EX-13 8 y87970exv13.htm EX-13 exv13
 



For the fiscal year ended December 31, 2010






















 
Exhibit 13
 
 
2010 FINANCIAL RESULTS
 
         
       
 
20
    FINANCIAL REVIEW
       
 
65
    MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
       
 
66
    REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
       
 
67
    INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
       
 
68
    CONSOLIDATED FINANCIAL STATEMENTS
       
 
72
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
       
 
120
    CONSOLIDATED FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
       
 
121
    COMPARISON OF FIVE-YEAR TOTAL RETURN TO SHAREHOLDERS


Table of Contents

AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW
 
 
FINANCIAL REVIEW
 
The financial section of American Express Company’s (the Company) Annual Report consists of this Financial Review, the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements. The following discussion is designed to provide perspective and understanding regarding the Company’s consolidated financial condition and results of operations. Certain key terms are defined in the Glossary of Selected Terminology, which begins on page 61.
This Financial Review and the Notes to Consolidated Financial Statements have been adjusted to exclude discontinued operations unless otherwise noted.
 
EXECUTIVE OVERVIEW
American Express is a global service 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. The Company’s range of products and services include:
 
  charge and credit card products;
 
  expense management products and services;
 
  consumer and business travel services;
 
  stored value products such as Travelers Cheques and other prepaid products;
 
  network services;
 
  merchant acquisition and processing, point-of-sale, servicing and settlement, and marketing and information products and services for merchants; and
 
  fee services, including market and trend analyses and related consulting services, fraud prevention services, and the design of customized customer loyalty and rewards programs.
 
The Company’s 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, on-line applications, targeted direct and third-party sales forces, and direct response advertising.
The Company has also recently created an Enterprise Growth Group to focus on generating alternative sources of revenue on a global basis, both organically and through acquisitions, in areas such as online and mobile payments and fee-based services.
The Company’s products and services generate the following types of revenue for the Company:
 
  Discount revenue, which is the Company’s largest revenue source, represents fees charged to merchants when cardmembers use their cards to purchase goods and services on the Company’s network;
 
  Net card fees, which represent revenue earned for annual charge card memberships;
 
  Travel commissions and fees, which are earned by charging a transaction or management fee for airline or other travel-related transactions;
 
  Other commissions and fees, which are earned on foreign exchange conversions and card-related fees and assessments;
 
  Other revenue, which represents insurance premiums earned from cardmember travel and other insurance programs, revenues arising from contracts with Global Network Services’ (GNS) partners (including royalties and signing fees), publishing revenues and other miscellaneous revenue and fees; and
 
  Interest and fees on loans, which principally represents interest income earned on outstanding balances, and card fees related to the cardmember loans portfolio.
 
In addition to funding and operating costs associated with these types of revenue, other major expense categories are related to marketing and reward programs that add new cardmembers and promote cardmember loyalty and spending, and provisions for anticipated cardmember credit and fraud losses.
Historically, the Company sought to achieve three financial targets, on average and over time:
 
  Revenues net of interest expense growth of at least 8 percent;
 
  Earnings per share (EPS) growth of 12 to 15 percent; and
 
  Return on average equity (ROE) of 33 to 36 percent.
 
In addition, assuming achievement of such financial targets, the Company sought to return at least 65 percent of the capital it generates to shareholders as a dividend or through the repurchase of common stock.
The Company met or exceeded these targets for most of the past decade. However, during 2008 and 2009, its performance fell short of the targets due to the effects of the continuing global economic downturn. The Company’s share repurchase program was suspended in 2008 and, as a result, the amount of capital generated that has been returned to shareholders has been below the levels achieved earlier in the decade. Refer to Share Repurchases and Dividends below for further discussion of the Company’s share repurchase activity.
The Company is retaining its on average and over time revenue and earnings growth targets. However, evolving market, regulatory and debt investor expectations will likely cause the Company, as well as other financial institutions, to maintain in future years a higher level of capital than they have historically maintained. These higher capital requirements would in turn lead, all other things being equal, to lower future ROE than the Company has historically targeted. In addition, the Company recognizes it may need to maintain higher capital levels to support acquisitions that can augment its business growth. In combination, these factors have led the


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AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW
 
 
Company to revise its on average and over time ROE financial target to 25 percent or more.
In establishing the revised ROE target, the Company has assumed that it will target a 10 percent Tier 1 Common ratio. The actual future capital requirements applicable to the Company are uncertain and will not be known until further guidance is provided in connection with certain initiatives, such as Basel III and the implementation of regulations under the recent United States financial reform legislation. International and United States banking regulators could also increase the capital ratio levels at which banks would be deemed to be “well capitalized”. Refer to Capital Strategy below. The revised ROE target also assumes the Company would need to maintain capital to finance moderate-sized acquisitions, although the actual magnitude of these transactions cannot be determined at this time. If the Company achieves its EPS target as well as the revised ROE target, it would seek to return, on average and over time, at least 50 percent of the capital it generates to shareholders as a dividend or through the repurchase of common stock rather than the 65 percent level referred to above.
Certain of the statements in this Annual Report are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Refer to the “Forward-Looking Statements” section below.
 
BANK HOLDING COMPANY
The Company is a bank holding company under the Bank Holding Company Act of 1956 and the Federal Reserve Board (Federal Reserve) is the Company’s primary federal regulator. As such, the Company is subject to the Federal Reserve’s regulations, policies and minimum capital standards.
 
CURRENT ECONOMIC ENVIRONMENT/OUTLOOK
The Company’s results for 2010 reflected strong spending growth and improved credit performance. Throughout the year cardmember spending volumes grew both in the United States and internationally, and across all of the Company’s businesses. Cardmember spending levels in 2010 reached record levels by the end of the year.
During 2010, the Company continued to see a sharp divergence between the positive growth rates in customer spending on credit cards and lower borrowing levels, due in part to changing consumer behavior and the Company’s strategic (e.g., additional focus on charge and co-brand products) and risk-related actions. While the offsetting influences of stronger billings growth and lower loan balances challenged overall revenue growth, the year-over-year benefits from improving credit trends have provided an ability to invest in the business at significant levels and also generate strong earnings. Some of these investments are focused on near-term metrics, while others are initiatives focused on the medium to long-term success of the Company. These investments are reflected not only in marketing and other operating expenses, but also involve using the Company’s strong capital base for acquisitions such as Accertify and Loyalty Partner, which were announced during the fourth quarter of 2010. Refer to “Acquisitions” below.
The improving credit trends contributed to a significant reduction in loan and receivable write-offs and in loss reserve levels over the course of 2010 when compared to 2009. Despite the reduction in loss reserve levels, reserve coverage ratios remain strong. It is expected that the year-over-year benefits from improving credit trends will decrease over the course of 2011. While the Company invested at historically high levels in 2010, it intends to maintain the flexibility to scale back on investments as business conditions change and the benefits realized from improving credit trends lessen.
Net interest yield declined over the course of 2010. The lower yield reflects higher payment rates and lower revolving levels, and the implementation of elements of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the “CARD Act”), which were partially offset by the benefit of certain repricing initiatives effective during 2009 and 2010. The Company expects the net interest yield in the US Consumer business to decline, moving closer to historic levels, but this remains subject to uncertainties such as cardmember behavior and the requirement under the CARD Act to periodically reevaluate annual percentage rate (APR) increases.
Despite improvement in parts of the economic environment, challenges clearly remain for the Company, both in the United States and in many other key regions. These challenges include weak job creation, volatile consumer confidence, uncertain consumer behavior, an uncertain housing market, and the regulatory and legislative environment, including the uncertain impact of the CARD Act, of the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act and of the proceeding against the Company recently brought by the Department of Justice (DOJ) and certain state attorneys general alleging a violation of the U.S. antitrust laws. In addition, during 2011 the Company will stop receiving quarterly Visa and MasterCard litigation settlement payments, and year-over-year comparisons will be more difficult in light of the strong 2010 results. Refer to “Certain Legislative, Regulatory and Other Developments”, “Other Information — Legal Proceedings” and “Risk Factors” below.


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AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW
 
 
REENGINEERING INITIATIVES
On January 19, 2011, the Company announced that it was undertaking various reengineering initiatives resulting in charges aggregating approximately $113 million pretax (approximately $74 million after-tax), which were recorded in the fourth quarter of 2010. The charges for the reengineering initiatives include a fourth quarter restructuring charge in the amount of approximately $98 million pretax (approximately $63 million after-tax) relating to employee severance obligations and other employee-related costs.
The $98 million restructuring charge is pursuant to a plan, approved by the Company’s management in December 2010, that resulted in a consolidation of facilities within the Company’s global servicing network due to reduced service volumes as a greater number of routine transactions have migrated to online and mobile channels. In addition, the Company expects to record further restructuring charges in one or more quarterly periods during 2011 relating to these restructuring activities in the aggregate amount of approximately $60 million to $80 million pretax (approximately $38 million to $51 million after-tax). The total expected additional charges include approximately $25 million to $35 million in costs associated with additional employee compensation and approximately $35 million to $45 million in other costs principally relating to the termination of certain real property leases.
The reengineering activities, in total, are expected to result in the elimination of approximately 3,500 jobs (including approximately 3,200 jobs relating to the above noted restructuring charge). However, overall staffing levels are expected to decrease only by approximately 550 positions on a net basis (including 400 positions related to specific restructuring activities), as new employees are hired at the locations to which work is being transferred.
Substantially all of these reengineering activities are expected to be completed by the end of the fourth quarter of 2011.
The Company also announced that it expects the reengineering charges recorded in the fourth quarter of 2010 and to be recorded during 2011 to result in annualized cost savings to the Company of approximately $70 million pretax, starting in 2012. The Company announced that it intends to reinvest a portion of such savings into new servicing capabilities and other business building initiatives.
During 2008 and 2009, the Company undertook major reengineering initiatives that were expected to produce significant cost benefits in 2009. These initiatives included reducing staffing levels resulting in lower compensation expenses and reducing certain operating costs for marketing and other business building initiatives. As the Company has previously disclosed, benefits related to better than initially forecasted credit and business trends for 2009 were utilized to increase spending on marketing and other business-building initiatives during the second half of 2009, reducing the expected reengineering benefits.
 
ACQUISITIONS
During the course of the year, the Company purchased Accertify (November 10, 2010) and Revolution Money (January 15, 2010) for a total consideration of $151 million and $305 million, respectively. Accertify is an on-line fraud solution provider and Revolution Money is a provider of secure person-to-person payment services through an internet-based platform. These acquisitions did not have a significant impact on either the Company’s consolidated results of operations or the segments in which they are reflected for the year ended December 31, 2010.
On March 28, 2008, the Company purchased Corporate Payment Services (CPS), General Electric Company’s commercial card and corporate purchasing business unit.
 
The following table summarizes the assets acquired and liabilities assumed for these acquisitions as of the acquisition dates:
 
                         
   
                Corporate
 
          Revolution
    Payment
 
(Millions)   Accertify     Money     Services  
 
Goodwill
  $ 131     $ 184     $ 818  
Definite-lived intangible assets
    15       119       232  
Other assets
    11       7       1,259  
                         
Total assets
    157       310       2,309  
Total liabilities
    6       5       65  
                         
Net assets acquired
  $ 151     $ 305     $ 2,244  
                         
Reportable operating segment
    GNMS       Corporate
& Other
      GCS (a)
 
 
 
(a) An insignificant portion of the receivables and intangible assets are also allocated to the USCS reportable operating segment.
 
On December 16, 2010, the Company announced an agreement to acquire Loyalty Partner, a leading marketing services company known for the loyalty programs it operates in Germany, Poland and India. The purchase, which has received regulatory approval, is expected to close in the first quarter of 2011. The transaction, which values Loyalty Partner at approximately $660 million (subject to currency movement and other adjustments), consists of an upfront cash purchase price of approximately $566 million and an additional $94 million equity interest that the Company will acquire over the next five years at a value based on business performance.
 
DISCONTINUED OPERATIONS
For the applicable periods, the operating results, assets and liabilities, and cash flows of American Express International Deposit Company (AEIDC), which was sold to Standard Chartered in the third quarter of 2009, have been removed from the Corporate & Other segment and reported separately within the discontinued operations captions on the Company’s Consolidated Financial Statements. Refer to Note 2 to the Consolidated Financial Statements for further discussion of the Company’s discontinued operations.


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AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW
 
 
FINANCIAL SUMMARY
A summary of the Company’s recent financial performance follows:
 
                           
     
Years Ended December 31,
              Percent
   
(Millions, except per share
              Increase
   
amounts and ratio data)   2010     2009     (Decrease)    
 
Total revenues net of interest expense
  $ 27,819     $ 24,523       13   %
Provisions for losses
  $ 2,207     $ 5,313       (58 ) %
Expenses
  $ 19,648     $ 16,369       20   %
Income from continuing operations
  $ 4,057     $ 2,137       90   %
Net income
  $ 4,057     $ 2,130       90   %
Earnings per common share from continuing operations – diluted(a)
  $ 3.35     $ 1.54       #    
Earnings per common share – diluted(a)
  $ 3.35     $ 1.54       #    
Return on average equity(b)
    27.5 %     14.6 %          
Return on average tangible common equity(c)
    35.1 %     17.6 %          
 
 
 
# Denotes a variance of more than 100 percent.
 
(a) Earnings per common share from continuing operations — diluted and Earnings per common share — diluted were both reduced by the impact of (i) accelerated preferred dividend accretion of $212 million for the year ended December 31, 2009, due to the repurchase of $3.39 billion of preferred shares issued as part of the Capital Purchase Program (CPP), (ii) preferred share dividends and related accretion of $94 million for the year ended December 31, 2009, and (iii) earnings allocated to participating share awards and other items of $51 million and $22 million for the years ended December 31, 2010 and 2009, respectively.
(b) ROE is calculated by dividing (i) one-year period net income ($4.1 billion and $2.1 billion for 2010 and 2009, respectively), by (ii) one-year average total shareholders’ equity ($14.8 billion and $14.6 billion for 2010 and 2009, respectively).
(c) Return on average tangible common equity is computed in the same manner as ROE except the computation of average tangible common equity excludes from average total shareholders’ equity average goodwill and other intangibles of $3.3 billion and $3.0 billion as of December 31, 2010 and 2009, respectively. The Company believes that return on average tangible common equity is a useful measure of profitability of its business.
 
See Consolidated Results of Operations, beginning on page 31, for discussion of the Company’s results.
Upon adoption of new accounting standards related to transfers of financial assets and consolidation of variable interest entities (VIEs) effective on January 1, 2010 (new GAAP effective January 1, 2010), the Company was required to change its accounting for the American Express Credit Account Master Trust (the Lending Trust), a previously unconsolidated VIE which is now consolidated. Prior period results have not been revised for the change in accounting for the Lending Trust. Refer to Note 1 and Note 7 for further discussion.
The Company follows U.S. generally accepted accounting principles (GAAP). For periods ended on or prior to December 31, 2009, the Company’s non-securitized cardmember loans and related debt performance information on a GAAP basis was referred to as the “owned” basis presentation. For such periods, the Company also provided information on a non-GAAP “managed” basis. This information assumes, in the Consolidated Selected Statistical Information and U.S. Card Services (USCS) segment, there have been no cardmember loans securitization transactions. Upon adoption of new GAAP effective January 1, 2010, both the Company’s securitized and non-securitized cardmember loans are included in the consolidated financial statements. As a result, the Company’s 2010 GAAP presentations and managed basis presentations prior to 2010 are generally comparable. Refer to “Cardmember Loan Portfolio Presentation” on page 54.
Certain reclassifications of prior year amounts have been made to conform to the current presentation.


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AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW
 
 
 
CRITICAL ACCOUNTING POLICIES
Refer to Note 1 to the Consolidated Financial Statements for a summary of the Company’s significant accounting policies referenced, as applicable, to other notes. The following chart provides information about five critical accounting policies that are important to the Consolidated Financial Statements and that require significant management assumptions and judgments.
 
RESERVES FOR CARDMEMBER LOSSES
         
 
        Effect if Actual Results Differ
Description   Assumptions/Approach Used   from Assumptions
 
Reserves for cardmember losses relating to cardmember loans and receivables represent management’s best estimate of the losses inherent in the Company’s outstanding portfolio of loans and receivables.  
Reserves for cardmember loans and receivables losses are primarily based upon models that analyze portfolio performance and reflect management’s judgment regarding overall reserve adequacy. The analytic models take into account several factors, including average losses and recoveries over an appropriate historical period. Management considers whether to adjust the analytic models for specific factors such as increased risk in certain portfolios, impact of risk management initiatives on portfolio performance and concentration of credit risk based on factors such as tenure, industry or geographic regions. In addition, management may increase or decrease the reserves for losses on cardmember loans for other external environmental factors including leading economic and market indicators such as the unemployment rate, Gross Domestic Product (GDP), home price indices, non-farm payrolls, personal consumption expenditures index, consumer confidence index, purchasing managers index, bankruptcy filings and the legal and regulatory environment. Due to the short-term nature of cardmember receivables, the impact of the other external environmental factors on the inherent losses within the cardmember receivable portfolio is not significant. As part of this evaluation process, management also considers various reserve coverage metrics, such as reserves as a percentage of past due amounts, reserves as a percentage of cardmember loans and receivables, and net write-off coverage.
Cardmember loans and receivables are written off when management deems amounts to be uncollectible and is generally determined by the number of days past due. Cardmember loans and receivables are generally written off no later than 180 days past due.
Cardmember loans and receivables in bankruptcy or owed by deceased individuals are written off upon notification.
Recoveries of both cardmember loans and receivables are recognized on a cash basis.
 
To the extent historical credit experience updated for emerging market trends in credit is not indicative of future performance, actual losses could differ significantly from management’s judgments and expectations, resulting in either higher or lower future provisions for losses, as applicable.
As of December 31, 2010, an increase (decrease) in write-offs equivalent to 20 basis points of cardmember loan and receivable balances at such date would increase (decrease) the provision for cardmember losses by approximately $196 million. This sensitivity analysis does not represent management’s expectations for write-offs but is provided as a hypothetical scenario to assess the sensitivity of the provision for cardmember losses to changes in key inputs.
The process of determining the reserve for cardmember losses requires a high degree of judgment. It is possible that others, given the same information, may at any point in time reach different reasonable conclusions.
 
 


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AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW
 
 
RESERVES FOR MEMBERSHIP REWARDS COSTS
         
 
        Effect if Actual Results Differ
Description   Assumptions/Approach Used   from Assumptions
 
The Membership Rewards program is the largest card-based rewards program in the industry. Eligible cardmembers can earn points for purchases charged on many card products. Many of these card products offer the ability to earn bonus points for certain types of purchases. Membership Rewards points are redeemable for a broad variety of rewards including travel, entertainment, retail certificates and merchandise.
Points typically do not expire and there is no limit on the number of points a cardmember may earn. A large majority of spending earns points under the program. While cardmember spend, redemption rates, and the related expense have increased, the Company believes it has historically benefited through higher revenues, lower cardmember attrition and credit losses and more timely payments.
The Company establishes balance sheet liabilities that represent the estimated future cost of points earned to date that are expected to be ultimately redeemed. These liabilities reflect management’s judgment regarding overall adequacy. The provision for the cost of Membership Rewards is included in marketing, promotion, rewards and cardmember services expenses.
 
A weighted-average cost per point redeemed during the previous 12 months, adjusted as appropriate for recent changes in redemption costs, is used to approximate future redemption costs and is affected by the mix of rewards redeemed. Management uses models to estimate ultimate redemption rates based on historical redemption statistics, card product type, year of program enrollment, enrollment tenure and card spend levels. These models incorporate sophisticated statistical and actuarial techniques to estimate ultimate redemption rates of points earned to date by current cardmembers given historical redemption trends and projected future redemption behavior.
The global ultimate redemption rate assumption that drives the Company’s balance sheet reserves for expected redemptions by current participants is 91 percent. The Company continually evaluates its reserve methodology and assumptions based on developments in redemption patterns, cost per point redeemed, contract changes and other factors.
 
The reserve for the estimated cost of points expected to be redeemed is impacted over time by enrollment levels, the number of points earned and redeemed, and the weighted-average cost per point, which is influenced by redemption choices made by cardmembers, reward offerings by partners and other Membership Rewards program changes. The reserve is most sensitive to changes in the estimated ultimate redemption rate. This rate is based on the expectation that a large majority of all points earned will eventually be redeemed.
As of December 31, 2010, if the ultimate redemption rate of current enrollees increased by 100 basis points, the balance sheet reserve and corresponding provision for the cost of Membership Rewards would each increase by approximately $283 million. Similarly, if the effective weighted-average cost per point increased by 1 basis point, the balance sheet reserve and corresponding provision for the cost of Membership Rewards would each increase by approximately $60 million.
 
 


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AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW
 
 
FAIR VALUE MEASUREMENT
         
        Effect if Actual Results Differ
Description   Assumptions/Approach Used   from Assumptions
 
The Company holds investment securities and derivative instruments. These financial instruments are reflected at fair value on the Company’s Consolidated Balance Sheets. Management makes significant assumptions and judgments when estimating fair value for these financial instruments.   In accordance with fair value measurement and disclosure guidance, the objective of a fair value measurement is to determine the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The disclosure guidance establishes a three-level hierarchy of inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to the measurement of fair value based on unadjusted quoted prices in active markets for identical assets or liabilities (Level 1), followed by the measurement of fair value based on pricing models with significant observable inputs (Level 2), with the lowest priority given to the measurement of fair value based on pricing models with significant unobservable inputs (Level 3).    
         
Investment Securities
The Company’s investment securities are predominantly comprised of fixed-income securities issued by states and municipalities as well as the U.S. Government and Agencies (e.g., Fannie Mae, Freddie Mac or Ginnie Mae). The investment securities are classified as available-for-sale with changes in fair value recorded in accumulated other comprehensive (loss) income within shareholders’ equity on the Company’s Consolidated Balance Sheets.
 
Investment Securities
The fair market values for the Company’s investment securities are obtained primarily from pricing services engaged by the Company, and the Company receives one price for each security. The fair values provided by the pricing services are estimated using pricing models where the inputs to those models are based on observable market inputs. The inputs to the valuation techniques applied by the pricing services vary depending on the type of security being priced but are typically benchmark yields, benchmark security prices, credit spreads, prepayment speeds, reported trades and broker-dealer quotes, all with reasonable levels of transparency. The pricing services did not apply any adjustments to the pricing models used. In addition, the Company did not apply any adjustments to prices received from the pricing services. The Company reaffirms its understanding of the valuation techniques used by its pricing services at least annually. In addition, the Company corroborates the prices provided by its pricing services to test their reasonableness by comparing their prices to valuations from different pricing sources as well as comparing prices to the sale prices received from sold securities. As of December 31, 2010, all of the Company’s investment securities are classified in either Level 1 or Level 2 of the fair value hierarchy. Refer to Note 3 to the Company’s Consolidated Financial Statements.
  Investment Securities
In the measurement of fair value for the Company’s investment securities, even though the underlying inputs used in the pricing models are directly observable from active markets or recent trades of similar securities in inactive markets, the pricing models do entail a certain amount of subjectivity and therefore differing judgments in how the underlying inputs are modeled could result in different estimates of fair value.
 
 


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AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW
 
 
FAIR VALUE MEASUREMENT (CONTINUED)
 
         
        Effect if Actual Results Differ
Description   Assumptions/Approach Used   from Assumptions
 
   
Other-Than-Temporary Impairment
Realized losses are recognized when management determines that a decline in fair value is other-than-temporary. Such determination requires judgment regarding the amount and timing of recovery. The Company reviews and evaluates its investment securities, at least quarterly, and more often as market conditions may require, to identify investment securities that have indications of other-than-temporary impairments. The determination of other-than-temporary impairment is a subjective process, requiring the use of judgments and assumptions. Accordingly, the Company considers several factors when evaluating debt securities for other-than-temporary impairment, including the determination of the extent to which the decline in fair value of the security is due to increased default risk for the specific issuer or market interest rate risk. With respect to increased default risk, the Company assesses the collectibility of principal and interest payments by monitoring issuers’ credit ratings, related changes to those ratings, specific credit events associated with the individual issuers as well as the credit ratings of a financial guarantor, where applicable, and the extent to which amortized cost exceeds fair value and the duration and size of that difference. With respect to market interest rate risk, including benchmark interest rates and credit spreads, the Company assesses whether it has the intent to sell the investment securities, and whether it is more likely than not that the Company will not be required to sell the investment securities before recovery of any unrealized losses. Refer to Note 6 to the Company’s Consolidated Financial Statements.
 
Other-Than-Temporary Impairment
In determining whether any of the Company’s investment securities are other-than-temporarily impaired, a change in facts and circumstances could lead to a change in management judgment around the Company’s view on collectibility and credit quality of the issuer, or the Company’s intent to sell the investment securities, and whether it is more likely than not that the Company will not be required to sell the investment securities before recovery of any unrealized losses. Therefore, it is at least reasonably possible that a change in estimate will occur in the near term relating to other-than-temporary impairment. This could result in the Company recording an other-than-temporary impairment loss through earnings with a corresponding offset to accumulated other comprehensive (loss) income. As of December 31, 2010, the Company had approximately $0.4 billion in gross unrealized losses in its investment securities portfolio which were deemed not to be other-than-temporarily impaired.
         
Defined Benefit Pension Plan Assets
Defined benefit pension plan (the Plan) assets are measured at fair value, changes in which are included in the determination of the Plan’s net funded status which is reported in other liabilities on the Company’s Consolidated Balance Sheets.
 
Defined Benefit Pension Plan Assets
The fair value measurements for the Plan assets align with those described under investment securities above. Refer to Note 21 to the Company’s Consolidated Financial Statements.
  Defined Benefit Pension Plan Assets
The fair value measurements for the Plan assets contain a similar amount of subjectivity as described under investment securities above, and therefore differing judgments in how the underlying inputs are modeled could result in different estimates of fair value.
 
 


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AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW
 
 
FAIR VALUE MEASUREMENT (CONTINUED)
 
         
        Effect if Actual Results Differ
Description   Assumptions/Approach Used   from Assumptions
 
         
Derivative Instruments
The Company’s primary derivative instruments include interest rate swaps, foreign currency forward agreements and cross-currency swaps. Derivative instruments are reported at fair value in other assets and other liabilities on the Company’s Consolidated Balance Sheets. Changes in fair value are recorded in accumulated other comprehensive (loss) income, and/or in the Consolidated Statements of Income, depending on (i) the documentation and designation of the derivative instrument, and (ii) if the derivative instrument is in a hedging relationship, its effectiveness in offsetting the changes in the designated risk being hedged.
 
Derivative Instruments
The fair value of the Company’s derivative instruments is estimated by using either a third-party valuation service that uses proprietary pricing models, or by internal pricing models. The pricing models do not contain a high level of subjectivity as the valuation techniques used do not require significant judgment and inputs to those models are readily observable from actively quoted markets. The pricing models used are consistently applied and reflect the contractual terms of the derivatives, including the period of maturity, and market-based parameters such as interest rates, foreign exchange rates, equity indices or prices, and volatility.
Credit valuation adjustments are necessary when the market parameters, such as a benchmark curve, used to value the derivative instruments are not indicative of the credit quality of the Company or its counterparties. The Company considers the counterparty credit risk by applying an observable forecasted default rate to the current exposure.
The Company manages derivative instrument counterparty credit risk by considering the current exposure, which is the replacement cost of contracts on the measurement date, as well as estimating the maximum potential value of the contracts over the next 12 months, considering such factors as the volatility of the underlying or reference index. To mitigate derivative instrument credit risk, counterparties are required to be pre-approved and rated as investment grade.
The Company’s derivative instruments are classified in Level 2 of the fair value hierarchy. Refer to Notes 3 and 12 to the Company’s Consolidated Financial Statements.
 
Derivative Instruments
In the measurement of fair value for the Company’s derivative instruments, although the underlying inputs used in the pricing models are readily observable from actively quoted markets, the pricing models do entail a certain amount of subjectivity and therefore, differing judgments in how the underlying inputs are modeled could result in different estimates of fair value. In addition, any necessary credit valuation adjustments are based on observable default rates. A change in facts and circumstances could lead to a change in management judgment about counterparty credit quality, which could result in the Company recognizing an additional counterparty credit valuation adjustment. As of December 31, 2010, the credit and nonperformance risks associated with the Company’s derivative instrument counterparties were not significant.
 
 


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AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW
 
 
GOODWILL
         
 
        Effect if Actual Results Differ
Description   Assumptions/Approach Used   from Assumptions
 
Goodwill represents the excess of acquisition cost of an acquired company over the fair value of assets acquired and liabilities assumed. In accordance with GAAP, goodwill is not amortized but is tested for impairment at the reporting unit level annually at June 30 and between annual tests if events or circumstances arise, such as adverse changes in the business climate, that would more likely than not reduce the fair value of the reporting unit below its carrying value.
The Company assigns goodwill to its reporting units for the purpose of impairment testing. A reporting unit is defined as either an operating segment or a business one level below an operating segment for which discrete financial information is available that management regularly reviews.
The goodwill impairment test utilizes a two-step approach. The first step identifies whether there is potential impairment by comparing the fair value of a reporting unit to its carrying amount, including goodwill. If the fair value of a reporting unit is less than its carrying amount, the second step of the impairment test is required to measure the amount of any impairment loss.
 
Goodwill impairment testing involves management judgment, requiring an assessment of whether the carrying value of the reporting unit can be supported by its fair value using widely accepted valuation techniques, such as the market approach (earnings multiples or transaction multiples for the industry in which the reporting unit operates) or the income approach (discounted cash flow methods). The fair values of the reporting units were determined using a combination of valuation techniques consistent with the market approach and the income approach.
When preparing discounted cash flow models under the income approach, the Company estimates future cash flows using the reporting unit’s internal five year forecast and a terminal value calculated using a growth rate that management believes is appropriate in light of current and expected future economic conditions. The Company then applies a discount rate to discount these future cash flows to arrive at a net present value amount, which represents the estimated fair value of the reporting unit. The discount rate applied approximates the expected cost of equity financing, determined using a capital asset pricing model. The model generates an appropriate discount rate using internal and external inputs to value future cash flows based on the time value of money and the price for bearing the uncertainty inherent in an investment. The Company believes the resulting rate, 11.8 percent, appropriately reflects the risks and uncertainties in the financial markets generally and in the Company’s internally developed forecasts.
  The Company has approximately $2.6 billion of goodwill as of December 31, 2010. The fair value of each of the Company’s reporting units is above its carrying value; accordingly, the Company has concluded its goodwill is not impaired at December 31, 2010. The Company could be exposed to increased risk of goodwill impairment if future operating results or macroeconomic conditions differ significantly from management’s current assumptions.
 
 


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AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW
 
 
INCOME TAXES
         
 
        Effect if Actual Results Differ
Description   Assumptions/Approach Used   from Assumptions
 
The Company is subject to the income tax laws of the United States, its states and municipalities and those of the foreign jurisdictions in which the Company operates. These tax laws are complex, and the manner in which they apply to the taxpayer’s facts is sometimes open to interpretation. In establishing a provision for income tax expense, the Company must make judgments about the application of these inherently complex tax laws.        
         
Unrecognized Tax Benefits
The Company establishes a liability for unrecognized tax benefits, which are the differences between a tax position taken or expected to be taken in a tax return and the benefit recognized in the financial statements.
 
Unrecognized Tax Benefits
In establishing a liability for an unrecognized tax benefit, assumptions may be made in determining whether a tax position is more likely than not to be sustained upon examination by the taxing authority and also in determining the ultimate amount that is likely to be realized. A tax position is recognized only when, based on management’s judgment regarding the application of income tax laws, it is more likely than not that the tax position will be sustained upon examination. The amount of tax benefit recognized is based on the Company’s assessment of the most likely outcome on ultimate settlement with the taxing authority. This measurement is based on many factors, including whether a tax dispute may be settled through negotiation with the taxing authority or is only subject to review in the courts. As new information becomes available, the Company evaluates its tax positions, and adjusts its unrecognized tax benefits, as appropriate.
 
Unrecognized Tax Benefits
If the tax benefit ultimately realized differs from the amount previously recognized in the income tax provision, the Company recognizes an adjustment of the unrecognized tax benefit through the income tax provision.
         
Deferred Taxes
Deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using the enacted tax rates expected to be in effect for the years in which the differences are expected to reverse. A valuation allowance is established when management determines that it is more likely than not that all or some portion of the benefit of the deferred tax asset will not be realized.
 
Deferred Taxes
Since deferred taxes measure the future tax effects of items recognized in the financial statements, certain estimates and assumptions are required to determine whether it is more likely than not that all or some portion of the benefit of a deferred tax asset will not be realized. In making this assessment, management analyzes and estimates the impact of future taxable income, reversing temporary differences and available tax planning strategies. These assessments are performed quarterly, taking into account any new information.
 
Deferred Taxes
Should a change in facts or circumstances lead to a change in judgment about the ultimate realizability of a deferred tax asset, the Company records or adjusts the related valuation allowance in the period that the change in facts or circumstances occurs, along with a corresponding increase or decrease to the income tax provision.
 
 


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AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW
 
 
AMERICAN EXPRESS COMPANY CONSOLIDATED RESULTS OF OPERATIONS
Refer to “Glossary of Selected Terminology” for the definitions of certain key terms and related information appearing in the tables below.
 
SUMMARY OF THE COMPANY’S
FINANCIAL PERFORMANCE
 
                         
   
Years Ended December 31,
                 
(Millions, except per share
                 
amounts and ratio data)   2010     2009     2008  
 
Total revenues net of interest expense
  $ 27,819     $ 24,523     $ 28,365  
Provisions for losses
  $ 2,207     $ 5,313     $ 5,798  
Expenses
  $ 19,648     $ 16,369     $ 18,986  
Income from continuing operations
  $ 4,057     $ 2,137     $ 2,871  
Net income
  $ 4,057     $ 2,130     $ 2,699  
Earnings per common share from continuing operations — diluted(a)
  $ 3.35     $ 1.54     $ 2.47  
Earnings per common share — diluted(a)
  $ 3.35     $ 1.54     $ 2.32  
Return on average equity(b)
    27.5 %     14.6 %     22.3 %
Return on average tangible common equity(c)
    35.1 %     17.6 %     28.0 %
 
 
 
(a) Earnings per common share from continuing operations — diluted and Earnings per common share — diluted were both reduced by the impact of (i) accelerated preferred dividend accretion of $212 million for the year ended December 31, 2009, due to the repurchase of $3.39 billion of preferred shares issued as part of the Capital Purchase Program (CPP), (ii) preferred share dividends and related accretion of $94 million for the year ended December 31, 2009, and (iii) earnings allocated to participating share awards and other items of $51 million, $22 million and $15 million for the years ended December 31, 2010, 2009 and 2008, respectively.
(b) ROE is calculated by dividing (i) one-year period net income ($4.1 billion, $2.1 billion and $2.7 billion for 2010, 2009 and 2008, respectively) by (ii) one-year average total shareholders’ equity ($14.8 billion, $14.6 billion and $12.1 billion for 2010, 2009 and 2008, respectively).
(c) Return on average tangible common equity is computed in the same manner as ROE except the computation of average tangible common equity excludes from average total shareholders’ equity average goodwill and other intangibles of $3.3 billion, $3.0 billion and $2.5 billion as of December 31, 2010, 2009 and 2008, respectively.
 
SELECTED STATISTICAL INFORMATION
 
                         
   
Years Ended December 31,
                 
(Billions, except percentages
                 
and where indicated)   2010     2009     2008  
 
Card billed business:
                       
United States
  $ 479.3     $ 423.7     $ 471.1  
Outside the United States
    234.0       196.1       212.2  
                         
Total
  $ 713.3     $ 619.8     $ 683.3  
                         
Total cards-in-force (millions)(a)
                       
United States
    48.9       48.9       54.0  
Outside the United States
    42.1       39.0       38.4  
                         
Total
    91.0       87.9       92.4  
                         
Basic cards-in-force (millions)(a)
                       
United States
    37.9       38.2       42.0  
Outside the United States
    37.4       34.3       33.4  
                         
Total
    75.3       72.5       75.4  
                         
Average discount rate
    2.55 %     2.54 %     2.55 %
Average basic cardmember
spending (dollars)(b)
  $ 13,259     $ 11,213     $ 12,025  
Average fee per card (dollars)(b)
  $ 38     $ 36     $ 34  
Average fee per card adjusted (dollars)(b)
  $ 41     $ 40     $ 39  
 
 
 
(a) As previously discussed, in the third quarter of 2010 the definition of cards-in-force was changed for certain retail co-brand cards in GNS. The change caused a reduction of 1.6 million to reported cards-in-force in the third quarter.
(b) Average basic cardmember spending and average fee per card are computed from proprietary card activities only. Average fee per card is computed based on net card fees, including the amortization of deferred direct acquisition costs, plus card fees included in interest and fees on loans (including related amortization of deferred direct acquisition costs), divided by average worldwide proprietary cards-in-force. The card fees related to cardmember loans included in interest and fees on loans were $220 million, $186 million and $146 million for the years ended December 31, 2010, 2009 and 2008, respectively. The adjusted average fee per card is computed in the same manner, but excludes amortization of deferred direct acquisition costs (a portion of which is charge card related and included in net card fees and a portion of which is lending related and included in interest and fees on loans). The amount of amortization excluded was $207 million, $243 million and $320 million for the years ended December 31, 2010, 2009 and 2008, respectively. The Company presents adjusted average fee per card because management believes that this metric presents a useful indicator of card fee pricing across a range of its proprietary card products.


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AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW
 
 
 
AMERICAN EXPRESS COMPANY
 
SELECTED STATISTICAL INFORMATION
 
                         
   
As of or for the Years Ended December 31,
                 
(Billions, except percentages and where indicated)   2010     2009     2008  
 
Worldwide cardmember receivables
                       
Total receivables
  $ 37.3     $ 33.7     $ 33.0  
Loss reserves (millions)
                       
Beginning balance
  $ 546     $ 810     $ 1,149  
Provision for losses on
authorized transactions(a)
    439       773       1,363  
Net write-offs(b)
    (598 )     (1,131 )     (1,552 )
Other
    (1 )     94       (150 )
                         
Ending balance
  $ 386     $ 546     $ 810  
                         
% of receivables
    1.0 %     1.6 %     2.5 %
Net write-off rate — USCS
    1.6 %     3.8 %     3.6 %
30 days past due as a % of total — USCS
    1.5 %     1.8 %     3.7 %
Net loss ratio as a % of charge
volume — ICS/GCS(b)(c)
    0.16 %     0.25 %     0.17 %
90 days past billing as a % of total — ICS/GCS(b)
    0.9 %     1.6 %     2.84 %
Worldwide cardmember loans — GAAP basis portfolio(d)
                       
Total loans
  $ 60.9     $ 32.8     $ 42.2  
30 days past due as a % of total
    2.1 %     3.6 %     4.4 %
Loss reserves (millions)
                       
Beginning balance
  $ 3,268     $ 2,570     $ 1,831  
Adoption of new GAAP
consolidation standard(e)
    2,531              
Provision for losses on
authorized transactions
    1,445       4,209       4,106  
Net write-offs — principal
    (3,260 )     (2,949 )     (2,643 )
Write-offs — interest and fees
    (359 )     (448 )     (580 )
Other
    21       (114 )     (144 )
                         
Ending balance
  $ 3,646     $ 3,268     $ 2,570  
                         
Ending Reserves — principal
  $ 3,551     $ 3,172     $ 2,379  
Ending Reserves — interest and fees
  $ 95     $ 96     $ 191  
% of loans
    6.0 %     10.0 %     6.1 %
% of past due
    287 %     279 %     137 %
Average loans
  $ 58.4     $ 34.8     $ 47.6  
Net write-off rate
    5.6 %     8.5 %     5.5 %
Net interest income divided by average loans(f)(g)
    8.3 %     9.0 %     7.7 %
Net interest yield on cardmember loans(f)
    9.7 %     10.1 %     8.6 %
Worldwide cardmember loans — Managed basis portfolio(d)
                       
Total loans
  $ 60.9     $ 61.8     $ 72.0  
30 days past due as a % of total
    2.1 %     3.6 %     4.6 %
Net write-offs — principal (millions)
  $ 3,260     $ 5,366     $ 4,065  
Average loans
  $ 58.4     $ 63.8     $ 75.0  
Net write-off rate
    5.6 %     8.4 %     5.4 %
Net interest yield on cardmember loans(f)
    9.7 %     10.4 %     9.1 %
 
 
 
(a) Represents loss provisions for cardmember receivables consisting of principal (resulting from authorized transactions) and fee reserve components. Adjustments to cardmember receivables resulting from unauthorized transactions have been reclassified from this line to “Other” for all periods presented.
(b) Effective January 1, 2010, the Company revised the time period in which past due cardmember receivables in International Card Services and Global Commercial Services are written off to when they are 180 days past due or earlier, consistent with applicable bank regulatory guidance and the write-off methodology adopted for U.S. Card Services in the fourth quarter of 2008. Previously, receivables were written off when they were 360 days past billing or earlier. Therefore, the net write-offs for the first quarter of 2010 included net write-offs of approximately $60 million for International Card Services and approximately $48 million for Global Commercial Services resulting from this write-off methodology change, which increased the net loss ratios and decreased the 90 days past billing metrics for these segments, but did not have a substantial impact on provisions for losses.
(c) Beginning with the first quarter of 2010, the Company has revised the net loss ratio to exclude net write-offs related to unauthorized transactions, consistent with the methodology for calculation of the net write-off rate for U.S. Card Services. The metrics for prior periods have not been revised for this change as it was deemed immaterial.
(d) Refer to “Cardmember Loan Portfolio Presentation” on page 54 for discussion of the GAAP and non-GAAP presentation of the Company’s U.S. loan portfolio.
(e) Reflects the new GAAP effective January 1, 2010, which resulted in the consolidation of the American Express Credit Account Master Trust (the Lending Trust), reflecting $29.0 billion of additional cardmember loans along with a $2.5 billion loan loss reserve on the Company’s balance sheets.
(f) See below for calculations of net interest yield on cardmember loans, a non-GAAP measure, and net interest income divided by average loans, a GAAP measure. Management believes net interest yield on cardmember loans is useful to investors because it provides a measure of profitability of the Company’s cardmember loan portfolio.
(g) This calculation includes elements of total interest income and total interest expense that are not attributable to the cardmember loan portfolio, and thus is not representative of net interest yield on cardmember loans. The calculation includes interest income and interest expense attributable to investment securities and other interest-bearing deposits as well as to cardmember loans, and interest expense attributable to other activities, including cardmember receivables.


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AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW
 
 
CALCULATION OF NET INTEREST YIELD ON CARDMEMBER LOANS(a)
 
                 
   
Years Ended December 31,
           
(Millions)   2010     2009  
 
Calculation based on 2010 and 2009 GAAP information:(b)
               
Net interest income
  $ 4,869     $ 3,124  
Average loans (billions)
  $ 58.4     $ 34.8  
Adjusted net interest income
  $ 5,629     $ 3,540  
Adjusted average loans (billions)
  $ 58.3     $ 34.9  
Net interest income divided by average loans(c)
    8.3 %     9.0 %
Net interest yield on cardmember loans
    9.7 %     10.1 %
Calculation based on 2010 and 2009 managed information:(b)
               
Net interest income(b)
  $ 4,869     $ 5,977  
Average loans (billions)
  $ 58.4     $ 63.8  
Adjusted net interest income
  $ 5,629     $ 6,646  
Adjusted average loans (billions)
  $ 58.3     $ 63.9  
Net interest yield on cardmember loans
    9.7 %     10.4 %
 
 
 
(a) Beginning in the first quarter of 2010, the Company changed the manner in which it allocates interest expense and capital to its reportable operating segments. The change reflects modifications in allocation methodology that the Company believes to more accurately reflect the funding and capital characteristics of its segments. The change to interest allocation impacted the consolidated net interest yield on cardmember loans. Accordingly, the net interest yields for periods prior to the first quarter of 2010 have been revised for this change.
(b) Refer to “Cardmember Loan Portfolio Presentation” on page 54 for discussion of GAAP and non-GAAP presentation of the Company’s U.S. loan portfolio.
(c) Refer to “Consolidated Results of Operations — Selected Statistical Information”, footnote (g) on page 32.
 
The following discussions regarding Consolidated Results of Operations and Consolidated Liquidity and Capital Resources are presented on a basis consistent with GAAP unless otherwise noted.
 
CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 2010
The Company’s 2010 consolidated income from continuing operations increased $1.9 billion or 90 percent to $4.1 billion and diluted EPS from continuing operations increased by $1.81 to $3.35. Consolidated income from continuing operations for 2009 decreased $734 million or 26 percent from 2008 and diluted EPS from continuing operations for 2009 declined $0.93 or 38 percent from 2008.
Consolidated net income for December 31, 2010, 2009 and 2008 was $4.1 billion, $2.1 billion and $2.7 billion, respectively. Net income included losses from discontinued operations of nil, $7 million and $172 million for 2010, 2009 and 2008, respectively.
The Company’s total revenues net of interest expense and total expenses increased by approximately 13 percent and 20 percent, respectively, while total provisions for losses decreased by 58 percent in 2010. Assuming no changes in foreign currency exchange rates from 2009 to 2010, total revenues net of interest expense and total expenses increased approximately 12 percent and 19 percent, respectively, while provisions for losses decreased approximately 59 percent in 20101.
The Company’s total revenues net of interest expense, provisions for losses and total expenses decreased by approximately 14 percent, 8 percent and 14 percent, respectively, in 2009. Assuming no changes in foreign currency exchange rates from 2008 to 2009, total revenues net of interest expense, provisions for losses and total expenses decreased approximately 12 percent, 7 percent and 12 percent, respectively, in 20091. Currency rate changes had a minimal impact on the growth rates in 2008.
 
Results from continuing operations for 2010 included:
 
  A $127 million ($83 million after-tax) net charge for costs related to the Company’s reengineering initiatives.
 
Results from continuing operations for 2009 included:
 
  A $180 million ($113 million after-tax) benefit in the third quarter related to the accounting for a net investment in the Company’s consolidated foreign subsidiaries. See also Business Segment Results — Corporate & Other below for further discussion;
 
  A $211 million ($135 million after-tax) gain in the second quarter of 2009 on the sale of 50 percent of the Company’s equity holdings of Industrial and Commercial Bank of China (ICBC); and
 
  A $190 million ($125 million after-tax) net charge related to the Company’s reengineering initiatives.
 
Results from continuing operations for 2008 included:
 
  A $600 million ($374 million after-tax) addition to U.S. lending credit reserves reflecting a deterioration of credit indicators in the second quarter of 2008;
 
  A $449 million ($291 million after-tax) net charge, primarily reflecting the restructuring costs related to the Company’s reengineering initiatives in the fourth quarter of 2008;
 
  A $220 million ($138 million after-tax) reduction to the fair market value of the Company’s interest-only strip; and
 
  A $106 million ($66 million after-tax) charge in the fourth quarter of 2008 to increase the Company’s Membership Rewards liability, in connection with the Company’s extension of its partnership arrangements with Delta.
 
 
 1  These currency rate adjustments assume a constant exchange rate between periods for purposes of currency translation into U.S. dollars (i.e., assumes the foreign exchange rates used to determine results for the current year apply to the corresponding year-earlier period against which such results are being compared). Management believes that this presentation is helpful to investors by making it easier to compare the Company’s performance from one period to another without the variability caused by fluctuations in currency exchange rates.


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Table of Contents

 
AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW
 
 
Total Revenues Net of Interest Expense
Consolidated total revenues net of interest expense for 2010 of $27.8 billion were up $3.3 billion or 13 percent from 2009. The increase in total revenues net of interest expense primarily reflects new GAAP effective January 1, 2010, which caused the reporting of write-offs related to securitized loans to move from securitization income, net in 2009 to provisions for cardmember loan losses in 2010. In addition, total revenues net of interest expense reflects higher discount revenues, increased other commissions and fees, greater travel commissions and fees, and higher net interest income, partially offset by lower other revenue, and reduced net card fees. Consolidated total revenues net of interest expense for 2009 of $24.5 billion were down $3.8 billion or 14 percent from 2008, due to lower discount revenue, lower total interest income, reduced securitization income, net, lower other commissions and fees, reduced travel commissions and fees, and decreased other revenues, partially offset by lower total interest expense.
Discount revenue for 2010 increased $1.7 billion or 13 percent as compared to 2009 to $15.1 billion as a result of a 15 percent increase in worldwide billed business and a slightly higher discount rate. The lower revenue growth versus total billed business growth reflects the relatively faster billed business growth rate of 28 percent related to GNS, where discount revenue is shared with card issuing partners, and higher contra-revenues, including cash-back rewards costs and corporate incentive payments. The 15 percent increase in worldwide billed business in 2010 reflected an increase in proprietary billed business of 13 percent. The average discount rate was 2.55 percent and 2.54 percent for 2010 and 2009, respectively. Over time, certain repricing initiatives, changes in the mix of business and volume-related pricing discounts and investments will likely result in some erosion of the average discount rate.
U.S. billed business and billed business outside the United States were up 13 percent and 19 percent, respectively, in 2010. The increase in billed business within the United States reflected an increase in average spending per proprietary basic card, partially offset by a slight decrease in basic cards-in-force. The increase in billed business outside the United States reflected an increase in average spending per proprietary basic card and basic cards-in-force.
 
The table below summarizes selected statistics for billed business and average spend:
 
                                 
   
    2010     2009  
          Percentage Increase
          Percentage Increase
 
          (Decrease) Assuming
          (Decrease) Assuming
 
          No Changes in
          No Changes in
 
    Percentage Increase
    Foreign Exchange
    Percentage Increase
    Foreign Exchange
 
    (Decrease)     Rates(a)      (Decrease)     Rates(a)   
 
Worldwide(b)
                               
Billed business
    15 %     14 %     (9 )%     (7 )%
Proprietary billed business
    13       13       (11 )     (9 )
GNS billed business(c)
    28       24       7       11  
Average spending per proprietary basic card
    18       17       (7 )     (5 )
Basic cards-in-force
    4               (4 )        
United States(b)
                               
Billed business
    13               (10 )        
Average spending per proprietary basic card
    18               (6 )        
Basic cards-in-force
    (1 )             (9 )        
Proprietary consumer card billed business(d)
    12               (10 )        
Proprietary small business billed business(d)
    11               (13 )        
Proprietary Corporate Services billed business(e)
    19               (11 )        
Outside the United States(b)
                               
Billed business
    19       15       (8 )     (1 )
Average spending per proprietary basic card
    20       16       (9 )     (3 )
Basic cards-in-force
    9               3          
Proprietary consumer and small business billed business(f)
    14       9       (10 )     (4 )
Proprietary Corporate Services billed business(e)
    20       18       (19 )     (12 )
 
 
 
(a) Refer to footnote 1 on page 33 relating to changes in foreign exchange rates.
(b) Captions in the table above not designated as “proprietary” or “GNS” include both proprietary and GNS data.
(c) Included in the Global Network segment.
(d) Included in the USCS segment.
(e) Included in the GCS segment.
(f) Included in the ICS segment.


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Table of Contents

 
AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW
 
 
Assuming no changes in foreign exchange rates, total billed business outside the United States grew 22 percent in Asia Pacific, 18 percent in Latin America, 10 percent in Europe and 9 percent in Canada.
During 2009, discount revenue decreased $1.6 billion or 11 percent to $13.4 billion compared to 2008 as a result of a 9 percent decrease in worldwide billed business. The greater decrease in discount revenue compared to billed business primarily reflected growth in billed business related to GNS where the Company shares the discount rate with card issuing partners, as well as a slight decline in the average discount rate. The 9 percent decrease in worldwide billed business in 2009 reflected a decline in proprietary billed business of 11 percent, offset by a 7 percent increase in billed business related to GNS.
Net card fees in 2010 decreased 2 percent, partially due to a non-renewal reserve adjustment in the prior year. Net card fees in 2009 remained unchanged compared to 2008 as the decline in total proprietary cards-in-force was offset by an increase in the average fee per card.
Travel commissions and fees increased $185 million or 12 percent to $1.8 billion in 2010 compared to 2009, primarily reflecting a 19 percent increase in worldwide travel sales, partially offset by a lower sales revenue rate. Travel commissions and fees decreased $416 million or 21 percent to $1.6 billion in 2009 compared to 2008, primarily reflecting a 28 percent decrease in worldwide travel sales, partially offset by higher sales commission and fee rates.
Other commissions and fees increased $253 million or 14 percent to $2.0 billion in 2010 compared to 2009, driven primarily by new GAAP effective January 1, 2010 where fees related to securitized receivables are now recognized as other commissions and fees. These fees were previously reported in securitization income, net. The increase also reflects greater foreign currency conversion revenues related to higher spending, partially offset by lower delinquency fees in the non-securitized cardmember loan portfolio. Other commissions and fees decreased $529 million or 23 percent to $1.8 billion in 2009 compared to 2008, due to lower delinquency fees reflecting decreased owned loan balances and the impacts of various customer assistance programs, in addition to reduced spending-related foreign currency conversion revenues.
Securitization income, net decreased $400 million to nil in 2010 compared to 2009, as the Company no longer reports securitization income, net, in accordance with new GAAP effective January 1, 2010. Securitization income, net decreased $670 million or 63 percent to $400 million in 2009 compared to 2008, primarily due to lower excess spread, net, driven by increased write-offs and a decrease in interest income on cardmember loans and fee revenues. These unfavorable impacts were partially offset by a decrease in interest expense due to lower coupon rates paid on variable-rate investor certificates, as well as a favorable fair value adjustment of the interest-only strip.
Other revenues in 2010 decreased $160 million or 8 percent to $1.9 billion compared to 2009, primarily reflecting the $211 million gain on the sale of 50 percent of the Company’s equity holdings in ICBC in 2009, lower insurance premium revenues and higher partner investments which appear as a contra-other revenue, partially offset by higher GNS partner-related royalty revenues, greater merchant fee-related revenue and higher publishing revenue. Other revenues in 2009 decreased $70 million or 3 percent to $2.1 billion compared to 2008, primarily reflecting decreased revenues from CPS, due to the migration of clients to the American Express network and lower publishing revenues, partially offset by the ICBC gain.
Interest income increased $2.0 billion or 37 percent to $7.3 billion in 2010 compared to 2009. Interest and fees on loans increased $2.3 billion or 52 percent, driven by an increase in the average loan balance resulting from the consolidation of securitized receivables in accordance with new GAAP effective January 1, 2010. Interest income related to securitized receivables is reported in securitization income, net in prior periods, but is now reported in interest and fees on loans. The increase related to this consolidation was partially offset by a lower yield on cardmember loans, reflecting higher payment rates and lower revolving levels, and the implementation of elements of the CARD Act. These reductions to yield were partially offset by the benefit of certain repricing initiatives effective during 2009 and 2010. Interest and dividends on investment securities decreased $361 million or 45 percent, primarily reflecting the elimination of interest on retained securities driven by new GAAP effective January 1, 2010 and lower short-term investment levels. Interest income from deposits with banks and other increased $7 million or 12 percent primarily due to higher average deposit balances versus the prior year. Interest income decreased $1.9 billion or 26 percent to $5.3 billion in 2009 compared to 2008. Interest and fees on loans decreased $1.7 billion or 27 percent due to decline in the average owned loan balance, reduced market interest rates and the impact of various customer assistance programs, partially offset by the benefit of certain repricing initiatives. Interest and dividends on investment securities increased $33 million or 4 percent, primarily reflecting increased investment levels partially offset by reduced investment yields. Interest income from deposits with banks and other decreased $212 million or 78 percent, primarily due to a reduced yield and a lower balance of deposits in other banks.
Interest expense increased $216 million or 10 percent to $2.4 billion in 2010 compared to 2009. Interest expense related to deposits increased $121 million or 28 percent, as higher customer balances were partially offset by a lower cost of funds. Interest expense related to short-term borrowings decreased $34 million or 92 percent, reflecting lower commercial paper levels versus the prior year and a lower cost of funds. Interest expense related to long-term debt and other increased $129 million or 7 percent, reflecting the consolidation of long-term debt associated with securitized loans previously held off-balance sheet in accordance with

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AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW
 
 
new GAAP effective January 1, 2010. Interest expense related to this debt was reported in securitization income, net in prior periods, but is now reported in long-term debt and other interest expense. The increase was partially offset by lower average long-term debt. Interest expense decreased $1.3 billion or 38 percent to $2.2 billion in 2009 compared to 2008. Interest expense related to deposits decreased $29 million or 6 percent, primarily due to a lower cost of funds which more than offset increased balances. Interest expense related to short-term borrowings decreased $446 million or 92 percent, due to significantly lower short-term debt levels and a lower cost of funds. Interest expense related to long-term debt and other decreased $873 million or 33 percent, primarily reflecting a lower cost of funds driven by reduced market rates on variably priced debt, as well as a lower average balance of long-term debt outstanding.
 
Provisions for Losses
Provisions for losses of $2.2 billion in 2010 decreased $3.1 billion or 58 percent, compared to 2009. Charge card provisions for losses decreased $262 million or 31 percent, driven by lower reserve requirements, due to improved credit performance, partially offset by higher receivables. Cardmember loans provisions for losses decreased $2.7 billion or 64 percent, primarily reflecting lower reserve requirements during the year, due to improving credit performance, partially offset by an increase related to the inclusion of the 2010 expense for written-off securitized loans, which in 2009 was reported in securitization income, net. Other provisions for losses decreased $105 million or 55 percent primarily reflecting lower merchant-related debit balances.
Provisions for losses of $5.3 billion in 2009 decreased $485 million or 8 percent compared to 2008. Charge card provisions for losses decreased $506 million or 37 percent, primarily driven by improved credit performance. Cardmember loans provisions for losses increased $35 million or 1 percent, primarily due to a higher cardmember reserve level due to the challenging credit environment, partially offset by a lower owned-loan balance.
 
Expenses
Consolidated expenses for 2010 were $19.6 billion, up $3.2 billion or 20 percent from $16.4 billion in 2009. The increase in 2010 reflected greater marketing and promotion expenses, increased cardmember rewards expense, higher salaries and employee benefits, greater professional services expenses, higher other, net expenses, and increased cardmember services expenses, partially offset by lower occupancy and equipment expense and lower communications expense. Consolidated expenses for 2009 were $16.4 billion, down $2.6 billion or 14 percent from $19.0 billion in 2008. The decrease in 2009 was primarily driven by lower other, net expenses, reduced salaries and employee benefits expenses, lower marketing and promotion expense and decreased cardmember rewards expense, partially offset by greater cardmember services expense. Consolidated expenses in 2010, 2009 and 2008 also included $127 million, $190 million and $449 million, respectively, of reengineering costs, of which $96 million, $185 million and $417 million, respectively, represent restructuring charges.
Marketing and promotion expenses increased $1.2 billion or 60 percent to $3.1 billion in 2010 from $1.9 billion in 2009, as improved credit and billings trends led to increased investment levels in 2010. Marketing and promotion expenses decreased $516 million or 21 percent to $1.9 billion in 2009 from $2.4 billion in 2008, due to lower spending levels in the first three quarters of 2009, partially offset by higher expense in the fourth quarter of 2009.
Cardmember rewards expenses increased $993 million or 25 percent to $5.0 billion in 2010 from $4.0 billion in 2009, reflecting higher rewards-related spending volumes and co-brand expense, and a benefit in the third quarter of 2009 relating to the adoption of a more restrictive redemption policy for accounts 30 days past due. Cardmember rewards expenses decreased $353 million or 8 percent to $4.0 billion in 2009 from $4.4 billion in 2008, reflecting lower rewards-related spending volumes, partially offset by higher redemption rates and costs in Membership Rewards and higher costs with relatively lower declines in co-brand spending volumes.
Salaries and employee benefits expenses increased $486 million or 10 percent to $5.6 billion in 2010 from $5.1 billion in 2009, reflecting a 2 percent increase in total employee count, merit increases for existing employees, higher benefit-related costs, including the impact of reinstating certain benefits that were temporarily suspended during the recession, higher management incentive compensation expense and greater volume-related sales incentives, partially offset by lower net reengineering costs in 2010 versus 2009. Salaries and employee benefits expenses decreased $1.0 billion or 17 percent to $5.1 billion in 2009 from $6.1 billion in 2008, reflecting lower employee levels and costs related to the Company’s reengineering initiatives, as well as the restructuring charge in the fourth quarter of 2008.
Professional services expenses in 2010 increased $398 million or 17 percent compared to 2009, reflecting higher technology development expenditures, greater legal costs, and higher third-party merchant sales force commissions, partially offset by lower credit and collection agency costs. Professional services expenses in 2009 compared to 2008 remained flat.
Other, net expenses in 2010 increased $218 million or 9 percent to $2.6 billion compared to 2009, reflecting the $180 million ($113 million after-tax) benefit in the third quarter of 2009 related to the accounting for a net investment in the Company’s consolidated foreign subsidiaries, as well as higher investments in business building initiatives and higher travel and entertainment costs in 2010, partially offset by lower postage and telephone-related costs and a charge of $63 million in 2009 for certain property exits. Other, net expenses in 2009 decreased $708 million or 23 percent to $2.4 billion compared to 2008, reflecting the full


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AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW
 
 
year of settlement payments from MasterCard in 2009 versus two quarters in 2008, a $180 million third quarter benefit related to the accounting for a net investment in the Company’s consolidated foreign subsidiaries (as discussed further in Business Segment Results — Corporate & Other below), a $59 million benefit in the second quarter of 2009 from the completion of certain account reconciliations related to prior periods, and lower travel and entertainment and other expenses due to the Company’s reengineering activities. These were partially offset by a $9 million favorable impact in the fourth quarter of 2008 related to fair value hedge ineffectiveness.
 
Income Taxes
The effective tax rate was 32 percent in 2010 compared to 25 percent in 2009 and 20 percent in 2008. The tax rates in all years reflect the level of pretax income in relation to recurring permanent tax benefits.
 
Discontinued Operations
Loss from discontinued operations, net of tax, was nil, $7 million and $172 million in 2010, 2009 and 2008, respectively. Loss from discontinued operations, net of tax, primarily reflected AEIDC and AEB results from operations, including AEIDC’s $15 million ($10 million after-tax) and $275 million ($179 million after-tax) of losses related to mark-to-market adjustments and sales within the AEIDC investment portfolio in 2009 and 2008, respectively.
 
CASH FLOWS
Cash Flows from Operating Activities
Cash flows from operating activities primarily include net income adjusted for (i) non-cash items included in net income, including the provision for losses, depreciation and amortization, deferred taxes, and stock-based compensation 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 various payments.
For the year ended December 31, 2010, net cash provided by operating activities of $9.3 billion increased $3.0 billion compared to $6.3 billion in 2009. The increase was primarily due to higher net income in 2010, increases in non-cash expenses for deferred taxes, acquisition costs and increases in accounts payable and other liabilities in 2010, partially offset by lower provisions for losses and an increase in other assets in 2010.
For the year ended December 31, 2009, net cash provided by operating activities of $6.3 billion decreased $1.5 billion compared to $7.8 billion in 2008. The decrease was primarily due to a decrease in deferred taxes, acquisition costs and other, fluctuations in the Company’s other receivables, accounts payable and other liabilities, as well as a reduction in income from continuing operations, partially offset by changes in other assets.
 
Cash Flows from Investing Activities
The Company’s investing activities primarily include funding cardmember loans and receivables, securitizations of cardmember loans and receivables, and the Company’s available-for-sale investment portfolio.
For the year ended December 31, 2010, net cash used in investing activities of $1.2 billion decreased $5.6 billion compared to net cash used in investing activities of $6.8 billion in 2009, primarily due to higher maturity and redemption of investments and lower purchases of investments, partially offset by increases in cardmember loans and receivables.
For the year ended December 31, 2009, net cash used in investing activities was $6.8 billion, compared to net cash provided by investing activities of $7.6 billion in 2008. The year-over-year change was primarily due to lower proceeds from cardmember loan securitizations, decreased maturities and redemptions of investments, and an increase in restricted cash required for related securitization activities.
 
Cash Flows from Financing Activities
The Company’s financing activities primarily include issuing and repaying debt, taking customer deposits, paying dividends and repurchasing its common and preferred shares.
For the year ended December 31, 2010, net cash used in financing activities of $8.1 billion increased $3.5 billion compared to $4.6 billion in 2009, due to a reduced level of growth in customer deposits during 2010 as compared to 2009 and an increase in principal payments of long-term debt, partially offset by a net increase in short-term borrowings in 2010 and the repayment of preferred shares in 2009.
For the year ended December 31, 2009, net cash used in financing activities of $4.6 billion decreased $5.8 billion compared to $10.4 billion in 2008, primarily due to an increase in customer deposits in 2009 and a reduction in cash used in financing activities attributable to discontinued operations from 2008 to 2009.


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AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW
 
 
CERTAIN LEGISLATIVE, REGULATORY AND OTHER DEVELOPMENTS
As a participant in the financial services industry, the Company is subject to a wide array of regulations applicable to its businesses. The Company, as a bank holding company and a financial holding company, is subject to the supervision of the Federal Reserve. As such, the Company is subject to the Federal Reserve’s regulations and policies, including its regulatory capital requirements. In addition, the extreme disruptions in the capital markets that commenced in mid-2007 and the resulting instability and failure of numerous financial institutions have led to a number of changes in the financial services industry, including significant additional regulation and the formation of additional regulatory bodies. The Company’s conversion to a bank holding company in the fourth quarter of 2008 has increased the scope of its regulatory oversight and its compliance program. In addition, although the long-term impact on the Company of much of the recent and pending legislative and regulatory initiatives remains uncertain, the Company expects that compliance requirements and expenditures will continue to rise for financial services firms, including the Company, as the legislation and rules become effective over the course of the next several years.
 
The CARD Act
In May 2009, the U.S. Congress passed, and the President of the United States signed into law, legislation, known as the CARD Act, to fundamentally reform credit card billing practices, pricing and disclosure requirements. This legislation accelerated the effective date and expanded the scope of amendments to the rules regarding Unfair or Deceptive Acts or Practices (UDAP) and Truth in Lending Act that restrict certain credit and charge card practices and require expanded disclosures to consumers, which were adopted in December 2008 by federal bank regulators in the United States. Together, the legislation and the regulatory amendments include, among other matters, rules relating to the imposition by card issuers of interest rate increases on outstanding balances and the allocation of payments in respect of outstanding balances with different interest rates. Certain other provisions of the CARD Act require penalty fees to be reasonable and proportional in relation to the circumstances for which such fees are levied and require issuers to evaluate past interest rate increases twice per year to determine whether it is appropriate to reduce such increases.
The Company has made changes to its product terms and practices that are designed to mitigate the impact on Company revenue of the changes required by the CARD Act and the regulatory amendments. These changes include instituting product-specific increases in pricing on purchases and cash advances, modifying the criteria pursuant to which the penalty rate of interest is imposed on a cardmember and assessing late fees on certain charge products at an earlier date than previously assessed. Although the Company believes its actions to mitigate the impact of the CARD Act have, to date, been largely effective (as evidenced in part by the net interest yield for its U.S. lending portfolio), the impacts of certain other provisions of the CARD Act are still subject to some uncertainty (such as the requirement to periodically reevaluate APR increases). Accordingly, in the event the actions undertaken by the Company to date to offset the impact of the new legislation and regulations are not ultimately effective, they could have a material adverse effect on the Company’s results of operations, including its revenue and net income.
 
Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Reform Act”)
In July 2010, President Obama signed into law the Dodd-Frank Reform Act. The Dodd-Frank Reform Act is comprehensive in scope and contains a wide array of provisions intending to govern the practices and oversight of financial institutions and other participants in the financial markets. Among other matters, the law creates a new independent Consumer Financial Protection Bureau, which will regulate consumer credit across the U.S. economy. The Bureau will have 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 Bureau will have examination and enforcement authority with respect to certain federal consumer financial laws for some providers of consumer financial products and services, including the Company and its insured depository institution subsidiaries. The Bureau will be directed to prohibit “unfair, deceptive or abusive” practices, and to ensure that all consumers have access to fair, transparent and competitive markets for consumer financial products and services.
Under the Dodd-Frank Reform Act, the Federal Reserve is authorized to regulate interchange fees paid to banks on debit card and certain general-use prepaid card transactions to ensure that they are “reasonable and proportional” to the cost of processing individual transactions, and to prohibit debit and general-use prepaid card networks and issuers from requiring transactions to be processed on a single payment network. The Company does not offer a debit card linked to a deposit account, but does issue various types of prepaid cards. The Dodd-Frank Reform Act also prohibits credit/debit networks from restricting a merchant from offering discounts or incentives to customers in order to encourage them to use a particular form of payment, or from restricting a merchant from setting certain minimum and maximum transaction amounts for credit cards, as long as any such discounts or incentives or any minimum or maximum transaction amounts do not discriminate among issuers or networks and comply with applicable federal or state disclosure requirements.
The Dodd-Frank Reform Act also authorizes the Federal Reserve to establish heightened capital, leverage and liquidity standards, risk management requirements, concentration limits on credit exposures, mandatory resolution plans (so-called “living wills”) and stress tests for, among others, large bank holding companies, such as the Company, that have greater than


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AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW
 
 
$50 billion in assets. In addition, certain derivative transactions will be required to be centrally cleared, which may create or increase collateral posting requirements for the Company.
Many provisions of the Dodd-Frank Reform Act require the adoption of rules for implementation. In addition, the Dodd-Frank Reform Act mandates multiple studies, which could result in additional legislative or regulatory action. These new rules and studies will be implemented and undertaken over a period of several years. Accordingly, the ultimate consequences of the Dodd-Frank Reform Act and its implementing regulations on the Company’s business, results of operations and financial condition are uncertain at this time.
 
Other Legislative and Regulatory Initiatives
The credit and charge card sector also faces continuing scrutiny in connection with the fees merchants pay to accept cards. Although investigations into the way bankcard network members collectively set the “interchange” (that is, the fee paid by the bankcard merchant acquirer to the card issuing bank in “four party” payment networks, like Visa and MasterCard) had largely been a subject of regulators outside the United States, legislation was previously introduced in Congress designed to give merchants antitrust immunity to negotiate interchange collectively with card networks and to regulate certain card network practices. Although, unlike the Visa and MasterCard networks, the American Express network does not collectively set fees, antitrust actions and government regulation relating to merchant pricing could ultimately affect all networks.
In addition to the provisions of the Dodd-Frank Reform Act regarding merchants’ ability to offer discounts or incentives to encourage customers’ use of a particular form of payment, a number of U.S. states are also considering legislation that would prohibit card networks from imposing conditions, restrictions or penalties on a merchant if the merchant, among other things, (i) provides a discount to a customer for using one form of payment versus another or one type of credit or charge card versus another, (ii) imposes a minimum dollar requirement on customers with respect to the use of credit or charge cards or (iii) chooses to accept credit and charge cards at some of its locations but not at others. Such legislation has recently been enacted in Vermont, and similar legislation has been introduced in other states.
Also, other countries in which the Company operates have been considering and in some cases adopting similar legislation and rules that would impose changes on certain practices of card issuers and bankcard networks.
Any or all of the above changes to the legal and regulatory environment in which the Company operates could have a material adverse effect on the Company’s results of operations.
Refer to “Consolidated Capital Resources and Liquidity” for a discussion of the series of international capital and liquidity standards published by the Basel Committee on Banking Supervision.
 
CONSOLIDATED CAPITAL RESOURCES AND LIQUIDITY
The Company’s 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 its assets and meet operating requirements; and
 
  Liquidity programs that enable the Company to continuously meet expected future financing obligations and business requirements, even in the event it is unable to raise new funds under its regular funding programs.
 
CAPITAL STRATEGY
The Company’s objective is to retain sufficient levels of capital generated through earnings and other sources to maintain a solid equity capital base and to provide flexibility to satisfy future business growth. The Company believes capital allocated to growing businesses with a return on risk-adjusted equity in excess of its costs will generate shareholder value.
The level and composition of the Company’s consolidated capital position are determined through the Company’s internal capital adequacy assessment process (ICAAP), which reflects its business activities, as well as marketplace conditions and credit rating agency requirements. They are also influenced by subsidiary capital requirements. The Company, as a bank holding company, is also subject to regulatory requirements administered by the U.S. federal banking agencies. The Federal Reserve has established specific capital adequacy guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items.
The Company currently calculates and reports its capital ratios under the measurement standards commonly referred to as Basel I. In June 2004, the Basel Committee published new international guidelines for determining regulatory capital (Basel II). In December 2007, the U.S. bank regulatory agencies jointly adopted a final rule based on Basel II.
The Dodd-Frank Reform Act and a series of international capital and liquidity standards known as Basel III published by the Basel Committee on Banking Supervision (commonly referred to as Basel) will in the future change these current quantitative measures. In general, these changes will involve, for the U.S. banking industry as a whole, a reduction in the types of instruments deemed to be capital along with an increase in the amount of capital that assets, liabilities and certain off-balance sheet items require. These changes will generally serve to reduce reported capital ratios compared to current capital guidelines. The specific U.S. guidelines supporting the new standards and the proposed Basel III capital standards have not been finalized, but are generally expected to be issued within the next 12 months. In addition to these measurement changes, international and United States banking regulators could increase the ratio levels at which banks would be deemed to be “well capitalized”.


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AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW
 
 
The following table presents the regulatory risk-based capital ratios and leverage ratio for the Company and its significant banking subsidiaries, as well as additional ratios widely utilized in the market place, as of the fourth quarter of 2010:
 
                 
   
    Well-
       
    Capitalized
       
    Ratio     Actual  
 
Risk-Based Capital
               
Tier 1
    6 %        
American Express Company
            11.1 %
Centurion Bank
            18.3 %
FSB
            16.3 %
Total
    10 %        
American Express Company
            13.1 %
Centurion Bank
            19.5 %
FSB(a)
            18.8 %
Tier 1 Leverage
    5 %        
American Express Company
            9.3 %
Centurion Bank
            19.4 %
FSB
            16.1 %
Tier 1 Common Risk-Based
               
American Express Company
            11.1 %
Common Equity to Risk-
Weighted Assets
               
American Express Company
            13.7 %
Tangible Common Equity to
Risk-Weighted Assets
               
American Express Company
            10.7 %
 
 
 
(a) Refer to Note 23 to the Consolidated Financial Statements for further discussion of FSB’s Total capital ratio.
 
On December 16, 2010, the Basel Committee on Banking Supervision issued the Basel III rules text, which presents details of global regulatory standards on bank capital adequacy and liquidity agreed to by Governors and Heads of Supervision, and endorsed by the G20 Leaders at their November 2010 summit. Basel III, when implemented by the U.S. banking agencies and fully phased-in, will require bank holding companies and their bank subsidiaries to maintain substantially more capital, with a greater emphasis on common equity. While final implementation of the rules related to capital ratios will be determined by the Federal Reserve, the Company estimates that had the new rules been in place during the fourth quarter of 2010, the reported Tier 1 risk-based capital and Tier 1 common risk-based ratios would decline by approximately 50 basis points. In addition, the impact of the new rules on the reported Tier 1 leverage ratio would be a decline of approximately 150 basis points.
 
The following provides definitions for the Company’s regulatory risk-based capital ratios and leverage ratio, all of 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. Risk-weighted assets as of December 31, 2010 were $118.3 billion.
 
Tier 1 Risk-Based Capital Ratio — The Tier 1 capital ratio is calculated as Tier 1 capital divided by risk-weighted assets. Tier 1 capital is the sum of common shareholders’ equity, certain perpetual preferred stock (not applicable to the Company), and noncontrolling interests in consolidated subsidiaries, adjusted for ineligible goodwill and intangible 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. Tier 1 capital as of December 31, 2010 was $13.1 billion. This ratio is commonly used by regulatory agencies to assess a financial institution’s financial strength and is the primary form of capital used to absorb losses beyond current loss accrual estimates.
 
Total Risk-Based Capital Ratio — The total risk-based capital ratio is 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 45 percent of the unrealized gains on equity securities, plus a $750 million subordinated hybrid security, for which the Company received approval from the Federal Reserve Board for treatment as Tier 2 capital. Tier 2 capital as of December 31, 2010 was $2.4 billion.
 
Tier 1 Leverage Ratio — The Tier 1 leverage ratio is calculated by dividing Tier 1 capital by the Company’s average total consolidated assets for the most recent quarter. Average consolidated assets as of December 31, 2010 were $141.3 billion.
 
The following provides definitions for capital ratios widely used in the marketplace, although they may be calculated differently by different companies.
 
Tier 1 Common Risk-Based Capital Ratio — The Tier 1 common risk-based capital ratio is calculated as Tier 1 common capital divided by risk weighted assets. As of December 31, 2010, the Tier 1 common capital was $13.1 billion and is calculated as Tier 1 capital less (a) certain noncontrolling interests (applicable but immaterial for the Company), (b) qualifying perpetual preferred stock and (c) trust preferred securities. Items (b) and (c) are not applicable for the Company. While this was not one of the required risk-based capital ratios for regulatory reporting purposes, it was submitted to the Federal Reserve on January 7, 2011 as part of its 2011 Capital Plan Review.
 
Common Equity and Tangible Common Equity to Risk-Weighted Assets Ratios — Common equity equals the Company’s shareholders’ equity of $16.2 billion as of December 31, 2010, and tangible common equity equals common equity, less goodwill and other intangibles of $3.6 billion. Management believes presenting the ratio of tangible common equity to risk-weighted assets is a useful measure of evaluating the strength of the Company’s capital position.


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AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW
 
 
The Company seeks to maintain capital levels and ratios in excess of the minimum regulatory requirements; failure to maintain minimum capital levels could affect the Company’s status as a financial holding company and cause the respective regulatory agencies to take actions that could limit the Company’s business operations.
The Company’s primary source of equity capital has been through 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 growth in its capital requirements. To the extent capital has exceeded business, regulatory and rating agency requirements, the Company has returned excess capital to shareholders through its regular common dividend and share repurchase program.
The Company maintains certain flexibility to shift capital across its businesses as appropriate. For example, the Company 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 for American Express’ Parent Company (Parent Company).
 
U.S. DEPARTMENT OF TREASURY CAPITAL PURCHASE PROGRAM
On January 9, 2009, under the United States Department of the Treasury (Treasury Department) Capital Purchase Program (CPP), the Company issued to the Treasury Department for aggregate proceeds of $3.39 billion: (1) 3.39 million shares of Fixed Rate (5 percent) Cumulative Perpetual Preferred Shares, Series A, and (2) a ten-year warrant (the Warrant) for the Treasury Department to purchase up to 24 million common shares at an exercise price of $20.95 per share. The Company repurchased the Preferred Shares from the Treasury Department at par on June 17, 2009, and repurchased the Warrant for $340 million on July 29, 2009. Refer to Note 14 to the Consolidated Financial Statements for further discussion of this program.
 
SHARE REPURCHASES AND DIVIDENDS
The Company has a share repurchase program to return excess capital to shareholders. These share repurchases reduce shares outstanding and offset, in whole or part, the issuance of new shares as part of employee compensation plans.
During the fourth quarter of 2010, the Company repurchased 14 million shares through the share repurchase program. On January 7, 2011 the Company submitted its Comprehensive Capital Plan (CCP) to the Federal Reserve requesting approval to proceed with additional share repurchases in 2011. The CCP includes an analysis of performance and capital availability under certain adverse economic assumptions. The CCP was submitted to the Federal Reserve pursuant to the Federal Reserve’s guidance on dividends and capital distributions, most recently updated in November 2010, and discussed further below in “Regulatory Matters and Capital Adequacy — Bank Holding Company Dividend Restrictions”. The Company expects a response from the Federal Reserve by the end of the first quarter. The Company cannot predict whether the Federal Reserve will approve additional share repurchases. No additional shares are expected to be repurchased prior to its response. No shares were repurchased during 2009 as share repurchases were suspended during the first quarter of 2008 in light of the challenging global economic environment and limitations while under the CPP.
On a cumulative basis, since 1994, the Company has distributed 64 percent of capital generated through share repurchases and dividends.
During 2010, the Company returned $1.5 billion in dividends and share repurchases to shareholders, which represents approximately 30 percent of total capital generated.
 
FUNDING STRATEGY
The Company’s principal funding objective is to maintain broad and well-diversified funding sources to allow it to meet its maturing obligations, cost-effectively finance current and future asset growth in its global businesses as well as to maintain a strong liquidity profile. The diversity of funding sources by type of debt instrument, by maturity and by investor base, among other factors, provides additional insulation from the impact of disruptions in any one type of debt, maturity or investor. The mix of the Company’s funding in any period will seek to achieve cost-efficiency consistent with both maintaining diversified sources and achieving its liquidity objectives. The Company’s funding strategy and activities are integrated into its asset-liability management activities. The Company has in place a Funding Policy covering American Express Company and all of its subsidiaries.
The Company’s proprietary card businesses are the primary asset-generating businesses, with significant assets in both domestic and international cardmember receivable and lending activities. The Company’s financing needs are in large part a consequence of its proprietary card-issuing businesses and the maintenance of a liquidity position to support all of its business activities, such as merchant payments. The Company generally pays merchants for card transactions prior to reimbursement by cardmembers and therefore funds the merchant payments during the period cardmember loans and receivables are outstanding. The Company also has additional financing needs associated with general corporate purposes, including acquisition activities.


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AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW
 
 
FUNDING PROGRAMS AND ACTIVITIES
The Company meets its funding needs through a variety of sources, including debt instruments such as direct and third-party distributed deposits, senior unsecured debentures, asset securitizations, securitized borrowings through a conduit facility and long-term committed bank borrowing facilities in certain non-U.S. regions.
The following discussion includes information on both a GAAP and managed basis. The managed basis presentation includes debt issued in connection with the Company’s lending securitization activities, which were off-balance sheet. The adoption of new GAAP effective on January 1, 2010 resulted in accounting for both the Company’s securitized and non-securitized cardmember loans in the Consolidated Financial Statements. As a result, the Company’s 2010 GAAP presentations and managed basis presentations prior to 2010 are generally comparable. Prior period Consolidated Financial Statements have not been revised for this accounting change. For a discussion of managed basis and management’s rationale for such presentation, refer to “U.S. Card Services — Cardmember Loan Portfolio Presentation” below.
 
The Company had the following consolidated debt, on both a GAAP and managed basis, and customer deposits outstanding as of December 31:
 
                 
   
(Billions)   2010     2009  
 
                                 
Short-term borrowings
  $ 3.4     $ 2.3  
Long-term debt
    66.4       52.3  
                 
Total debt (GAAP basis)
    69.8       54.6  
Off-balance sheet securitizations
          28.3  
                 
Total debt (managed basis)
    69.8       82.9  
Customer deposits
    29.7       26.3  
                 
Total debt (managed) and customer deposits
  $ 99.5     $ 109.2  
 
 
 
The Company seeks to raise funds to meet all of its financing needs, including seasonal and other working capital needs, while also seeking to maintain sufficient cash and readily-marketable securities that are easily convertible to cash, in order to meet the scheduled maturities of all long-term borrowings on a consolidated basis for a 12-month period. The Company has $8.9 billion of unsecured long-term debt, $5.3 billion of asset securitizations and $5.6 billion of long-term deposits that will mature during 2011. See “Liquidity Management” section for more details.
The Company’s 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 to support the Company’s access to cost effective unsecured funding as part of its overall financing programs. Ratings for the Company’s ABS activities are evaluated separately.
 
                 
 
Credit
      Short-Term
  Long-Term
   
Agency   Entity Rated   Ratings   Ratings   Outlook
 
                                 
DBRS
  All rated entities   R-1   A   Stable
        (middle)   (high)    
Fitch
  All rated entities   F1   A+   Stable
Moody’s
  TRS and rated operating subsidiaries   Prime-1   A2   Negative(a)
Moody’s
  American Express Company   Prime-2   A3   Negative
S&P
  All rated entities   A-2   BBB+   Stable
 
 
 
(a) In November 2010, Moody’s revised its ratings outlook for TRS and rated operating subsidiaries from “Stable” to “Negative”.
 
Downgrades in the Company’s unsecured debt or asset securitization program’s securities ratings could result in higher interest expense on the Company’s unsecured debt and asset securitizations, as well as higher fees related to borrowings under its unused lines of credit. In addition to increased funding costs, declines in credit ratings could reduce the Company’s borrowing capacity in the unsecured debt and asset securitization capital markets. The Company believes the change in its funding mix, which now includes an increasing proportion of FDIC-insured (as defined below) U.S. retail deposits, should reduce the impact that credit rating downgrades would have on the Company’s funding capacity and costs. Downgrades to certain of the Company’s unsecured debt ratings that have occurred over the last several years have not caused a permanent increase in the Company’s borrowing costs or a reduction in its borrowing capacity.
 
SHORT-TERM FUNDING PROGRAMS
Short-term borrowings, such as commercial paper, are defined as any debt or time deposit with an original maturity of 12 months or less. The Company’s short-term funding programs are used primarily to meet working capital needs, such as managing seasonal variations in receivables balances. Short-term borrowings were fairly stable throughout 2010; however, the Company did reflect an increase in short-term borrowings in November and December 2010, due to the reclassification of certain book overdraft balances (i.e., primarily due to timing differences arising in the ordinary course of business). The amount of short-term borrowings issued in the future will depend on the Company’s funding strategy, its needs and market conditions.


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AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW
 
 
The Company had the following short-term borrowings outstanding as of December 31:
 
                 
   
(Billions)   2010     2009  
 
Credco commercial paper
  $ 0.6     $ 1.0  
Other short-term borrowings
    2.8       1.3  
                 
Total
  $ 3.4     $ 2.3  
 
 
 
Refer to Note 10 to the Consolidated Financial Statements for further description of these borrowings.
 
The Company’s short-term borrowings as a percentage of total debt as of December 31 were as follows:
 
                 
   
    2010     2009  
 
Short-term borrowings as a percentage of total
debt (GAAP basis)
    4.9 %     4.3 %
 
 
 
As of December 31, 2010, the Company had $0.6 billion of commercial paper outstanding. Average commercial paper outstanding was $0.9 billion and $2.0 billion in 2010 and 2009, respectively.
American Express Credit Corporation’s (Credco) total back-up liquidity coverage, which includes its undrawn committed bank facilities, was in excess of 100 percent of its net short-term borrowings as of December 31, 2010 and 2009. The undrawn committed bank credit facilities were $5.7 billion as of December 31, 2010.
 
DEPOSIT PROGRAMS
The Company offers deposits within its American Express Centurion Bank and American Express Bank, FSB subsidiaries (together, the “Banks”). These funds are currently insured up to $250,000 per account through the Federal Deposit Insurance Corporation (FDIC). The Company’s ability to obtain deposit funding and offer competitive interest rates is dependent on the Banks’ capital levels. During the second quarter of 2009, the Company, through FSB, launched a direct deposit-taking program, Personal Savings from American Express, to supplement its distribution of deposit products through third-party distribution channels. This program makes FDIC-insured certificates of deposit (CDs) and high-yield savings account products available directly to consumers.
During 2010, within U.S. retail deposits the Company focused on continuing to grow both the number of accounts and the total balances outstanding on savings accounts and CDs that were sourced directly with consumers through Personal Savings from American Express. These accounts and balances grew during the year and financed the maturities of CDs issued through third-party distribution channels.
 
The Company held the following deposits as of December 31, 2010 and 2009:
 
                 
   
(Billions)   2010     2009  
 
U.S. retail deposits:
               
Savings accounts — Direct
  $ 7.7     $ 2.0  
Certificates of deposit:(a)
               
Direct
    1.1       0.3  
Third party
    11.4       14.8  
Sweep accounts — Third party
    8.9       8.5  
Other deposits
    0.6       0.7  
                 
Total customer deposits
  $ 29.7     $ 26.3  
 
 
 
(a) The average remaining maturity and average rate at issuance on the total portfolio of U.S. retail CDs, issued through direct and third-party programs, were 19.2 months and 2.5 percent, respectively.
 
LONG-TERM DEBT PROGRAMS
During 2010, the Company and its subsidiaries issued debt and asset securitizations with maturities ranging from 2 to 5 years. These amounts included approximately $0.9 billion of AAA-rated lending securitization certificates and $2.4 billion of unsecured debt across a variety of maturities and markets. During the year, the Company retained approximately $0.3 billion of subordinated securities, as the pricing and yields for these securities were not attractive compared to other sources of financing available to the Company.
 
The Company’s 2010 offerings are presented as follows:
 
         
   
(Billions)   Amount  
 
American Express Credit Corporation:
       
Fixed Rate Senior Note (2.75% coupon)
  $ 2.0  
Bank Credit Facilities Borrowings(a)
    0.4  
American Express Issuance Trust(b)
       
Floating Rate Senior Notes held by Conduit(c)
    2.5  
American Express Credit Account Master Trust(d)
       
Floating Rate Senior Notes (1-month LIBOR plus 25 basis points)
    0.9  
Floating Rate Subordinated Notes (1-month LIBOR plus 102 basis points on average)
    0.1  
         
Total
  $ 5.9  
 
 
 
(a) Interest accrues at 1-month Australian Bank Bill Swap Bid rate plus 29 basis points.
(b) Issuances from the Charge Trust do not include $0.2 billion of subordinated securities retained by American Express during the year.
(c) The Secured Borrowing Capacity section below provides further details about this issuance.
(d) Issuances from the Lending Trust do not include $0.1 billion of subordinated securities retained by American Express during the year.


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AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW
 
 
ASSET SECURITIZATION PROGRAMS
The Company periodically securitizes cardmember receivables and loans arising from its card business, as the securitization market provides the Company with cost-effective funding. Securitization of cardmember receivables and loans is accomplished through the transfer of those assets to a trust, which in turn issues certificates or notes (securities) collateralized by the transferred assets to third-party investors. The proceeds from issuance are distributed to the Company, through its wholly owned subsidiaries, as consideration for the transferred assets.
The receivables and loans being securitized are reported as owned assets on the Company’s Consolidated Balance Sheets and the related securities issued to third-party investors are reported as long-term debt. Notes 1 and 7 to the Consolidated Financial Statements provide a description of the adoption of new GAAP effective January 1, 2010 and the impact on the Company’s accounting for its securitization activities.
Under the respective terms of the securitization trust agreements, the occurrence of certain events could result in payment of trust expenses, establishment of reserve funds, or in a worst-case scenario, early amortization of investor certificates. As of December 31, 2010, no triggering events have occurred that would have resulted in the funding of reserve accounts or early amortization.
The ability of issuers of asset-backed securities to obtain necessary credit ratings for their issuances has historically been based, in part, on qualification under the FDIC’s safe harbor rule for assets transferred in securitizations. In 2009 and 2010, the FDIC issued a series of changes to its safe harbor rule, with its new final rule for its securitization safe harbor, issued in 2010, requiring issuers to comply with a new set of requirements in order to qualify for the safe harbor. Issuances out of the Lending Trust are grandfathered under the new FDIC final rule. The trust for the Company’s cardmember charge receivable securitization (the Charge Trust) does not satisfy the criteria required to be covered by the FDIC’s new safe harbor rule, nor did it meet the requirements to be covered by the safe harbor rule existing prior to 2009. It was structured and continues to be structured such that the financial assets transferred to the Charge Trust would not be deemed to be property of the originating banks in the event the FDIC is appointed as a receiver or conservator of the originating banks. The Company has received confirmation from Moody’s, S&P and Fitch, which rate issuances from the Charge Trust, that they will continue to rate issuances from the trust in the same manner as they have historically, even though they do not satisfy the requirements to be covered by the FDIC’s safe harbor rule. Nevertheless, one or more of the rating agencies may ultimately conclude that in the absence of compliance with the safe harbor rule, the highest rating a Charge Trust security could receive would be based on the originating bank’s unsecured debt rating. If one or more rating agencies come to this conclusion, it could adversely impact the Company’s capacity and cost of using its Charge Trust as a source of funding for its business.
 
LIQUIDITY MANAGEMENT
The Company’s liquidity objective is to maintain access to a diverse set of cash, readily-marketable securities and contingent sources of liquidity, such that the Company can continuously meet expected future financing obligations and business requirements, even in the event it is unable to raise new funds under its regular funding programs. The Company has in place a Liquidity Risk Policy that sets out the Company’s approach to managing liquidity risk on an enterprise-wide basis.
The Company incurs and accepts liquidity risk arising in the normal course of offering its products and services. The liquidity risks that the Company is exposed to can arise from a variety of sources, and thus its liquidity management strategy includes a variety of parameters, assessments and guidelines, including but not limited to:
 
  Maintaining a diversified set of funding sources (refer to Funding Strategy section for more details);
 
  Maintaining unencumbered liquid assets and off-balance sheet liquidity sources; and
 
  Projecting cash inflows and outflows from a variety of sources and under a variety of scenarios, including contingent liquidity exposures such as unused cardmember lines of credit and collateral requirements for derivative transactions.
 
The Company’s current liquidity target is to have adequate liquidity in the form of excess cash and readily-marketable securities that are easily convertible into cash to satisfy all maturing long-term funding obligations for a 12-month period. In addition to its cash and readily-marketable securities, the Company maintains a variety of contingent liquidity resources, such as access to secured borrowings through its conduit facility and the Federal Reserve discount window as well as committed bank credit facilities.


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AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW
 
 
As of December 31, 2010, the Company’s excess cash and readily-marketable securities available to fund long-term maturities were as follows:
 
         
   
(Billions)   Total  
 
Cash
  $ 20.3 (a)
Readily-marketable securities
    7.1 (b)
         
Cash and readily-marketable securities
    27.4  
Less:
       
Operating cash
    6.5 (c)
Short-term obligations outstanding
    0.6 (d)
         
Cash and readily-marketable securities available to fund maturities
  $ 20.3  
 
 
 
(a) Includes $16.7 billion of cash and cash equivalents and $3.6 billion held in other assets on the Consolidated Balance Sheet for certain forthcoming asset-backed securitization maturities in the first quarter of 2011.
(b) Consists of certain available-for-sale investment securities (U.S. Treasury and agency securities, and government-guaranteed debt) that are considered highly liquid.
(c) Cash on hand for day-to-day operations.
(d) Consists of commercial paper and U.S. retail CDs with original maturities of three and six months.
 
The upcoming approximate maturities of the Company’s long-term unsecured debt, debt issued in connection with asset-backed securitizations and long-term certificates of deposit are as follows:
 
                                 
   
(Billions)   Debt Maturities  
    Unsecured
    Asset-Backed
    Certificates of
       
2011 Quarters Ending:   Debt     Securitizations     Deposit     Total  
 
March 31
  $         —     $            3.2     $           2.0     $ 5.2  
June 30
    1.4       1.5       1.6       4.5  
September 30
    0.6       0.6       0.7       1.9  
December 31
    6.9             1.3       8.2  
                                 
Total
  $ 8.9     $ 5.3     $ 5.6     $ 19.8  
 
 
 
The Company’s financing needs for 2011 are expected to arise from these debt and deposit maturities as well as changes in business needs, including changes in outstanding cardmember loans and receivables as well as acquisition activities.
The Company considers various factors in determining the amount of liquidity it maintains, such as economic and financial market conditions, seasonality in business operations, growth in its businesses, potential acquisitions or dispositions, the cost and availability of alternative liquidity sources, and regulatory and credit rating agency considerations.
The yield the Company receives on its cash and readily-marketable securities is, generally, less than the interest expense on the sources of funding for these balances. Thus, the Company incurs substantial net interest costs on these amounts.
The level of net interest costs will be dependent on the size of its cash and readily-marketable securities holdings, as well as the difference between its cost of funding these amounts and their investment yields.
 
Securitized Borrowing Capacity
During December 2010, the Company entered into a $3 billion, 3-year committed, revolving, secured financing facility sponsored by and with liquidity backup provided by a syndicate of banks. The facility gives the Company the right to sell up to $3 billion face amount of eligible notes issued from the Charge Trust at any time through December 16, 2013. The purchasers’ commitments to fund any unfunded amounts under this facility are subject to the terms and conditions of, among other things, a purchase agreement among certain subsidiaries, the note purchasers and certain other parties. This facility will be used in the ordinary course of business to fund seasonal working capital needs, as well as further enhance the Company’s contingent funding resources. The borrowing cost of the facility includes a fixed facility fee. In addition, the drawn balance incurs a weighted average cost of funds to the participating banks plus 25 basis points. On December 16, 2010, the Company drew $2.5 billion from the facility, which was still outstanding as of December 31, 2010. The Company incurred an interest cost on the drawn amount that was equal to the weighted average cost of funds, which was approximately 1-month LIBOR, plus 25 basis points.
 
Federal Reserve Discount Window
The Banks are insured depository institutions that have the capability of borrowing from the Federal Reserve Bank of San Francisco, subject to the amount of qualifying collateral that they pledge. The Federal Reserve has indicated that both credit and charge card receivables are a form of qualifying collateral for secured borrowing made through the discount window. Whether specific assets will be considered qualifying collateral for secured borrowings made through the discount window, and the amount that may be borrowed against the collateral, remains in the discretion of the Federal Reserve.
The Company had approximately $32.5 billion as of December 31, 2010, in U.S. credit card loans and charge card receivables that could be sold over time through its existing 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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AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW
 
 
Committed Bank Credit Facilities
The Company maintained committed bank credit facilities as of December 31, 2010, as follows:
 
                                         
   
    Parent
          Centurion
             
(Billions)   Company     Credco     Bank     FSB     Total(a)   
 
Committed(b)
  $ 0.8     $ 9.0     $ 0.4     $ 0.4     $ 10.6  
Outstanding
  $     $ 4.1     $     $     $ 4.1  
 
 
 
(a) Does not include the $3.0 billion Secured Borrowing Capacity described above of which $2.5 billion was drawn as of December 31, 2010.
(b) Committed lines were supplied by 32 financial institutions as of year end.
 
The Company’s committed facilities expire as follows:
 
         
   
(Billions)      
 
2011
  $ 3.3  
2012
    7.3  
         
Total
  $ 10.6  
 
 
 
The availability of the credit lines is subject to the Company’s compliance with certain financial covenants, including the maintenance by the Company of consolidated tangible net worth of at least $4.1 billion, the maintenance by Credco of a 1.25 ratio of combined earnings and fixed charges to fixed charges, and the compliance by the Banks with applicable regulatory capital adequacy guidelines. As of December 31, 2010, the Company’s consolidated tangible net worth was approximately $13.1 billion, Credco’s ratio of combined earnings and fixed charges to fixed charges was 1.54 and Centurion Bank and FSB each exceeded their regulatory capital adequacy guidelines. The drawn balance of $4.1 billion as of December 31, 2010 was used to fund the Company’s business activities in the normal course. The remaining capacity of the facilities mainly served to further enhance the Company’s contingent funding resources.
The Company’s committed bank credit facilities do not contain material adverse change clauses, which might otherwise preclude borrowing under the credit facilities. The facilities may not be terminated should there be a change in the Company’s credit rating.
In consideration of all the funding sources described above, the Company believes it would have access to liquidity to satisfy all maturing long-term funding obligations for at least a 12-month period in the event that access to the secured and unsecured fixed income capital markets is completely interrupted for that length of time. These events are not considered likely to occur.
 
Parent Company Funding
Parent Company long-term debt outstanding was $10.3 billion and $10.2 billion as of December 31, 2010 and 2009, respectively.
The Parent Company is authorized to issue commercial paper. This program is supported by a $0.8 billion multi-purpose committed bank credit facility. The credit facility will expire in 2012. There was no Parent Company commercial paper outstanding during 2010 and 2009 and no borrowings have been made under its bank credit facility.
 
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
The Company has identified both on and off-balance sheet transactions, arrangements, obligations and other relationships that may have a material current or future effect on its financial condition, changes in financial condition, results of operations, or liquidity and capital resources.


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AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW
 
 
CONTRACTUAL OBLIGATIONS
The table below identifies transactions that represent contractually committed future obligations of the Company. Purchase obligations include agreements to purchase goods and services that are enforceable and legally binding on the Company and that specify significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction.
                                         
   
    Payments due by year  
                      2016 and
       
(Millions)   2011     2012-2013     2014-2015     thereafter     Total(a)   
 
Long-term debt
  $ 14,263     $ 26,135     $ 14,530     $ 11,601     $ 66,529  
Interest payments on long-term debt(b)
    1,729       2,434       1,449       3,859       9,471  
Other long-term liabilities(c)
    98       33       8       63       202  
Operating lease obligations
    222       379       305       1,071       1,977  
Purchase obligations(d)
    421       97       56       48       622  
                                         
Total
  $ 16,733     $ 29,078     $ 16,348     $ 16,642     $ 78,801  
 
 
 
(a) The above table excludes approximately $1.4 billion of tax liabilities that have been recorded in accordance with GAAP governing the accounting for uncertainty in income taxes as inherent complexities and the number of tax years currently open for examination in multiple jurisdictions do not permit reasonable estimates of payments, if any, to be made over a range of years.
(b) Estimated interest payments were calculated using the effective interest rate in place as of December 31, 2010, and reflects the effect of existing interest rate swaps. Actual cash flows may differ from estimated payments.
(c) As of December 31, 2010, there were no minimum required contributions, and no contributions are currently planned, for the U.S. American Express Retirement Plan. For the U.S. American Express Supplemental Retirement Plan and non-U.S. defined benefit pension and postretirement benefit plans, contributions in 2011 are anticipated to be approximately $69 million, and this amount has been included within other long-term liabilities. Remaining obligations under defined benefit pension and postretirement benefit plans aggregating $633 million have not been included in the table above as the timing of such obligations is not determinable. Additionally, other long-term liabilities do not include $4.5 billion of Membership Rewards liabilities, which are not considered long-term liabilities as cardmembers in good standing can redeem points immediately, without restrictions, and because the timing of point redemption is not determinable.
(d) The purchase obligation amounts represent non-cancelable minimum contractual obligations by period under contracts that were in effect as of December 31, 2010. Termination fees are included in these amounts.
 
The Company also has certain contingent obligations to make payments under contractual agreements entered into as part of the ongoing operation of the Company’s business, primarily with co-brand partners. The contingent obligations under such arrangements were approximately $7.5 billion as of December 31, 2010.
In addition to the contractual obligations noted above, the Company has off-balance sheet arrangements that include guarantees, retained interests in structured investments, unconsolidated variable interest entities and other off-balance sheet arrangements as more fully described below.
 
GUARANTEES
The Company’s principal guarantees are associated with cardmember services to enhance the value of owning an American Express card. As of December 31, 2010, the Company had guarantees totaling approximately $68 billion related to cardmember protection plans, as well as other guarantees in the ordinary course of business that are within the scope of GAAP governing the accounting for guarantees. Refer to Note 13 to the Consolidated Financial Statements for further discussion regarding the Company’s guarantees.
 
CERTAIN OTHER OFF-BALANCE SHEET
ARRANGEMENTS
As of December 31, 2010, the Company had approximately $226 billion of unused credit available to cardmembers as part of established lending product agreements. Total unused credit available to cardmembers does not represent potential future cash requirements, as a significant portion of this unused credit will likely not be drawn. The Company’s charge card products have no pre-set limit and, therefore, are not reflected in unused credit available to cardmembers.
Refer to Note 24 to the Consolidated Financial Statements for discussion regarding the Company’s other off-balance sheet arrangements.


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AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW
 
 
RISK MANAGEMENT
GOVERNANCE
The Audit and Risk Committee of the Board approves the Company’s Enterprise-wide Risk Management Policy and all its subordinate risk policies. The Enterprise-wide Risk Management Policy defines risk management objectives, risk appetite, risk limits and escalation triggers, and establishes the governance structure for managing risk. The Policy focuses on the major risks that are relevant to the Company given its business model — credit risk (individual and institutional), operational risk, funding and liquidity risk, market risk and reputational risk. Internal management committees, including the Enterprise Risk Management Committee (ERMC), chaired by the Company’s Chief Risk Officer, and the Asset-Liability Committee (ALCO), chaired by the Company’s Chief Financial Officer, are responsible for implementing the Policy across the Company. Additionally, in 2010, the Risk Management organization developed a group to independently validate models used to manage the Company’s risk.
 
CREDIT RISK MANAGEMENT PROCESS
Credit risk is defined as loss due to obligor or counterparty default. Credit risks in the Company are divided into two broad categories: individual and institutional. Each has distinct risk management tools and metrics. Business units that create individual or institutional credit risk exposures of significant importance are supported by dedicated risk management teams, each led by a Chief Credit Officer. To preserve independence, Chief Credit Officers for all business units have a solid line reporting relationship to the Company’s Chief Risk Officer.
 
INDIVIDUAL CREDIT RISK
Individual credit risk arises principally from consumer and small business charge cards, credit cards, lines of credit, loans and prepaid products. These portfolios consist of millions of customers across multiple geographies, occupations, industries and levels of net worth. The Company benefits from the high-quality profile of its customers, which is driven by brand, premium customer servicing, product features and risk management capabilities which span underwriting, customer management and collections. Externally, the risk in these portfolios is correlated with broad economic trends, such as unemployment rates, GDP growth, and home values, which can affect customer liquidity.
The business unit leaders and their embedded Chief Credit Officers take the lead in managing this process. These Chief Credit Officers are guided by the Individual Credit Policy Committee which is responsible for implementation and enforcement of the Individual Credit Risk Policy. This policy is further supported by subordinate policies and operating manuals covering decision logic and processes of credit extension, including prospecting, new account approvals, authorizations, line management and collections. The subordinate risk policies and operating manuals are designed to assure consistent application of risk management principles and standardized reporting of asset quality and loss recognition.
Individual credit risk management is supported by sophisticated proprietary scoring and decision-making models that use the most up-to-date proprietary information on prospects and customers, such as spending and payment history, data feeds from credit bureaus and mortgage information. Additional data, such as new commercial variables, were integrated into the Company’s models in the early stages of the recent economic downturn to further mitigate small business risk. The Company has developed data-driven economic decision logic for each customer interaction to better serve its customers.
 
INSTITUTIONAL CREDIT RISK
Institutional credit risk arises principally within the Company’s Global Corporate Card Services, Merchant Services and Network Services, prepaid services, foreign exchange services businesses, and investment activities. Unlike individual credit, institutional credit risk is characterized by a lower loss frequency but higher severity. It is affected both by general economic conditions and by customer-specific events. The absence of large losses in any given year or over several years is not necessarily representative of the level of risk of institutional portfolios, given the infrequency of loss events in such portfolios.
Similar to Individual Credit Risk, business units taking institutional risks are supported by Chief Credit Officers. These officers are guided by the Institutional Risk Management Committee (IRMC) which is responsible for implementation and enforcement of the Policy and for providing guidance to the credit officers of each business unit with substantial institutional credit risk exposures. The committee, along with business unit Chief Credit Officers, make investment decisions in core risk capabilities, ensure proper implementation of the underwriting standards and contractual rights of risk mitigation, monitor risk exposures, and determine risk mitigation actions. The IRMC formally reviews large institutional exposures to ensure compliance with ERMC guidelines and procedures and escalates them to the ERMC as appropriate. At the same time, the IRMC provides guidance to business unit risk teams to optimize risk-adjusted returns on capital. A company-wide risk rating utility and a specialized airline risk group provide risk assessment of institutional obligors.
 
MARKET RISK MANAGEMENT PROCESS
Market risk is the risk to earnings or value resulting from movements in market prices. The Company’s market risk exposure is primarily generated by:
 
  Interest rate risk in its card, insurance and Travelers Cheque businesses, as well as its investment portfolios; and
 
  Foreign exchange risk in its operations outside the United States.


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2010 FINANCIAL REVIEW
 
 
 
  Market Risk limits and escalation triggers within the Market Risk Policy are approved by ALCO and by the ERMC. Market risk is centrally monitored for compliance with policy and limits by the Market Risk Committee, which reports into the ALCO and is chaired by the Chief Market Risk Officer. Market risk management is also guided by policies covering the use of derivative financial instruments, funding and liquidity and investments.
The Company’s market exposures are in large part by-products of the delivery of its products and services. Interest rate risk arises through the funding of cardmember receivables and fixed-rate loans with variable-rate borrowings as well as through the risk to net interest margin from changes in the relationship between benchmark rates such as Prime and LIBOR.
Interest rate exposure within the Company’s charge card and fixed-rate lending products is managed by varying the proportion of total funding provided by short-term and variable-rate debt and deposits compared to fixed-rate debt and deposits. In addition, interest rate swaps are used from time to time to effectively convert fixed-rate debt to variable-rate or to convert variable-rate debt to fixed-rate. The Company may change the mix between variable-rate and fixed-rate funding based on changes in business volumes and mix, among other factors.
The Company does not engage in derivative financial instruments for trading purposes. Refer to Note 12 to the Consolidated Financial Statements for further discussion of the Company’s derivative financial instruments.
The detrimental effect on the Company’s annual pretax earnings of a hypothetical 100 basis point increase in interest rates would be approximately $149 million ($97 million related to the U.S. dollar), based on the 2010 year-end positions. This effect, which is calculated using a static asset liability gapping model, is primarily determined by the volume of variable-rate funding of charge card and fixed-rate lending products for which the interest rate exposure is not managed by derivative financial instruments. As of year end 2010, the percentage of worldwide charge card accounts receivable and loans that were deemed to be fixed rate was 65 percent, or $63.7 billion, with the remaining 35 percent, or $34.3 billion, deemed to be variable rate.
The Company is also subject to market risk from changes in the relationship between the benchmark Prime rate that determines the yield on its variable-rate lending receivables and the benchmark LIBOR rate that determines the effective interest cost on a significant portion of its outstanding debt. Differences in the rate of change of these two indices, commonly referred to as basis risk, would impact the Company’s variable-rate U.S. lending net interest margins because the Company borrows at rates based on LIBOR but lends to its customers based on the Prime rate. The detrimental effect on the Company’s pretax earnings of a hypothetical 10 basis point decrease in the spread between Prime and 1 month LIBOR over the next 12 months is estimated to be $34 million. The Company currently has approximately $34.3 billion of Prime-based, variable-rate U.S. lending receivables that are funded with LIBOR-indexed debt, including asset securitizations.
Foreign exchange risk is generated by cardmember cross-currency charges, foreign subsidiary equity and foreign currency earnings in units outside the United States. The Company’s foreign exchange risk is managed primarily by entering into agreements to buy and sell currencies on a spot basis or by hedging this market exposure to the extent it is economically justified through various means, including the use of derivative financial instruments such as foreign exchange forward and cross-currency swap contracts, which can help “lock in” the value of the Company’s exposure to specific currencies.
As of December 31, 2010 and 2009, foreign currency derivative instruments with total notional amounts of approximately $22 billion and $19 billion, respectively, were outstanding. Derivative hedging activities related to cross-currency charges, balance sheet exposures and foreign currency earnings generally do not qualify for hedge accounting; however, derivative hedging activities related to translation exposure of foreign subsidiary equity generally do.
With respect to cross-currency charges and balance sheet exposures, including related foreign exchange forward contracts outstanding, the effect on the Company’s earnings of a hypothetical 10 percent change in the value of the U.S. dollar would be immaterial as of December 31, 2010. With respect to earnings denominated in foreign currencies, the adverse impact on pretax income of a hypothetical 10 percent strengthening of the U.S. dollar related to anticipated overseas operating results for the next 12 months would be approximately $152 million as of December 31, 2010. With respect to translation exposure of foreign subsidiary equity, including related foreign exchange forward contracts outstanding, a hypothetical 10 percent strengthening in the U.S. dollar would result in an immaterial reduction in equity as of December 31, 2010.
The actual impact of interest rate and foreign exchange rate changes will depend on, among other factors, the timing of rate changes, the extent to which different rates do not move in the same direction or in the same direction to the same degree, and changes in the volume and mix of the Company’s businesses.
 
FUNDING & LIQUIDITY RISK MANAGEMENT
PROCESS
Liquidity risk is defined as the inability of the Company to meet its ongoing financial and business obligations as they become due at a reasonable cost. General principles and the overall framework for managing liquidity risk across the Company are defined in the Liquidity Risk Policy approved by the ALCO and Audit and Risk Committee of the Board. Liquidity risk is centrally managed by the Funding and Liquidity Committee, which reports into the ALCO. The Company’s liquidity objective is to maintain access to a diverse set of cash, readily-marketable securities and contingent sources of liquidity, such that the Company can continuously meet


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AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW
 
 
expected future financing obligations and business requirements, even in the event it is unable to raise new funds under its regular funding programs. The Company balances the trade-offs between maintaining too much liquidity, which can be costly and limit financial flexibility, and having inadequate liquidity, which may result in financial distress during a liquidity event.
Liquidity risk is managed both at an aggregate company level and at the major legal entities in order to ensure that sufficient funding and liquidity resources are available in the amount and in the location needed in a stress event. The Funding and Liquidity Committee reviews the forecasts of the Company’s aggregate and subsidiary cash positions and financing requirements, approves the funding plans designed to satisfy those requirements under normal conditions, establishes guidelines to identify the amount of liquidity resources required and monitors positions and determines any actions to be taken. Liquidity planning also takes into account operating cash flexibilities.
 
OPERATIONAL RISK MANAGEMENT PROCESS
The Company defines operational risk as the risk of not achieving business objectives due to inadequate or failed processes or information systems, human error or the external environment (i.e., natural disasters) including losses due to failures to comply with laws and regulations. Operational risk is inherent in all business activities and can impact an organization through direct or indirect financial loss, brand damage, customer dissatisfaction, or legal and regulatory penalties.
The operational risk governance and the overall framework for managing operational risk across the Company are defined in the Operational Risk Policy approved by the Audit and Risk Committee of the Board of Directors. The Operational Risk Management Committee (ORMC) coordinates and oversees the operational risk mitigation efforts by Lead Operational Risk Officers in the business units and staff groups supported by the control groups.
In order to appropriately measure operational risk, the Company has developed a comprehensive operational risk framework. This framework assesses (i) risk events; (ii) root causes; (iii) impact and (iv) accountability. The impact on the Company is assessed from a financial, brand, regulatory and legal perspective. The operational risk model also assesses the frequency and likelihood that events may occur again so that the appropriate mitigation steps may be taken.
Additionally, the Company uses an operational risk framework to identify, measure, monitor and report inherent and emerging operational risks. This framework, supervised by the ORMC, consists of (a) operational risk event capture, (b) project office to coordinate control enhancements, (c) key risk indicators, and (d) process and entity-level risk self-assessments. The process risk self-assessment methodology is used to facilitate compliance with Section 404 of the Sarbanes-Oxley Act, and is also used for non-financial operational risk self-assessments. During the entity risk self-assessment, senior leaders identify key operational risks in a business unit or staff group and determine the Company’s risk mitigation plans.
Managing operational risk is an important priority for the Company, and projects and investments are underway to increase operational risk management effectiveness, which will benefit both shareholders and customers.
 
REPUTATIONAL RISK MANAGEMENT PROCESS
The Company defines reputational risk as the risk that negative publicity regarding the Company’s products, services, business practices, management, clients and partners, whether true or not, could cause a decline in the customer base, costly litigation, or revenue reductions.
The Company views protecting its reputation as core to its vision of becoming the world’s most respected service brand and fundamental to its long-term success.
General principles and the overall framework for managing reputational risk across the Company are defined in the Reputational Risk Management Policy. The Reputational Risk Management Committee (RRMC) is responsible for implementation and adherence to this policy, and for performing periodic assessment of the Company’s reputation and brand health based on internal and external assessments.
Business leaders across the Company are responsible for ensuring that reputation risk implications of transactions, business activities and management practices are appropriately considered and relevant subject matter experts are engaged as needed.


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AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW
 
 
BUSINESS SEGMENT RESULTS
The Company is a global service company principally engaged in businesses comprising four reportable operating segments: U.S. Card Services (USCS), International Card Services (ICS), Global Commercial Services (GCS) and Global Network & Merchant Services (GNMS).
The Company considers a combination of factors when evaluating the composition of its reportable operating segments, including the results reviewed by the chief operating decision maker, economic characteristics, products and services offered, classes of customers, product distribution channels, geographic considerations (primarily U.S. versus non-U.S.) and regulatory environment considerations. Refer to Note 25 to the Consolidated Financial Statements for additional discussion of products and services by segment.
Results of the business segments essentially treat each segment as a stand-alone business. The management reporting process that derives these results allocates income and expense using various methodologies as described below.
Beginning in the fourth quarter of 2010, the Company completed its conversion to a new general ledger platform. This conversion enabled the Company to streamline its ledger reporting unit structure, resulting in a reconfiguration of intercompany accounts. These changes have the effect of altering intercompany balances among segments, thus altering reported total segment assets. Total segment assets as of December 31, 2010 and 2009 presented below reflect the changes described above. This conversion has no impact on segment results, segment capital or return on segment capital metrics.
Beginning in the first quarter of 2010, the Company made changes to the manner in which it allocates capital and the related interest expense charged to its reportable operating segments. The changes reflect modifications in allocation methodology that the Company believes more accurately reflect the funding and capital characteristics of its segments. The change to interest allocation also impacted the consolidated and segment reported net interest yield on cardmember loans. The segment results and net interest yield on cardmember loans for 2009 and 2008 have been revised for this change.
Beginning in 2009, the Company changed the manner by which it assesses the performance of its reportable operating segments to exclude the impact of its excess liquidity funding levels. Accordingly, the debt, cash and investment balances associated with the Company’s excess liquidity funding and the related net negative interest spread are not included within the reportable operating segment results (primarily USCS and GCS segments) and are reported in the Corporate & Other segment for 2010 and 2009. The segment results for 2008 have not been revised for this change.
As discussed more fully below, results are presented on a GAAP basis unless otherwise stated. Refer to “Glossary of Selected Terminology” for the definitions of certain key terms and related information appearing in the tables below.
 
TOTAL REVENUES NET OF INTEREST EXPENSE
The Company allocates discount revenue and certain other revenues among segments using a transfer pricing methodology. Segments earn discount revenue based on the volume of merchant business generated by cardmembers. Within the USCS, ICS and GCS segments, discount revenue reflects the issuer component of the overall discount rate; within the GNMS segment, discount revenue reflects the network and merchant component of the overall discount rate. Total interest income and net card fees are directly attributable to the segment in which they are reported.
 
PROVISIONS FOR LOSSES
The provisions for losses are directly attributable to the segment in which they are reported.
 
EXPENSES
Marketing and promotion expenses are reflected in each segment based on actual expenses incurred, with the exception of brand advertising, which is primarily reflected in the GNMS and USCS segments. Rewards and cardmember services expenses are reflected in each segment based on actual expenses incurred within each segment.
Salaries and employee benefits and other operating expenses, such as professional services, occupancy and equipment and communications, reflect expenses incurred directly within each segment. In addition, expenses related to the Company’s support services, such as technology costs, are allocated to each segment based on support service activities directly attributable to the segment. Other overhead expenses, such as staff group support functions, are allocated to segments based on each segment’s relative level of pretax income. Financing requirements are managed on a consolidated basis. Funding costs are allocated based on segment funding requirements.
 
CAPITAL
Each business segment is allocated capital based on established business model operating requirements, risk measures and regulatory capital requirements. Business model operating requirements include capital needed to support operations and specific balance sheet items. The risk measures include considerations for credit, market and operational risk.
 
INCOME TAXES
Income tax provision (benefit) is allocated to each business segment based on the effective tax rates applicable to various businesses that make up the segment.


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AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW
 
 
U.S. CARD SERVICES
 
SELECTED INCOME STATEMENT DATA GAAP BASIS PRESENTATION
 
                         
   
Years Ended December 31,
                 
(Millions)   2010     2009     2008  
 
Revenues
                       
Discount revenue, net card fees and other
  $ 10,038     $ 9,105     $ 10,345  
                         
Securitization income, net(a)
          400       1,070  
                         
Interest income
    5,390       3,216       4,425  
Interest expense
    812       568       1,641  
                         
Net interest income
    4,578       2,648       2,784  
                         
Total revenues net of interest expense
    14,616       12,153       14,199  
Provisions for losses
    1,591       3,769       4,389  
                         
Total revenues net of interest expense after provisions for losses
    13,025       8,384       9,810  
                         
Expenses
                       
Marketing, promotion, rewards and cardmember services
    5,651       4,266       4,837  
Salaries and employee benefits and other operating expenses
    3,837       3,532       3,630  
                         
Total
    9,488       7,798       8,467  
                         
Pretax segment income
    3,537       586       1,343  
Income tax provision
    1,291       175       365  
                         
Segment income
  $ 2,246     $ 411     $ 978  
 
 
 
(a) In accordance with new GAAP effective January 1, 2010, the Company no longer reports securitization income, net in its income statement.
 
SELECTED STATISTICAL INFORMATION
 
                         
   
As of or for the Years Ended December 31,
                 
(Billions, except percentages
                 
and where indicated)   2010     2009     2008  
 
Card billed business
  $ 378.1     $ 339.4     $ 382.0  
Total cards-in-force (millions)
    39.9       39.5       44.2  
Basic cards-in-force (millions)
    29.7       29.5       32.9  
Average basic cardmember
spending (dollars)*
  $ 12,795     $ 10,957     $ 11,594  
U.S. Consumer Travel:
                       
Travel sales (millions)
  $ 3,116     $ 2,561     $ 3,113  
Travel commissions and fees/sales
    8.2 %     8.4 %     8.2 %
Total segment assets
  $ 91.3     $ 57.6 (f)   $ 77.8 (f)
Segment capital (millions)
  $ 7,411     $ 6,021     $ 4,199  
Return on average segment capital(a)
    35.4 %     8.0 %     22.3 %
Return on average tangible segment capital(a)
    38.1 %     8.7 %     23.6 %
                         
Cardmember receivables:
                       
Total receivables
  $ 19.2     $ 17.8     $ 17.8  
30 days past due as a % of total
    1.5 %     1.8 %     3.7 %
Average receivables
  $ 17.1     $ 16.1     $ 19.2  
Net write-off rate(b)
    1.6 %     3.8 %     3.6 %
                         
Cardmember loans — GAAP basis portfolio:(c)
                       
Total loans
  $ 51.6     $ 23.5     $ 32.7  
30 days past due loans as a % of total
    2.1 %     3.7 %     4.7 %
Average loans
  $ 49.8     $ 25.9     $ 36.7  
Net write-off rate
    5.8 %     9.1 %     5.8 %
Net interest income divided by average loans(d)(e)
    9.2 %     10.2 %     7.6 %
Net interest yield on cardmember loans(d)
    9.4 %     9.4 %     8.4 %
                         
Cardmember loans — Managed basis portfolio:(c)
                       
Total loans
  $ 51.6     $ 52.6     $ 62.4  
30 days past due loans as a % of total
    2.1 %     3.7 %     4.7 %
Average loans
  $ 49.8     $ 54.9     $ 64.0  
Net write-off rate
    5.8 %     8.7 %     5.5 %
Net interest yield on cardmember loans(d)
    9.4 %     10.1 %     9.0 %
 
 
 
 * Proprietary cards only.
(a) Return on average segment capital is calculated by dividing (i) one-year period segment income ($2.2 billion, $411 million and $978 million for 2010, 2009 and 2008, respectively) by (ii) one-year average segment capital ($6.4 billion, $5.1 billion and $4.4 billion for 2010, 2009 and 2008, respectively). Return on average tangible segment capital is computed in the same manner as return on average segment capital except the computation of average tangible segment capital excludes from average segment capital average goodwill and other intangibles of $459 million, $432 million and $243 million at December 31, 2010, 2009 and 2008, respectively. The Company believes that return on average tangible segment capital is a useful measure of the profitability of its business.
(b) In the fourth quarter of 2008, the Company revised the time period in which past due cardmember receivables in USCS are written off to 180 days past due, consistent with applicable bank regulatory guidance. Previously, receivables were written off when 360 days past billing. The net write-offs for 2008 include approximately $341 million resulting from this write-off methodology change, which is not reflected in the table above. If the $341 million had been included in USCS write-offs, the net write-off rate would have been 5.4 percent for 2008.


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AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW
 
 
(c) Refer to “Cardmember Loan Portfolio Presentation” on page 54 for discussion of GAAP and non-GAAP presentation of the Company’s U.S. loan portfolio.
(d) Refer to “Consolidated Results of Operations — Selected Statistical Information”, footnote (f) on page 32.
(e) Refer to “Consolidated Results of Operations — Selected Statistical Information”, footnote (g) on page 32.
(f) Revised from prior disclosure due to the reclassification of certain intercompany accounts.
 
CALCULATION OF NET INTEREST YIELD ON CARDMEMBER LOANS(a)
 
                 
   
Years Ended December 31,
           
(Millions, except percentages or where indicated)   2010     2009  
 
Calculation based on 2010 and 2009 GAAP information:(b)
               
Net interest income
  $ 4,578     $ 2,648  
Average loans (billions)
  $ 49.8     $ 25.9  
Adjusted net interest income
  $ 4,684     $ 2,451  
Adjusted average loans (billions)
  $ 49.8     $ 26.0  
Net interest income divided by average loans(c)
    9.2 %     10.2 %
Net interest yield on cardmember loans
    9.4 %     9.4 %
Calculation based on 2010 and 2009 managed information:(b)
               
Net interest income(b)
  $ 4,578     $ 5,501  
Average loans (billions)
  $ 49.8     $ 54.9  
Adjusted net interest income
  $ 4,684     $ 5,558  
Adjusted average loans (billions)
  $ 49.8     $ 55.0  
Net interest yield on cardmember loans
    9.4 %     10.1 %
 
 
 
(a) Refer to “Consolidated Results of Operations — Calculation of Net Interest Yield on Cardmember Loans”, footnote (a) on page 33.
(b) Refer to “Cardmember Loan Portfolio Presentation” on page 54 for discussion of GAAP and non-GAAP presentation of the Company’s U.S. loan portfolio.
(c) Refer to “Consolidated Results of Operations — Selected Statistical Information”, footnote (g) on page 32.
 
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 2010 — GAAP BASIS
The following discussion of USCS segment results of operations is presented on a GAAP basis.
USCS reported segment income of $2.2 billion for 2010, a $1.8 billion or greater than 100 percent increase from $411 million in 2009, which decreased $567 million or 58 percent from 2008.
 
Total Revenues Net of Interest Expense
In 2010, USCS total revenues net of interest expense increased $2.5 billion or 20 percent to $14.6 billion due to increases in discount revenue, net card fees and other, and interest income partially offset by increased interest expense.
Discount revenue, net card fees and other of $10.0 billion in 2010 increased $933 million or 10 percent from 2009, primarily due to billed business growth of 11 percent. The growth in billed business was driven by a 17 percent increase in average spending per proprietary basic cards-in-force. This line also reflects higher other commissions and fees, driven by the new GAAP effective January 1, 2010, which led to the inclusion of fees formerly recorded in securitization income, net and greater travel commissions and fees, partially offset by lower net card fees.
Interest income of $5.4 billion in 2010 was $2.2 billion or 68 percent higher than in 2009, principally due to the new GAAP effective January 1, 2010, partially offset by lower yields on cardmember loans.
Interest expense of $812 million in 2010 increased $244 million or 43 percent as compared to a year ago, reflecting higher expense related to the new GAAP effective January 1, 2010, a higher cost of funds and greater average cardmember receivable balances, partially offset by reduced funding requirements due to a reduction in average balances of cardmember loans.
Total revenues net of interest expense of $12.2 billion in 2009 were $2.0 billion or 14 percent lower than 2008 as a result of lower securitization income, net, decreased interest income and lower discount revenue, net card fees and other, partially offset by lower interest expense.
 
Provisions for Losses
Provisions for losses decreased $2.2 billion or 58 percent to $1.6 billion for 2010 compared to 2009, principally reflecting lower reserve requirements driven by improving cardmember loan and charge card credit trends, partially offset by the inclusion in 2010 of write-offs on securitized cardmember loans and a higher charge card provision. The lending net write-off rate decreased to 5.8 percent in 2010 from 9.1 percent in 2009. The charge card net write-off rate decreased to 1.6 percent in 2010 from 3.8 percent in 2009.
Provisions for losses decreased $620 million or 14 percent to $3.8 billion for 2009 compared to 2008 due to lower loan balances and improving credit indicators during the second half of 2009.
 
Expenses
During 2010, USCS expenses increased $1.7 billion or 22 percent to $9.5 billion, due to increased marketing, promotion, rewards and cardmember services expenses, and salaries and employee benefits and total other operating expenses. Expenses in 2010, 2009 and 2008, included $55 million, $12 million and $30 million, respectively, of charges related to reengineering activities primarily related to the Company’s reengineering initiatives in 2010, 2009 and 2008 as previously discussed. Expenses in 2009 of $7.8 billion were $669 million or 8 percent lower than in 2008, due to lower marketing, promotion, rewards and cardmember services expenses and lower salaries and employee benefits and total operating expenses.
Marketing, promotion, rewards and cardmember services expenses increased $1.4 billion or 32 percent in 2010 to $5.7 billion, reflecting increased marketing and promotion expenses due to increased investment spending resulting from better credit and business trends in 2010 and higher rewards expense primarily due to greater rewards-related spending volumes and higher co-brand expense. Rewards expense


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AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW
 
 
growth also reflects the benefit in 2009 of a revised, more restrictive redemption policy for accounts 30 days past due. Marketing, promotion, rewards and cardmember services expenses decreased $571 million or 12 percent in 2009 to $4.3 billion, due to lower rewards costs, reduced marketing and promotion expenses and the Delta-related charge to the Membership Reward balance sheet reserve in the fourth quarter of 2008.
Salaries and employee benefits and other operating expenses of $3.8 billion in 2010 increased $305 million or 9 percent from 2009, primarily reflecting the higher reengineering-related costs, and higher technology development expenditures and other business building investments. Salaries and employee benefits and other operating expenses of $3.5 billion in 2009 decreased $98 million or 3 percent from 2008, reflecting the benefits from reengineering activities, lower net charges associated with these reengineering programs, the favorable impact in 2008 related to fair value hedge ineffectiveness and the costs related to the Delta contract extension in the fourth quarter of 2008.
 
Income Taxes
The effective tax rate was 36 percent for 2010 compared to 30 percent and 27 percent for 2009 and 2008, respectively. The rates for each of these years reflect the benefits from the resolution of certain prior years’ tax items and the relationship of recurring tax benefits to varying levels of pretax income.
 
Cardmember Loan Portfolio Presentation
For periods ended on or prior to December 31, 2009, the Company’s non-securitized cardmember loan and related debt performance information on a GAAP basis was referred to as the “owned” basis presentation. For such periods, the Company also provided information on a non-GAAP “managed” basis which should be read only as a supplement to GAAP information. Unlike the GAAP basis presentation, the managed basis presentation in such periods assumed there had been no off-balance sheet securitizations for the Company’s USCS segment (the Company does not currently securitize its international cardmember loans), resulting in the inclusion of all securitized and non-securitized cardmember loans and related debt in the Company’s performance information.
Under the GAAP basis presentation prior to securitization for the period ended on or prior to December 31, 2009, revenues and expenses from cardmember loans and related debt were reflected in the Company’s income statements in other commissions and fees, net interest income and provisions for losses for cardmember loans. At the time of a securitization transaction, the securitized cardmember loans were removed from the Company’s balance sheet, and the resulting gain on sale was reflected in securitization income, net, as well as a reduction to the provision for losses (credit reserves were no longer recorded for the cardmember loans once sold). Over the life of a securitization transaction, the Company recognized the net cash flow from interest and fee collections on interests sold to investors (the investors’ interests) after deducting interest paid on the investors’ certificates, credit losses, contractual service fees, other expenses and changes in the fair value of the interest-only strip (referred to as “excess spread”). These amounts, in addition to servicing fees and the non-credit components of the gains/(losses) from securitization activities, were reflected in securitization income, net. The Company also recognized interest income over the life of the securitization transaction related to the interest it retained (i.e., the seller’s interest). At the maturity of a securitization transaction, cardmember loans on the balance sheet increased, and the impact of the incremental required loss reserves was recorded in provisions for losses.
Under the managed basis presentation for periods ended on or prior to December 31, 2009, revenues and expenses related to securitized cardmember loans and related debt were reflected in other commissions and fees (included in discount revenue, net card fees and other), interest income, interest expense and provisions for losses. In addition, there was no securitization income, net as this presentation assumed no securitization transactions had occurred.
Historically, the Company included USCS information on a managed basis, as that was the manner in which the Company’s management viewed and managed the business. Management believed that a full picture of trends in the Company’s cardmember loans business could only be derived by evaluating the performance of both securitized and non-securitized cardmember loans, as the presentation of the entire cardmember loan portfolio was more representative of the economics of the aggregate cardmember relationships and ongoing business performance and related trends over time. The managed basis presentation also provided investors a more comprehensive assessment of the information necessary for the Company and investors to evaluate the Company’s market share.
The adoption of new GAAP on January 1, 2010 resulted in accounting for both the Company’s securitized and non-securitized cardmember loans in the Consolidated Financial Statements. As a result, the Company’s 2010 GAAP presentations and managed basis presentations prior to 2010 are generally comparable.


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AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW
 
 
The following table sets forth cardmember loan portfolio financial information for the years ended December 31, 2010, 2009 and 2008. The December 31, 2010 financial information was determined in accordance with the new GAAP effective January 1, 2010. The December 31, 2009 and 2008 information includes the “owned” (GAAP) basis presentation, together with the adjustments for securitization activity to arrive at the “managed” (non-GAAP) basis presentation. For additional information, see “Cardmember Loan Portfolio Presentation” above.
 
U.S. CARD SERVICES
 
SELECTED FINANCIAL INFORMATION MANAGED BASIS PRESENTATION
 
                         
   
Years Ended December 31,
                 
(Millions)   2010     2009     2008  
 
Discount revenue, net card fees and other:
                       
Reported for the period (GAAP)
  $ 10,038     $ 9,105     $ 10,345  
Securitization adjustments
          331       400  
                         
Managed discount revenue, net card fees and other
  $ 10,038     $ 9,436     $ 10,745  
                         
Interest income:
                       
Reported for the period (GAAP)
  $ 5,390     $ 3,216     $ 4,425  
Securitization adjustments
          3,097       3,512  
                         
Managed interest income
  $ 5,390     $ 6,313     $ 7,937  
                         
Securitization income, net:(a)
                       
Reported for the period (GAAP)
  $     $ 400     $ 1,070  
Securitization adjustments
          (400 )     (1,070 )
                         
Managed securitization income, net
  $     $     $  
                         
Interest expense:
                       
Reported for the period (GAAP)
  $ 812     $ 568     $ 1,641  
Securitization adjustments
          244       830  
                         
Managed interest expense
  $ 812     $ 812     $ 2,471  
                         
Provisions for losses:
                       
Reported for the period (GAAP)
  $ 1,591     $ 3,769     $ 4,389  
Securitization adjustments
          2,573 (b)     2,002 (b)
                         
Managed provisions for losses
  $ 1,591     $ 6,342 (b)   $ 6,391 (b)
 
 
 
(a) In accordance with new GAAP effective January 1, 2010, the Company no longer reports securitization income, net in its income statement.
(b) Includes provisions for losses for off-balance sheet cardmember loans based on the same methodology as applied to on-balance sheet cardmember loans, except that any quarterly adjustment to reserve levels for on-balance sheet loans to address external environmental factors was not applied to adjust the provision expense for the securitized portfolio.
 
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 2010 — MANAGED BASIS
The following discussion of USCS is on a managed basis.
Discount revenue, net card fees and other in 2010 increased $602 million or 6 percent to $10.0 billion, reflecting higher billed business volumes and increased travel revenues, partially offset by lower commissions and fees. Discount revenue, net card fees and other in 2009 decreased $1.3 billion or 12 percent to $9.4 billion, due to lower billed business volumes, reduced other commissions and fees, decreased net card fees, lower other revenues and reduced travel commissions and fees.
Interest income in 2010 of $5.4 billion decreased by $923 million or 15 percent, due to a decline in the average loan balance and a lower portfolio yield driven by higher payment rates, lower revolving levels and the CARD Act, partially offset by repricing initiatives during 2009 and 2010. Interest income in 2009 of $6.3 billion decreased by $1.6 billion or 20 percent due to a decline in the average managed lending balance and a lower portfolio yield, offset by the benefits of certain repricing initiatives during 2009.
Interest expense in 2010 remained flat at $812 million, due to an increase in the cost of funds and higher average cardmember receivable balances, offset by reduced funding requirements due to a lower average cardmember loan balance in the managed portfolio. In 2009, interest expense decreased $1.7 billion or 67 percent to $812 million due to a lower market interest rate-driven cost of funds and lower average managed cardmember loans and receivable balances, as well as the movement of liquidity-related interest expense to the Corporate & Other segment.
Provisions for losses decreased $4.8 billion or 75 percent to $1.6 billion in 2010, due to improving cardmember loan and charge card credit performance and a lower average loan balance. The lending net write-off rate was 5.8 percent in 2010 versus 8.7 percent in 2009. Provisions for losses decreased 1 percent in 2009, driven by a lower average loan and receivable balance and improved charge card credit performance, partially offset by a higher lending write-off level versus 2008.
 
INTERNATIONAL CARD SERVICES
 
SELECTED INCOME STATEMENT DATA
 
                         
   
Years Ended December 31,
                 
(Millions)   2010     2009     2008  
 
Revenues
                       
Discount revenue, net card fees and other
  $ 3,685     $ 3,447     $ 3,782  
                         
Interest income
    1,393       1,509       1,720  
Interest expense
    428       427       770  
                         
Net interest income
    965       1,082       950  
                         
Total revenues net of interest expense
    4,650       4,529       4,732  
Provisions for losses
    392       1,211       1,030  
                         
Total revenues net of interest expense after provisions for losses
    4,258       3,318       3,702  
                         
Expenses
                       
Marketing, promotion, rewards and cardmember services
    1,612       1,221       1,453  
Salaries and employee benefits and other operating expenses
    2,008       1,821       2,145  
                         
Total
    3,620       3,042       3,598  
                         
Pretax segment income
    638       276       104  
Income tax provision (benefit)
    72       (56 )     (217 )
                         
Segment income
  $ 566     $ 332     $ 321  
 
 


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AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW
 
 
SELECTED STATISTICAL INFORMATION
 
                         
   
As of or for the Years Ended December 31,
                 
(Billions, except percentages
                 
and where indicated)   2010     2009     2008  
 
Card billed business
  $ 107.9     $ 94.9     $ 106.1  
Total cards-in-force (millions)
    15.0       15.0       16.3  
Basic cards-in-force (millions)
    10.4       10.5       11.4  
Average basic cardmember
spending (dollars)*
  $ 10,366     $ 8,758     $ 9,292  
International Consumer Travel:
                       
Travel sales (millions)
  $ 1,126     $ 985     $ 1,267  
Travel commissions and fees/sales
    8.0 %     8.6 %     8.1 %
Total segment assets
  $ 25.3     $ 23.0 (f)   $ 20.7 (f)
Segment capital (millions)
  $ 2,199     $ 2,262     $ 2,240  
Return on average segment capital(a)
    26.5 %     15.1 %     14.7 %
Return on average tangible segment capital(a)
    36.7 %     20.1 %     19.6 %
                         
Cardmember receivables:
                       
Total receivables
  $ 6.7     $ 5.9     $ 5.6  
90 days past billing as a % of total(b)
    1.0 %     2.1 %     3.1 %
Net loss ratio (as a % of charge volume)(b)(c)
    0.24 %     0.36 %     0.24 %
                         
Cardmember loans:
                       
Total loans
  $ 9.3     $ 9.2     $ 9.5  
30 days past due loans as a % of total
    2.3 %     3.3 %     3.6 %
Average loans
  $ 8.6     $ 8.9     $ 10.9  
Net write-off rate
    4.6 %     6.8 %     4.8 %
Net interest income divided by average loans(d)(e)
    11.2 %     12.2 %     8.7 %
Net interest yield on cardmember loans(d)
    11.1 %     12.2 %     9.4 %
 
 
 
 * Proprietary cards only.
(a) Return on average segment capital is calculated by dividing (i) one-year period segment income ($566 million, $332 million and $321 million for December 31, 2010, 2009 and 2008, respectively) by (ii) one-year average segment capital ($2.1 billion, $2.2 billion and $2.2 billion for December 31, 2010, 2009 and 2008, respectively). Return on average tangible segment capital is computed in the same manner as return on average segment capital except the computation of average tangible segment capital excludes from average segment capital average goodwill and other intangibles of $592 million, $551 million and $544 million as of December 31, 2010, 2009 and 2008, respectively. Management believes that return on average tangible segment capital is a useful measure of the profitability of its business.
(b) Effective January 1, 2010, the Company revised the time period in which past due cardmember receivables in ICS are written off to when they are 180 days past due or earlier, consistent with applicable bank regulatory guidance and the write-off methodology adopted for USCS in the fourth quarter of 2008. Previously, receivables were written off when they were 360 days past billing or earlier. Therefore, the net write-offs for the first quarter of 2010 include net write-offs of approximately $60 million for ICS resulting from this write-off methodology change, which increased the net loss ratio and decreased the 90 days past billing metric for this segment, but did not have a substantial impact on provisions for losses.
(c) Refer to “Consolidated Results of Operations — Selected Statistical Information”, footnote (c) on page 32.
(d) Refer to “Consolidated Results of Operations — Selected Statistical Information”, footnote (f) on page 32.
(e) Refer to “Consolidated Results of Operations — Selected Statistical Information”, footnote (g) on page 32.
(f) Refer to “U.S. Card Services — Selected Statistical Information”, footnote (f) on page 52.
 
CALCULATION OF NET INTEREST YIELD ON CARDMEMBER LOANS(a)
 
                 
   
Years Ended December 31,
           
(Millions, except percentage and where indicated)   2010     2009  
 
Net interest income
  $ 965     $ 1,082  
Average loans (billions)
  $ 8.6     $ 8.9  
Adjusted net interest income
  $ 946     $ 1,087  
Adjusted average loans (billions)
  $ 8.5     $ 8.9  
Net interest income divided by average loans(b)
    11.2 %     12.2 %
Net interest yield on cardmember loans
    11.1 %     12.2 %
 
 
 
(a) Refer to “Consolidated Results of Operations — Calculation of Net Interest Yield on Cardmember Loans”, footnote (a) on page 33.
(b) Refer to “Consolidated Results of Operations — Selected Statistical Information”, footnote (g) on page 32.
 
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 2010
ICS reported segment income of $566 million for 2010, a $234 million or 70 percent increase from $332 million in 2009, which increased $11 million or 3 percent from 2008. The increase in segment income for 2010 is primarily due to an increase in total revenues net of interest expense and a decrease in provisions for losses, partially offset by an increase in expenses. A significant portion of ICS segment income in 2009 and 2008 is attributable to the Company’s internal tax allocation process. See further discussion in the Income Taxes section below.
 
Total Revenues Net of Interest Expense
In 2010, ICS total revenues net of interest expense increased $121 million or 3 percent to $4.7 billion compared to 2009 due to higher discount revenue, net card fees and other, partially offset by lower interest income.
Discount revenue, net card fees, and other increased $238 million or 7 percent to $3.7 billion in 2010 compared to 2009, driven primarily by the higher level of cardmember spending and greater foreign-exchange conversion revenues. The 14 percent increase in billed business in 2010 reflected an 18 percent increase in average spending per proprietary basic cards-in-force, partially offset by a 1 percent decrease in basic cards-in-force. Assuming no changes in foreign currency exchange rates from 2009 to 2010, billed business and average spending per proprietary basic cards-in-force increased 9 percent and 14 percent, respectively; volumes increased across the major geographic regions, including an increase of 13 percent in Latin America, 10 percent in Asia Pacific, and 8 percent in both Canada and Europe2.
 
2   Refer to footnote 1 on page 33 under Consolidated Results of Operations for the Three Years Ended December 31, 2010 relating to changes in foreign exchange rates.


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AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW
 
 
Interest income declined $116 million or 8 percent to $1.4 billion in 2010 compared to 2009, as a lower yield on cardmember loans and a lower average loan balance were partially offset by higher lending card fees.
Interest expense of $428 million in 2010 was flat as compared to 2009, as lower average loan balances offset higher average receivable levels.
Total revenues net of interest expense of $4.5 billion in 2009 were $203 million or 4 percent lower than 2008 due to lower discount revenue, net card fees and other and decreased interest income, partially offset by lower interest expense.
 
Provisions for Losses
Provisions for losses decreased $819 million or 68 percent to $392 million in 2010 compared to 2009, primarily reflecting lower reserve requirements due to improving cardmember loan and charge card credit trends. The charge card net loss ratio (as a percentage of charge volume) was 0.24 percent in 2010 versus 0.36 percent last year. The lending net write-off rate was 4.6 percent in 2010 versus 6.8 percent last year.
Provisions for losses increased $181 million or 18 percent to $1.2 billion in 2009 compared to 2008, primarily reflecting a higher lending reserve level.
 
Expenses
During 2010, ICS expenses increased $578 million or 19 percent to $3.6 billion compared to 2009, due to higher marketing, promotion, rewards and cardmember services and increased salaries and employee benefits and other operating expenses. Expenses in 2010, 2009 and 2008, included $19 million, $4 million and $83 million, respectively, of reengineering costs primarily related to the Company’s reengineering initiatives in 2010, 2009 and 2008 as previously discussed. Expenses in 2009 of $3.0 billion were $556 million or 15 percent lower than 2008, due to lower marketing, promotion, rewards and cardmember services and decreased salaries and employee benefits and other operating expenses.
Marketing, promotion, rewards and cardmember services expenses increased $391 million or 32 percent to $1.6 billion in 2010 compared to 2009, primarily due to higher marketing and promotion expenses and greater volume-related rewards costs. Marketing, promotion, rewards and cardmember services expenses decreased $232 million or 16 percent to $1.2 billion in 2009 compared to 2008, reflecting reduced marketing and promotion expenses through the first nine months of 2009 and lower reward costs.
Salaries and employee benefits and other operating expenses increased $187 million or 10 percent to $2.0 billion in 2010 compared to 2009, reflecting the higher net reengineering costs in 2010, higher technology development expenditures, increased investments in sales-force, closing costs related to the acquisition of Loyalty Partner and other business building investments. Salaries and employee benefits and other operating expenses decreased $324 million or 15 percent to $1.8 billion in 2009 compared to 2008, primarily due to benefits from the Company’s reengineering activities and lower net charges during 2009 related to reengineering initiatives.
 
Income Taxes
The effective tax rate was 11 percent in 2010 versus negative 20 percent in 2009 and negative 209 percent in 2008. The tax rate in 2010 reflects a benefit from the resolution of certain prior years’ tax items. In addition, the tax rates in each of the periods primarily reflect the impact of recurring tax benefits on varying levels of pretax income. This segment reflects the favorable impact of the consolidated tax benefit related to its ongoing funding activities outside the U.S., which is allocated to ICS under the Company’s internal tax allocation process.
 
GLOBAL COMMERCIAL SERVICES
 
SELECTED INCOME STATEMENT DATA
 
                         
   
Years Ended December 31,
                 
(Millions)   2010     2009     2008  
 
Revenues
                       
Discount revenue, net card fees and other
  $ 4,622     $ 4,158     $ 5,082  
                         
Interest income
    7       5       6  
Interest expense
    227       180       471  
                         
Net interest expense
    (220 )     (175 )     (465 )
                         
Total revenues net of interest expense
    4,402       3,983       4,617  
Provisions for losses
    158       177       231  
                         
Total revenues net of interest expense after provisions for losses
    4,244       3,806       4,386  
                         
Expenses
                       
Marketing, promotion, rewards and cardmember services
    442       332       377  
Salaries and employee benefits and other operating expenses
    3,041       2,969       3,395  
                         
Total
    3,483       3,301       3,772  
                         
Pretax segment income
    761       505       614  
Income tax provision
    287       155       160  
                         
Segment income
  $ 474     $ 350     $ 454  
 
 


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AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW
 
 
SELECTED STATISTICAL INFORMATION
 
                         
   
As of or for the Years Ended December 31,
                 
(Billions, except percentages
                 
and where indicated)   2010     2009     2008  
 
Card billed business
  $ 132.8     $ 111.2     $ 129.2  
Total cards-in-force (millions)
    7.1       7.1       7.1  
Basic cards-in-force (millions)
    7.1       7.1       7.1  
Average basic cardmember
spending (dollars)*
  $ 18,927     $ 15,544     $ 18,527  
Global Corporate Travel:
                       
Travel sales
  $ 17.5     $ 14.6     $ 21.0  
Travel commissions and fees/sales
    8.2 %     8.8 %     7.8 %
Total segment assets
  $ 18.9     $ 16.1 (d)   $ 25.2 (d)
Segment capital (millions)
  $ 3,650     $ 3,719     $ 3,611  
Return on average segment capital(a)
    13.2 %     9.7 %     14.1 %
Return on average tangible segment capital(a)
    28.6 %     20.8 %     30.5 %
Cardmember receivables:
                       
Total receivables
  $ 11.3     $ 9.8     $ 9.4  
90 days past billing as a % of total(b)
    0.8 %     1.4 %     2.7 %
Net loss ratio (as a % of charge volume)(b)(c)
    0.11 %     0.19 %     0.13 %
 
 
 
 * Proprietary cards only.
(a) Return on average segment capital is calculated by dividing (i) one-year period segment income ($474 million, $350 million and $454 million for 2010, 2009 and 2008, respectively) by (ii) one-year average segment capital ($3.6 billion, $3.6 billion and $3.2 billion for 2010, 2009 and 2008, respectively). Return on average tangible segment capital is computed in the same manner as return on average segment capital except the computation of average tangible segment capital excludes from average segment capital average goodwill and other intangibles of $1.9 billion, $1.9 billion and $1.7 billion at December 31, 2010, 2009 and 2008, respectively. The Company believes the return on average tangible segment capital is a useful measure of the profitability of its business.
(b) Effective January 1, 2010, the Company revised the time period in which past due cardmember receivables in Global Commercial Services are written off to when they are 180 days past due or earlier, consistent with applicable bank regulatory guidance and the write-off methodology adopted for U.S. Card Services in the fourth quarter of 2008. Previously, receivables were written off when they were 360 days past billing or earlier. Therefore, the net write-offs for the first quarter of 2010 include net write-offs of approximately $48 million for Global Commercial Services resulting from this write-off methodology change, which increased the net loss ratio and decreased the 90 days past billing metric for this segment, but did not have a substantial impact on provisions for losses. The metrics for prior periods have not been revised for this change as it was deemed immaterial.
(c) Refer to “Consolidated Results of Operations — Selected Statistical Information”, footnote(c) on page 32.
(d) Refer to “U.S. Card Services — Selected Statistical Information”, footnote (f) on page 52.
 
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 2010
GCS reported segment income of $474 million for 2010, a $124 million or 35 percent increase from $350 million in 2009, which decreased $104 million or 23 percent from 2008.
 
Total Revenues Net of Interest Expense
In 2010, GCS total revenues net of interest expense increased $419 million or 11 percent to $4.4 billion due to increased discount revenue, net card fees, and other and higher interest income, partially offset by higher interest expense.
Discount revenue, net card fees, and other revenues increased $464 million or 11 percent to $4.6 billion in 2010 primarily driven by higher cardmember spending and greater travel commissions and fees. The 19 percent increase in billed business in 2010 was driven by the 22 percent increase in average spending per proprietary basic cards-in-force. Adjusting for the impact of foreign exchange translation, billed business and average spending per proprietary basic cards-in-force grew 19 percent and 21 percent, respectively3, volume increased 19 percent within the United States, compared to an increase of 18 percent outside the United States3.
Interest income increased $2 million or 40 percent to $7 million in 2010 compared to 2009.
Interest expense increased $47 million or 26 percent to $227 million in 2010 compared to 2009 driven by increased funding requirements due to a higher average receivable balance and a higher cost of funds.
Total revenues net of interest expense of $4.0 billion in 2009 decreased $634 million or 14 percent compared to 2008 due to decreased discount revenue, net card fees, and other and lower interest income, partially offset by lower interest expense.
 
Provisions for Losses
Provisions for losses decreased $19 million or 11 percent to $158 million in 2010 compared to 2009, driven by improved credit performance within the underlying portfolio. The charge card net loss ratio (as a percentage of charge volume) was 0.11 percent in 2010 versus 0.19 percent last year. Provisions for losses decreased $54 million or 23 percent to $177 million in 2009 compared to 2008, reflecting improved credit trends as 2009 progressed.
 
 
 3  Refer to footnote 1 on page 33 under Consolidated Results of Operations for the Three Years Ended December 31, 2010 relating to changes in foreign exchange rates.


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AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW
 
 
Expenses
During 2010, GCS expenses increased $182 million or 6 percent to $3.5 billion, due to higher marketing, promotion, rewards and cardmember services expense and increased salaries and employee benefits and other operating expenses. Expenses in 2010, 2009 and 2008, included $32 million, $101 million and $138 million, respectively, of reengineering costs, primarily reflecting the Company’s reengineering initiatives in 2010, 2009 and 2008 as previously discussed. Expenses in 2009 of $3.3 billion decreased $471 million or 12 percent, reflecting a reduction in salaries and employee benefits and other operating expenses, as well as lower rewards costs, lower net charges associated with reengineering initiatives in 2009, and the Delta-related increase in the Membership Rewards balance sheet reserve in the fourth quarter of 2008.
Marketing, promotion, rewards and cardmember services expenses increased $110 million or 33 percent to $442 million in 2010 compared to 2009, reflecting higher rewards costs and greater marketing and promotion expenses. Marketing, promotion, rewards and cardmember services expenses decreased $45 million or 12 percent to $332 million in 2009 compared to 2008, primarily reflecting lower rewards costs in 2009 and the Delta-related increase in the Membership Rewards balance sheet reserve in the fourth quarter of 2008.
Salaries and employee benefits and other operating expenses increased $72 million or 2 percent to $3.0 billion in 2010 compared to 2009, as higher travel volume-driven personnel costs, greater incentive-based sales-force costs, as well as increased technology development expenditures and other business-building investments were partially offset by the lower reengineering-related costs. Salaries and employee benefits and other operating expenses decreased $426 million or 13 percent to $3.0 billion in 2009 compared to 2008, reflecting the benefits from the Company’s reengineering initiatives, partially offset by lower net charges associated with these programs during 2009.
 
Income Taxes
The effective tax rate was 38 percent in 2010 versus 31 percent in 2009 and 26 percent in 2008. The higher 2010 rate reflects the impact of increasing the valuation allowance against deferred tax assets associated with certain non-U.S. travel operations.
 
GLOBAL NETWORK & MERCHANT
SERVICES
 
SELECTED INCOME STATEMENT DATA
 
                         
   
Years Ended December 31,
                 
(Millions)   2010     2009     2008  
 
Revenues
                       
Discount revenue, net card fees and other
  $ 4,169     $ 3,602     $ 3,863  
                         
Interest income
    4       1        
Interest expense
    (200 )     (177 )     (328 )
                         
Net interest income
    204       178       328  
                         
Total revenues net of interest expense
    4,373       3,780       4,191  
Provisions for losses
    61       135       127  
                         
Total revenues net of interest expense after provisions for losses
    4,312       3,645       4,064  
                         
Expenses
                       
Marketing, promotion, rewards and cardmember services
    755       521       553  
Salaries and employee benefits and other operating expenses
    1,908       1,679       1,932  
                         
Total
    2,663       2,200       2,485  
                         
Pretax segment income
    1,649       1,445       1,579  
Income tax provision
    586       508       529  
                         
Segment income
  $ 1,063     $ 937     $ 1,050  
 
 
 
SELECTED STATISTICAL INFORMATION
 
                         
   
As of or for the Years Ended December 31,
                 
(Billions, except percentages
                 
and where indicated)   2010     2009     2008  
 
Global Card billed business
  $ 713.3     $ 619.8     $ 683.3  
Global Network & Merchant Services:
                       
Total segment assets
  $ 13.6     $ 12.3 (c)   $ 7.2 (c)
Segment capital (millions)
  $ 1,922     $ 1,443     $ 1,238  
Return on average segment capital(a)
    63.9 %     65.7 %     98.4 %
Return on average tangible segment capital(a)
    66.7 %     67.4 %     101.8 %
Global Network Services:(b)
                       
Card billed business
  $ 91.7     $ 71.8     $ 67.4  
Total cards-in-force (millions)
    29.0       26.3       24.8  
 
 
 
(a) Return on average segment capital is calculated by dividing (i) segment income ($1.1 billion, $937 million and $1.1 billion for 2010, 2009 and 2008, respectively) by (ii) average segment capital ($1.7 billion, $1.4 billion and $1.1 billion for 2010, 2009 and 2008, respectively). Return on average tangible segment capital is computed in the same manner as return on average segment capital except the computation of average tangible segment capital excludes from average segment capital average goodwill and other intangibles of $70 million, $36 million and $35 million as of December 31, 2010, 2009 and 2008, respectively. The Company believes the return on average tangible segment capital is a useful measure of the profitability of its business.
(b) For non-proprietary retail co-brand partners, Global Network Services metrics exclude cardmember accounts which have no out-of-store spend activity during the prior 12-month period.
(c) Refer to “U.S. Card Services — Selected Statistical Information”, footnote (f) on page 52.


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AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW
 
 
 
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 2010
GNMS reported segment income of $1.1 billion in 2010, a $126 million or 13 percent increase from $937 million in 2009, which decreased $113 million or 11 percent from 2008.
 
Total Revenues Net of Interest Expense
GNMS total revenues net of interest expense increased $593 million or 16 percent to $4.4 billion in 2010 compared to 2009, due to increased discount revenue, net card fees and other and increased interest expense credit.
Discount revenue, fees and other increased $567 million or 16 percent to $4.2 billion in 2010 compared to 2009, primarily due to an increase in merchant-related revenues, driven by a 15 percent increase in global card billed business, as well as higher volume driven GNS-related revenues.
Interest expense credit increased $23 million or 13 percent to $200 million in 2010 compared to 2009, due to a higher funding-driven interest credit related to internal transfer pricing, which recognizes the merchant services’ accounts payable-related funding benefit.
Total revenues net of interest expense of $3.8 billion in 2009 decreased $411 million or 10 percent compared to 2008 due to decreased discount revenue, net card fees and other and decreased interest expense credit.
 
Provisions for Losses
Provisions for losses decreased $74 million or 55 percent to $61 million in 2010 compared to 2009, primarily due to lower merchant-related debit balances. Provisions for losses in 2009 increased $8 million or 6 percent to $135 million compared to 2008, primarily driven by the higher provisions in GNS.
 
Expenses
During 2010, GNMS expenses increased $463 million or 21 percent to $2.7 billion compared to 2009 due to higher salaries and employee benefits and other operating expenses and an increase in marketing and promotion expenses. Expenses in 2009 of $2.2 billion were $285 million or 11 percent lower than 2008, due to lower salaries and employee benefits and other operating expenses and a decrease in marketing and promotion expenses.
Marketing and promotion expenses increased $234 million or 45 percent to $755 million in 2010 compared to 2009, reflecting higher network, merchant-related and brand marketing investments. Marketing and promotion expenses decreased 6 percent in 2009 to $521 million compared to 2008, reflecting lower brand and merchant-related marketing costs.
Salaries and employee benefits and other operating expenses increased $229 million or 14 percent to $1.9 billion in 2010 compared to 2009, primarily due to greater third party merchant sales-force commissions, higher technology development expenditures, and other business building investments. Salaries and employee benefits and other operating expenses decreased $253 million or 13 percent to $1.7 billion in 2009 compared to 2008, primarily reflecting the benefits from the Company’s reengineering initiatives.
 
Income Taxes
The effective tax rate was 36 percent in 2010, 35 percent in 2009 and 34 percent in 2008.
 
CORPORATE & OTHER
Corporate & Other had net expense of $292 million and net income of $107 million and $68 million in 2010, 2009 and 2008, respectively. Results in 2010, 2009 and 2008 reflected $372 million, $372 million and $186 million of after-tax income related to the MasterCard litigation settlement, respectively, and $172 million of after-tax income for all three years related to the Visa litigation settlement. Reengineering costs after-tax of $2 million, $35 million and $108 million, for 2010, 2009 and 2008, respectively, primarily related to the Company’s reengineering initiatives previously discussed.
Net expense in 2010 reflected higher incentive compensation and benefit reinstatement-related expenses, and various investments in the Global Prepaid business and Enterprise Growth initiatives.
Net income in 2009 reflected $135 million of after-tax income related to the ICBC sale, a $135 million benefit representing the correction of an error related to the accounting for cumulative translation adjustments associated with a net investment in foreign subsidiaries and a $45 million benefit resulting from the change in fair value of certain forward exchange contracts.
Net income in 2008 reflected a $19 million after-tax charge primarily relating to AEB operations retained by the Company in the first quarter of 2008.
 
EXPOSURE TO AIRLINE INDUSTRY
The Company has multiple co-brand relationships and rewards partners, of which relationships with airlines are one of the most important and valuable. Refer to Note 22 to the Consolidated Financial Statements for further discussion of these relationships. Refer also to Note 8 for further discussion of prepaid miles acquired from certain airlines.


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AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW
 
 
OTHER REPORTING MATTERS
 
ACCOUNTING DEVELOPMENTS
See the Recently Issued Accounting Standards section of Note 1 to the Consolidated Financial Statements.
 
GLOSSARY OF SELECTED TERMINOLOGY
Adjusted average loans — Represents average cardmember loans on a GAAP or managed basis, as applicable, in each case excluding the impact of deferred card fees, net of deferred direct acquisition costs of cardmember loans.
Adjusted net interest income — Represents net interest income allocated to the Company’s cardmember loans portfolio on a GAAP or managed basis, as applicable, in each case excluding the impact of card fees on loans and balance transfer fees attributable to the Company’s cardmember loans.
Asset securitizations — Asset securitization involves the transfer and sale of receivables or loans 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 receivables or loans. The trust uses the proceeds from the sale of such securities to pay the purchase price for the underlying receivables or loans.
Average discount rate — This calculation is designed to reflect pricing at merchants accepting general purpose American Express cards. It represents the percentage of billed business (both proprietary and Global Network Services) retained by the Company from merchants it acquires, prior to payments to third parties unrelated to merchant acceptance.
Basic cards-in-force — Proprietary basic consumer cards-in-force includes basic cards issued to the primary account owner and does not include additional supplemental cards issued on that account. Proprietary basic small business and corporate cards-in-force include basic and supplemental cards issued to employee cardmembers. Non-proprietary basic cards-in-force includes all cards that are issued and outstanding under network partnership agreements, except for retail co-brand cardmember accounts which have no out-of-store spend activity during the prior 12-month period.
Billed business — Includes activities (including cash advances) related to proprietary cards, cards issued under network partnership agreements (non-proprietary billed business) and certain insurance fees charged on proprietary cards. In-store spend activity within retail co-brand portfolios in Global Network Services, from which the Company earns no revenue, is not included in non-proprietary billed business. Card billed business is reflected in the United States or outside the United States based on where the cardmember is domiciled.
Capital asset pricing model — Generates an appropriate discount rate using internal and external inputs to value future cash flows based on the time value of money and the price for bearing uncertainty inherent in an investment.
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.
Card acquisition — Primarily represents the issuance of new cards to either new or existing cardmembers through marketing and promotion efforts.
Cardmember — The individual holder of an issued American Express branded charge or credit card.
Cardmember loans — Represents the outstanding amount due from cardmembers for charges made on their American Express credit cards, as well as any interest charges and card-related fees. Cardmember loans also include balances with extended payment terms on certain charge card products and are net of unearned revenue.
Cardmember receivables — Represents the outstanding amount due from cardmembers 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 cardmembers 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 customer’s most recent credit information and spend patterns.
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 charged to merchants with whom the Company has entered into a card acceptance agreement for processing cardmember transactions. The discount fee generally is deducted from the Company’s payment reimbursing the merchant for cardmember purchases. Such amounts are reduced by contra-revenue such as payments to third-party card issuing partners, cash-back reward costs and corporate incentive payments.
Interest expense — Interest expense includes interest incurred primarily to fund cardmember loans, charge card product receivables, general corporate purposes, and liquidity needs, and is recognized as incurred. Interest expense is divided principally into three categories: (i) deposits, which primarily relates to interest expense on deposits taken from customers and institutions, (ii) short-term borrowings, which primarily relates to interest expense on commercial paper, federal funds purchased, bank overdrafts and other short-term borrowings, and (iii) long-term debt, which primarily relates to interest expense on the Company’s long-term debt.
Interest income — Interest income includes (i) interest and fees on loans, (ii) interest and dividends on investment securities and (iii) interest income on deposits with banks and others.
Interest and fees on loans includes interest on loans which is assessed using the average daily balance method for loans owned. These amounts are recognized based upon the principal amount outstanding in accordance with the terms of


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AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW
 
 
the applicable account agreement until the outstanding balance is paid or written-off. Loan fees are deferred and recognized in interest income on a straight-line basis over the 12-month card membership period, net of deferred direct card acquisition costs and a reserve for projected membership cancellation.
Interest and dividends on investment securities primarily relates to the Company’s performing fixed-income securities. Interest income is accrued as earned using the effective interest method, which adjusts the yield for security premiums and discounts, fees and other payments, so that the related investment security recognizes a constant rate of return on the outstanding balance throughout its term. These amounts are recognized until these 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 is 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.
Interest-only strip — Interest-only strips are generated from USCS’ securitization activity and are a form of retained interest held by the Company in the securitization. This financial instrument represents the present value of estimated future positive “excess spread” expected to be generated by the securitized assets over the estimated life of those assets. Excess spread is the net cash flow from interest and fee collections allocated to the third-party investors’ interests in the securitization after deducting the interest paid on the investor certificates, credit losses, contractual servicing fees, and other expenses.
Merchant acquisition — Represents the signing of merchants to accept American Express-branded cards.
Net card fees — Represents the charge card membership fees earned during the period. These fees are recognized as revenue over the covered card membership period (typically one year), net of provision for projected refunds for cancellation of card membership.
Net interest yield on cardmember loans — Net interest yield on cardmember loans is a non-GAAP financial measure that represents the net spread earned on cardmember loans. Net interest yield on cardmember loans is computed by dividing adjusted net interest income by adjusted average loans, computed on an annualized basis. The calculation of net interest yield on cardmember loans includes interest that is deemed uncollectible. For all presentations of net interest yield on cardmember loans, reserves and net write-offs related to uncollectible interest are recorded through provisions for losses — cardmember loans; therefore, such reserves and net write-offs are not included in the net interest yield calculation.
Net loss ratio — Represents the ratio of charge card write-offs consisting of principal (resulting from authorized and unauthorized transactions) and fee components, less recoveries, on cardmember receivables expressed as a percentage of gross amounts billed to cardmembers.
Net write-off rate — Represents the amount of cardmember loans or USCS cardmember receivables written off consisting of principal (resulting from authorized transactions), less recoveries, as a percentage of the average loan balance or USCS average receivables during the period.
Return on average equity — Calculated by dividing one-year period net income by one-year average total shareholders’ equity.
Return on average tangible common equity — Computed in the same manner as ROE except the computation of average tangible common shareholders’ equity excludes from average total shareholders’ equity average goodwill and other intangibles.
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 return on average segment capital except the computation of average tangible segment capital excludes from average segment capital average goodwill and other intangibles.
Risk-weighted assets — Refer to Capital Strategy section for definition.
Securitization income, net — Prior to 2010, includes non-credit provision components of the net gains or losses from securitization activities; changes in fair value of the interest-only strip; excess spread related to securitized cardmember loans; and servicing income, net of related discounts or fees. Excess spread, which is recognized as earned, is the net cash flow from interest and fee collections allocated to the third-party investors’ interests in the securitization after deducting the interest paid on the investor certificates, credit losses, contractual servicing fees and other expenses.
Segment capital — Represents capital allocated to a segment based upon specific business operational needs, risk measures, and regulatory capital requirements.
Stored value and prepaid products — Includes Travelers Cheques and other prepaid products such as gift cheques and cards as well as reloadable Travelers Cheque cards. These products are sold as safe and convenient alternatives to currency for purchasing goods and services.
Tier 1 leverage ratio — Refer to Capital Strategy section for definition.
Tier 1 risk-based capital ratio — Refer to Capital Strategy section for definition.
Total cards-in-force — Represents the number of cards that are issued and outstanding. Proprietary basic consumer cards-in-force includes basic cards issued to the primary account owner and does not include additional supplemental cards issued on that account. Proprietary basic small business and corporate cards-in-force include basic and supplemental cards issued to employee cardmembers. Non-proprietary cards-in-force includes all cards that are issued and


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AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW
 
 
outstanding under network partnership agreements, except for retail co-brand cardmember accounts which have no out-of-store spend activity during the prior 12-month period.
Total risk-based capital ratio — Refer to Capital Strategy section for definition.
Travel sales — Represents the total dollar amount of travel transaction volume for airline, hotel, car rental, and other travel arrangements made for consumers and corporate clients. The Company earns revenue on these transactions by charging a transaction or management fee.
 
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 the Company’s expected business and financial performance, among other matters, contain words such as “believe,” “expect,” “estimate,” “anticipate,” “optimistic,” “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. The Company undertakes 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:
 
  changes in global economic and business conditions, including consumer and business spending, the availability and cost of credit, unemployment and political conditions, all of which may significantly affect spending on the Company’s cards, delinquency rates, loan balances and other aspects of our business and results of operations;
 
  changes in capital and credit market conditions, which may significantly affect the Company’s ability to meet its liquidity needs, 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;
 
  litigation, such as class actions or proceedings brought by governmental and regulatory agencies (including the lawsuit filed against the Company by the U.S. Department of Justice and certain state attorneys general), that could result in (i) the imposition of behavioral remedies against the Company or the Company’s voluntarily making certain changes to its business practices, the effects of which in either case could have a material adverse impact on the Company’s financial performance; (ii) the imposition of substantial monetary damages in private actions against the Company; and/or (iii) damage to the Company’s global reputation and brand;
 
  legal and regulatory developments wherever we do business, including legislative and regulatory reforms in the United States, such as the Dodd-Frank Act’s stricter regulation of large, interconnected financial institutions, increasing regulation of rates charged to merchants and the practices merchants may engage in to discriminate among the payment products they accept, changes in requirements relating to securitization and the establishment of the Bureau of Consumer Financial Protection, which could make fundamental changes to many of our business practices or materially affect our capital requirements, results of operations, ability to pay dividends or repurchase our stock; or actions and potential future actions by the FDIC and credit rating agencies applicable to securitization trusts, which could impact the Company’s ABS program;
 
  changes in the substantial and increasing worldwide competition in the payments industry, including competitive pressures from charge, credit and debit card networks and issuers, as well as evolving alternative payment systems and products, competitive pressure that may impact the prices we charge merchants that accept our Cards and the success of marketing, promotion or rewards programs;
 
  changes in technology or in our ability to protect our intellectual property (such as copyrights, trademarks, patents and controls on access and distribution), and invest in and compete at the leading edge of technological developments across our businesses, including technology and intellectual property of third parties whom we rely on, all of which could materially affect our results of operations;
 
  data breaches and fraudulent activity, which could damage our brand, increase our costs or have regulatory implications, and changes in regulation affecting privacy and data security under federal, state and foreign law, which could result in higher compliance and technology costs to ourselves or our vendors;
 
  changes in our ability to attract or retain qualified personnel in the management and operation of the Company’s business, including any changes that may result from increasing regulatory supervision of compensation practices;
 
  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 Global Network Services or financial institutions that we rely on for routine funding and liquidity, which could materially affect our financial condition or results of operations;


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AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW
 
 
 
  uncertainties associated with business acquisitions, including the ability to realize anticipated business retention, growth and cost savings or effectively integrate the acquired business into our existing operations;
 
  changes affecting the success of our reengineering and other cost control initiatives, which may result in the Company not realizing all or a significant portion of the benefits that we intend;
 
  the actual amount to be spent by the Company on investments in the business, including on marketing, promotion, rewards and cardmember services and certain other operating expenses, which will be based in part on management’s assessment of competitive opportunities and the Company’s performance and the ability to control and manage operating, infrastructure, advertising and promotion expenses as business expands or changes;
 
  the effectiveness of the Company’s risk management policies and procedures, including credit risk relating to consumer debt, liquidity risk in meeting business requirements and operational risks;
 
  changes affecting our ability to accept or maintain deposits due to market demand or regulatory constraints, such as changes in interest rates and regulatory restrictions on our ability to obtain deposit funding or offer competitive interest rates, which could affect our liquidity position and our ability to fund our business; and
 
  factors beyond our control such as fire, power loss, disruptions in telecommunications, severe weather conditions, natural disasters, terrorism, “hackers” or fraud, which could affect 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 Company’s Annual Report on Form 10-K for the year ended December 31, 2010, and the Company’s other reports filed with the SEC.


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AMERICAN EXPRESS COMPANY
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
 
 
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting.
The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP in the United States of America, and includes those policies and procedures that:
 
  Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
 
  Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
 
  Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework.
Based on management’s assessment and those criteria, we conclude that, as of December 31, 2010, the Company’s internal control over financial reporting is effective.
PricewaterhouseCoopers LLP, the Company’s independent registered public accounting firm, has issued an attestation report appearing on the following page on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010.


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AMERICAN EXPRESS COMPANY
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
THE BOARD OF DIRECTORS AND SHAREHOLDERS OF AMERICAN EXPRESS COMPANY:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, cash flows and shareholders’ equity present fairly, in all material respects, the financial position of American Express Company and its subsidiaries at December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 1 to the consolidated financial statements, the Company adopted new guidance in 2010 relating to transfers of financial assets and consolidation of variable interest entities.
A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
-s- Pricewaterhouse Coopers LLP
New York, New York
February 25, 2011


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AMERICAN EXPRESS COMPANY
 
     
CONSOLIDATED FINANCIAL STATEMENTS   PAGE
 
  68
  69
  70
  71
     
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   
  72
  75
  75
  78
  81
  83
  85
  87
  89
  89
  92
  92
  96
  97
  98
  99
  101
  103
  103
Includes further details of:
   
   Other Commissions and Fees
   
   Other Revenues
   
   Marketing, Promotion, Rewards and Cardmember Services
   
   Other, Net Expenses
   
  104
  105
  110
  111
  113
  114
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AMERICAN EXPRESS COMPANY
 
                         
   
Years Ended December 31 (Millions, except per share amounts)   2010     2009     2008  
 
Revenues
                       
Non-interest revenues
                       
Discount revenue
  $ 15,111     $ 13,389     $ 15,025  
Net card fees
    2,102       2,151       2,150  
Travel commissions and fees
    1,779       1,594       2,010  
Other commissions and fees
    2,031       1,778       2,307  
Securitization income, net
          400       1,070  
Other
    1,927       2,087       2,157  
                         
Total non-interest revenues
    22,950       21,399       24,719  
                         
Interest income
                       
Interest and fees on loans
    6,783       4,468       6,159  
Interest and dividends on investment securities
    443       804       771  
Deposits with banks and other
    66       59       271  
                         
Total interest income
    7,292       5,331       7,201  
                         
Interest expense
                       
Deposits
    546       425       454  
Short-term borrowings
    3       37       483  
Long-term debt and other
    1,874       1,745       2,618  
                         
Total interest expense
    2,423       2,207       3,555  
                         
Net interest income
    4,869       3,124       3,646  
                         
Total revenues net of interest expense
    27,819       24,523       28,365  
                         
Provisions for losses
                       
Charge card
    595       857       1,363  
Cardmember loans
    1,527       4,266       4,231  
Other
    85       190       204  
                         
Total provisions for losses
    2,207       5,313       5,798  
                         
Total revenues net of interest expense after provisions for losses
    25,612       19,210       22,567  
                         
Expenses
                       
Marketing, promotion, rewards and cardmember services
    8,644       6,467       7,361  
Salaries and employee benefits
    5,566       5,080       6,090  
Professional services
    2,806       2,408       2,413  
Other, net
    2,632       2,414       3,122  
                         
Total
    19,648       16,369       18,986  
                         
Pretax income from continuing operations
    5,964       2,841       3,581  
Income tax provision
    1,907       704       710  
                         
Income from continuing operations
    4,057       2,137       2,871  
Loss from discontinued operations, net of tax
          (7 )     (172 )
                         
Net income
  $ 4,057     $ 2,130     $ 2,699  
                         
Earnings per Common Share — Basic: (Note 18)
                       
Income from continuing operations attributable to common shareholders(a)
  $ 3.37     $ 1.55     $ 2.47  
Loss from discontinued operations
          (0.01 )     (0.14 )
                         
Net income attributable to common shareholders(a)
  $ 3.37     $ 1.54     $ 2.33  
                         
Earnings per Common Share — Diluted: (Note 18)
                       
Income from continuing operations attributable to common shareholders(a)
  $ 3.35     $ 1.54     $ 2.47  
Loss from discontinued operations
              $ (0.15 )
                         
Net income attributable to common shareholders(a)
  $ 3.35     $ 1.54     $ 2.32  
                         
Average common shares outstanding for earnings per common share:
                       
Basic
    1,188       1,168       1,154  
Diluted
    1,195       1,171       1,156  
 
 
 
(a) Represents income from continuing operations or net income, as applicable, less (i) accelerated preferred dividend accretion of $212 million for the year ended December 31, 2009 due to the repurchase of $3.39 billion of preferred shares issued as part of the Capital Purchase Program (CPP), (ii) preferred share dividends and related accretion of $94 million for the year ended December 31, 2009, and (iii) earnings allocated to participating share awards and other items of $51 million, $22 million and $15 million for the years ended December 31, 2010, 2009 and 2008, respectively.
 
See Notes to Consolidated Financial Statements.


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AMERICAN EXPRESS COMPANY
 
                 
   
December 31 (Millions, except per share data)   2010     2009  
 
Assets
               
                 
Cash and cash equivalents
               
                 
Cash and cash due from banks
  $ 2,498     $ 1,525  
                 
Interest-bearing deposits in other banks (including securities purchased under resale agreements: 2010, $372;
2009, $212)
    13,557       11,010  
                 
Short-term investment securities
    654       4,064  
                 
                 
Total
    16,709       16,599  
                 
Accounts receivable
               
                 
Cardmember receivables (includes gross receivables available to settle obligations of a consolidated
variable interest entity: 2010, $8,192; 2009, $8,314), less reserves: 2010, $386; 2009, $546
    36,880       33,197  
                 
Other receivables, less reserves: 2010, $175; 2009, $109
    3,554       5,007  
                 
Loans
               
                 
Cardmember loans, (includes gross loans available to settle obligations of a consolidated
variable interest entity: 2010, $34,726)(a), less reserves: 2010, $3,646; 2009, $3,268
    57,204       29,504  
                 
Other, less reserves: 2010, $24; 2009, $27
    412       506  
                 
Investment securities
    14,010       24,337  
                 
Premises and equipment — at cost, less accumulated depreciation: 2010, $4,483; 2009, $4,130
    2,905       2,782  
                 
Other assets (includes restricted cash of consolidated variable interest entities: 2010, $3,759; 2009, $1,799)(a)
    15,368       13,213  
                 
                 
Total assets
  $ 147,042     $ 125,145  
                 
                 
Liabilities and Shareholders’ Equity
               
                 
Liabilities
               
                 
Customer deposits
  $ 29,727     $ 26,289  
                 
Travelers Cheques outstanding
    5,618       5,975  
                 
Accounts payable
    9,691       9,063  
                 
Short-term borrowings
    3,414       2,344  
                 
Long-term debt (includes debt issued by consolidated variable interest entities: 2010, $23,341; 2009, $4,970)
    66,416       52,338  
                 
Other liabilities
    15,946       14,730  
                 
                 
Total liabilities
    130,812       110,739  
                 
                 
Commitments and contingencies (Note 24)
               
                 
Shareholders’ Equity
               
                 
Common shares, $0.20 par value, authorized 3.6 billion shares; issued and outstanding 1,197 million shares
as of December 31, 2010 and 1,192 million shares as of December 31, 2009
    238       237  
                 
Additional paid-in capital
    11,937       11,144  
                 
Retained earnings
    4,972       3,737  
                 
Accumulated other comprehensive (loss) income
               
                 
Net unrealized securities gains, net of tax: 2010, $(19); 2009, $(291)
    57       507  
                 
Net unrealized derivatives losses, net of tax: 2010, $4; 2009, $15
    (7 )     (28 )
                 
Foreign currency translation adjustments, net of tax: 2010, $405; 2009, $31
    (503 )     (722 )
                 
Net unrealized pension and other postretirement benefit losses, net of tax: 2010, $226; 2009, $244
    (464 )     (469 )
                 
                 
Total accumulated other comprehensive loss
    (917 )     (712 )
                 
                 
Total shareholders’ equity
    16,230       14,406  
                 
                 
Total liabilities and shareholders’ equity
  $ 147,042     $ 125,145  
 
 
 
(a) The balances as of December 31, 2009 include an undivided, pro-rata interest in an unconsolidated variable interest entity (historically referred to as “seller’s interest”) totaling $8,752, of which $8,033 is included in cardmember loans and $719 is included in other assets. Refer to Note 7 for additional details.
 
See Notes to Consolidated Financial Statements.


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AMERICAN EXPRESS COMPANY
 
                         
   
Years Ended December 31 (Millions)   2010     2009     2008  
 
Cash Flows from Operating Activities
                       
Net income
  $ 4,057     $ 2,130     $ 2,699  
Loss from discontinued operations, net of tax
          7       172  
                         
Income from continuing operations
    4,057       2,137       2,871  
Adjustments to reconcile income from continuing operations to net cash provided by operating activities
                       
Provisions for losses
    2,207       5,313       5,798  
Depreciation and amortization
    917       1,070       712  
Deferred taxes, acquisition costs and other
    1,135       (1,429 )     442  
Stock-based compensation
    287       230       256  
Changes in operating assets and liabilities, net of effects of acquisitions and dispositions:
                       
Other receivables
    (498 )     (730 )     101  
Other assets
    (590 )     526       (2,256 )
Accounts payable and other liabilities
    2,090       (98 )     490  
Travelers Cheques outstanding
    (317 )     (449 )     (770 )
Net cash (used in) provided by operating activities attributable to discontinued operations
          (233 )     129  
                         
Net cash provided by operating activities
    9,288       6,337       7,773  
                         
Cash Flows from Investing Activities
                       
Sale of investments
    2,196       2,930       4,657  
Maturity and redemption of investments
    12,066       2,900       9,620  
Purchase of investments
    (7,804 )     (13,719 )     (14,724 )
Net (increase) decrease in cardmember loans/receivables
    (6,389 )     6,154       5,940  
Proceeds from cardmember loan securitizations
          2,244       9,619  
Maturities of cardmember loan securitizations
          (4,800 )     (4,670 )
Purchase of premises and equipment
    (887 )     (772 )     (977 )
Sale of premises and equipment
    9       50       27  
Acquisitions/Dispositions, net of cash acquired
    (400 )           (4,589 )
Net (increase) decrease in restricted cash
    (20 )     (1,935 )     33  
Net cash provided by investing activities attributable to discontinued operations
          196       2,625  
                         
Net cash (used in) provided by investing activities
    (1,229 )     (6,752 )     7,561  
                         
Cash Flows from Financing Activities
                       
Net increase in customer deposits
    3,406       11,037       358  
Net increase (decrease) in short-term borrowings
    1,056       (6,574 )     (8,693 )
Issuance of long-term debt
    5,918       6,697       19,213  
Principal payments on long-term debt
    (17,670 )     (15,197 )     (13,787 )
Issuance of American Express Series A preferred shares and warrants
          3,389        
Issuance of American Express common shares
    663       614       176  
Repurchase of American Express Series A preferred shares
          (3,389 )      
Repurchase of American Express stock warrants
          (340 )      
Repurchase of American Express common shares
    (590 )           (218 )
Dividends paid
    (867 )     (924 )     (836 )
Net cash provided by (used in) financing activities attributable to discontinued operations
          40       (6,653 )
                         
Net cash used in financing activities
    (8,084 )     (4,647 )     (10,440 )
                         
Effect of exchange rate changes on cash
    135       7       20  
                         
Net increase (decrease) in cash and cash equivalents
    110       (5,055 )     4,914  
Cash and cash equivalents at beginning of year includes cash of discontinued operations: 2010, $0; 2009, $3; 2008, $6,390
    16,599       21,654       16,740  
                         
Cash and cash equivalents at end of year includes cash of discontinued operations: 2010, $0; 2009, $0; 2008, $3
  $ 16,709     $ 16,599     $ 21,654  
 
 
 
See Notes to Consolidated Financial Statements.


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AMERICAN EXPRESS COMPANY
 
                                                 
   
                            Accumulated
       
                      Additional
    Other
       
Three Years Ended December 31, 2010
        Preferred
    Common
    Paid-in
    Comprehensive
    Retained
 
(Millions, except per share amounts)   Total     Shares     Shares     Capital     (Loss) Income     Earnings  
 
Balances as of December 31, 2007
  $ 11,029     $     $ 232     $ 10,164     $ (442 )   $ 1,075  
Comprehensive income
                                               
Net income
    2,699                                       2,699  
Change in net unrealized securities gains
    (711 )                             (711 )        
Change in net unrealized derivatives (losses) gains
    (9 )                             (9 )        
Foreign currency translation adjustments
    (113 )                             (113 )        
Change in net unrealized pension and other postretirement benefit losses
    (334 )                             (334 )        
                                                 
Total comprehensive income
    1,532                                          
Repurchases of common shares
    (218 )             (1 )     (42 )             (175 )
Other changes, primarily employee plans
    334               1       374       3       (44 )
Cash dividends declared Common, $0.72 per share
    (836 )                                     (836 )
                                                 
Balances as of December 31, 2008
    11,841             232       10,496       (1,606 )     2,719  
Comprehensive income
                                               
Net income
    2,130                                       2,130  
Change in net unrealized securities gains
    1,206                               1,206          
Change in net unrealized derivatives (losses) gains
    52                               52          
Foreign currency translation adjustments
    (354 )                             (354 )        
Change in net unrealized pension and other postretirement benefit losses
    (10 )                             (10 )        
                                                 
Total comprehensive income
    3,024                                          
Issuance of preferred shares and common stock warrants
    3,389       3,157               232                  
Preferred share accretion
          232                               (232 )
Repurchase of preferred shares
    (3,389 )     (3,389 )                                
Repurchase of warrants
    (340 )                     (232 )             (108 )
Issuance of common shares
    531               4       527                  
Other changes, primarily employee plans
    279               1       121               157  
Cash dividends declared
                                               
Preferred shares
    (74 )                                     (74 )
Common, $0.72 per share
    (855 )                                     (855 )
                                                 
Balances as of December 31, 2009
    14,406             237       11,144       (712 )     3,737  
Impact of Adoption of new GAAP (Note 7)
    (1,769 )                       (315 )     (1,454 )
                                                 
Balances as of January 1, 2010 (Adjusted)
    12,637             237       11,144       (1,027 )     2,283  
Comprehensive income
                                               
Net income
    4,057                                       4,057  
Change in net unrealized securities gains
    (135 )                             (135 )        
Change in net unrealized derivatives (losses) gains
    21                               21          
Foreign currency translation adjustments
    219                               219          
Change in net unrealized pension and other postretirement benefit losses
    5                               5          
                                                 
Total comprehensive income
    4,167                                          
Repurchase of common shares
    (590 )             (3 )     (132 )             (455 )
Other changes, primarily employee plans
    883               4       925               (46 )
Cash dividends declared Common, $0.72 per share
    (867 )                                     (867 )
                                                 
Balances as of December 31, 2010
  $ 16,230     $     $ 238     $ 11,937