfy, the withholding obligation with regard to all Tax-Related Items by any of the following:

 

(1)

if permitted by the Committee, surrendering shares then issuable upon the Option’s exercise valued at their Fair Market Value on the exercise date; or

 

(2)

if permitted by the Committee, by authorizing a third party to sell, on behalf of the Participant, the appropriate number of shares otherwise issuable to the Participant upon the exercise of the Option and to remit to the Company a sufficient portion of the sale proceeds.

The Company and/or the Employer have the right and option, but not the obligation, to treat the Participant’s failure to provide timely payment of any tax withholding with regard to all Tax-Related Items as the Participant’s election to satisfy all or a portion of the tax withholding pursuant to Section 2(a)(iii)(1) above.

Depending on the withholding method, the Company may withhold or account for Tax-Related Items by considering applicable minimum statutory withholding amounts or other applicable withholding rates, including maximum applicable rates. If the maximum rate is used, any over-withheld amount may be refunded to the Participant in cash by the Company or Employer (with no entitlement to the share equivalent) or, if not refunded, the Participant may seek a refund from the local tax authorities. If the obligation for Tax-Related Items is satisfied by withholding any shares deliverable to the Participant, for tax purposes, the Participant is deemed to have been issued the full number of shares subject to the exercised Option, notwithstanding that a number of the shares is held back solely for the purpose of paying the Tax-Related Items.

Finally, the Participant agrees to pay to the Company or the Employer any amount of Tax-Related Items that the Company or the Employer may be required to withhold or account for as a result of Participant’s participation in the Plan that cannot be satisfied by the means previously described.

(iv) Documentation.    The Participant must provide the Company with any forms, documents or other information reasonably required by the Company.

(v) No Fractional Shares.    The Option may not be exercised for a fraction of a share.

(vi) Compliance with Laws.    As provided by Paragraph 18(e) of the Plan, legal counsel for the Company must be satisfied at the time of exercise that the issuance of shares upon exercise will be in compliance with the Securities Act and applicable United States federal, state, local and foreign laws, and the Company shall be under no obligation to

 

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effect the registration pursuant to the Securities Act of any shares to be issued hereunder or to effect similar compliance under any state or local laws.

(b) Issuance of Shares.

(i) Issuance.    Subject to Section 2(b)(ii) and Section 2(b)(iii), the Company shall issue to a Participant the shares from the exercise of the Participant’s Option as soon as administratively practicable following such exercise. If the Participant has elected pursuant to Section 2(a)(ii) or Section 2(a)(iii) to sell shares from the exercise of the Option to pay the Exercise Price or satisfy withholding obligations for Tax-Related Items associated with the Option, the number of shares from the exercise of the Option issued to the Participant shall be reduced by the number of shares used to pay the Exercise Price or required Tax-Related Items. Delivery of shares may be made by crediting the shares to an account for the benefit of the Participant or by such other permissible manner chosen by the Company, in its sole discretion.

(ii) Satisfaction of Tax-Related Items.    It shall be a condition to the Company’s obligation to issue shares upon the exercise of the Option that the Participant pay to the Company or the Employer, or their respective agents, upon their demand, in accordance with Paragraph 18(f) of the Plan, such amount as may be demanded for the purpose of satisfying any obligation to withhold any Tax-Related Items.

(iii) Compliance with Laws.    If the Company, in its sole discretion, determines that the listing upon any securities exchange or registration or qualification under any United States federal, state, local or foreign law of any shares to be issued pursuant to the Option is necessary or desirable, issuance of such shares shall not be made in shares until such listing, registration or qualification shall have been completed.

(iv) No Shareholder Rights until Issuance.    As provided by Paragraph 18(c)(ii) of the Plan, until the shares from the exercise of the Option by a Participant have been issued to the Participant, the Participant shall have no rights as a shareholder of the Company with respect to such shares, and in particular, shall not be entitled to vote such shares or to receive any dividend or other distribution paid or made in respect of such shares.

(c) Option Exercise Outside United States.    Notwithstanding Section 2(a)(ii) and Section 2(a)(iii), the Secretary of the Company shall have the authority to exclude one or more methods for exercising the Option, paying the Exercise Price and satisfying any Tax-Related Items associated with the Option in countries outside the United States.

Section 3. Death or Disability. 

(a) Vesting.    Notwithstanding anything in this Agreement to the contrary, if a Participant ceases Employment before the Vesting Date by reason of the Participant’s death or Disability while holding the Option, and the Option has not expired and has not vested, the Participant’s Option shall immediately vest and become exercisable for the Number of Shares

 

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on the date of the Participant’s death or Disability, and shall no longer be subject to the vesting conditions set forth in Section 1(b) or Section 1(c), and the Option may be exercised as to any or all of the Number of Shares, as described by Section 3(b).

(b) Exercise.    If at the time of a Participant’s death or Disability, the Participant’s Option has not been fully exercised for the entire Number of Shares, the Participant (or in the case of the Participant’s death, the Participant’s beneficiary or any person who acquires the right to exercise the Option by bequest or inheritance or by reason of the Participant’s death) may, at any time within five years after the date of the Participant’s death or Disability, but in no event on or after the Expiration Date, exercise the Option as to any number of shares, which, when added to the number of shares as to which the Option has theretofore been exercised, if any, will not exceed the Number of Shares. The requirements of Section 2 (other than Section 2(a)(i)) must be satisfied at the time of such exercise.

Section 4. Retirement. 

(a) Vesting.

(i) Participants Outside European Union.    If a Participant’s home base country is outside the European Union, then: (A) if the Participant ceases Employment by reason of the Participant’s Early Retirement before the Vesting Date, and the date of Early Retirement is more than one year after the Date of Grant, the Participant’s Option shall continue and vest and become exercisable on the Vesting Date; and (B) if the Participant ceases Employment by reason of the Participant’s Full Retirement before the Vesting Date, the Participant’s Option shall continue and vest and become exercisable on the Vesting Date; in each case, without regard to the vesting condition set forth in Section 1(b), but subject to the attainment of the performance requirement of Section 1(c).

(ii) Participants Within European Union.    If a Participant’s home base country is in the European Union, then if the Participant ceases Employment by reason of the Participant’s EU Retirement before the Vesting Date, and the date of EU Retirement is more than one year after the Date of Grant, the Participant’s Option shall continue and vest and become exercisable on the Vesting Date, without regard to the vesting condition set forth in Section 1(b), but subject to the attainment of the performance requirement of Section 1(c).

(iii) Forfeiture and Cancellation.    If a Participant ceases Employment by reason of the Participant’s Retirement, and the Participant’s Option does not continue pursuant to Section 4(a)(i) or Section 4(a)(ii), the Option shall be forfeited and cancelled by the Company.

(b) Exercise.    If at the time of a Participant’s Retirement, the Participant’s vested Option has not been fully exercised for the entire Number of Shares, the Participant may, at any time on or after the Vesting Date and before the Expiration Date, exercise the Option as to any number of shares, which, when added to the number of shares as to which the Option has theretofore been exercised, if any, will not exceed the Number of Shares. The

 

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requirements of Section 2 (other than Section 2(a)(i)) must be satisfied at the time of such exercise.

Section 5. Change in Control. 

(a) Vesting.    Notwithstanding anything in this Agreement to the contrary, but subject to Appendix B, which could negate the treatment provided by this Section 5(a) as a result of Section 280G of the Code, in the event of a Defined Termination of a Participant before the Vesting Date, the Participant’s Option shall immediately vest and become exercisable on the date of the Defined Termination for a number of shares based on either (i) the degree of performance under Section 1(c) attained as of the date of the Defined Termination, and/or (ii) the portion of the performance period under Section 1(c) elapsed as of the date of the Defined Termination, as determined by the Committee, and the Participant’s Option shall no longer be subject to the vesting conditions set forth in Section 1(b) or Section 1(c).

(b) Exercise.    In the event of a Defined Termination of a Participant within two years following a Change in Control, the Participant may, at any time within 90 days following such Defined Termination, but before the Expiration Date, exercise the Option as to any number of shares, which, when added to the number of shares as to which the Option has theretofore been exercised, if any, will not exceed the number of shares determined in Section 5(a). The requirements of Section 2 (other than Section 2(a)(i)) must be satisfied at the time of such exercise.

Section 6. Other Termination.    Unless the Committee determines otherwise, then except as otherwise provided by Section 3, Section 4, Section 5 or a Participant’s Award Communication, in the event that a Participant’s Employment terminates, the Participant’s Option, whether vested or unvested, shall be immediately forfeited and cancelled by the Company.

Section 7. Additional Terms. 

(a) No Assignment.    As provided by Paragraph 18(d) of the Plan, except as otherwise determined by the Committee or permitted by the Plan, a Participant may not sell, assign, transfer, pledge, hypothecate, encumber in whole or in part, or otherwise dispose of the Participant’s Option (or the shares underlying such Option) or the Participant’s rights and interest under the Option (except by will or the laws of descent and distribution in the event of the Participant’s death), including, but not limited to, by execution, levy, garnishment, attachment, pledge, bankruptcy or in any other manner, and except as otherwise provided by Section 3(b), the Option is exercisable during the Participant’s lifetime only by the Participant. If a Participant or anyone claiming under or through the Participant attempts to violate this Section 7(a), such attempted violation shall be null and void and without effect.

(b) Transfer to Immediate Family Members.    If a Participant is subject to U.S. taxation, then after any waiting period following the Date of Grant imposed by the Company

 

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on the Transfer of the Option, the Participant may transfer all or a portion of the Participant’s Option on an irrevocable basis to an Immediate Family Member of the Participant who is subject to U.S. taxation, conditional on the following terms and conditions:

(i) the transfer must be for a minimum of 1,000 shares;

(ii) no further transfer by the transferee is permitted (except to the transferee’s estate upon the death of the transferee);

(iii) the exercise of the Option by the transferee requires full payment of all Tax-Related Items by the Participant; and

(iv) the exercise of the Option by the transferee is subject to the Participant’s continuous Employment from the Date of Grant through the date of exercise of the Option by the transferee pursuant to the terms of this Agreement, the satisfaction of the performance vesting requirement set forth in Section 1(c), the terms of the Plan, the terms of the Participant’s Award Communication and the terms of Section 7(d), Section 7(e), Section 7(f) and all other terms of this Agreement and the Appendices hereto.

(c) No Assumption or Substitution Required.    In the event that the Company or any of its Affiliates is a participant in a corporate merger, consolidation or other similar transaction, neither the Company nor such Affiliate shall be obligated to cause any other participant in such transaction to assume a Participant’s Option or to substitute a new stock option for the Option under this Agreement.

(d) Detrimental Conduct.    A Participant’s Option is subject to the provisions of Appendix C and the Consent to Detrimental Conduct Provisions executed by the Participant, which if violated, could result in the forfeiture and recoupment of the Option and the proceeds from the exercise of the Option.

(e) Clawback.    As provided by Paragraph 4(f)(ii) of the Plan, notwithstanding anything in the Plan, this Agreement or any Award Communication to the contrary, the Company will be entitled to the extent required by applicable law (including, without limitation, Section 10D of the Exchange Act and any regulations promulgated with respect thereto) or Exchange listing conditions, in each case as in effect from time to time, to recoup compensation of whatever kind paid under this Agreement by the Company at any time. A Participant’s Option is subject to the Clawback Requirements and the Consent to Dodd-Frank Clawback Provisions executed by the Participant, which could require the Participant to return to the Company, or forfeit if not yet paid, the Participant’s Option and the proceeds from the exercise of the Option, in order to comply with the Clawback Requirements and any policy adopted by the Committee pursuant to the Clawback Requirements.

(f) FDIA Limitations.    As provided by Paragraph 4(f)(i) of the Plan, notwithstanding any other provision of the Plan, this Agreement or any Award Communication, vesting and exercise of Options pursuant to this Agreement are subject to and conditioned

 

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upon their compliance with 12 USC Section 1828(k) and any regulations promulgated thereunder.

Section 8. Miscellaneous. 

(a) Incorporation of Plan and Award Communication.    The Option is subject to the Plan, the Award Communication and any interpretations by the Committee under the Plan or the Award Communication, which are hereby incorporated into this Agreement by reference and made a part hereof.

(b) Administration, Interpretation, Etc.    Any action taken or decision made by the Company, the Board or the Committee arising out of or in connection with the construction, administration, interpretation or effect of any provision of the Plan, this Agreement or a Participant’s Award Communication shall lie within its sole and absolute discretion, as the case may be, and shall be final, conclusive and binding on the Participant and all persons claiming under or through the Participant. By receipt of the Participant’s Option or other benefit under the Plan, the Participant and each person claiming under or through the Participant shall be conclusively deemed to have indicated acceptance and ratification of, and consent to, any action taken under the Plan, this Agreement or the Participant’s Award Communication, by the Company, the Board or the Committee.

(c) Correction.    The Committee may rescind, without further notice to a Participant, any Option or portion thereof issued to the Participant in duplicate or in error.

(d) Amendment.

(i) The terms of a Participant’s Option (including terms under this Agreement or the Participant’s Award Communication) may be amended from time to time by the Committee, in its sole discretion, in any manner that the Committee deems necessary or appropriate; provided, however, that (A) no such amendment shall adversely affect in a material manner any right of the Participant under the Option without the written consent of the Participant, (B) except as provided by Paragraph 9 of the Plan, the Committee shall not amend the Participant’s Option if the amendment would disqualify the Option from the exception to Section 162(m) of the Code; and (C) the Committee may not amend or delete Section 5 or Section A1(f) in a manner that is detrimental to the Participant without the Participant’s written consent. Notwithstanding Paragraph 11 of the Plan, neither the Board, the Committee nor other person shall not have the authority to amend the terms of a Participant’s Option (including terms under this Agreement or the Participant’s Award Communication) without the written consent of the Participant is such amendment would adversely affect in a material manner any right of the Participant under the Option, even if the Board, Committee or other person in its discretion determines that there have occurred or are about to occur significant changes in the Participant’s position, duties or responsibilities, or significant changes in economic, legislative, regulatory, tax, accounting or cost/benefit conditions which are determined by the Board, Committee or other person in its discretion to

 

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have or to be expected to have a significant effect on the performance of the Company, or any subsidiary, Affiliate, division or department thereof, on the Plan or on the Participant’s Option.

(ii) The Senior Vice President, Global Total Rewards and Learning or the Senior Vice President, Global Compensation may amend, revise or make any changes to this Agreement to reflect any amendments, revisions, changes or other actions approved or taken by the Committee pursuant to Section 8(d)(i).

(e) Dilution and Other Adjustments.

(i) As provided by Paragraph 15(a) of the Plan, in the event of any change in the outstanding shares of the Company by reason of any corporate transaction or change in corporate capitalization such as a stock split, stock dividend, split-up, split-off, spin-off, recapitalization, merger, consolidation, rights offering, reorganization, combination, consolidation, subdivision or exchange of shares, a sale by the Company of all or part of its assets, any distribution to shareholders other than a normal cash dividend, partial or complete liquidation of the Company or other extraordinary or unusual event, the Committee shall make such adjustment in the class, the Number of Shares, the Exercise Price of the Option or other terms of the Award Communications of outstanding Options as may be determined to be appropriate by the Committee, and such adjustments shall be final, conclusive and binding for all purposes.

(ii) As provided by Paragraph 15(b) of the Plan, in the event of any merger, consolidation or similar transaction as a result of which the holders of shares of the Company receive consideration consisting exclusively of securities of the surviving entity (or the parent of the surviving entity) in such transaction, the Committee shall, to the extent deemed appropriate by the Committee, adjust the Option to the extent outstanding on the date of such merger, consolidation or similar transaction so that it pertains and applies to the securities which a holder of the number of shares subject to such Option would have received in such merger, consolidation or similar transaction.

(iii) As provided by Paragraph 15(c) of the Plan, in the event of (A) a dissolution or liquidation of the Company, (B) a sale of all or substantially all of the Company’s assets (on a consolidated basis), (C) a merger, consolidation or similar transaction involving the Company in which the holders of shares of the Company receive securities and/or other property, including cash, other than shares of the surviving entity in such transaction (or the parent of such surviving entity), the Committee shall, to the extent deemed appropriate by the Committee, have the power to provide for the exchange of the Option (whether or not then exercisable or vested) for an Option with respect to (1) some or all of the property which a holder of the number of shares of the Company subject to such Option would have received in such transaction or (2) securities of the acquirer or surviving entity (or parent of such acquirer or surviving entity) and, incident thereto, make an equitable adjustment as determined by the Committee in the number of shares subject to the Option or provide for a payment (in cash or other property) to the Participant in partial consideration for the exchange of the Option; provided, however, that in the event that the acquirer does not agree to the assumption or

 

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substitution of the Option in the foregoing manner, the Committee shall, to the extent deemed appropriate by the Committee, have the power to cancel, effective immediately prior to the occurrence of such event, the Option (whether or not then vested), and, in full consideration of such cancellation, pay to the Participant an amount in cash, for each share subject to such Option, equal to the value, as determined by the Committee of such Option, provided that such value shall be equal to the excess of (A) the value, as determined by the Committee, of the property (including cash) received by the holder of a share as a result of such event over (B) the exercise price of such Option and that no change to the original timing of payment will be made to the extent it would result in a tax under Section 409A.

(f) Beneficiary Designation.    As provided by Paragraph 17 of the Plan, a Participant may, in a manner determined by the Committee in its discretion, designate a beneficiary or beneficiaries to receive any payment to which such Participant may be entitled under the Participant’s Option in the event of such Participant’s death. If a Participant does not designate a beneficiary, or if no designated beneficiary is living on the date on which any amount becomes payable under the Participant’s Option, such payment will be made to the legal representatives of the Participant’s estate, which will be deemed to be the Participant’s designated beneficiary under the Participant’s Option. If there is any question as to the legal right of a Participant’s beneficiary to receive a distribution under the Participant’s Option, the Committee in its discretion may determine that the amount in question be paid to the legal representatives of the Participant’s estate, in which event the Company, the Board and the Committee will have no further liability to anyone with respect to such amount.

(g) Governing Law and Venue.    As provided by Paragraph 18(n) of the Plan, the validity, construction, interpretation, administration and effect of the Plan and of its rules and regulations, and rights relating to the Plan and to the Option issued under this Agreement, shall be governed by the substantive laws, but not the choice of law rules, of the State of New York. For purposes of litigating any dispute that arises under this Option or the Agreement, the parties hereby submit to and consent to the exclusive jurisdiction of the State of New York, and agree that such litigation shall be conducted in the courts of New York County, or the federal courts for the United States for the Southern District of New York, where this grant is made and/or to be performed.

(h) Section 409A.    Options are intended to be exempt from Section 409A, and the Plan, this Agreement and the Participant’s Award Communications shall be administered and interpreted consistent with such intent and the 409A Policy. Notwithstanding the foregoing, the Company makes no representations that the Options or the vesting and payments provided by this Agreement are exempt from or comply with Section 409A, and in no event shall the Company or any Affiliate be liable for all or any portion of any taxes, penalties, interest or other expenses that may be incurred by a Participant on account of non-compliance with Section 409A.

(i) Other Options.    Notwithstanding any other provision of this Agreement, the Company, in its sole discretion, may approve and grant stock options that are not governed

 

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by the provisions contained in this Agreement, which stock options shall be subject to the terms of such other agreement or writing specified by the Company as applicable thereto.

*        *        *         *        *

 

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AMERICAN EXPRESS COMPANY

2016 INCENTIVE COMPENSATION PLAN

 

 

[                    ] NONQUALIFIED STOCK OPTION AWARD AGREEMENT (BAND 99)

 

 

APPENDIX A

DEFINITIONS

Section A1. Definitions.    As used in the Agreement, the Appendices and the Award Communication, the following terms will have the respective meanings set forth below, and other capitalized terms used in the Agreement, the Appendices or the Award Communication will have the respective meanings given such capitalized terms in the Agreement, the Appendices, the Award Communication or the Plan.

(a) “409A Policy” means the Company’s Section 409A Compliance Policy, as amended and restated from time to time, or any successor thereto.

(b) “Affiliate” has the meaning given such term by Paragraph 3(b) of the Plan, which states that unless the Committee provides otherwise, “Affiliate” means any entity in which the Company has a direct or indirect equity interest of 50% or more, as determined by the Committee in its discretion.

(c) “Agreement” means the [                    ] Nonqualified Stock Option Award Agreement (Band 99), including the Appendices.

(d) “Award Communication” for a Participant and the Participant’s Option means, collectively, the Participant’s year-end compensation statement for the year preceding the year that includes the Date of Grant (if applicable), and any other written or electronic communication by or on behalf of the Company to the Participant regarding the particular terms of the Participant’s Option, and the LTIA Overview or similar document describing the terms of the Option generally.

(e) “Board” means the Board of Directors of the Company.

(f) “Change in Control” means the happening of any of the following:

(i) Any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act (a “Person”) becomes the beneficial owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 25% or more of either (i) the then outstanding common shares of the Company (the “Outstanding Company Common Shares”) or (ii) the combined voting power of the then outstanding voting securities

 

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of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that such beneficial ownership shall not constitute a Change in Control if it occurs as a result of any of the following acquisitions of securities: (A) any acquisition directly from the Company; (B) any acquisition by the Company or any corporation, partnership, trust or other entity controlled by the Company (a “Subsidiary”); (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Subsidiary; (D) any acquisition by an underwriter temporarily holding Company securities pursuant to an offering of such securities; (E) any acquisition by an individual, entity or group that is permitted to, and actually does, report its beneficial ownership on Schedule 13-G (or any successor schedule), provided that, if any such individual, entity or group subsequently becomes required to or does report its beneficial ownership on Schedule 13D (or any successor schedule), then, for purposes of this subsection, such individual, entity or group shall be deemed to have first acquired, on the first date on which such individual, entity or group becomes required to or does so report, beneficial ownership of all of the Outstanding Company Common Stock and Outstanding Company Voting Securities beneficially owned by it on such date; or (F) any acquisition by any corporation pursuant to a reorganization, merger or consolidation if, following such reorganization, merger or consolidation, the conditions described in clauses (A), (B) and (C) of Section A1(h)(iii) are satisfied. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any Person (the “Subject Person”) became the beneficial owner of 25% or more of the Outstanding Company Common Shares or Outstanding Company Voting Securities as a result of the acquisition of Outstanding Company Common Shares or Outstanding Company Voting Securities by the Company which, by reducing the number of Outstanding Company Common Shares or Outstanding Company Voting Securities, increases the proportional number of shares beneficially owned by the Subject Person; provided, that if a Change in Control would be deemed to have occurred (but for the operation of this sentence) as a result of the acquisition of Outstanding Company Common Shares or Outstanding Company Voting Securities by the Company, and after such share acquisition by the Company, the Subject Person becomes the beneficial owner of any additional Outstanding Company Common Shares or Outstanding Company Voting Securities which increases the percentage of the Outstanding Company Common Shares or Outstanding Company Voting Securities beneficially owned by the Subject Person, then a Change in Control shall then be deemed to have occurred; or

(ii) Individuals who, as of the date hereof, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board, including by reason of agreement intended to avoid or settle any such actual or threatened contest or solicitation; or

 

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(iii) The consummation of a reorganization, merger, statutory share exchange, consolidation, or similar corporate transaction involving the Company or any of its direct or indirect Subsidiaries (each a “Business Combination”), in each case, unless, following such Business Combination, (A) the Outstanding Company Common Shares and the Outstanding Company Voting Securities immediately prior to such Business Combination, continue to represent (either by remaining outstanding or being converted into voting securities of the resulting or surviving entity or any parent thereof) more than 50% of the then-outstanding shares of common stock and the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation that, as a result of such transaction, owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries), (B) no Person (excluding the Company, any employee benefit plan (or related trust) of the Company, a Subsidiary or such corporation resulting from such Business Combination or any parent or subsidiary thereof, and any Person beneficially owning, immediately prior to such Business Combination, directly or indirectly, 25% or more of the Outstanding Company Common Shares or Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 25% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination (or any parent thereof) or the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors, and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination (or any parent thereof) were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such Business Combination; or

(iv) The consummation of the sale, lease, exchange or other disposition of all or substantially all of the assets of the Company, unless such assets have been sold, leased, exchanged or disposed of to a corporation with respect to which following such sale, lease, exchange or other disposition (A) more than 50% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation (or any parent thereof) entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Shares and Outstanding Company Voting Securities immediately prior to such sale, lease, exchange or other disposition in substantially the same proportions as their ownership immediately prior to such sale, lease, exchange or other disposition of such Outstanding Company Common Shares and Outstanding Company Voting Shares, as the case may be, (B) no Person (excluding the Company and any employee benefit plan (or related trust)) of the Company or a Subsidiary or of such corporation or a subsidiary thereof and any Person beneficially owning, immediately prior to such sale, lease, exchange or other disposition, directly or indirectly, 25% or more of the Outstanding Company Common Shares or Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 25% or more of respectively, the then outstanding shares of common stock of such corporation (or any parent thereof) and the combined voting power of

 

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the then outstanding voting securities of such corporation (or any parent thereof) entitled to vote generally in the election of directors, and (C) at least a majority of the members of the board of directors of such corporation (or any parent thereof) were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale, lease, exchange or other disposition of assets of the Company; or

(v) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.

(g) “Clawback Requirements” means (i) any applicable listing standards of a national securities exchange adopted in accordance with Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (regarding recovery of erroneously awarded compensation) and any implementing rules and regulations of the U.S. Securities and Exchange Commission adopted thereunder, (ii) similar rules under the laws of any other jurisdiction and (iii) any policies adopted by the Company to implement such requirements, all to the extent determined by the Company in its discretion to be applicable to the Participant.

(h) “Code” means the U.S. Internal Revenue Code of 1986, as amended and restated from time to time, and includes the applicable Treasury Regulations promulgated and other official guidance issued thereunder.

(i) “Committee” means the Compensation and Benefits Committee of the Board. To the extent that the Committee has delegated its authority to certain officers and employees of the Company, references to the Committee with respect to a matter for which the Committee has delegated its authority shall include the officers and employees to whom such authority has been delegated.

(j) “Company” means American Express Company.

(k) “Consent to Detrimental Conduct Provisions” with respect to a Participant means the “Consent to the Application of Forfeiture and Detrimental Conduct Provisions to Incentive Compensation Plan Awards” or similar document, and any successor thereto, executed by the Participant.

(l) “Consent to Dodd-Frank Clawback Provisions” with respect to a Participant means the “Consent to the Requirements of Section 954 of the Dodd-Frank Act” or similar document, and any successor thereto, executed by the Participant.

(m) “Constructive Termination” has the meaning given such term by the Senior Executive Severance Plan, which generally states that a “Constructive Termination” of a Participant means any termination of the Participant’s Employment by the Participant as a result of Good Reason within two years after a Change in Control, and that “Good Reason” generally means the occurrence of any of the following events without the Participant’s written consent: (i) a material reduction in the Participant’s base salary (except for similar across the board changes affecting all similarly situated employees) or any material reduction

 

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in the aggregate of the Participant’s annual and long-term incentive opportunity, in each case from that in effect immediately prior to the Change in Control, (ii) the requirement that the Participant be based more than 50 miles from the location at which the Participant was based immediately prior to the Change in Control and which location is more than 35 miles from the Participant’s residence, (iii) the assignment to the Participant of any duties that are materially inconsistent with the Participant’s duties prior to the Change in Control, or (iv) a significant reduction in the Participant’s position, duties, or responsibilities from those in effect prior to the Change in Control; provided, however, in order for any of the foregoing events to constitute Good Reason, the Participant must notify the Company within 30 days after the occurrence of the event giving rise to a Good Reason and the Company shall have 30 days to remedy the condition, and if remedied by the Company within such 30-day period, no Good Reason shall exist on account of the remedied event.

(n) [                    ]

(o) “Date of Grant” for an Option means the date specified by the applicable Award Communication.

(p) “Defined Termination” has the meaning given such term by the Senior Executive Severance Plan, which states that “Defined Termination” means a Separation from Service within two years after a Change in Control that occurs as a result of either an Involuntary Termination or a Constructive Termination.

(q) “Disability” has the meaning given such term by Paragraph 12 of the Plan, which generally states that a Participant shall be deemed to have terminated his or her Employment by reason of “Disability” if the Committee determines that the physical or mental condition of the Participant was such at that time as would entitle the Participant to payment of monthly disability benefits under the long-term disability benefit plan of the Company covering the Participant, or, if the Participant is not eligible for benefits under any long-term disability benefit plan, the Committee determines that the Participant’s physical or mental condition would entitle him or her to benefits under a long-term disability benefit plan of the Company if the Participant were eligible thereunder.

(r) “Early Retirement” with respect to a Participant means the termination of the Participant’s Employment at a time that the Participant has attained 10 or more years of service (or deemed service under applicable retirement arrangements) with the Company or applicable Affiliates and the Participant is age 55 or older, but younger than age 62.

(s) “Employment” means employment with the Company or an Affiliate, or engagement in Related Employment.

(t) “EU Retirement” with respect to a Participant means the termination of the Participant’s Employment at a time that the Participant has attained 15 or more years of service (or deemed service under applicable retirement arrangements) with the Company or applicable Affiliates.

 

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(u) “Exchange” has the meaning given such term by Paragraph 2(a) of the Plan, which states that “Exchange” shall mean the New York Stock Exchange or such other principal securities market on which the shares are traded.

(v) “Exchange Act” means the U.S. Securities Exchange Act of 1934, as amended and restated from time to time.

(w) “Exercise Price” for an Option means, unless an Award Communication provides otherwise, as provided by Paragraph 5(a) and Paragraph 5(b) of the Plan, the closing price of a Company share on the Date of Grant as reported by the Exchange on such date.

(x) “Expiration Date” means the 10-year anniversary of the Date of Grant or such other expiration date specified by an Award Communication.

(y) “Fair Market Value” has the meaning given such term by Paragraph 5(b) of the Plan, which generally states that “Fair Market Value” of a share on a given date is the fair market value of a share on such date, as determined in such reasonable manner as may be provided from time to time by the Committee or as may be required in order to comply with the requirements of any applicable laws or regulation; and unless the Committee determines otherwise, the “Fair Market Value” of a Company share on a given date shall be the closing price of a Company share reported by the Exchange on such date.

(z) “Full Retirement” with respect to a Participant means the termination of the Participant’s Employment at a time that the Participant has attained 10 or more years of service (or deemed service under applicable retirement arrangements) with the Company or applicable Affiliates and the Participant is age 62 or older.

(aa) “Immediate Family Member” of a Participant means the Participant’s children, grandchildren, stepchildren, daughters and sons-in-law, parents, grandparents, step parents, siblings, brothers and sisters-in-law, and adoptive relationships comparable to the foregoing; certain household members (excluding employees or tenants); and trusts or partnerships for the beneficial interest of an Immediate Family Member(s) (who are expected to own a 100% beneficial interest in such trust or partnership). The foregoing definition of Immediate Family Member is intended to follow the definition of “immediate family” member in accordance with accounting interpretations that would avoid a charge to earnings, and the Company is authorized to interpret and administer the definition in accordance with accounting and other interpretations affecting the Company.

(bb) “Involuntary Termination” has the meaning given such term by the Senior Executive Severance Plan, which generally states that an “Involuntary Termination” of a Participant means any involuntary termination of the Participant’s Employment for reasons other than Good Cause within two years after a Change in Control, and that “Good Cause” generally means the occurrence of any of the following: (i) the Participant’s willful and continued failure to adequately perform substantially all of the duties of the Participant’s Employment; (ii) the Participant’s willful engagement in conduct which is demonstrably and

 

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materially injurious to the Company and such of its subsidiaries and affiliated companies and other trades or businesses, monetarily or otherwise; or (iii) the Participant’s conviction of a felony.

(cc) “LTIA Overview” for a Participant’s Option means the overview, program, summary, guide or similar document provided by or on behalf of the Company describing certain terms of the Participant’s Option. Generally, new LTIA Overviews are provided each year describing the Options granted to employees in specified Band levels as part of the Company’s annual award process for that year.

(dd) “Number of Shares” for an Option means the number of shares subject to such Option, as specified in the applicable Award Communication.

(ee) “Option” means a Nonqualified Stock Option granted by the Company to a Participant pursuant to the Plan, the Agreement and the Participant’s Award Communication.

(ff) “Participant” means an employee to whom an Option has been granted pursuant to the Plan and the Agreement, and if applicable, the person(s) who acquire the Participant’s rights under the Option pursuant to Section 3(b) of the Agreement.

(gg) “Plan” means the Company’s 2016 Incentive Compensation Plan, as amended and restated from time to time, or any successor thereto.

(hh) “Related Employment” has the meaning given such term by Paragraph 14 of the Plan, which generally states that “Related Employment” of an individual means the employment or performance of services by the individual for an employer that is neither the Company nor an Affiliate, provided that (a) such employment or performance of services is undertaken by the individual at the request of the Company or an Affiliate; (b) immediately prior to undertaking such employment or performance of services, the individual was engaged in Employment; and (c) such employment or performance of services is in the best interests of the Company and is recognized by the Committee, in its discretion, as Related Employment.

(ii) “Retirement” means Early Retirement, Full Retirement or EU Retirement.

(jj) “Section 409A” means Section 409A of the Code.

(kk) “Securities Act” means the U.S. Securities Act of 1933, as amended and restated from time to time.

(ll) “Senior Executive Severance Plan” means the Company’s Senior Executive Severance Plan, as amended and restated from time to time, or any successor thereto.

(mm) “Separation from Service” has the meaning given such term by Section 409A (and as determined in accordance with the 409A Policy), which generally states that an employee has a “Separation from Service” with an employer if the employee dies,

 

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retires, or otherwise has a termination of his or her employment with such employer. Whether a Separation from Service has occurred is determined based on whether the facts and circumstances indicate that the employer and employee reasonably anticipated that no further services would be performed after a certain date or that the level of bona fide services the employee would perform after such date would permanently decrease to no more than 20% of the average level of bona fide services performed over the immediately preceding 36-month period.

(nn) “shares” refers to the shares of the Company’s common stock, par value of $.20 per share, or the shares of any other stock of any other class or company into which such shares may thereafter be changed.

(oo) “Tax-Related Items” means any income tax, social insurance, payroll tax, fringe benefits tax, payment on account or other tax-related items related to the Participant’s participation in the Plan and legally applicable to the Participant.

(pp) “Vesting Date” of an Option means the vesting date specified in the Award Communication for such Option.

*        *        *         *        *

 

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AMERICAN EXPRESS COMPANY

2016 INCENTIVE COMPENSATION PLAN

 

 

[                    ] NONQUALIFIED STOCK OPTION AWARD AGREEMENT (BAND 99)

 

 

APPENDIX B

SECTION 280G TERMS & PROCEDURES

Section B1. “Best Net” Limitation.    In the event that any payment or benefit received or to be received by a Participant under the Agreement in connection with a Change in Control or termination of the Participant’s employment (collectively, the “Payments”), will be subject to the excise tax referred to in Section 4999 of the Code (the “Excise Tax”), then the Payments shall be reduced to the extent necessary so that no portion of the Payments is subject to the Excise Tax but only if (A) the net amount of all payments and benefits received or to be received by a Participant in connection with the applicable Change in Control or the termination of the Participant’s employment, whether pursuant to the terms of the Agreement or any other plan, arrangement or agreement with the Company, any Person whose actions result in such Change in Control or any Person affiliated with the Company or such Person (the “Total Payments”), as so reduced (and after subtracting the net amount of federal, state and local income and employment taxes on such reduced Total Payments), is greater than or equal to (B) the net amount of such Total Payments without any such reduction (but after subtracting the net amount of federal, state and local income and employment taxes on such Total Payments and the amount of Excise Tax to which the Participant would be subject in respect of such unreduced Total Payments); provided, however, that the Participant may elect in writing to have other components of his or her Total Payments reduced prior to any reduction in the Payments hereunder.

Section B2. Calculations.    For purposes of determining whether the Payments will be subject to the Excise Tax, the amount of such Excise Tax and whether any Payments are to be reduced hereunder: (i) the Total Payments shall be treated as “parachute payments” (within the meaning of Section 280G(b)(2) of the Code) unless, in the opinion of the accounting firm which was, immediately prior to the Change in Control, the Company’s independent auditor, or if that firm refuses to serve, by another qualified firm, whether or not serving as independent auditors, designated by the Committee (the “Firm”), such payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of Section 280G(b)(2)(A) or Section 280G(b)(4)(A) of the Code; (ii) no portion of the Total Payments the receipt or enjoyment of which the Participant shall have waived at such time and in such manner as not to constitute a “payment” within the meaning of Section 280G(b) of the Code shall be taken into account; (iii) all “excess parachute payments” within the meaning of Section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax unless, in the opinion of the Firm, such excess parachute payments (in whole or in part) represent reasonable compensation for

 

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services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the Base Amount (within the meaning of Section 280G(b)(3) of the Code) allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax; and (iv) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Firm in accordance with the principles of Section 280G(d)(3) and Section 280G(d)(4) of the Code. For purposes of determining whether any Payments in respect of a Participant shall be reduced, a Participant shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation (and state and local income taxes at the highest marginal rate of taxation in the state and locality of such Participant’s residence, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes) in the calendar year in which the Payments are made. The Firm will be paid reasonable compensation by the Company for its services.

Section B3. Notice of Adjustment.    As soon as practicable following a Change in Control, but in no event later than 30 days thereafter, the Company shall provide to each Participant with respect to whom it is proposed that Payments be reduced, a written statement setting forth the manner in which the Total Payments in respect of such Participant were calculated and the basis for such calculations, including, without limitation, any opinions or other advice the Company has received from the Firm or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement).

*        *        *         *        *

 

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AMERICAN EXPRESS COMPANY

2016 INCENTIVE COMPENSATION PLAN

 

 

[                     ] NONQUALIFIED STOCK OPTION AWARD AGREEMENT (BAND 99)

 

 

APPENDIX C

DETRIMENTAL CONDUCT PROVISIONS

Section C1. Detrimental Conduct.    If a current or former employee of, or other individual that provides or has provided services for, the Company or its Affiliates (the “Employee”) engages in Detrimental Conduct, Awards (as defined in Section C7(b) below) previously issued to such Employee may be canceled, rescinded or otherwise restricted and the Company can recover any payments received by and stock delivered to the Employee in accordance with the terms of Section C2. For purposes of this Appendix C, “Detrimental Conduct” means the prohibited conduct described in Section C1(a) through Section C1(g).

(a) Noncompete.    For a one-year period after the last day of active employment if the Employee is a Band 70 or above employee or for a six-month period after the last day of active employment if the Employee is a Band 50 or 60 employee, and during the Employee’s employment with the Company or its Affiliates, the Employee shall not be employed by, provide advice to or act as a consultant for any Competitor. The Company has defined “Competitor” for certain lines of business, departments or job functions by establishing a specific standard and/or by name as set forth in the Company’s Competitor List(s). An Employee’s personal list of Competitors will be the sum of:

(i) either (1) all Competitors derived from the column titled “Standard” on the Competitor List for the lines of business and departments (as listed on the Competitor List under the “Line of Business” column) that the Employee provided services to or managed during the two-year period preceding the date the Employee’s active employment with the Company or its Affiliates terminates, or (2) if the job function the Employee is employed in at the time his or her active employment with the Company or its Affiliates terminates is listed on the Competitor List under the “Line of Business” column, the Competitors cited for that job function under the “Standard” column of the Competitor List; and

(ii) the Entities (as defined in Section C7(c) below) listed on the Competitor List under the column titled “Business Unit Wide Competitors” for the business units the Employee provided services to or managed during the two-year period preceding the date his or her active employment with the Company or its Affiliates terminates. If any line(s) of business the Employee provided services to or managed during the two-year period preceding the date his or her active employment with the Company or its Affiliates terminates

 

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is not listed on the Competitor List then, with respect to such line(s) of business, the Employee shall not be employed by, provide advice to or act as a consultant for (1) an Entity’s line of business that competes with those line(s) of business and (2) the Entities listed on the Competitor List under the column titled “Business Unit Wide Competitors” for the business units the Employee provided services to or managed during the two-year period preceding the date the Employee’s active employment with the Company or its Affiliates terminates. Except for Business Unit Wide Competitors, the prohibition against being employed by, providing advice to or acting as a consultant for a Competitor is limited to the line(s) of business of the Competitor that compete with the line(s) of business of the Company or its Affiliates that the Employee provided services to or managed. With respect to Business Unit Wide Competitors, the Employee agrees not to be employed by, provide advice to or act as a consultant for such Entities in any line of business because these Entities compete with several of the Company’s or its Affiliates’ lines of business. The Company can revise the Competitor List at its discretion at any time and from time to time and as revised will become part of this Appendix C; a copy of the current Competitor List will be available through the Corporate Secretary’s Office. Notwithstanding anything in this Appendix C to the contrary, the Company shall not make any addition to the Competitor List for a period of two years following the date of a Change in Control.

(b) Nondenigration.    For a one-year period after an Employee’s last day of active employment (the “Restricted Period”) and during his or her employment with the Company or its Affiliates, an Employee or anyone acting at his or her direction may not denigrate the Company or its Affiliates or the Company’s or its Affiliates’ employees to the media or financial analysts. During the Restricted Period, an Employee may not (i) provide information considered proprietary by the Company to the media or financial analysts or (ii) discuss the Company or its Affiliates with the media or financial analysts, without the explicit written permission of the Executive Vice President of Corporate Affairs and Communications. This Section C1(b) shall not be applicable to any truthful statement required by any legal proceeding.

(c) Nonsolicitation of Employees.    During the Restricted Period, an Employee may not employ or solicit for employment any employee of the Company or its Affiliates. In addition, during the Restricted Period an Employee may not advise or recommend to any other person that he or she employ or solicit for employment, any person employed by the Company or its Affiliates for the purpose of employing that person at an Entity at which the Employee is or intends to be (i) employed, (ii) a member of the board of directors, or (iii) providing consulting services.

(d) Nonsolicitation of Customers.    During the Restricted Period, an Employee may not directly or indirectly solicit or enter into any arrangement with any Entity which is, at the time of such solicitation, a significant customer of the Company or its Affiliates for the purpose of engaging in any business transactions of the nature performed or contemplated by the Company or its Affiliates. This Section C1(d) shall apply only to customers whom the Employee personally serviced while employed by the Company or its Affiliates or customers

 

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the Employee acquired material information about while employed by the Company or its Affiliates.

(e) Misconduct.    During his or her employment with the Company or its Affiliates, an Employee may not engage in any conduct that results in termination of his or her employment for Misconduct. For purposes of this Section C1(e), “Misconduct” is (i) material violation of the American Express Company Code of Conduct, (ii) criminal activity, (iii) gross insubordination, or (iv) gross negligence in the performance of duties.

(f) Confidential Information.    During the Restricted Period and during his or her employment with the Company or its Affiliates, an Employee may not misappropriate or improperly disclose confidential information or trade secrets of the Company, its Affiliates and their businesses, including but not limited to information about marketing or business plans, possible acquisitions or divestitures, potential new products or markets and other data not available to the public.

(g) Other Detrimental Conduct.    During the Restricted Period, an Employee may not take any actions that the Company reasonably deems detrimental to its interests or those of its Affiliates. To the extent practicable, the Company will request an Employee to cease and desist or rectify the conduct prior to seeking any legal remedies under this Appendix C and will only seek legal remedies if the Employee does not comply with such request. This Section C1(g) shall not be applied to conduct that is otherwise permitted by Section C1(a) through Section C1(f). For example, if an Employee leaves the Company’s employment to work for an Entity that is not a Competitor under Section C1(a), the Company will not claim that employment with that Entity violates Section C1(g). Notwithstanding anything in this Appendix C to the contrary, the prohibition on conduct described in this Section C1(g) shall not be applicable to an Employee from and after his or her last day of active employment, if his or her active employment terminates for any reason (other than for Misconduct) within two years following a Change in Control.

Section C2. Remedies.

(a) Repayment of Financial Gain.

(i) If an Employee fails to comply with the requirements of Section C1(a) through Section C1(g), the Company may cancel any outstanding Awards and recover from the Employee (1) the Amount (as that term is defined in Section C7(a) below) of any gain realized on Stock Options that the Employee exercised, as of the date exercised, (2) the Amount of any payments received by the Employee for Portfolio Grant Awards, Performance Grant Awards or other Awards granted under the Plan and (3) the Number (as that term is defined in Section C7(d) below) of shares of stock whose restrictions lapsed (or the value of the Number of such shares of stock at the time the restrictions lapsed) pursuant to an award of Restricted Stock or Restricted Stock Units or other Award, during the 24-month period preceding the Employee’s last day of active employment.

 

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(ii) If an Employee fails to comply with the requirements of Section C1(a) through Section C1(g), the Employee must and agrees to repay the Company, upon demand by the Company, in accordance with the terms of this Section C2, and the Company shall be entitled, to the extent and in the manner permitted by the 409A Policy, to set-off against the amount of any such repayment obligation against any amount owed, from any source, to the Employee by the Company or its Affiliates.

(b) Other Remedies.    The remedy provided pursuant to Section C2(a) shall be without prejudice to the Company’s right to recover any losses resulting from a violation of this Appendix C and shall be in addition to whatever other remedies the Company may have, at law or equity, for violation of the terms of this Appendix C.

Section C3. Compensation Band Changes.    If the Company changes its current system of classifying employees in compensation bands and management tiers, the references to Bands 50, 60 and 70, and Executive Officers in this Appendix C will be construed to mean the compensation level(s) and management tiers in the new or revised system that, in the Company’s discretion, most closely approximates these bands and management tiers under the current system.

Section C4. Involuntary Terminations.    This Appendix C will not apply to employees of the Company or its Affiliates who enter into a severance agreement with the Company or its Affiliates or other involuntary terminations as determined by the Company (excluding terminations covered by Section C1(e)).

Section C5. Court Modification.    If any term of this Appendix C is determined by a court of competent jurisdiction not to be enforceable in the manner set forth in this Appendix C, such term shall be enforceable to the maximum extent possible under applicable law and such court shall reform such term to make it enforceable.

Section C6. Waivers.    The failure of the Company to enforce at any time any term of this Appendix C shall not be construed to be a waiver of such term or of any other term. Any waiver or modification of the terms of this Appendix C will only be effective if reduced to writing and signed by both the Employee and the President or Chief Executive Officer of the Company.

Section C7. Definitions.    As used in this Appendix C, the following terms will have the respective meanings set forth below.

(a) “Amount” means the gross amount, before deduction of applicable taxes or other amounts, and includes the gross amount of any dividends or dividend equivalents paid to the Employee on awards of Restricted Stock or Restricted Stock Units.

(b) “Award” means a Performance Grant Award, Portfolio Grant Award, Restricted Stock, Restricted Stock Unit, Stock Option or other award issued under the Plan.

 

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(c) “Entity” or “Entities” mean any corporation, partnership, association, joint venture, trust, government, governmental agency or authority, person or other organization or entity.

(d) “Number” means the total number of shares of stock, before reduction for the payment of applicable taxes or other amounts, and includes the total number of any shares of stock paid to the Employee on awards of Restricted Stock or Restricted Stock Units.

(e) “Performance Grant Award” means a performance grant award issued under the Plan, and includes the annual bonus provided to Executive Officers.

(f) “Portfolio Grant Award” means a portfolio grant award issued under the Plan.

(g) “Restricted Stock,” “Restricted Stock Unit” and “Stock Option” have the respective meanings given such terms in the Plan.

*        *        *         *        *

 

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EXHIBIT 10.3

AMERICAN EXPRESS COMPANY

2016 INCENTIVE COMPENSATION PLAN

 

 

[                     ] RESTRICTED STOCK UNIT AWARD AGREEMENT (BAND 99)

 

 

This [                     ] Restricted Stock Unit Award Agreement (Band 99) sets forth the terms and conditions of the Restricted Stock Units granted by American Express Company pursuant to the Company’s 2016 Incentive Compensation Plan to select employees in Band 99 during [                     ]. Capitalized terms used herein have the meanings given such terms herein or by Appendix A.

Additional specific terms of a Participant’s Award under this Agreement are set forth in the Participant’s Award Communication, which shall include the Date of Grant, the Number of Shares, the Vesting Date, and any additional terms applicable to such Award. The terms of the performance vesting requirement applicable to a Participant’s Award under this Agreement are set forth on Schedule A, including the Performance Requirement and the Performance Period.

For Awards granted in special situations (such as grants to newly hired or promoted Participants), the vesting and/or performance requirements, if any, and references to the Date of Grant, the Vesting Date or the Performance Period applicable to the Participant’s Award may vary from the terms set forth in this Agreement, as specified in the Participant’s Award Communication, which terms shall apply instead of the terms set forth in this Agreement. If a Participant’s Award Communication provides for vesting of the Number of Shares in installments, references to the Vesting Date shall refer to the date an installment vests and references to Earned Shares shall refer to the portion of the Number of Shares that vest on a given Vesting Date, as applicable, and each installment will be treated separately under this Agreement as necessary to give effect to the intent thereof.

Section 1. Vesting.

(a) Vesting Date.    Subject to Section 1(b), Section 1(c) and the other terms of this Agreement, a Participant’s Award shall vest for the number of Earned Shares on the Vesting Date.

(b) Continued Employment Requirement.    Except as otherwise provided by Section 2, Section 3 or Section 4, the vesting of a Participant’s Award is subject to and conditioned upon the Participant’s continued Employment at all times during the period beginning with the Date of Grant and ending on the Vesting Date.

(c) Performance Requirement.    Except as otherwise provided by Section 2 or Section 4, or by the Participant’s Award Communication for an Award granted in a special situation (such as a grant to a newly hired or promoted Participant), the vesting of a

 

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Participant’s Award is subject to and conditioned upon: (i) the Company achieving at least the threshold level of performance under the Performance Requirement for the Performance Period, each as set forth on Schedule A, (ii) the Committee certifying the level of performance achieved under the Performance Requirement for the Performance Period and determining the RSU Payout Percentage pursuant to Schedule A based on such certified level of performance achieved, (iii) the Committee determining the number of shares eligible for vesting (the “Earned Shares”) based on the RSU Payout Percentage, and (iv) the Committee approving the vesting and payment of the Earned Shares. (For the avoidance of doubt, the number of Earned Shares under a Participant’s Award may exceed the Award’s Number of Shares in the event of above-target performance.) This performance requirement is intended to qualify the Award for the “performance-based” compensation exception to Section 162(m) of the Code, and it shall be administered, interpreted and applied consistent with such intent. Notwithstanding any other provision of this Agreement, if the requirements of this Section 1(c) are not satisfied, then except as otherwise provided by Section 2 or Section 4, the Participant’s Award will be forfeited.

(d) Portion Which Does Not Vest.    To the extent that a portion of a Participant’s Award does not vest pursuant to Section 1(a), Section 2, Section 3 or Section 4, such portion of the Award shall be forfeited and cancelled by the Company.

Section 2. Death or Disability.    Notwithstanding anything in this Agreement to the contrary, if a Participant ceases Employment by reason of the Participant’s death or Disability before the Vesting Date, the Participant’s Award shall immediately vest on the date of the Participant’s death or Disability, the RSU Payout Percentage for the Participant’s Award shall be 100% and the Participant’s Award shall no longer be subject to the vesting conditions set forth in Section 1(b) or Section 1(c).

Section 3. Retirement.

(a) Participants Outside European Union.    If a Participant’s home base country is outside the European Union, then: (A) if the Participant ceases Employment by reason of the Participant’s Early Retirement before the Vesting Date, and the date of Early Retirement is more than one year after the Date of Grant, the Participant’s Award shall continue and vest on the Vesting Date for the number of Earned Shares determined under Section 1(c); and (B) if the Participant ceases Employment by reason of the Participant’s Full Retirement before the Vesting Date, the Participant’s Award shall continue and vest on the Vesting Date for the number of Earned Shares determined under Section 1(c); in each case, without regard to the vesting condition set forth in Section 1(b).

(b) Participants Within European Union.    If a Participant’s home base country is in the European Union, then if the Participant ceases Employment by reason of the Participant’s EU Retirement before the Vesting Date, and the date of EU Retirement is more than one year after the Date of Grant, the Participant’s Award shall continue and vest on the Vesting Date for the number of Earned Shares determined under Section 1(c), without regard to the vesting condition set forth in Section 1(b).

 

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Section 4. Change in Control.    Notwithstanding anything in this Agreement to the contrary, but subject to Appendix B, which could negate the treatment provided by this Section 4 as a result of Section 280G of the Code, in the event of a Defined Termination of a Participant before the Vesting Date, the Participant’s Award shall immediately vest on the date of the Defined Termination for a number of shares based on either (i) the degree of the Performance Requirement attained as of the date of the Defined Termination, and/or (ii) the portion of the Performance Period elapsed as of the date of the Defined Termination, as determined by the Committee, and the Participant’s Award shall no longer be subject to the vesting conditions set forth in Section 1(b) or Section 1(c).

Section 5. Other Termination.    Unless the Committee determines otherwise (but in any case subject to and conditioned upon the satisfaction of Section 1(c)), then except as otherwise provided by Section 2, Section 3, Section 4 or a Participant’s Award Communication, in the event that a Participant’s Employment terminates for any reason before the Vesting Date, the Participant’s Award shall be immediately forfeited and cancelled by the Company.

Section 6. Payment.

(a) Generally.    Subject to Section 6(f), Section 6(h) and Section 6(i), and except as otherwise provided by Section 6(b) or Section 6(d)(i), as soon as practical following the Vesting Date, but no later than the end of the calendar year in which the Vesting Date occurs, the Company shall issue to a Participant the number of Earned Shares from the vesting of the Participant’s Award, less the number of any shares withheld or cancelled to satisfy withholding obligations for Tax-Related Items pursuant to Section 6(i).

(b) Death or Disability.    Subject to Section 6(f), Section 6(h) and Section 6(i), as soon as practical (but in no event later than 90 days) after the date of a Participant’s death or Disability, the Company shall issue to the Participant the number of Earned Shares from the vesting of the Participant’s Award pursuant to Section 2, less the number of any shares withheld or cancelled to satisfy withholding obligations for Tax-Related Items pursuant to Section 6(i). In the case of death, the issuance of shares is subject to the Company receiving required documentation from the legal representatives of the estate.

(c) Retirement.    Subject to Section 6(f), Section 6(h) and Section 6(i), the Company shall issue to a Participant the number of Earned Shares from the vesting of the Participant’s Award pursuant to Section 3, less the number of any shares withheld or cancelled to satisfy withholding obligations for Tax-Related Items pursuant to Section 6(i), at the time specified by Section 6(a).

(d) Change in Control.    Subject to Section 6(f), Section 6(h) and Section 6(i), the Company shall issue to a Participant the number of Earned Shares from the vesting of the Participant’s Award pursuant to Section 4 and after the application of Appendix B, less the number of any shares withheld or cancelled to satisfy withholding obligations for Tax-Related Items pursuant to Section 6(i), as follows:

 

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(i) if the Change in Control qualifies as a Section 409A Change Event, then the shares shall be issued to the Participant immediately upon the occurrence of the Defined Termination, but in no event later than five days thereafter; or

(ii) if the Change in Control does not qualify as a Section 409A Change Event, then the shares shall be issued to the Participant at the time specified by Section 6(a).

(e) Issuance.    The issuance of shares pursuant to this Section 6 may be made by crediting the shares to an account for the benefit of the Participant or by such other permissible manner chosen by the Company, in its sole discretion. As provided by Paragraph 18(e) of the Plan, legal counsel for the Company must be satisfied at the time of the issuance of the shares that such issuance of shares will be in compliance with the Securities Act and applicable United States federal, state, local and foreign laws, and the Company shall be under no obligation to effect the registration pursuant to the Securities Act of any shares to be issued hereunder or to effect similar compliance under any state or local laws.

(f) Documentation.    The Participant must provide the Company with any forms, documents or other information reasonably required by the Company.

(g) No Shareholder Rights.    Until the shares from the payment of an Award to a Participant have been issued to the Participant, the Participant shall have no rights as a shareholder of the Company with respect to such shares, and in particular, shall not be entitled to vote such shares or to receive any dividend or other distribution paid or made in respect of such shares (other than the dividend equivalents provided by Section 7).

(h) Compliance with Laws.    If the Company, in its sole discretion, determines that the listing upon any securities exchange or registration or qualification under any United States federal, state, local or foreign law of any shares to be issued pursuant to an Award is necessary or desirable, issuance of such shares shall not be made in shares until such listing, registration or qualification shall have been completed.

(i) Responsibility for Taxes.    The Participant acknowledges that, regardless of any action taken by the Company or, if different, the Participant’s employer (the “Employer”), the ultimate liability for all Tax-Related Items is and remains the Participant’s responsibility and may exceed the amount actually withheld by the Company or the Employer. The Participant further acknowledges that the Company and/or the Employer (i) make no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the Award, including, but not limited to, the grant or vesting of the Award, the subsequent sale of any shares acquired pursuant to the Award and the receipt of any dividend equivalents; and (ii) do not commit to and are under no obligation to structure the terms of the grant or any aspect of the Award to reduce or eliminate the Participant’s liability for Tax-Related Items or achieve any particular tax result. Further, if the Participant is subject to Tax-Related Items in more than one jurisdiction, the Participant acknowledges that the Company and/or the Employer (or former employer, as applicable) may be required to withhold or account for Tax-Related Items in more than one jurisdiction.

 

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Prior to the relevant taxable or tax withholding event, as applicable, the Participant agrees to make adequate arrangements satisfactory to the Company and/or the Employer to satisfy all Tax-Related Items. In this regard, the Company and/or the Employer, or their respective agents, at their discretion, may satisfy, or allow the Participant to satisfy, the withholding obligation with regard to all Tax-Related Items by any of the following, or a combination thereof:

(i) withholding from the Participant’s wages or other cash compensation paid to the Participant by the Company and/or the Employer; or

(ii) withholding or cancelling a number of shares subject to the Award with a Fair Market Value sufficient to cover the Tax-Related Items; or

(iii) authorizing a third party to sell, on behalf of the Participant, the appropriate number of shares subject to the Award with a Fair Market Value sufficient to cover the Tax-Related Items and to remit to the Company the sale proceeds; or

(iv) any other method deemed by the Company to comply with applicable law.

The Company and/or the Employer have the right and option, but not the obligation, to treat the Participant’s failure to provide timely payment of any tax withholding with regard to all Tax-Related Items as the Participant’s election to satisfy all or a portion of the tax withholding pursuant to Section 6(i)(ii) above.

Depending on the withholding method, the Company or the Employer may withhold or account for Tax-Related Items by considering applicable minimum statutory withholding amounts or other applicable withholding rates, including maximum applicable rates. If the maximum rate is used, any over-withheld amount may be refunded to the Participant in cash by the Company or Employer (with no entitlement to the share equivalent) or, if not refunded, the Participant may seek a refund from the local tax authorities. If the obligation for Tax-Related Items is satisfied by withholding any shares deliverable to the Participant, for tax purposes, the Participant is deemed to have been issued the full number of Earned Shares subject to the Award, notwithstanding that a number of the shares is held back solely for the purpose of paying the Tax-Related Items.

Finally, the Participant agrees to pay to the Company or the Employer any amount of Tax-Related Items that the Company or the Employer may be required to withhold or account for as a result of the Participant’s participation in the Plan that cannot be satisfied by the means previously described.

Notwithstanding the foregoing, the provisions of this Section 6(i) will not apply or will be modified if, in the opinion of the Company’s legal counsel, the application of this Section 6(i) to

 

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the Participant would jeopardize the Company’s deductibility of the Participant’s Award, or would cause a violation of Section 409A, in which event, the Participant will be required to arrange for payment to the Company of the Tax-Related Items.

Section 7. Dividend Equivalents.    Prior to the vesting or forfeiture of the Participant’s Award, there shall be accrued on the Number of Shares an amount(s) equivalent to the regular cash dividends paid, if any, on the underlying shares. In the event of the vesting and payment of the Award, the dividend equivalents accrued on the Earned Shares, less any Tax-Related Items that the Company determines are required to be withheld therefrom, shall be paid at the time that the Earned Shares are issued to the Participant. In the event of the forfeiture or cancellation of all or a portion of the Number of Shares, the dividend equivalents accrued on the portion of the Number of Shares that are forfeited shall also be forfeited. For an Award granted to a Participant in a special situation (such as a grant to a newly hired or promoted Participant), the Participant’s Award Communication may provide for different terms, treatment and/or payment of any dividend equivalents on the Participant’s Award.

Section 8. Additional Terms.

(a) No Assignment.    As provided by Paragraph 7(b) and Paragraph 18(d) of the Plan, except as otherwise determined by the Committee or permitted by the Plan, a Participant may not sell, assign, transfer, pledge, hypothecate, encumber in whole or in part, or otherwise dispose of the Participant’s Award (or the shares underlying such Award) or the Participant’s rights and interest under the Award (except by will or the laws of descent and distribution in the event of the Participant’s death), including, but not limited to, by execution, levy, garnishment, attachment, pledge, bankruptcy or in any other manner. If a Participant or anyone claiming under or through the Participant attempts to violate this Section 8(a), such attempted violation shall be null and void and without effect.

(b) No Assumption or Substitution Required.    In the event that the Company or any of its Affiliates is a participant in a corporate merger, consolidation or other similar transaction, neither the Company nor such Affiliate shall be obligated to cause any other participant in such transaction to assume a Participant’s Award or to substitute a new award for the Award under this Agreement.

(c) Detrimental Conduct.    A Participant’s Award is subject to the provisions of Appendix C and the Consent to Detrimental Conduct Provisions executed by the Participant, which if violated, could result in the forfeiture and recoupment of the Award and the proceeds from the Award.

(d) Clawback.    As provided by Paragraph 4(f)(ii) of the Plan, notwithstanding anything in the Plan, this Agreement or any Award Communication to the contrary, the Company will be entitled to the extent required by applicable law (including, without limitation, Section 10D of the Exchange Act and any regulations promulgated with respect thereto) or Exchange listing conditions, in each case as in effect from time to time, to recoup compensation of whatever kind paid under this Agreement by the Company at any time. A Participant’s

 

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Award is subject to the Clawback Requirements and the Consent to Dodd-Frank Clawback Provisions executed by the Participant, which could require the Participant to return to the Company, or forfeit if not yet paid, the Participant’s Award and the proceeds from the Award, in order to comply with the Clawback Requirements and any policy adopted by the Committee pursuant to the Clawback Requirements.

(e) FDIA Limitations.    As provided by Paragraph 4(f)(i) of the Plan, notwithstanding any other provision of the Plan, this Agreement or any Award Communication, vesting and payment of Awards pursuant to this Agreement are subject to and conditioned upon their compliance with 12 USC Section 1828(k) and any regulations promulgated thereunder.

Section 9. Miscellaneous.

(a) Incorporation of Plan and Award Communication.    The Award is subject to the Plan, the Award Communication and any interpretations by the Committee under the Plan or the Award Communication, which are hereby incorporated into this Agreement by reference and made a part hereof.

(b) Administration, Interpretation, Etc.    Any action taken or decision made by the Company, the Board or the Committee arising out of or in connection with the construction, administration, interpretation or effect of any provision of the Plan, this Agreement or a Participant’s Award Communication shall lie within its sole and absolute discretion, as the case may be, and shall be final, conclusive and binding on the Participant and all persons claiming under or through the Participant. By receipt of the Participant’s Award or other benefit under the Plan, the Participant and each person claiming under or through the Participant shall be conclusively deemed to have indicated acceptance and ratification of, and consent to, any action taken under the Plan, this Agreement or the Participant’s Award Communication, by the Company, the Board or the Committee.

(c) Correction.    The Committee may rescind, without further notice to a Participant, any Award or portion thereof issued to the Participant in duplicate, or in error.

(d) Amendment.

(i) The terms of a Participant’s Award (including terms under this Agreement or the Participant’s Award Communication) may be amended from time to time by the Committee, in its sole discretion, in any manner that the Committee deems necessary or appropriate; provided, however, that (A) no such amendment shall adversely affect in a material manner any right of the Participant under the Award without the written consent of the Participant, (B) except as provided by Paragraph 9 of the Plan, the Committee shall not amend the Participant’s Award if the amendment would disqualify the Award from the exception to Section 162(m) of the Code; and (C) the Committee may not amend or delete Section 4 or Section A1(p) in a manner that is detrimental to the Participant without the Participant’s written consent. Notwithstanding Paragraph 11 of the Plan, neither the Board, the

 

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Committee nor other person shall not have the authority to amend the terms of a Participant’s Award (including terms under this Agreement or the Participant’s Award Communication) without the written consent of the Participant is such amendment would adversely affect in a material manner any right of the Participant under the Award, even if the Board, Committee or other person in its discretion determines that there have occurred or are about to occur significant changes in the Participant’s position, duties or responsibilities, or significant changes in economic, legislative, regulatory, tax, accounting or cost/benefit conditions which are determined by the Board, Committee or other person in its discretion to have or to be expected to have a significant effect on the performance of the Company, or any subsidiary, Affiliate, division or department thereof, on the Plan or on the Participant’s Award.

(ii) The Senior Vice President, Global Total Rewards and Learning or the Senior Vice President, Global Compensation may amend, revise or make any changes to this Agreement to reflect any amendments, revisions, changes or other actions approved or taken by the Committee pursuant to Section 9(d)(i).

(e) Dilution and Other Adjustments.

(i) As provided by Paragraph 15(a) of the Plan, to the extent permissible for purposes of Section 162(m) of the Code, in the event of any change in the outstanding shares of the Company by reason of any corporate transaction or change in corporate capitalization such as a stock split, stock dividend, split-up, split-off, spin-off, recapitalization, merger, consolidation, rights offering, reorganization, combination, consolidation, subdivision or exchange of shares, a sale by the Company of all or part of its assets, any distribution to shareholders other than a normal cash dividend, partial or complete liquidation of the Company or other extraordinary or unusual event, the Committee shall make such adjustment in the class and the Number of Shares or other terms of the Award Communications of outstanding Awards as may be determined to be appropriate by the Committee, and such adjustments shall be final, conclusive and binding for all purposes.

(ii) As provided by Paragraph 15(b) of the Plan, to the extent permissible for purposes of Section 162(m) of the Code, in the event of any merger, consolidation or similar transaction as a result of which the holders of shares of the Company receive consideration consisting exclusively of securities of the surviving entity (or the parent of the surviving entity) in such transaction, the Committee shall, to the extent deemed appropriate by the Committee, adjust the Award to the extent outstanding on the date of such merger, consolidation or similar transaction so that it pertains and applies to the securities which a holder of the number of shares subject to such Award would have received in such merger, consolidation or similar transaction.

(iii) As provided by Paragraph 15(c) of the Plan, to the extent permissible for purposes of Section 162(m) of the Code, in the event of (A) a dissolution or liquidation of the Company, (B) a sale of all or substantially all of the Company’s assets (on a consolidated basis), (C) a merger, consolidation or similar transaction involving the Company in which the holders of shares of the Company receive securities and/or other property, including

 

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cash, other than shares of the surviving entity in such transaction (or the parent of such surviving entity), the Committee shall, to the extent deemed appropriate by the Committee, have the power to provide for the exchange of the Award (whether or not then exercisable or vested) for an Award with respect to (1) some or all of the property which a holder of the number of shares of the Company subject to such Award would have received in such transaction or (2) securities of the acquirer or surviving entity (or parent of such acquirer or surviving entity) and, incident thereto, make an equitable adjustment as determined by the Committee in the number of shares subject to the Award or provide for a payment (in cash or other property) to the Participant in partial consideration for the exchange of the Award; provided, however, that in the event that the acquirer does not agree to the assumption or substitution of the Award in the foregoing manner, the Committee shall, to the extent deemed appropriate by the Committee, have the power to cancel, effective immediately prior to the occurrence of such event, the Award (whether or not then vested), and, in full consideration of such cancellation, pay to the Participant an amount in cash, for each share subject to such Award, equal to the value, as determined by the Committee of such Award.

(f) Beneficiary Designation.    As provided by Paragraph 17 of the Plan, a Participant may, in a manner determined by the Committee in its discretion, designate a beneficiary or beneficiaries to receive any payment to which such Participant may be entitled under the Participant’s Award in the event of such Participant’s death. If a Participant does not designate a beneficiary, or if no designated beneficiary is living on the date on which any amount becomes payable under the Participant’s Award, such payment will be made to the legal representatives of the Participant’s estate, which will be deemed to be the Participant’s designated beneficiary under the Participant’s Award. If there is any question as to the legal right of a Participant’s beneficiary to receive a distribution under the Participant’s Award, the Committee in its discretion may determine that the amount in question be paid to the legal representatives of the Participant’s estate, in which event the Company, the Board and the Committee will have no further liability to anyone with respect to such amount.

(g) Governing Law and Venue.    As provided by Paragraph 18(n) of the Plan, the validity, construction, interpretation, administration and effect of the Plan and of its rules and regulations, and rights relating to the Plan and to the Award issued under this Agreement, shall be governed by the substantive laws, but not the choice of law rules, of the State of New York. For purposes of litigating any dispute that arises under this Award or the Agreement, the parties hereby submit to and consent to the exclusive jurisdiction of the State of New York, and agree that such litigation shall be conducted in the courts of New York County, or the federal courts for the United States for the Southern District of New York, where this grant is made and/or to be performed.

(h) Section 409A.    Restricted Stock Units and the dividend equivalents payable thereon are intended to comply with the requirements of Section 409A, and the Plan, this Agreement and the Participant’s Award Communications shall be administered and interpreted consistent with such intent and the 409A Policy. Notwithstanding the foregoing, the Company makes no representations that the Awards or the vesting and payments provided

 

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by this Agreement comply with Section 409A, and in no event shall the Company or any Affiliate be liable for all or any portion of any taxes, penalties, interest or other expenses that may be incurred by a Participant on account of non-compliance with Section 409A. Notwithstanding anything in this Agreement to the contrary, (i) references to a Participant’s “termination of Employment” and similar terms used in this Agreement mean, to the extent necessary to comply with Section 409A, the date that the Participant first incurs a Separation from Service, and (ii) if at the time of a Participant’s Separation from Service, the Participant is a “specified employee” for purposes of Section 409A, and the payment of the Award under this Agreement as a result of such Separation from Service is required to be delayed by six months pursuant to Section 409A, then the Company will make such payment on the date that is the first day of the seventh month following the Participant’s Separation from Service.

(i) Other Awards.    Notwithstanding any other provision of this Agreement, the Company, in its sole discretion, may approve and grant Awards that are not governed by the provisions contained in this Agreement, which Awards shall be subject to the terms of such other agreement or writing specified by the Company as applicable thereto.

*        *        *         *        *

 

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AMERICAN EXPRESS COMPANY

2016 INCENTIVE COMPENSATION PLAN

 

 

[                    ] RESTRICTED STOCK UNIT AWARD AGREEMENT (BAND 99)

 

 

APPENDIX A

DEFINITIONS

Section A1. Definitions.    As used in the Agreement, the Appendices, Schedule A and the Award Communication, the following terms will have the respective meanings set forth below, and other capitalized terms used in the Agreement, the Appendices, Schedule A or the Award Communication will have the respective meanings given such capitalized terms in the Agreement, the Appendices, Schedule A, the Award Communication or the Plan.

(j) “409A Policy” means the Company’s Section 409A Compliance Policy, as amended and restated from time to time, or any successor thereto.

(k) “Affiliate” has the meaning given such term by Paragraph 3(b) of the Plan, which states that unless the Committee provides otherwise, “Affiliate” means any entity in which the Company has a direct or indirect equity interest of 50% or more, as determined by the Committee in its discretion.

(l) “Agreement” means the [                    ] Restricted Stock Unit Award Agreement (Band 99), including the Appendices.

(m) “Award” means the Restricted Stock Units granted by the Company to a Participant pursuant to the Plan, the Agreement and the Participant’s Award Communication.

(n) “Award Communication” for a Participant and the Participant’s Award means, collectively, the Participant’s year-end compensation statement for the year preceding the year that includes the Date of Grant (if applicable), and any other written or electronic communication by or on behalf of the Company to the Participant regarding the particular terms of the Participant’s Award, and the LTIA Overview or similar document describing the terms of the Award generally.

(o) “Board” means the Board of Directors of the Company.

(p) “Change in Control” means the happening of any of the following:

(i) Any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act (a “Person”) becomes the beneficial owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 25% or more of

 

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either (i) the then outstanding common shares of the Company (the “Outstanding Company Common Shares”) or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that such beneficial ownership shall not constitute a Change in Control if it occurs as a result of any of the following acquisitions of securities: (A) any acquisition directly from the Company; (B) any acquisition by the Company or any corporation, partnership, trust or other entity controlled by the Company (a “Subsidiary”); (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Subsidiary; (D) any acquisition by an underwriter temporarily holding Company securities pursuant to an offering of such securities; (E) any acquisition by an individual, entity or group that is permitted to, and actually does, report its beneficial ownership on Schedule 13-G (or any successor schedule), provided that, if any such individual, entity or group subsequently becomes required to or does report its beneficial ownership on Schedule 13D (or any successor schedule), then, for purposes of this subsection, such individual, entity or group shall be deemed to have first acquired, on the first date on which such individual, entity or group becomes required to or does so report, beneficial ownership of all of the Outstanding Company Common Stock and Outstanding Company Voting Securities beneficially owned by it on such date; or (F) any acquisition by any corporation pursuant to a reorganization, merger or consolidation if, following such reorganization, merger or consolidation, the conditions described in clauses (A), (B) and (C) of Section A1(h)(iii) are satisfied. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any Person (the “Subject Person”) became the beneficial owner of 25% or more of the Outstanding Company Common Shares or Outstanding Company Voting Securities as a result of the acquisition of Outstanding Company Common Shares or Outstanding Company Voting Securities by the Company which, by reducing the number of Outstanding Company Common Shares or Outstanding Company Voting Securities, increases the proportional number of shares beneficially owned by the Subject Person; provided, that if a Change in Control would be deemed to have occurred (but for the operation of this sentence) as a result of the acquisition of Outstanding Company Common Shares or Outstanding Company Voting Securities by the Company, and after such share acquisition by the Company, the Subject Person becomes the beneficial owner of any additional Outstanding Company Common Shares or Outstanding Company Voting Securities which increases the percentage of the Outstanding Company Common Shares or Outstanding Company Voting Securities beneficially owned by the Subject Person, then a Change in Control shall then be deemed to have occurred; or

(ii) Individuals who, as of the date hereof, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board, including by

 

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reason of agreement intended to avoid or settle any such actual or threatened contest or solicitation; or

(iii) The consummation of a reorganization, merger, statutory share exchange, consolidation, or similar corporate transaction involving the Company or any of its direct or indirect Subsidiaries (each a “Business Combination”), in each case, unless, following such Business Combination, (A) the Outstanding Company Common Shares and the Outstanding Company Voting Securities immediately prior to such Business Combination, continue to represent (either by remaining outstanding or being converted into voting securities of the resulting or surviving entity or any parent thereof) more than 50% of the then-outstanding shares of common stock and the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation that, as a result of such transaction, owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries), (B) no Person (excluding the Company, any employee benefit plan (or related trust) of the Company, a Subsidiary or such corporation resulting from such Business Combination or any parent or subsidiary thereof, and any Person beneficially owning, immediately prior to such Business Combination, directly or indirectly, 25% or more of the Outstanding Company Common Shares or Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 25% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination (or any parent thereof) or the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors, and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination (or any parent thereof) were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such Business Combination; or

(iv) The consummation of the sale, lease, exchange or other disposition of all or substantially all of the assets of the Company, unless such assets have been sold, leased, exchanged or disposed of to a corporation with respect to which following such sale, lease, exchange or other disposition (A) more than 50% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation (or any parent thereof) entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Shares and Outstanding Company Voting Securities immediately prior to such sale, lease, exchange or other disposition in substantially the same proportions as their ownership immediately prior to such sale, lease, exchange or other disposition of such Outstanding Company Common Shares and Outstanding Company Voting Shares, as the case may be, (B) no Person (excluding the Company and any employee benefit plan (or related trust)) of the Company or a Subsidiary or of such corporation or a subsidiary thereof and any Person beneficially owning, immediately prior to such sale, lease, exchange or other disposition, directly or indirectly, 25% or more of the Outstanding Company Common

 

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Shares or Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 25% or more of respectively, the then outstanding shares of common stock of such corporation (or any parent thereof) and the combined voting power of the then outstanding voting securities of such corporation (or any parent thereof) entitled to vote generally in the election of directors, and (C) at least a majority of the members of the board of directors of such corporation (or any parent thereof) were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale, lease, exchange or other disposition of assets of the Company; or

(v) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.

(q) “Clawback Requirements” means (i) any applicable listing standards of a national securities exchange adopted in accordance with Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (regarding recovery of erroneously awarded compensation) and any implementing rules and regulations of the U.S. Securities and Exchange Commission adopted thereunder, (ii) similar rules under the laws of any other jurisdiction and (iii) any policies adopted by the Company to implement such requirements, all to the extent determined by the Company in its discretion to be applicable to the Participant.

(r) “Code” means the U.S. Internal Revenue Code of 1986, as amended and restated from time to time, and includes the applicable Treasury Regulations promulgated and other official guidance issued thereunder.

(s) “Committee” means the Compensation and Benefits Committee of the Board. To the extent that the Committee has delegated its authority to certain officers and employees of the Company, references to the Committee with respect to a matter for which the Committee has delegated its authority shall include the officers and employees to whom such authority has been delegated.

(t) “Company” means American Express Company.

(u) “Consent to Detrimental Conduct Provisions” with respect to a Participant means the “Consent to the Application of Forfeiture and Detrimental Conduct Provisions to Incentive Compensation Plan Awards” or similar document, and any successor thereto, executed by the Participant.

(v) “Consent to Dodd-Frank Clawback Provisions” with respect to a Participant means the “Consent to the Requirements of Section 954 of the Dodd-Frank Act” or similar document, and any successor thereto, executed by the Participant.

(w) “Constructive Termination” has the meaning given such term by the Senior Executive Severance Plan, which generally states that a “Constructive Termination” of a Participant means any termination of the Participant’s Employment by the Participant as a result of Good Reason within two years after a Change in Control, and that “Good Reason”

 

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generally means the occurrence of any of the following events without the Participant’s written consent: (i) a material reduction in the Participant’s base salary (except for similar across the board changes affecting all similarly situated employees) or any material reduction in the aggregate of the Participant’s annual and long-term incentive opportunity, in each case from that in effect immediately prior to the Change in Control, (ii) the requirement that the Participant be based more than 50 miles from the location at which the Participant was based immediately prior to the Change in Control and which location is more than 35 miles from the Participant’s residence, (iii) the assignment to the Participant of any duties that are materially inconsistent with the Participant’s duties prior to the Change in Control, or (iv) a significant reduction in the Participant’s position, duties, or responsibilities from those in effect prior to the Change in Control; provided, however, in order for any of the foregoing events to constitute Good Reason, the Participant must notify the Company within 30 days after the occurrence of the event giving rise to a Good Reason and the Company shall have 30 days to remedy the condition, and if remedied by the Company within such 30-day period, no Good Reason shall exist on account of the remedied event.

(x) “Date of Grant” for an Award means the date specified by the applicable Award Communication.

(y) “Defined Termination” has the meaning given such term by the Senior Executive Severance Plan, which states that “Defined Termination” means a Separation from Service within two years after a Change in Control that occurs as a result of either an Involuntary Termination or a Constructive Termination.

(z) “Disability” has the meaning given such term by Section 409A, which generally provides that “Disability” of a Participant means either (i) the Participant is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or (ii) the Participant is, by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than three months under an accident and health plan covering the employees of the Participant’s employer.

(aa) “Early Retirement” with respect to a Participant means the termination of the Participant’s Employment at a time that the Participant has attained 10 or more years of service (or deemed service under applicable retirement arrangements) with the Company or applicable Affiliates and the Participant is age 55 or older, but younger than age 62.

(bb) “Employment” means employment with the Company or an Affiliate, or engagement in Related Employment.

(cc) “EU Retirement” with respect to a Participant means the termination of the Participant’s Employment at a time that the Participant has attained 15 or more years of

 

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service (or deemed service under applicable retirement arrangements) with the Company or applicable Affiliates.

(dd) “Exchange” has the meaning given such term by Paragraph 2(a) of the Plan, which states that “Exchange” shall mean the New York Stock Exchange or such other principal securities market on which the shares are traded.

(ee) “Exchange Act” means the U.S. Securities Exchange Act of 1934, as amended and restated from time to time.

(ff) “Fair Market Value” has the meaning given such term by Paragraph 5(b) of the Plan, which generally states that “Fair Market Value” of a share on a given date is the fair market value of a share on such date, as determined in such reasonable manner as may be provided from time to time by the Committee or as may be required in order to comply with the requirements of any applicable laws or regulation; and unless the Committee determines otherwise, the “Fair Market Value” of a Company share on a given date shall be the closing price of a Company share reported by the Exchange on such date.

(gg) “Full Retirement” with respect to a Participant means the termination of the Participant’s Employment at a time that the Participant has attained 10 or more years of service (or deemed service under applicable retirement arrangements) with the Company or applicable Affiliates and the Participant is age 62 or older.

(hh) “Involuntary Termination” has the meaning given such term by the Senior Executive Severance Plan, which generally states that an “Involuntary Termination” of a Participant means any involuntary termination of the Participant’s Employment for reasons other than Good Cause within two years after a Change in Control, and that “Good Cause” generally means the occurrence of any of the following: (i) the Participant’s willful and continued failure to adequately perform substantially all of the duties of the Participant’s Employment; (ii) the Participant’s willful engagement in conduct which is demonstrably and materially injurious to the Company and such of its subsidiaries and affiliated companies and other trades or businesses, monetarily or otherwise; or (iii) the Participant’s conviction of a felony.

(ii) “LTIA Overview” for a Participant’s Award means the overview, program, summary, guide or similar document provided by or on behalf of the Company describing certain terms of the Participant’s Award. Generally, new LTIA Overviews are provided each year describing the Awards granted to employees in specified Band levels as part of the Company’s annual award process for that year.

(jj) “Number of Shares” for an Award means the number of shares subject to such Award, as specified in the applicable Award Communication.

(kk) “Participant” means an employee to whom an Award has been granted pursuant to the Plan and the Agreement, and following such employee’s death, the employee’s

 

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beneficiary or any person who acquires the right to receive payment of the employee’s Award by bequest or inheritance or by reason of the employee’s death.

(ll) “Performance Period” for an Award means the performance period established by the Committee and set forth in Schedule A.

(mm) “Performance Requirement” for an Award means the performance objectives established by the Committee and set forth in Schedule A.

(nn) “Plan” means the Company’s 2016 Incentive Compensation Plan, as amended and restated from time to time, or any successor thereto.

(oo) “Related Employment” has the meaning given such term by Paragraph 14 of the Plan, which generally states that “Related Employment” of an individual means the employment or performance of services by the individual for an employer that is neither the Company nor an Affiliate, provided that (a) such employment or performance of services is undertaken by the individual at the request of the Company or an Affiliate; (b) immediately prior to undertaking such employment or performance of services, the individual was engaged in Employment; and (c) such employment or performance of services is in the best interests of the Company and is recognized by the Committee, in its discretion, as Related Employment.

(pp) “Restricted Stock Unit” means an Award that is a promise to issue shares to a Participant in the future if the applicable vesting conditions are satisfied.

(qq) “Retirement” means Early Retirement, Full Retirement or EU Retirement.

(rr) “RSU Payout Percentage” means the “RSU Payout Percentage” determined pursuant to Schedule A.

(ss) “Section 409A” means Section 409A of the Code.

(tt) “Section 409A Change Event” means a “change in ownership,” a “change in effective control” or a “change in ownership of a substantial portion of the assets” of the Company, each as defined by Section 409A. Section 409A generally states that (i) a “change in ownership” of a company means that any one person, or more than one person acting as a group, acquires ownership of stock of the company that, together with stock held by such person or group, constitutes more than 50% of the total fair market value or total voting power of the stock of the company; (ii) a “change in effective control” of a company means (A) that any one person, or more than one person acting as a group, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) ownership of stock of the company possessing 30% or more of the total voting power of the stock of the company, or (B) a majority of members of the company’s board of directors is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of the company’s board of directors before the date of the appointment or election; and (iii) a “change in ownership of a substantial portion of the

 

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assets” of a company means that any one person, or more than one person acting as a group, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) assets from the company that have a total gross fair market value equal to or more than 40% of the total gross fair market value of all of the assets of the company immediately before such acquisition or acquisitions).

(uu) “Securities Act” means the U.S. Securities Act of 1933, as amended and restated from time to time.

(vv) “Senior Executive Severance Plan” means the Company’s Senior Executive Severance Plan, as amended and restated from time to time, or any successor thereto.

(ww) “Separation from Service” has the meaning given such term by Section 409A (and as determined in accordance with the 409A Policy), which generally states that an employee has a “Separation from Service” with an employer if the employee dies, retires, or otherwise has a termination of his or her employment with such employer. Whether a Separation from Service has occurred is determined based on whether the facts and circumstances indicate that the employer and employee reasonably anticipated that no further services would be performed after a certain date or that the level of bona fide services the employee would perform after such date would permanently decrease to no more than 20% of the average level of bona fide services performed over the immediately preceding 36-month period.

(xx) “shares” refers to the shares of the Company’s common stock, par value of $.20 per share, or the shares of any other stock of any other class or company into which such shares may thereafter be changed.

(yy) “Tax-Related Items” means any income tax, social insurance, payroll tax, fringe benefits tax, payment on account or other tax-related items related to the Participant’s participation in the Plan and legally applicable to the Participant.

(zz) “Vesting Date” of an Award means the vesting date specified in the Award Communication for such Award. (For the avoidance of doubt, the Vesting Date of an Award may differ from the last day of the Award’s Performance Period.)

*        *        *        *        *

 

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AMERICAN EXPRESS COMPANY

2016 INCENTIVE COMPENSATION PLAN

 

 

[                     ] RESTRICTED STOCK UNIT AWARD AGREEMENT (BAND 99)

 

 

APPENDIX B

SECTION 280G TERMS & PROCEDURES

Section B1. “Best Net” Limitation.    In the event that any payment or benefit received or to be received by a Participant under the Agreement in connection with a Change in Control or termination of the Participant’s employment (collectively, the “Payments”), will be subject to the excise tax referred to in Section 4999 of the Code (the “Excise Tax”), then the Payments shall be reduced to the extent necessary so that no portion of the Payments is subject to the Excise Tax but only if (A) the net amount of all payments and benefits received or to be received by a Participant in connection with the applicable Change in Control or the termination of the Participant’s employment, whether pursuant to the terms of the Agreement or any other plan, arrangement or agreement with the Company, any Person whose actions result in such Change in Control or any Person affiliated with the Company or such Person (the “Total Payments”), as so reduced (and after subtracting the net amount of federal, state and local income and employment taxes on such reduced Total Payments), is greater than or equal to (B) the net amount of such Total Payments without any such reduction (but after subtracting the net amount of federal, state and local income and employment taxes on such Total Payments and the amount of Excise Tax to which the Participant would be subject in respect of such unreduced Total Payments); provided, however, that the Participant may elect in writing to have other components of his or her Total Payments reduced prior to any reduction in the Payments hereunder.

Section B2. Calculations.    For purposes of determining whether the Payments will be subject to the Excise Tax, the amount of such Excise Tax and whether any Payments are to be reduced hereunder: (i) the Total Payments shall be treated as “parachute payments” (within the meaning of Section 280G(b)(2) of the Code) unless, in the opinion of the accounting firm which was, immediately prior to the Change in Control, the Company’s independent auditor, or if that firm refuses to serve, by another qualified firm, whether or not serving as independent auditors, designated by the Committee (the “Firm”), such payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of Section 280G(b)(2)(A) or Section 280G(b)(4)(A) of the Code; (ii) no portion of the Total Payments the receipt or enjoyment of which the Participant shall have waived at such time and in such manner as not to constitute a “payment” within the meaning of Section 280G(b) of the Code shall be taken into account; (iii) all “excess parachute payments” within the meaning of Section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax unless, in the opinion of the Firm, such excess parachute payments (in whole or in part) represent reasonable compensation for services

 

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actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the Base Amount (within the meaning of Section 280G(b)(3) of the Code) allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax; and (iv) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Firm in accordance with the principles of Section 280G(d)(3) and Section 280G(d)(4) of the Code. For purposes of determining whether any Payments in respect of a Participant shall be reduced, a Participant shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation (and state and local income taxes at the highest marginal rate of taxation in the state and locality of such Participant’s residence, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes) in the calendar year in which the Payments are made. The Firm will be paid reasonable compensation by the Company for its services.

Section B3. Notice of Adjustment.    As soon as practicable following a Change in Control, but in no event later than 30 days thereafter, the Company shall provide to each Participant with respect to whom it is proposed that Payments be reduced, a written statement setting forth the manner in which the Total Payments in respect of such Participant were calculated and the basis for such calculations, including, without limitation, any opinions or other advice the Company has received from the Firm or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement).

*        *        *         *        *

 

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AMERICAN EXPRESS COMPANY

2016 INCENTIVE COMPENSATION PLAN

 

 

[                    ] RESTRICTED STOCK UNIT AWARD AGREEMENT (BAND 99)

 

 

APPENDIX C

DETRIMENTAL CONDUCT PROVISIONS

Section C1. Detrimental Conduct.    If a current or former employee of, or other individual that provides or has provided services for, the Company or its Affiliates (the “Employee”) engages in Detrimental Conduct, Awards (as defined in Section C7(b) below) previously issued to such Employee may be canceled, rescinded or otherwise restricted and the Company can recover any payments received by and stock delivered to the Employee in accordance with the terms of Section C2. For purposes of this Appendix C, “Detrimental Conduct” means the prohibited conduct described in Section C1(a) through Section C1(g).

(a) Noncompete.    For a one-year period after the last day of active employment if the Employee is a Band 70 or above employee or for a six-month period after the last day of active employment if the Employee is a Band 50 or 60 employee, and during the Employee’s employment with the Company or its Affiliates, the Employee shall not be employed by, provide advice to or act as a consultant for any Competitor. The Company has defined “Competitor” for certain lines of business, departments or job functions by establishing a specific standard and/or by name as set forth in the Company’s Competitor List(s). An Employee’s personal list of Competitors will be the sum of:

(i) either (1) all Competitors derived from the column titled “Standard” on the Competitor List for the lines of business and departments (as listed on the Competitor List under the “Line of Business” column) that the Employee provided services to or managed during the two-year period preceding the date the Employee’s active employment with the Company or its Affiliates terminates, or (2) if the job function the Employee is employed in at the time his or her active employment with the Company or its Affiliates terminates is listed on the Competitor List under the “Line of Business” column, the Competitors cited for that job function under the “Standard” column of the Competitor List; and

(ii) the Entities (as defined in Section C7(c) below) listed on the Competitor List under the column titled “Business Unit Wide Competitors” for the business units the Employee provided services to or managed during the two-year period preceding the date his or her active employment with the Company or its Affiliates terminates. If any line(s) of business the Employee provided services to or managed during the two-year period preceding the date his or her active employment with the Company or its Affiliates terminates

 

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is not listed on the Competitor List then, with respect to such line(s) of business, the Employee shall not be employed by, provide advice to or act as a consultant for (1) an Entity’s line of business that competes with those line(s) of business and (2) the Entities listed on the Competitor List under the column titled “Business Unit Wide Competitors” for the business units the Employee provided services to or managed during the two-year period preceding the date the Employee’s active employment with the Company or its Affiliates terminates. Except for Business Unit Wide Competitors, the prohibition against being employed by, providing advice to or acting as a consultant for a Competitor is limited to the line(s) of business of the Competitor that compete with the line(s) of business of the Company or its Affiliates that the Employee provided services to or managed. With respect to Business Unit Wide Competitors, the Employee agrees not to be employed by, provide advice to or act as a consultant for such Entities in any line of business because these Entities compete with several of the Company’s or its Affiliates’ lines of business. The Company can revise the Competitor List at its discretion at any time and from time to time and as revised will become part of this Appendix C; a copy of the current Competitor List will be available through the Corporate Secretary’s Office. Notwithstanding anything in this Appendix C to the contrary, the Company shall not make any addition to the Competitor List for a period of two years following the date of a Change in Control.

(b) Nondenigration.    For a one-year period after an Employee’s last day of active employment (the “Restricted Period”) and during his or her employment with the Company or its Affiliates, an Employee or anyone acting at his or her direction may not denigrate the Company or its Affiliates or the Company’s or its Affiliates’ employees to the media or financial analysts. During the Restricted Period, an Employee may not (i) provide information considered proprietary by the Company to the media or financial analysts or (ii) discuss the Company or its Affiliates with the media or financial analysts, without the explicit written permission of the Executive Vice President of Corporate Affairs and Communications. This Section C1(b) shall not be applicable to any truthful statement required by any legal proceeding.

(c) Nonsolicitation of Employees.    During the Restricted Period, an Employee may not employ or solicit for employment any employee of the Company or its Affiliates. In addition, during the Restricted Period an Employee may not advise or recommend to any other person that he or she employ or solicit for employment, any person employed by the Company or its Affiliates for the purpose of employing that person at an Entity at which the Employee is or intends to be (i) employed, (ii) a member of the board of directors, or (iii) providing consulting services.

(d) Nonsolicitation of Customers.    During the Restricted Period, an Employee may not directly or indirectly solicit or enter into any arrangement with any Entity which is, at the time of such solicitation, a significant customer of the Company or its Affiliates for the purpose of engaging in any business transactions of the nature performed or contemplated by the Company or its Affiliates. This Section C1(d) shall apply only to customers whom the

 

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Employee personally serviced while employed by the Company or its Affiliates or customers the Employee acquired material information about while employed by the Company or its Affiliates.

(e) Misconduct.    During his or her employment with the Company or its Affiliates, an Employee may not engage in any conduct that results in termination of his or her employment for Misconduct. For purposes of this Section C1(e), “Misconduct” is (i) material violation of the American Express Company Code of Conduct, (ii) criminal activity, (iii) gross insubordination, or (iv) gross negligence in the performance of duties.

(f) Confidential Information.    During the Restricted Period and during his or her employment with the Company or its Affiliates, an Employee may not misappropriate or improperly disclose confidential information or trade secrets of the Company, its Affiliates and their businesses, including but not limited to information about marketing or business plans, possible acquisitions or divestitures, potential new products or markets and other data not available to the public.

(g) Other Detrimental Conduct.    During the Restricted Period, an Employee may not take any actions that the Company reasonably deems detrimental to its interests or those of its Affiliates. To the extent practicable, the Company will request an Employee to cease and desist or rectify the conduct prior to seeking any legal remedies under this Appendix C and will only seek legal remedies if the Employee does not comply with such request. This Section C1(g) shall not be applied to conduct that is otherwise permitted by Section C1(a) through Section C1(f). For example, if an Employee leaves the Company’s employment to work for an Entity that is not a Competitor under Section C1(a), the Company will not claim that employment with that Entity violates Section C1(g). Notwithstanding anything in this Appendix C to the contrary, the prohibition on conduct described in this Section C1(g) shall not be applicable to an Employee from and after his or her last day of active employment, if his or her active employment terminates for any reason (other than for Misconduct) within two years following a Change in Control.

Section C2. Remedies.

(a) Repayment of Financial Gain.

(i) If an Employee fails to comply with the requirements of Section C1(a) through Section C1(g), the Company may cancel any outstanding Awards and recover from the Employee (1) the Amount (as that term is defined in Section C7(a) below) of any gain realized on Stock Options that the Employee exercised, as of the date exercised, (2) the Amount of any payments received by the Employee for Portfolio Grant Awards, Performance Grant Awards or other Awards granted under the Plan and (3) the Number (as that term is defined in Section C7(d) below) of shares of stock whose restrictions lapsed (or the value of the Number of such shares of stock at the time the restrictions lapsed) pursuant to an award of Restricted Stock or Restricted Stock Units or other Award, during the 24-month period preceding the Employee’s last day of active employment.

 

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(ii) If an Employee fails to comply with the requirements of Section C1(a) through Section C1(g), the Employee must and agrees to repay the Company, upon demand by the Company, in accordance with the terms of this Section C2, and the Company shall be entitled, to the extent and in the manner permitted by the 409A Policy, to set-off against the amount of any such repayment obligation against any amount owed, from any source, to the Employee by the Company or its Affiliates.

(b) Other Remedies.    The remedy provided pursuant to Section C2(a) shall be without prejudice to the Company’s right to recover any losses resulting from a violation of this Appendix C and shall be in addition to whatever other remedies the Company may have, at law or equity, for violation of the terms of this Appendix C.

Section C3. Compensation Band Changes.    If the Company changes its current system of classifying employees in compensation bands and management tiers, the references to Bands 50, 60 and 70, and Executive Officers in this Appendix C will be construed to mean the compensation level(s) and management tiers in the new or revised system that, in the Company’s discretion, most closely approximates these bands and management tiers under the current system.

Section C4. Involuntary Terminations.    This Appendix C will not apply to employees of the Company or its Affiliates who enter into a severance agreement with the Company or its Affiliates or other involuntary terminations as determined by the Company (excluding terminations covered by Section C1(e)).

Section C5. Court Modification.    If any term of this Appendix C is determined by a court of competent jurisdiction not to be enforceable in the manner set forth in this Appendix C, such term shall be enforceable to the maximum extent possible under applicable law and such court shall reform such term to make it enforceable.

Section C6. Waivers.    The failure of the Company to enforce at any time any term of this Appendix C shall not be construed to be a waiver of such term or of any other term. Any waiver or modification of the terms of this Appendix C will only be effective if reduced to writing and signed by both the Employee and the President or Chief Executive Officer of the Company.

Section C7. Definitions.    As used in this Appendix C, the following terms will have the respective meanings set forth below.

(a) “Amount” means the gross amount, before deduction of applicable taxes or other amounts, and includes the gross amount of any dividends or dividend equivalents paid to the Employee on awards of Restricted Stock or Restricted Stock Units.

(b) “Award” means a Performance Grant Award, Portfolio Grant Award, Restricted Stock, Restricted Stock Unit, Stock Option or other award issued under the Plan.

 

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(c) “Entity” or “Entities” mean any corporation, partnership, association, joint venture, trust, government, governmental agency or authority, person or other organization or entity.

(d) “Number” means the total number of shares of stock, before reduction for the payment of applicable taxes or other amounts, and includes the total number of any shares of stock paid to the Employee on awards of Restricted Stock or Restricted Stock Units.

(e) “Performance Grant Award” means a performance grant award issued under the Plan, and includes the annual bonus provided to Executive Officers.

(f) “Portfolio Grant Award” means a portfolio grant award issued under the Plan.

(g) “Restricted Stock,” “Restricted Stock Unit” and “Stock Option” have the respective meanings given such terms in the Plan.

*        *        *         *        *

 

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AMERICAN EXPRESS COMPANY

2016 INCENTIVE COMPENSATION PLAN

 

 

[                     ] RESTRICTED STOCK UNIT AWARD AGREEMENT (BAND 99)

 

 

SCHEDULE A

PERFORMANCE REQUIREMENT

Performance Requirement:

[                     ]

Performance Period:

[                     ]

Earned Shares:

[                     ]

RSU Payout Percentage:

[                     ]

Definitions:

[                     ]

*        *        *         *        *

 

Page 26 of 26

EXHIBIT 12

AMERICAN EXPRESS COMPANY

COMPUTATION IN SUPPORT OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED

STOCK DIVIDENDS

(Dollars in Millions)

 

		Six Months Ended June 30,				Years Ended December 31,
		2016				2015				2014				2013				2012				2011
Earnings:
Pretax income from continuing operations		$	5,200			$	7,938			$	8,991			$	7,888			$	6,451			$	6,956
Interest expense(a)			861				1,623				1,707				1,958				2,226				2,320
Other adjustments(b)			48				118				402				133				117				124
Total earnings		$	6,109			$	9,679			$	11,100			$	9,979			$	8,794			$	9,400
Fixed charges:
Interest expense		$	861			$	1,623			$	1,707			$	1,958			$	2,226			$	2,320
Other adjustments(c)			27				62				79				93				102				94
Total fixed charges			888				1,685				1,786				2,051				2,328				2,414
Preferred stock dividends			40				62				—				—				—				—
Total fixed charges and preferred stock dividends		$	928			$	1,747			$	1,786			$	2,051			$	2,328			$	2,414
Ratio of earnings to combined fixed charges and preferred stock dividends			6.58				5.54				6.22				4.87				3.78				3.89

 

(a)

Included in interest expense is interest expense related to the Card Member lending activities, international banking operations, and charge card and other activities in the Consolidated Statements of Income. Interest expense does not include interest on liabilities recorded under GAAP governing accounting for uncertainty in income taxes. The Company’s policy is to classify such interest in income tax provision in the Consolidated Statements of Income.

 

(b)

For purposes of the “earnings” computation, “other adjustments” include adding the amortization of capitalized interest, the net loss of affiliates accounted for under the equity method whose debt is not guaranteed by the Company, the noncontrolling interest in the earnings of majority-owned subsidiaries with fixed charges, and the interest component of rental expense, and subtracting undistributed net income of affiliates accounted for under the equity method.

 

(c)	For purposes of the “fixed charges” computation, “other adjustments” include capitalized interest costs and the interest component of rental expense.

EXHIBIT 31.1

CERTIFICATION

I, Kenneth I. Chenault, certify that:

 

1.	I have reviewed this quarterly report on Form 10-Q of American Express Company;

 

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 26, 2016

 

EXHIBIT 31.2

CERTIFICATION

I, Jeffrey C. Campbell, certify that:

 

1.	I have reviewed this quarterly report on Form 10-Q of American Express Company;

 

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 26, 2016

 

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of American Express Company (the “Company”) for the quarterly period ended June 30, 2016, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Kenneth I. Chenault, as Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/s/ Kenneth I. Chenault

Name: Kenneth I. Chenault

Title: Chief Executive Officer

Date: July 26, 2016

The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and is not being “filed” as part of the Form 10-Q or as a separate disclosure document for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to liability under that section. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act except to the extent that this Exhibit 32.1 is expressly and specifically incorporated by reference in any such filing.

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of American Express Company (the “Company”) for the quarterly period ended June 30, 2016, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Jeffrey C. Campbell, as Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/s/ Jeffrey C. Campbell

Name: Jeffrey C. Campbell

Title: Chief Financial Officer

Date: July 26, 2016

The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and is not being “filed” as part of the Form 10-Q or as a separate disclosure document for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to liability under that section. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act except to the extent that this Exhibit 32.2 is expressly and specifically incorporated by reference in any such filing.

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.