EX-13 4 d281394dex13.htm PORTIONS OF THE COMPANY'S 2011 ANNUAL REPORT PORTIONS OF THE COMPANY'S 2011 ANNUAL REPORT
Table of Contents

Exhibit 13

 

 

 

 

2011 FINANCIAL RESULTS

 

 

 

 

 

  14     

FINANCIAL REVIEW

  52     

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

  53     

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

  54     

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

  55     

CONSOLIDATED FINANCIAL STATEMENTS

  59     

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  106     

CONSOLIDATED FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA

  107     

COMPARISON OF FIVE-YEAR TOTAL RETURN TO SHAREHOLDERS


Table of Contents

AMERICAN EXPRESS COMPANY

2011 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 48.

This Financial Review and the Notes to Consolidated Financial Statements have been revised to exclude discontinued operations unless otherwise noted.

EXECUTIVE OVERVIEW

BUSINESS INTRODUCTION

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, servicing and settlement, and point-of-sale, 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, online applications, in-house and third-party sales forces and direct response advertising.

We compete in the global payments industry with charge, credit and debit card networks, issuers and acquirers, as well as evolving alternative payment mechanisms, systems and products. As the payments industry continues to evolve, we are facing increasing competition from non-traditional players, such as online networks, telecom providers and software-as-a-service providers, who leverage new technologies and customers’ existing charge and credit card accounts and bank relationships to create payment or other fee-based solutions. In 2009, the Company established the Enterprise Growth Group, which focuses on generating alternative sources of global revenues in areas such as online and mobile payments and fee-based services. In addition to the Enterprise Growth Group, the Company is seeking to transform all of its businesses for the digital marketplace, including increasing the Company’s share of online spend across all products and enhancing customers’ digital experience.

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 at merchants 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 cardmember credit and fraud losses.

FINANCIAL TARGETS

The Company seeks 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 25 percent or more.

If the Company achieves its EPS and ROE targets, it will seek to return on average and over time 50 percent of the capital it generates to shareholders as dividends or through the repurchases of common stock, which may be subject to certain regulatory restrictions as described herein.

 

14


Table of Contents

AMERICAN EXPRESS COMPANY

2011 FINANCIAL REVIEW

 

FORWARD-LOOKING STATEMENTS AND NON-GAAP MEASURES

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. In addition, certain calculations included within this Annual Report constitute non-GAAP financial measures. The Company’s calculations of non-GAAP financial measures may differ from the calculations of similarly titled measures by other companies.

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 2011 continued to reflect strong spending growth and improved credit performance, as well as a planned slowdown in the growth of operating expenses in the fourth quarter of the year. During the year cardmember spending volumes grew both in the United States and internationally, and across all of the Company’s businesses, despite both a challenging economic environment and comparisons to relatively strong performance in the prior year.

While the positive impacts of strong billings growth and modestly higher cardmember borrowing levels were partially offset by lower loan yields, the strong billings growth, improved credit trends and certain tax benefits not expected to recur provided the Company with the opportunity to invest in the business and also generate strong earnings. The Company continues to focus its investments on both driving near-term metrics and building capabilities that will benefit the medium- to long-term success of the Company.

The Company’s improving credit trends contributed to a reduction in loan write-offs and in overall loss reserve levels over the course of 2011 when compared to 2010. Reserve coverage ratios remain at appropriate levels after taking into consideration a net reduction of approximately $1.8 billion in loss reserve levels in 2011. Going forward, the Company expects the benefits to its results from reserve releases to diminish as credit metrics are at historically low levels.

Despite the Company’s continued momentum, competition remains extremely intense across all of its businesses. In addition, the global economic environment remains uncertain. The current instability in Europe in particular, and concerns about sovereign defaults and the creditworthiness and liquidity of the European banking systems could adversely affect global economic conditions, including potentially negatively affecting consumer and corporate confidence and spending, disrupting the debt and equity markets and impacting foreign exchange rates. European billed business accounted for approximately 12 percent of the Company’s total billed business for the year ended December 31, 2011. The Company also received the last settlement payments from MasterCard and Visa in 2011 and faces more difficult year-over-year comparisons in light of strong 2010 and 2011 volume and credit performance. Due to these factors, the Company is continuing to implement its plan to slow the growth of operating expenses over the next few years.

ACQUISITIONS

On March 1, 2011, the Company completed the acquisition of a controlling interest in Loyalty Partner in furtherance of its strategy to accelerate growth internationally and to grow fee-based revenue. Loyalty Partner is a leading marketing services company best known for the loyalty programs it operates in Germany, Poland and India. Loyalty Partner also provides market analysis, operating platforms and consulting services that help merchants grow their businesses. Total consideration was $616 million ($585 million plus $31 million in cash acquired). The Company has an option to acquire the remaining interest over a three-year period beginning at the end of 2013 at a price based on business performance, which had an estimated fair value of $150 million at the acquisition date. The final purchase price allocation, which is not expected to be significantly different from the estimate at the date of acquisition, will be completed in the first quarter of 2012. Refer to Note 2 to the Consolidated Financial Statements for further information.

The Company also made selected organic and strategic investments over the course of 2011 as part of its plans to expand digital payment products and capabilities for customers.

FINANCIAL SUMMARY

A summary of the Company’s recent financial performance follows:

 

000000000 000000000 000000000

Years Ended December 31,

(Millions, except per share
amounts and ratio data)

   2011     2010     Percent
Increase
(Decrease)
 

Total revenues net of interest expense

   $ 29,962     $ 27,582       9  % 

Provisions for losses

   $ 1,112     $ 2,207       (50 )% 

Expenses

   $ 21,894     $ 19,411       13  % 

Income from continuing operations

   $ 4,899     $ 4,057       21  % 

Net income

   $ 4,935     $ 4,057       22  % 

Earnings per common share from continuing operations – diluted(a)

   $ 4.09     $ 3.35       22  % 

Earnings per common share – diluted(a)

   $ 4.12     $ 3.35       23  % 

Return on average equity(b)

     27.7     27.5  

Return on average tangible common equity(c)

     35.8     35.1        

 

(a) Earnings per common share from continuing operations — diluted and Earnings per common share — diluted were both reduced by the impact of earnings allocated to participating share awards and other items of $58 million and $51 million for the years ended December 31, 2011 and 2010, respectively.
(b) ROE is calculated by dividing (i) one-year period net income ($4.9 billion and $4.1 billion for 2011 and 2010, respectively), by (ii) one-year average total shareholders’ equity ($17.8 billion and $14.8 billion for 2011 and 2010, respectively).
(c) Return on average tangible common equity is computed in the same manner as ROE except the computation of average tangible common equity, a non-GAAP measure, excludes from average total shareholders’ equity average goodwill and other intangibles of $4.2 billion and $3.3 billion as of December 31, 2011 and 2010, respectively. The Company believes return on average tangible common equity is a useful measure of profitability of its business.

 

15


Table of Contents

AMERICAN EXPRESS COMPANY

2011 FINANCIAL REVIEW

 

See Consolidated Results of Operations, beginning on page 19, for discussion of the Company’s results.

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

CRITICAL ACCOUNTING ESTIMATES

Refer to Note 1 to the Consolidated Financial Statements for a summary of the Company’s significant accounting policies referenced, as applicable, to other financial statement footnotes. Certain of the Company’s accounting policies that require significant management assumptions and judgments are set forth below.

RESERVES FOR CARDMEMBER LOSSES

Reserves for cardmember losses represent management’s best estimate of losses inherent in the Company’s outstanding portfolio of cardmember loans and receivables as of the balance sheet date.

In estimating losses management uses statistical models that take into account several factors, including loss migration rates, historical losses and recoveries, portfolio specific risk indicators, current risk management initiatives and concentration of credit risk. In establishing the reserves, management also considers other external environmental factors such as leading economic and market indicators, including unemployment rates, home prices and Gross Domestic Product.

The process of determining the reserve for cardmember losses requires a high degree of judgment. To the extent historical credit experience updated for external environmental trends 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 of December 31, 2011, an increase (decrease) in write-offs equivalent to 20 basis points of cardmember loans and receivables balances at such date would increase (decrease) the provision for cardmember losses by approximately $210 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.

RESERVES FOR MEMBERSHIP REWARDS COSTS

The Membership Rewards program is the largest card-based rewards program in the industry. Eligible cardmembers can earn points for purchases charged on most of the Company’s card products. Certain types of purchases allow cardmembers to also earn bonus points. 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.

The Company establishes balance sheet reserves that represent the estimated future cost of points earned that are expected to be redeemed. These reserves reflect management’s judgment regarding ultimate redemptions and associated costs.

Management uses statistical and actuarial models to estimate ultimate redemption rates of points earned to date by current cardmembers based on historical redemption trends, current enrollee redemption behavior, card product type, year of program enrollment, enrollment tenure and card spend levels. A weighted-average cost per point redeemed during the previous twelve months, adjusted as appropriate for recent changes in redemption costs, including mix of rewards redeemed, is used to approximate future redemption costs. 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 earned points expected to be redeemed is impacted over time by enrollment levels, 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. Management assumes that a large majority of all points earned will eventually be redeemed, and therefore the reserve is most sensitive to changes in the estimated ultimate redemption rate.

Changes in the ultimate redemption rate and weighted-average cost per point have the effect of either increasing or decreasing the reserve through the current period provision by an amount estimated to cover the cost of all points previously earned but not yet redeemed by cardmembers as of the end of the reporting period. As of December 31, 2011, 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 $330 million. Similarly, if the 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 $70 million.

FAIR VALUE MEASUREMENT

The Company holds investment securities and derivative instruments that are carried at fair value on the Consolidated Balance Sheets. Management makes assumptions and judgments when estimating the fair values of 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). The Company does not have any Level 3 assets. Refer to Note 3 to the Consolidated Financial Statements.

 

16


Table of Contents

AMERICAN EXPRESS COMPANY

2011 FINANCIAL REVIEW

 

Investment Securities

The Company’s investment securities are mostly composed of fixed-income securities issued by states and municipalities as well as the U.S. Government and Agencies.

The fair market values for the Company’s investment securities, including investments comprising defined benefit pension plan assets, are obtained primarily from pricing services engaged by the Company. For each security, the Company receives one price from a pricing service. 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 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 for reasonableness by comparing the prices to valuations from different pricing sources as well as comparing prices to the sale prices received from sold 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.

Other-Than-Temporary Impairment of Investment Securities

Realized losses are recognized when management determines that a decline in the fair value of investment securities 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 Company considers several factors when evaluating debt securities for other-than-temporary impairment, including the determination of the extent to which a decline in the fair value of a security is due to increased default risk for the specific issuer or market interest rate risk. With respect to market interest rate risk, 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 be required to sell the investment securities before recovery of any unrealized losses.

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 impact of market interest rates on the investment securities. Any such changes could result in the Company recognizing an other-than-temporary impairment loss through earnings.

Derivative Instruments

The Company’s primary derivative instruments are interest rate swaps, foreign currency forward agreements, cross-currency swaps and a total return swap relating to a foreign equity investment.

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, where the inputs to those models are readily observable from actively quoted markets. The Company reaffirms its understanding of the valuation techniques used by its pricing services at least annually.

To mitigate derivative instrument credit risk, counterparties are required to be pre-approved and rated as investment grade. In addition, the Company manages certain counterparty credit risks by exchanging collateral under executed credit support agreements. Based on the assessment of credit risk of the Company’s derivative counterparties, the Company does not have derivative positions that warrant credit valuation adjustments.

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.

GOODWILL RECOVERABILITY

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 or when 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 that is one level below an operating segment for which discrete financial information is regularly reviewed by the operating segment manager.

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 any impairment loss.

The Company uses a combination of discounted cash flow methods and market multiples valuation methods in estimating the fair value of its reporting units.

 

17


Table of Contents

AMERICAN EXPRESS COMPANY

2011 FINANCIAL REVIEW

 

When using discounted cash flow models, 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, which represents the estimated fair value of the reporting unit. The discount rate applied approximates the Company’s expected cost of equity financing, determined using a capital asset pricing model.

The fair value of each of the Company’s reporting units exceeds the carrying value; accordingly, the Company has concluded goodwill is not impaired as of December 31, 2011. 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.

INCOME TAXES

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 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.

In establishing a liability for an unrecognized tax benefit, assumptions may be made in determining whether, and the extent to which, a tax position should be sustained. A tax position is recognized only when it is more likely than not to be sustained upon examination by the relevant taxing authority based on its technical merits. The amount of tax benefit recognized is the largest benefit that management believes is more likely than not to be realized on ultimate settlement. As new information becomes available, the Company evaluates its tax positions, and adjusts its unrecognized tax benefits, as appropriate.

Tax benefits ultimately realized can differ from amounts previously recognized due to uncertainties, with any such differences generally impacting the provision for income tax expense.

Deferred Tax Asset Realization

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.

Since deferred taxes measure the future tax effects of items recognized in the Consolidated 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.

Changes in facts or circumstances can lead to changes in the ultimate realization of deferred tax assets due to uncertainties.

 

18


Table of Contents

AMERICAN EXPRESS COMPANY

2011 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.

The Company follows U.S. generally accepted accounting principles (GAAP). For periods ended on or prior to December 31, 2009, the Company’s securitized cardmember loans and related debt securities issued to third parties by the American Express Credit Account Master Trust (the Lending Trust) were not included in the Consolidated Financial Statements, as it was an unconsolidated variable interest entity (VIE). 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 the January 1, 2010 prospective adoption of the accounting standards related to transfers of financial assets and consolidation of VIEs (new GAAP governing consolidations and VIEs), the Company changed its accounting for the Lending Trust, which is now consolidated and therefore both the Company’s securitized and non-securitized cardmember loans and related debt are included in the consolidated financial statements. The components of net securitization income for the cardmember loans and long-term debt are now recorded in other commissions and fees, interest income and interest expense. Prior period results were not revised for the change in accounting for the Lending Trust. The Company’s (i) 2011 and 2010 GAAP presentations and (ii) managed basis presentations prior to 2010 are generally comparable. Refer to Notes 1 and 7 to the Consolidated Financial Statements for further discussion of the impacts of this adoption.

SUMMARY OF THE COMPANY’S FINANCIAL PERFORMANCE

 

000000000 000000000 000000000

Years Ended December 31,

(Millions, except per share
amounts and ratio data)

   2011     2010     2009  

Total revenues net of interest expense

   $ 29,962     $ 27,582     $ 24,336  

Provisions for losses

   $ 1,112     $ 2,207     $ 5,313  

Expenses

   $ 21,894     $ 19,411     $ 16,182  

Income from continuing operations

   $ 4,899     $ 4,057     $ 2,137  

Net income

   $ 4,935     $ 4,057     $ 2,130  

Earnings per common share from continuing operations – diluted(a)

   $ 4.09     $ 3.35     $ 1.54  

Earnings per common share – diluted(a)

   $ 4.12     $ 3.35     $ 1.54  

Return on average equity(b)

     27.7     27.5     14.6

Return on average tangible
common equity(c)

     35.8     35.1     17.6

 

(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 $58 million, $51 million and $22 million for the years ended December 31, 2011, 2010 and 2009, respectively.
(b) ROE is calculated by dividing (i) one-year period net income ($4.9 billion, $4.1 billion and $2.1 billion for 2011, 2010 and 2009, respectively) by (ii) one-year average total shareholders’ equity ($17.8 billion, $14.8 billion and $14.6 billion for 2011, 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, a non-GAAP measure, excludes from average total shareholders’ equity average goodwill and other intangibles of $4.2 billion, $3.3 billion and $3.0 billion as of December 31, 2011, 2010 and 2009, respectively.

SELECTED STATISTICAL INFORMATION

 

000000000 000000000 000000000

Years Ended December 31,

(Millions, except percentages
and where indicated)

   2011     2010     2009  

Card billed business (billions)

      

United States

   $ 542.8     $ 479.3     $ 423.7  

Outside the United States

     279.4       234.0       196.1  

 

  

 

 

   

 

 

   

 

 

 

Total

   $ 822.2     $ 713.3     $ 619.8  

 

  

 

 

   

 

 

   

 

 

 

Total cards-in-force

      

United States

     50.6       48.9       48.9  

Outside the United States

     46.8       42.1       39.0  

 

  

 

 

   

 

 

   

 

 

 

Total

     97.4       91.0       87.9  

 

  

 

 

   

 

 

   

 

 

 

Basic cards-in-force(a)

      

United States

     39.3       37.9       38.0  

Outside the United States

     37.4       33.7       31.1  

 

  

 

 

   

 

 

   

 

 

 

Total

     76.7       71.6       69.1  

 

  

 

 

   

 

 

   

 

 

 

Average discount rate

     2.54     2.55     2.51

Average basic cardmember spending (dollars)(b)

   $ 14,881     $ 13,259     $ 11,213  

Average fee per card (dollars)(b)

   $ 39     $ 38     $ 36  

Average fee per card adjusted (dollars)(b)

   $ 43     $ 41     $ 40  

 

(a) Prior to and including the fourth quarter of 2010, the Company did not have the data necessary to separately report Basic and Supplementary cards-in-force (CIF) for Global Network Services; therefore, all cards-in-force for Global Network Services was reported as Basic CIF. Beginning in the first quarter of 2011, as the necessary data became available, the Company began to separately report Basic and Supplementary CIF for Global Network Services. The Company has accordingly revised prior periods to conform with the current period presentation.
(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 $265 million, $220 million and $186 million for the years ended December 31, 2011, 2010 and 2009, respectively. The adjusted average fee per card, which is a non-GAAP measure, 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 $219 million, $207 million and $243 million for the years ended December 31, 2011, 2010 and 2009, respectively. The Company presents adjusted average fee per card because the Company believes this metric presents a useful indicator of card fee pricing across a range of its proprietary card products.

 

19


Table of Contents

AMERICAN EXPRESS COMPANY

2011 FINANCIAL REVIEW

 

AMERICAN EXPRESS COMPANY

SELECTED STATISTICAL INFORMATION

 

000000000 000000000 000000000

As of or for the Years Ended December 31,

(Billions, except percentages
and where indicated)

  2011     2010     2009  

Worldwide cardmember receivables

     

Total receivables

  $ 40.9     $ 37.3     $ 33.7  

Loss reserves (millions)

     

Beginning balance

  $ 386     $ 546     $ 810  

Provision for losses on authorized transactions(a)

    603       439       773  

Net write-offs

    (560     (598     (1,131

Other

    9       (1     94  

 

 

 

 

   

 

 

   

 

 

 

Ending balance

  $ 438     $ 386     $ 546  

 

 

 

 

   

 

 

   

 

 

 

% of receivables

    1.1     1.0     1.6

Net write-off rate – principal – USCS(b)

    1.7     1.6     3.8

Net write-off rate – principal and fees – USCS(b)

    1.9     1.8     4.2

30 days past due as a % of total – USCS

    1.9     1.5     1.8

Net loss ratio as a % of charge volume – ICS/GCS(c)(d)

    0.09     0.16     0.25

90 days past billing as a % of total – ICS/GCS(c)

    0.9     0.9     1.6

Worldwide cardmember loans – GAAP basis portfolio

     

Total loans

  $ 62.6     $ 60.9     $ 32.8  

30 days past due as a % of total

    1.5     2.1     3.6

Loss reserves (millions)

     

Beginning balance

  $ 3,646     $ 3,268     $ 2,570  

Adoption of GAAP consolidation standard(e)

           2,531         

Provision for losses on authorized transactions

    145       1,445       4,209  

Net write-offs – principal

    (1,720     (3,260     (2,949

Net write-offs – interest and fees

    (201     (359     (448

Other

    4       21       (114

 

 

 

 

   

 

 

   

 

 

 

Ending balance

  $ 1,874     $ 3,646     $ 3,268  

 

 

 

 

   

 

 

   

 

 

 

Ending Reserves – principal

  $ 1,818     $ 3,551     $ 3,172  

Ending Reserves – interest and fees

  $ 56     $ 95     $ 96  

% of loans

    3.0     6.0     10.0

% of past due

    206     287     279

Average loans

  $ 59.1     $ 58.4     $ 34.8  

Net write-off rate – principal only(b)

    2.9     5.6     8.5

Net write-off rate – principal, interest and fees(b)

    3.3     6.2     9.8

Net interest income divided by average loans(f)(g)

    7.9     8.3     9.0

Net interest yield on cardmember loans(f)

    9.1     9.7     10.1

Worldwide cardmember loans – Managed basis portfolio

     

Total loans

  $ 62.6     $ 60.9     $ 61.8  

30 days past due as a % of total

    1.5     2.1     3.6

Net write-offs – principal (millions)

  $ 1,720     $ 3,260     $ 5,366  

Average loans

  $ 59.1     $ 58.4     $ 63.8  

Net write-off rate – principal only(b)

    2.9     5.6     8.4

Net write-off rate – principal, interest and fees(b)

    3.3     6.2     9.7

Net interest yield on cardmember loans(f)

    9.1     9.7     10.4

 

(a) Represents loss provisions for cardmember receivables consisting of principal (resulting from authorized transactions) and fee reserve components.
(b) The Company presents a net write-off rate based on principal losses only (i.e., excluding interest and/or fees) to be consistent with industry convention. In addition, because the Company’s practice is to include uncollectible interest and/or fees as part of its total provision for losses, a net write-off rate including principal, interest and/or fees is also presented.
(c) 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 for U.S. Card Services. 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 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.
(d) 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.
(e) In accordance with new GAAP governing consolidations and VIEs, which resulted in the consolidation of the American Express Credit Account Master Trust (the Lending Trust) beginning January 1, 2010, $29.0 billion of additional cardmember loans along with a $2.5 billion loan loss reserve were recorded on the Company’s Consolidated Balance Sheets.
(f) See below for calculation of net interest yield on cardmember loans, a non-GAAP measure, and net interest income divided by average loans, a GAAP measure. The Company 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) 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. 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.

 

20


Table of Contents

AMERICAN EXPRESS COMPANY

2011 FINANCIAL REVIEW

 

Calculation of Net Interest Yield on Cardmember Loans

 

000000000 000000000 000000000

Years Ended December 31,
(Millions, except percentages
and where indicated)

   2011     2010     2009  

Calculation based on GAAP information:

      

Net interest income

   $ 4,641     $ 4,869     $ 3,124  

Average loans (billions)

   $ 59.1     $ 58.4     $ 34.8  

Adjusted net interest income

   $ 5,345     $ 5,629     $ 3,540  

Adjusted average loans (billions)

   $ 59.0     $ 58.3     $ 34.9  

Net interest income divided by
average loans

     7.9     8.3     9.0

Net interest yield on cardmember loans

     9.1     9.7     10.1

Calculation based on managed information:

      

Net interest income

   $ 4,641     $ 4,869     $ 5,977  

Average loans (billions)

   $ 59.1     $ 58.4     $ 63.8  

Adjusted net interest income

   $ 5,345     $ 5,629     $ 6,646  

Adjusted average loans (billions)

   $ 59.0     $ 58.3     $ 63.9  

Net interest yield on cardmember loans

     9.1     9.7     10.4

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.

Beginning the first quarter of 2011, certain payments to business partners previously expensed in other expenses have been reclassified as contra-revenue within discount revenue or as marketing and promotion expense. These partner payments are primarily related to certain co-brand contracts where upfront payments are amortized over the life of the contract. Amounts in prior periods for this item and certain other amounts have been reclassified to conform to the current presentation and are immaterial to the affected line items.

CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 2011

The Company’s 2011 consolidated income from continuing operations increased $842 million or 21 percent to $4.9 billion, and diluted EPS from continuing operations increased by $0.74 to $4.09. Consolidated income from continuing operations for 2010 increased $1.9 billion or 90 percent to $4.1 billion from 2009, and diluted EPS from continuing operations for 2010 increased by $1.81 to $3.35 from 2009.

Consolidated net income for 2011, 2010 and 2009 was $4.9 billion, $4.1 billion and $2.1 billion, respectively. Net income included income from discontinued operations of $36 million for 2011 and losses from discontinued operations of nil and $7 million for 2010 and 2009, respectively.

The Company’s total revenues net of interest expense and total expenses increased by approximately 9 percent and 13 percent, respectively, while total provisions for losses decreased by 50 percent in 2011. Assuming no changes in foreign currency exchange rates from 2010 to 2011, total revenues net of interest expense and total expenses increased approximately 7 percent and 11 percent, respectively, while total provisions for losses decreased approximately 50 percent in 20111.

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 total provisions for losses decreased approximately 59 percent in 20101.

Results from continuing operations for 2011 included:

 

 

$153 million ($106 million after-tax) of net charges for costs related to the Company’s reengineering initiatives; and

 

 

A $102 million tax benefit related to the favorable resolution of certain prior years’ tax items.

Results from continuing operations for 2010 included:

 

 

$127 million ($83 million after-tax) of net charges for costs related to the Company’s reengineering initiatives.

Results from continuing operations for 2009 included:

 

 

A $211 million ($135 million after-tax) gain in 2009 on the sale of 50 percent of the Company’s equity holdings of Industrial and Commercial Bank of China (ICBC);

 

 

$190 million ($125 million after-tax) of net charges for costs related to the Company’s reengineering initiatives; and

 

 

$180 million ($113 million after-tax) of benefits related to the accounting for a net investment in the Company’s consolidated foreign subsidiaries. Refer to Business Segment Results — Corporate & Other for further discussion.

 

1 

The foreign currency adjusted information, a non-GAAP measure, assumes a constant exchange rate between the periods being compared for purposes of currency translation into U.S. dollars (i.e., assumes the foreign exchange rates used to determine results for the current year apply to the corresponding year-earlier period against which such results are being compared). The Company believes the presentation of information on a foreign currency adjusted basis is helpful to investors by making it easier to compare the Company’s performance in one period to that of another period without the variability caused by fluctuations in currency exchange rates.

 

21


Table of Contents

AMERICAN EXPRESS COMPANY

2011 FINANCIAL REVIEW

 

 

Total Revenues Net of Interest Expense

Consolidated total revenues net of interest expense for 2011 of $30.0 billion were up $2.4 billion or 9 percent from 2010. The increase in total revenues net of interest expense primarily reflects higher discount revenues, increased other commissions and fees, greater travel commissions and fees, higher net card fees, and higher other revenues, partially offset by lower net interest income. Consolidated total revenues net of interest expense for 2010 of $27.6 billion were up $3.2 billion or 13 percent from 2009, largely as a result of new GAAP governing consolidations and VIEs, which caused the reporting of write-offs related to securitized loans to move from net securitization income in 2009 to provisions for cardmember loan losses in 2010; in addition, total revenues net of interest expense also 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.

Discount revenue for 2011 increased $1.9 billion or 12 percent as compared to 2010 to $16.7 billion as a result of a 15 percent increase in worldwide billed business, partially offset by a slightly lower discount rate. The lower revenue growth versus total billed business growth reflects the relatively faster growth in billed business related to GNS, where discount revenue is shared with card-issuing partners, and higher contra-revenue items, including cash rewards, corporate incentive payments and partner payments. The 15 percent increase in worldwide billed business in 2011 reflected an increase in proprietary billed business of 13 percent. The average discount rate was 2.54 percent and 2.55 percent for 2011 and 2010, respectively. Over time, repricing initiatives, changes in the mix of spending by location and industry, volume-related pricing discounts and investments in growth businesses 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 2011, reflecting increases in average spending per proprietary basic card and basic cards-in-force.

 

The table below summarizes selected statistics for billed business and average spend:

 

      2011     2010   

 

   Percentage Increase
(Decrease)
    Percentage Increase
(Decrease) Assuming
No Changes in
Foreign Exchange
Rates(a)
    Percentage Increase
(Decrease)
    Percentage Increase
(Decrease) Assuming
No Changes in
Foreign Exchange
Rates(a)
 

Worldwide(b)

        

Billed business

     15     13     15     14

Proprietary billed business

     13       12        13       13   

GNS billed business(c)

     27       22        28       24   

Average spending per proprietary basic card

     12       11        18       17   

Basic cards-in-force

     7         4    

United States(b)

        

Billed business

     13         13    

Average spending per proprietary basic card

     11         18    

Basic cards-in-force

     4         (1  

Proprietary consumer card billed business(d)

     11         12    

Proprietary small business billed business(d)

     14         11    

Proprietary Corporate Services billed business(e)

     14         19    

Outside the United States(b)

        

Billed business

     19       13        19       15   

Average spending per proprietary basic card

     16       10        20       16   

Basic cards-in-force

     11         9    

Proprietary consumer and small business billed business(f)

     15       9        14       9   

Proprietary Corporate Services billed business(e)

     19       13        20       18   

 

(a) Refer to footnote 1 on page 21 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 & Merchant Services (GNMS) segment.
(d) Included in the USCS segment.
(e) Included in the Global Commercial Services (GCS) segment.
(f) Included in the International Card Services (ICS) segment.

 

22


Table of Contents

AMERICAN EXPRESS COMPANY

2011 FINANCIAL REVIEW

 

Assuming no changes in foreign exchange rates, total billed business outside the United States grew 18 percent in Japan, Asia Pacific and Australia, 14 percent in Latin America and Canada, and 8 percent in Europe, the Middle East and Africa during 20112.

During 2010, discount revenue increased $1.7 billion or 13 percent to $14.9 billion compared to 2009 as a result of a 15 percent increase in worldwide billed business and a slightly higher average 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.

Travel commissions and fees increased $198 million or 11 percent to $2.0 billion in 2011 compared to 2010, primarily reflecting a 13 percent increase in worldwide travel sales. Travel commissions and fees increased $182 million or 11 percent to $1.8 billion in 2010 compared to 2009, primarily reflecting a 19 percent increase in worldwide travel sales, partially offset by lower pricing.

Other commissions and fees increased $238 million or 12 percent to $2.3 billion in 2011 compared to 2010, primarily driven by revenues related to Loyalty Partner. Other commissions and fees increased $253 million or 14 percent to $2.0 billion in 2010 compared to 2009, driven primarily by new GAAP governing consolidations and VIEs where fees related to securitized receivables are recognized as other commissions and fees beginning 2010. These fees were reported in net securitization income in 2009 and prior periods. 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.

Net securitization income decreased $400 million to nil in 2010 compared to 2009, as the Company no longer reports net securitization income, in accordance with new GAAP governing consolidations and VIEs.

Other revenues in 2011 increased $237 million or 12 percent to $2.2 billion compared to 2010, primarily reflecting higher GNS partner-related royalty revenues, a contractual payment from a GNS partner and greater merchant-related fee revenues. Other revenues in 2010 decreased $163 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 reported as a contra-other revenue, partially offset by higher GNS partner-related royalty revenues, greater merchant fee-related revenue and higher publishing revenue.

Interest income decreased $331 million or 5 percent to $7.0 billion in 2011 compared to 2010. Interest and fees on loans decreased $246 million or 4 percent, driven by a lower net yield

 

2  Refer to footnote 1 on page 21 under Consolidated Results of Operations for the Three Years Ended December 31, 2011 relating to changes in foreign exchange rates.

on cardmember loans, partially offset by a slight increase in average cardmember loans. The lower net yield reflects lower revolving levels and lower balances at penalty rates due to the implementation of elements of the CARD Act and improved credit performance. 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 $116 million or 26 percent, primarily reflecting decreased levels of investment securities. Interest income from deposits with banks and other increased $31 million or 47 percent, primarily due to higher average deposit balances versus the prior year. 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 beginning January 1, 2010, in accordance with new GAAP governing consolidations and VIEs. Interest income related to securitized receivables was reported in net securitization income in 2009 and prior periods, but beginning January 1, 2010, is 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 in 2010 driven by new GAAP governing consolidations and VIEs 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 expense decreased $103 million or 4 percent to $2.3 billion in 2011 compared to 2010. Interest expense related to deposits decreased $18 million or 3 percent to $528 million, as lower funding costs were partially offset by an increase in average deposit balances. Interest expense related to long-term debt and other decreased $93 million or 5 percent, reflecting lower average long-term debt balances, partially offset by higher effective funding costs. 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 beginning January 1, 2010, in accordance with new GAAP governing consolidations and VIEs. Interest expense related to this debt was reported in net securitization income in 2009 and prior periods, but is reported in long-term debt and other interest expense beginning January 1, 2010. The increase was partially offset by lower average long-term debt.

 

23


Table of Contents

AMERICAN EXPRESS COMPANY

2011 FINANCIAL REVIEW

 

Provisions for Losses

Provisions for losses of $1.1 billion in 2011 decreased $1.1 billion or 50 percent, compared to 2010. Charge card provisions for losses increased $175 million or 29 percent, primarily driven by higher average receivable levels, higher write-offs and a release of reserves in the prior year due to improved credit performance. Cardmember loans provisions for losses decreased $1.3 billion or 83 percent, primarily reflecting lower write-offs and a lower cardmember loan reserve requirement in 2011 compared to 2010. The lending write-off rate was 2.9 percent in 2011 compared to 5.6 percent in 2010. Other provisions for losses increased 5 percent compared to the prior year.

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 improved credit performance, partially offset by an increase related to the inclusion of the 2010 expense for securitized loan write-offs as a result of new GAAP governing consolidations and VIEs, which in 2009 and prior periods was reported in net securitization income. Other provisions for losses decreased $105 million or 55 percent primarily reflecting lower merchant-related debit balances.

Expenses

Consolidated expenses for 2011 were $21.9 billion, up $2.5 billion or 13 percent from $19.4 billion in 2010. The increase in 2011 reflected higher cardmember rewards expenses, higher salaries and employee benefits expenses, higher other expenses, higher cardmember services expenses, greater professional services expenses and higher occupancy and equipment expenses, partially offset by lower marketing and promotion expenses. Consolidated expenses for 2010 were $19.4 billion, up $3.2 billion or 20 percent from $16.2 billion in 2009. The increase in 2010 reflected higher marketing and promotion expenses, increased cardmember rewards expense, higher salaries and employee benefits, higher professional services expenses, higher other expenses, and increased cardmember services expenses, partially offset by lower occupancy and equipment expense and lower communications expense. Consolidated expenses in 2011, 2010 and 2009 also included $153 million, $127 million and $190 million, respectively, of reengineering costs, of which $119 million, $96 million and $185 million, respectively, represent restructuring charges.

Marketing and promotion expenses decreased $151 million or 5 percent to $3.0 billion in 2011 from $3.1 billion in 2010, due to lower product media and brand spending. Marketing and promotion expenses increased $1.1 billion or 57 percent to $3.1 billion in 2010 from $2.0 billion in 2009, as improved credit and billings trends led to increased investments in growth businesses in 2010.

Cardmember rewards expenses increased $1.2 billion or 24 percent to $6.2 billion in 2011 from $5.0 billion in 2010, reflecting higher rewards-related spending volumes and co-brand expense. Cardmembers’ increased engagement with the Company’s Membership Rewards program drove an increase in the ultimate redemption rate to 92 percent in 2011 from 91 percent in 2010. This resulted in higher rewards expenses primarily driven by increased recent redemption patterns by U.S. cardmembers. Cardmember rewards expenses increased $995 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, as well as a benefit in 2009 relating to the adoption of a more restrictive redemption policy for accounts 30 days past due.

Cardmember services expenses increased $125 million or 21 percent to $716 million in 2011 from $591 million in 2010, reflecting increased costs associated with new benefits made available to U.S. cardmembers.

Salaries and employee benefits expenses increased $686 million or 12 percent to $6.3 billion in 2011 from $5.6 billion in 2010, reflecting higher employee levels, merit increases for existing employees, increased benefit-related costs and higher incentive-related compensation. 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.

Professional services expenses in 2011 increased $145 million or 5 percent compared to 2010, reflecting higher technology development expenditures including various initiatives related to digitizing the business, globalizing operating platforms and enhancing analytical data and capabilities. Higher legal costs and third-party merchant sales-force commissions also contributed to the increase. 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.

Other expenses in 2011 increased $460 million or 20 percent to $2.8 billion compared to 2010, primarily reflecting $300 million of MasterCard settlement payments received in 2010 that ceased in the second quarter of 2011. In addition, higher other expenses are driven by costs associated with Loyalty Partner, data processing and software amortization expense, as well as lease termination costs. Other expenses in 2010 increased $170 million or 8 percent to $2.3 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.

 

24


Table of Contents

AMERICAN EXPRESS COMPANY

2011 FINANCIAL REVIEW

 

Income Taxes

The effective tax rate was 30 percent in 2011 compared to 32 percent in 2010 and 25 percent in 2009. The tax rates in all years reflect the level of pretax income in relation to a generally consistent level of recurring permanent tax benefits. In addition, the tax rate in 2011 reflects a benefit related to a distribution of foreign subsidiary earnings with associated tax credits, as well as the favorable resolution of certain prior years’ tax items.

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, 2011, net cash provided by operating activities of $10.5 billion increased $1.6 billion compared to $8.9 billion in 2010. The increase was primarily due to higher net income in 2011 and increases in other receivables and accounts payable and other liabilities, partially offset by lower provisions for losses and decreases in deferred taxes and other in 2011.

For the year ended December 31, 2010, net cash provided by operating activities of $8.9 billion increased $2.6 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.

Cash Flows from Investing Activities

The Company’s investing activities primarily include funding cardmember loans and receivables, securitizations of cardmember loans and receivables, and activity in the Company’s available-for-sale investment portfolio.

For the year ended December 31, 2011, net cash used in investing activities of $0.5 billion decreased $0.7 billion compared to net cash used in investing activities of $1.2 billion in 2010, primarily due to lower purchases of investments and a decrease in restricted cash, partially offset by lower sales, maturity and redemption of investments and increases in cardmember loans and receivables.

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.

Cash Flows from Financing Activities

The Company’s financing activities primarily include issuing and repaying debt, taking customer deposits, paying dividends and repurchasing common and preferred shares.

For the year ended December 31, 2011, net cash used in financing activities of $1.4 billion decreased $6.7 billion compared to $8.1 billion in 2010, due to increases in customer deposits and issuances of long-term debt during 2011 as compared to 2010, partially offset by increases in principal payments of long-term debt and repurchases of common shares and a decrease in short-term borrowings in 2011.

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 repurchase of preferred shares in 2009.

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. As a bank holding company and a financial holding company, the Company is subject to comprehensive examination and supervision by the Federal Reserve and to a range of laws and regulations that impact the business and operations. In addition, the extreme disruptions in global capital markets that commenced in mid-2007 and the resulting instability and failure and near failure of numerous financial institutions, as well as reports of widespread consumer abuse, led to a number of changes in the financial services industry, including more intense supervision, enhanced enforcement activity, significant additional regulation and the formation of additional regulatory bodies. 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 continue to become effective and implemented over the course of the next several years.

The CARD Act

The Company is subject to the provisions of the legislation known as the CARD Act, which was enacted in May 2009 to fundamentally reform credit card billing practices, pricing and disclosure requirements. The Company has made changes to its product terms and practices that are designed to comply with the CARD Act, including pricing-related actions, while mitigating the impact on Company revenue of the changes required by the CARD Act and the regulatory amendments. Although the

 

25


Table of Contents

AMERICAN EXPRESS COMPANY

2011 FINANCIAL REVIEW

 

Company believes its actions to mitigate the impact of the CARD Act have, to date, been largely effective, the impacts of certain other provisions of the CARD Act are still subject to some uncertainty such as the requirement to periodically reevaluate annual percentage rate (APR) increases.

Dodd-Frank Wall Street Reform and Consumer Protection Act

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Reform Act), which was enacted in July 2010, is comprehensive in scope and contains a wide array of provisions intended to govern the practices and oversight of financial institutions and other participants in the financial markets. Among other matters, the law creates a new independent Consumer Financial Protection Bureau (the CFPB), which has broad rulemaking authority over providers of credit, savings, payment and other consumer financial products and services with respect to certain federal consumer financial laws. Moreover, the CFPB has examination and enforcement authority with respect to certain federal consumer financial laws for some providers of consumer financial products and services, including the Company and its insured depository institution subsidiaries. The CFPB is directed to prohibit “unfair, deceptive or abusive” acts or practices, and to ensure that all consumers have access to fair, transparent and competitive markets for consumer financial products and services. Following a review by the FDIC and the Utah Department of Financial Institutions (DFI) of American Express Centurion Bank’s (Centurion Bank) card practices for compliance with certain consumer protection laws and regulations, and the FDIC’s providing the CFPB with information the FDIC considered relevant and obtained by it in the course of its review, the FDIC notified Centurion Bank that it plans to take formal enforcement action against it, and it appears likely the CFPB and the DFI will take some type of action against Centurion Bank as well. See “Legal Proceedings” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

The Dodd-Frank Reform Act prohibits payment card networks from restricting merchants from offering discounts or incentives to customers to pay with particular forms of payment, such as cash, check, credit or debit card, or restricting merchants 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 on the basis of the issuer or network and comply with applicable federal or state disclosure requirements.

Under the Dodd-Frank Reform Act, the Federal Reserve is also authorized to regulate interchange fees paid to financial institutions 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 payment card networks and issuers from requiring transactions to be processed on a single payment network or fewer than two unaffiliated networks. The Federal Reserve issued its final rule on June 29, 2011, which provides that the regulations on interchange and routing do not apply to a three-party network like American Express when it acts as both the issuer and the network for its prepaid cards, and the Company is therefore not a “payment card network” as that term is defined and used for the specific purposes of this final rule.

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 $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.

Department of Justice Litigation

The U.S. Department of Justice (DOJ) and certain states attorneys general have brought an action against the Company alleging that the provisions in the Company’s card acceptance agreements with merchants that prohibit merchants from discriminating against the Company’s card products at the point of sale violate the U.S. antitrust laws. Visa and MasterCard, which were also defendants in the DOJ and state action, entered into a settlement agreement and have been dismissed as parties pursuant to that agreement. The settlement enjoins Visa and MasterCard from adopting rules or entering into contracts that prohibit merchants from engaging in various actions to steer cardholders to other cards products or payment forms at the point of sale. If similar conditions were imposed on American Express, it could have a material adverse effect on American Express’ business.

Other Legislative and Regulatory Initiatives

The payment card sector also faces continuing scrutiny in connection with the fees merchants pay to accept cards. Regulators and legislators outside the United States have focused on 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). 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 affect all networks.

In certain countries, such as Australia, and in certain member states in Europe, merchants are permitted by law to surcharge card purchases. While surcharging continues to be actively considered in certain jurisdictions, the benefits to customers have not been apparent in countries that have allowed it, and in some cases regulators are addressing concerns about excessive

 

26


Table of Contents

AMERICAN EXPRESS COMPANY

2011 FINANCIAL REVIEW

 

surcharging by merchants. Excessive surcharging, particularly where it disproportionately impacts American Express cardmembers, could have a material adverse effect on the Company if it becomes widespread. In the European Union (the EU), the Consumer Rights Directive, which was adopted by the EU Council of Ministers in October 2011, would prohibit merchants from surcharging card purchases more than the merchants’ cost of acceptance. The EU member states have two years to adopt this legislation.

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 have either adopted or are considering legislation that would prohibit card networks from imposing similar conditions and restrictions on merchants.

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, merchant acquirers and bankcard networks.

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 for at least a twelve-month period, even in the event it is unable to continue to raise new funds under its traditional 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 support 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, 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 standards commonly referred to as Basel I. In June 2004, the Basel Committee on Banking Supervision (commonly referred to as Basel) 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 Company has adopted Basel II in certain non-U.S. jurisdictions and is currently taking steps toward Basel II implementation in the U.S.

The Dodd-Frank Reform Act and a series of international capital and liquidity standards known as Basel III published by Basel on December 16, 2010 will in the future change the 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 Basel III capital standards have not been finalized, but are generally expected to be issued in 2012. In addition to these measurement changes, international and U.S. banking regulators could increase the ratio levels at which banks are considered to be “well capitalized”.

 

27


Table of Contents

AMERICAN EXPRESS COMPANY

2011 FINANCIAL REVIEW

 

The following table presents the regulatory risk-based capital ratios and leverage ratio for the Company and its significant bank subsidiaries, as well as additional ratios widely utilized in the marketplace, as of December 31, 2011. As noted below, certain of these ratios are based on shareholders’ equity of $18.8 billion as of December 31, 2011.

 

 

   Well-
Capitalized
Ratios(a)
    Ratios as of
December 31,
2011
 

Risk-Based Capital

    

Tier 1

     6  

American Express Company

       12.3

Centurion Bank

       18.8

FSB

       17.4

Total

     10  

American Express Company

       14.3

Centurion Bank

       20.1

FSB(b)

       19.8

Tier 1 Leverage

     5  

American Express Company

       10.2

Centurion Bank

       19.1

FSB

       18.4

Common Equity to Risk-Weighted Assets

    

American Express Company

       15.6

Tier 1 Common Risk-Based(c)

    

American Express Company

       12.3

Tangible Common Equity to
Risk-Weighted Assets(c)

    

American Express Company

             12.0

 

(a) As defined by the Company’s primary regulator.
(b) Refer to Note 23 to the Consolidated Financial Statements for further discussion of FSB’s Total capital ratio.
(c) Refer to page 29 for a reconciliation of Tier 1 common equity and tangible common equity, both non-GAAP measures.

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 than prior requirements, 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 (as currently proposed) been in place during the fourth quarter of 2011, the reported Tier 1 risk-based capital and Tier 1 common risk-based ratios would decline by approximately 30 basis points. Similarly, the reported Tier 1 leverage ratio would decline by approximately 160 basis points.3 The estimated impact of the Basel III rules will change over time based upon changes in the size and composition of the Company’s balance sheet as well as based on the U.S. implementation of the Basel III rules; and the estimated impact for the fourth quarter of 2011 is not necessarily indicative of the impact in future periods.

 

 

3 

The proposed capital ratios are non-GAAP measures. The Company believes the presentation of the proposed capital ratios is helpful to investors by showing the impact of Basel III, assuming the new rules as currently proposed are implemented by the Federal Reserve.

The following provides definitions for the Company’s regulatory risk-based capital ratios and leverage ratio, which are calculated as per standard regulatory guidance if applicable:

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, 2011 were $120.9 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, 2011 was $14.9 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 for treatment as Tier 2 capital. Tier 2 capital as of December 31, 2011 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 total consolidated assets as of December 31, 2011 were $146.3 billion.

 

28


Table of Contents

AMERICAN EXPRESS COMPANY

2011 FINANCIAL REVIEW

 

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 equity, a non-GAAP measure, divided by risk-weighted assets. Tier 1 common equity is calculated by reference to total shareholders’ equity as shown below:

 

(Millions)

   December 31,
2011
 

Total shareholders’ equity

   $ 18,794  

Effect of certain items in accumulated other comprehensive income (loss) excluded from Tier 1 common equity

     194  

Less: Ineligible goodwill and intangible assets

     (4,051

Less: Ineligible deferred tax assets

     (58

 

  

 

 

 

Total Tier 1 common equity

   $ 14,879  

The Company believes the Tier 1 common risk-based capital ratio may be useful because it can be used to assess and compare the quality and composition of the Company’s capital with the capital of other financial services companies. Moreover, the proposed international banking capital standards known as Basel III include measures that rely on the Tier 1 common risk-based capital ratio.

Common Equity and Tangible Common Equity to Risk-Weighted Assets Ratios — Common equity equals the Company’s shareholders’ equity of $18.8 billion as of December 31, 2011, and tangible common equity, a non-GAAP measure, equals common equity less goodwill and other intangibles of $4.3 billion as of December 31, 2011. The Company 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.

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 the generation of net income. Historically, capital generated through net income and other sources, such as the exercise of stock options by employees, has exceeded the annual growth in its capital requirements. To the extent capital has exceeded business, regulatory and rating agency requirements, the Company has historically returned excess capital to shareholders through its regular common share 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 at the American Express’ parent company (Parent Company) level.

SHARE REPURCHASES AND DIVIDENDS

The Company has a share repurchase program to return excess capital to shareholders. The share repurchases reduce shares outstanding and offset, in whole or part, the issuance of new shares as part of employee compensation plans.

During 2011, the Company returned $3.2 billion to its shareholders in the form of dividends ($856 million) and share repurchases ($2.3 billion), which represents approximately 56 percent of total capital generated. During the year, the Company repurchased 48 million common shares at an average price of $48.13. On January 9, 2012, the Company submitted its Comprehensive Capital Plan (CCP) to the Federal Reserve requesting approval to proceed with additional share repurchases in 2012. 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. The Company expects a response from the Federal Reserve by March 15, 2012.

Since the inception of repurchase programs in December 1994, 732 million shares have been acquired under cumulative Board authorizations to repurchase up to 770 million shares. On a cumulative basis, since 1994, the Company has distributed 63 percent of capital generated through share repurchases and dividends.

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.

 

29


Table of Contents

AMERICAN EXPRESS COMPANY

2011 FINANCIAL REVIEW

 

FUNDING PROGRAMS AND ACTIVITIES

The Company meets its funding needs through a variety of sources, including direct and third-party distributed deposits and debt instruments, such as senior unsecured debentures, asset securitizations, borrowings through a secured financing facility and long-term committed bank borrowing facilities in certain non-U.S. regions.

The Company had the following consolidated debt and customer deposits outstanding as of December 31:

 

000000000 000000000

(Billions)

   2011      2010  

Short-term borrowings

   $ 3.4      $ 3.4  

Long-term debt

     59.6        66.4  

 

  

 

 

    

 

 

 

Total debt

     63.0        69.8  

Customer deposits

     37.9        29.7  

 

  

 

 

    

 

 

 

Total debt and customer deposits

   $ 100.9      $ 99.5  

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 funding obligations on a consolidated basis for a 12-month period. Management does not expect to make any major funding or liquidity strategy changes in order to meet Basel III’s Liquidity Coverage Ratio standard.

The Company’s funding plan for the full year 2012 includes, among other sources, approximately $3 billion to $9 billion of unsecured term debt issuance and $1 billion to $6 billion of secured term debt issuance. The Company’s funding plans are subject to various risks and uncertainties, such as future business growth, the impact of global economic, political and other events on market capacity, demand for securities offered by the Company, regulatory changes, ability to securitize and sell receivables, and the performance of receivables previously sold in securitization transactions. Many of these risks and uncertainties are beyond the Company’s control.

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. The Company’s asset-backed securitization (ABS) activities are rated separately.

 

Credit Agency

 

Entity Rated

 

Short-Term
Ratings

 

Long-Term
Ratings

 

Outlook

DBRS

  All rated entities   R-1 (middle)   A
(high)
  Stable

Fitch

  All rated entities   F1   A+   Stable

Moody’s

  TRS(a) and rated operating subsidiaries   Prime-1   A2   Stable

Moody’s

  American Express Company   Prime-2   A3   Stable

S&P

  All rated entities   A-2   BBB+   Stable

 

(a) American Express Travel Related Services Company, Inc.

Downgrades in the Company’s unsecured debt or asset securitization program’s securities ratings could result in higher funding costs, as well as higher fees related to borrowings under its unused lines of credit. Declines in credit ratings could also 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 U.S. retail deposits insured by the Federal Deposit Insurance Corporation (FDIC), 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 in the last several years have not materially impacted the Company’s borrowing costs or resulted in a reduction in its borrowing capacity.

 

30


Table of Contents

AMERICAN EXPRESS COMPANY

2011 FINANCIAL REVIEW

 

SHORT-TERM FUNDING PROGRAMS

Short-term borrowings, such as commercial paper, are defined as any debt with an original maturity of 12 months or less, as well as interest-bearing overdrafts with banks. 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 stable throughout 2011. The amount of short-term borrowings issued in the future will depend on the Company’s funding strategy, its needs and market conditions.

The Company had the following short-term borrowings outstanding as of December 31:

 

000000000 000000000

(Billions)

   2011      2010  

Commercial paper

   $ 0.6      $ 0.6  

Other short-term borrowings

     2.8        2.8  

 

  

 

 

    

 

 

 

Total

   $ 3.4      $ 3.4  

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:

 

000000000 000000000

 

   2011     2010  

Short-term borrowings as a percentage of total debt

     5.4     4.9

As of December 31, 2011, the Company had $0.6 billion of commercial paper outstanding. Average commercial paper outstanding was $0.6 billion and $0.9 billion in 2011 and 2010, respectively.

American Express Credit Corporation’s (Credco) total back-up liquidity coverage, which includes its undrawn committed bank facilities, was 62 percent and over 100 percent of its net short-term borrowings as of December 31, 2011 and 2010, respectively. The undrawn committed bank credit facilities were $2.9 billion as of December 31, 2011.

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 FDIC. The Company’s ability to obtain deposit funding and offer competitive interest rates is dependent on the Banks’ capital levels. The Company, through FSB, has a direct retail deposit program, Personal Savings from American Express, to supplement its distribution of deposit products sourced through third-party distribution channels. The direct retail program makes FDIC-insured certificates of deposit (CDs) and high-yield savings account products available directly to consumers.

During 2011, 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. The account and balance growth of Personal Savings from American Express outpaced the maturities of CDs sourced through third-party distribution channels.

The Company held the following deposits as of December 31, 2011 and 2010:

 

000000000 000000000

(Billions)

   2011      2010  

U.S. retail deposits:

     

Savings accounts – Direct

   $ 14.6      $ 7.7  

Certificates of deposit:(a)

     

Direct

     0.9        1.1  

Third party

     10.8        11.4  

Sweep accounts – Third party

     11.0        8.9  

Other deposits

     0.6        0.6  

 

  

 

 

    

 

 

 

Total customer deposits

   $ 37.9      $ 29.7  

 

(a) The weighted average remaining maturity and weighted average rate at issuance on the total portfolio of U.S. retail CDs, issued through direct and third-party programs, were 22 months and 2.2 percent, respectively.

LONG-TERM DEBT PROGRAMS

During 2011, the Company and its subsidiaries issued debt and asset securitizations with maturities ranging from 2 to 5 years. These amounts included approximately $2.0 billion of AAA-rated lending securitization certificates, $0.3 billion of subordinated notes and certificates and $3.8 billion of unsecured debt across a variety of maturities and markets. During the year, the Company retained approximately $0.2 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 2011 issuances were as follows:

 

000000000

(Billions)

   Amount  

American Express Credit Corporation:

  

Fixed Rate Senior Notes (2.8% coupon)

   $ 2.3  

Floating Rate Senior Note (3-month LIBOR plus 85 basis points)

     0.6  

American Express Canada Credit Corporation

  

Fixed Rate Senior Notes (3.6% coupon)

     0.6  

Floating Rate Senior Note (1-month CDOR plus 105 basis points)(a)

     0.3  

American Express Credit Account Master Trust:(b)

  

Floating Rate Senior Notes (1-month LIBOR plus 15 basis points on average)

     2.0  

Floating Rate Subordinated Notes and Certificates
(1-month LIBOR plus 79 basis points on average)

     0.3  

 

  

 

 

 

Total

   $ 6.1  

 

(a) Canadian Dealer Offered Rate.
(b) Issuances from the Lending Trust do not include $0.2 billion of subordinated securities retained by American Express during the year.

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 to third-party investors, certificates or notes (securities) collateralized by the transferred assets. The proceeds from issuance are distributed to the Company, through its wholly owned subsidiaries, as consideration for the transferred assets.

 

31


Table of Contents

AMERICAN EXPRESS COMPANY

2011 FINANCIAL REVIEW

 

The receivables and loans being securitized are reported as assets on the Company’s Consolidated Balance Sheets and the related securities issued to third-party investors are reported as long-term debt.

Under the respective terms of the securitization trust agreements, the occurrence of certain triggering events could result in establishment of reserve funds or, in a worst-case scenario, early amortization of investor certificates. During the year ended December 31, 2011, no triggering events occurred that would have resulted in 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 such trust in the same manner as they have historically, even though the Charge Trust does 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 for at least a twelve-month period, 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 undrawn amounts under its secured financing facility and the Federal Reserve discount window as well as committed bank credit facilities.

As of December 31, 2011, the Company’s excess cash and readily-marketable securities available to fund long-term maturities were as follows:

 

000000000

(Billions)

   Total  

Cash

   $ 17.9 (a) 

Readily-marketable securities

     0.9 (b) 

 

  

 

 

 

Total Liquidity Portfolio

     18.8   

Less:

  

Short-term obligations outstanding

     0.6 (c) 

 

  

 

 

 

Cash and readily-marketable securities available to fund maturities

   $ 18.2   

 

(a) Includes $24.9 billion classified as cash and cash equivalents, less $7.8 billion of cash available to fund day-to-day operations. Cash as shown in the table above also includes $101 million classified as other assets on the Company’s Consolidated Balance Sheets, which is held against certain forthcoming asset-backed securitization maturities and $750 million classified as other receivables on the Company’s Consolidated Balance Sheet, which relates to readily marketable securities that matured on December 31, 2011, but which did not settle until January 3, 2012. The $17.9 billion represents cash residing in the United States.
(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) Consists of commercial paper.

 

32


Table of Contents

AMERICAN EXPRESS COMPANY

2011 FINANCIAL REVIEW

 

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  

2012 Quarters Ending:

   Unsecured
Debt
     Asset-Backed
Securitizations
     Certificates
of Deposit
     Total  

March 31

   $ 1.0      $ 0.5      $ 1.2      $ 2.7  

June 30

     1.2        2.0        0.7        3.9  

September 30

     0.5        3.2        0.4        4.1  

December 31

     1.6        1.1        0.9        3.6  

 

  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4.3      $ 6.8      $ 3.2      $ 14.3  

The Company’s financing needs for the next 12 months 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 the Company’s 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

The Company maintained a $3.0 billion committed, revolving, secured financing facility sponsored by and with liquidity backup provided by a syndicate of banks as of December 31, 2011 (the secured financing facility). The secured financing facility is used in the ordinary course of business to fund seasonal working capital needs, as well as further enhance the Company’s contingent funding resources. As of December 31, 2011, $3.0 billion was drawn on this facility.

Federal Reserve Discount Window

The Banks are insured depository institutions that have the ability to borrow from the Federal Reserve Bank of San Francisco, subject to the amount of qualifying collateral pledged. 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, remain in the discretion of the Federal Reserve.

The Company had approximately $38.4 billion as of December 31, 2011 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.

Committed Bank Credit Facilities

In addition to the secured financing facility, the Company maintained committed syndicated bank credit facilities as of December 31, 2011, as follows:

 

000000000 000000000 000000000

(Billions)

   Parent
Company
     Credco      Total  

Committed

   $ 0.8      $ 6.7      $ 7.5  

Outstanding

   $       $ 4.6      $ 4.6  

The Company’s committed bank credit facilities expire as follows:

 

000000000

(Billions)

  

 

 

2012

   $ 2.9  

2014

     2.0  

2016

     2.6  

 

  

 

 

 

Total

   $ 7.5  

The availability of the credit lines is subject to the Company’s compliance with certain financial covenants, including the maintenance by the Company of a certain level of consolidated tangible net worth, the maintenance by Credco of a certain 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, 2011, the Company was in compliance with each of its covenants. The drawn balance of the committed credit facilities of $4.6 billion as of December 31, 2011 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, nor are they dependent on the Company’s credit rating.

Parent Company Funding

Parent Company long-term debt outstanding was $10.1 billion and $10.3 billion as of December 31, 2011 and 2010, respectively.

The Parent Company is authorized to issue commercial paper under a program 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 2011 and 2010 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.

 

33


Table of Contents

AMERICAN EXPRESS COMPANY

2011 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.

 

000000000 000000000 000000000 000000000 000000000
      Payments due by year  

(Millions)

   2012      2013–2014      2015–2016      2017 and
thereafter
     Total(a)  

Long-term debt

   $ 11,057      $ 26,437      $ 10,466      $ 10,842      $ 58,802   

Interest payments on long-term debt(b)

     1,626        2,531        1,584        3,374        9,115   

Certificates of deposit

     3,703        7,262        874        222        12,061   

Other long-term liabilities(c)

     86        138        41        30        295   

Operating lease obligations

     255        422        279        1,048        2,004   

Purchase obligations(d)

     470        199        116        27        812   

 

  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 17,197      $ 36,989      $ 13,360      $ 15,543      $ 83,089   

 

(a) The above table excludes approximately $1.2 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, 2011, and reflects the effect of existing interest rate swaps. Actual cash flows may differ from estimated payments.
(c) As of December 31, 2011, 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 Retirement Restoration Plan and non-U.S. defined benefit pension and postretirement benefit plans, contributions in 2012 are anticipated to be approximately $48 million, and this amount has been included within other long-term liabilities. Remaining obligations under defined benefit pension and postretirement benefit plans aggregating $706 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 $5.1 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, 2011. 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 $5.3 billion as of December 31, 2011.

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, 2011, the Company had guarantees totaling approximately $52 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, 2011, the Company had approximately $238 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.

 

34


Table of Contents

AMERICAN EXPRESS COMPANY

2011 FINANCIAL REVIEW

 

RISK MANAGEMENT

GOVERNANCE

Risk management and key risks identified by management are overseen by the Company’s Board of Directors and its Audit and Risk Committee. The Audit and Risk Committee reports regularly to the Board on the matters reviewed at the Committee level. The Board and its Audit and Risk Committee monitor the Company’s risk culture, oversee risk management capabilities and risk outcomes in key business units, and review specific risks, as needed.

The Audit and Risk Committee approves the Company’s Enterprise-wide Risk Management Policy, which defines risk management objectives, risk appetite, risk limits, and escalation triggers, and establishes the internal governance structure for managing risks. The Policy focuses on the risks that are most important to the Company given its business model — credit risk (individual and institutional), operational risk, and reputational risk. The Audit and Risk Committee also approves the policies governing the areas of individual credit risk, institutional credit risk, market risk, liquidity risk, operational risk, asset/liability management and capital management, as well as the policy governing the launch of new products and services. Internal management committees, including the Enterprise-wide 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 policies across the Company. The ERMC approves policies governing reputational risk management, model governance and validation, and economic capital.

The Audit and Risk Committee periodically reviews risk profiles, risk trends and evolution of risk management capabilities of the Company’s major business units as well as updates on enterprise-wide operational risk management trends, events and capabilities (including, but not limited to, compliance, fraud, legal, information security, and privacy risks), market risk and funding and liquidity risk. The Audit and Risk Committee receives regular reports discussing emerging risks (including their likelihood and potential impact), key risk escalations, and compliance with the policy-based risk limits. The Audit and Risk Committee meets regularly in private session with the Company’s Chief Risk Officer and other senior management with regard to the Company’s risk management processes, controls and capabilities.

CREDIT RISK MANAGEMENT PROCESS

Credit risk is defined as loss due to obligor or counterparty default or changes in the credit quality of a security. 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, and loans. 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 Risk Committee which is responsible for implementation and enforcement of the Individual Credit Risk Management 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, continue to be integrated into the risk models to further mitigate small business risk. The Company has developed data-driven economic decision logic for customer interactions to better serve its customers.

 

35


Table of Contents

AMERICAN EXPRESS COMPANY

2011 FINANCIAL REVIEW

 

INSTITUTIONAL CREDIT RISK

Institutional credit risk arises principally within the Company’s Global Corporate Payments, Global Merchant Services, and Global Network Services, Prepaid Services, Foreign Exchange Services (formerly known as Global Foreign Exchange Services) businesses and investment and liquidity management activities. Unlike individual credit risk, institutional credit risk is characterized by a lower loss frequency but higher severity. It is affected both by general economic conditions and by client-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 credit 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 Institutional Credit Risk Management 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, makes investment decisions in core risk capabilities, ensures proper implementation of the underwriting standards and contractual rights of risk mitigation, monitors risk exposures, and determines 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 unit and a specialized airline risk group provide risk assessment of institutional obligors.

Exposure to Airline Industry

The Company has multiple important co-brand, rewards and corporate payments arrangements with airlines. The Company’s largest airline partner is Delta Air Lines and this relationship includes exclusive co-brand credit card partnerships and other arrangements including Membership Rewards, merchant acceptance, travel and corporate payments. Refer to Note 22 to the Consolidated Financial Statements for further discussion of these relationships.

European Debt Exposure

As part of its ongoing risk management process, the Company monitors its financial exposure to both sovereign and non-sovereign customers and counterparties, and measures and manages concentrations of risk by geographic regions, as well as by economic sectors and industries. Several European countries have been subject to credit deterioration due to weaknesses in their economic and fiscal situations. The Company is closely monitoring its exposures to Italy, Spain, Ireland, Greece and Portugal, which have been determined to be high risk based on the market assessment of the riskiness of their sovereign debt and the Company’s assessment of their economic and financial outlook. As of December 31, 2011, the Company did not hold any investments in sovereign debt securities issued by Italy, Spain, Ireland, Greece or Portugal, and the Company’s gross credit exposures to government entities, financial institutions and corporations in those countries were individually and collectively not material.

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 in its investment portfolios; and

 

 

Foreign exchange risk in its operations outside the United States.

Market Risk limits and escalation triggers within the Market Risk and Asset Liability Management Policies are approved by the Audit and Risk Committee and ALCO. 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 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.

 

36


Table of Contents

AMERICAN EXPRESS COMPANY

2011 FINANCIAL REVIEW

 

As of December 31, 2011, the detrimental effect on the Company’s annual net interest income of a hypothetical 100 basis point increase in interest rates would be approximately $192 million. To calculate this effect, the Company first measures the potential change in net interest income over the following 12 months taking into consideration anticipated future business growth and market-based forward interest rates. The Company then measures the impact of the assumed forward interest rate plus the 100 basis point increase on the projected net interest income. This effect is primarily driven by the volume of charge card receivables and loans deemed to be fixed-rate and funded by variable-rate liabilities. As of December 31, 2011, the percentage of worldwide charge card accounts receivable and credit card loans that were deemed to be fixed rate was 67.7 percent, or $71.3 billion, with the remaining 32.3 percent, or $34.0 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 net interest income of a hypothetical 10 basis point decrease in the spread between Prime and one-month LIBOR over the next 12 months is estimated to be $34 million. The Company currently has approximately $34 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, 2011 and 2010, foreign currency derivative instruments with total notional amounts of approximately $23 billion and $22 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, 2011. 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 $175 million as of December 31, 2011. 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, 2011.

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 manages liquidity risk by maintaining access to a diverse set of cash, readily-marketable securities and contingent sources of liquidity, such that the Company can continuously meet its business requirements and expected future financing obligations for at least a twelve-month period, 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.

 

37


Table of Contents

AMERICAN EXPRESS COMPANY

2011 FINANCIAL REVIEW

 

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.

In order to appropriately measure and manage operational risk, the Company has developed a comprehensive operational risk framework that is defined in the Operational Risk Management 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.

The Company uses the 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) a project office to coordinate issue management and control enhancements, (c) key risk indicators, and (d) process and entity-level risk self-assessments.

The framework requires the assessment of operational risk events to determine root causes, impacts and accountability for risk mitigation. 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.

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.

REPUTATIONAL RISK MANAGEMENT PROCESS

The Company defines reputational risk as the risk that negative public perceptions 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 is responsible for implementation of 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.

 

38


Table of Contents

AMERICAN EXPRESS COMPANY

2011 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 first quarter of 2011, the Company changed its segment allocation methodology to better align segment reporting with the Company’s previously announced management reorganization, which had been implemented over the several prior quarters. The reorganization included the formation of the Enterprise Growth Group, which is reported in Corporate & Other. The group consists of three core business units: Online and Mobile, Fee Based Services and Global Payment Options (formerly known as Global Prepaid). Starting in the first quarter of 2011, certain business activities such as LoyaltyEdge and Foreign Exchange Services that were previously managed and reported in the USCS and GCS operating segments, respectively, are now managed by Enterprise Growth. The reorganization also included consolidation of certain corporate support functions into the Global Services organization. Greater centralization of activities has led to modifications in the costs being allocated from Corporate & Other to the reportable operating segments starting in the first quarter of 2011. Prior period segment results have been revised for these changes.

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.

 

39


Table of Contents

AMERICAN EXPRESS COMPANY

2011 FINANCIAL REVIEW

 

U.S. CARD SERVICES

SELECTED INCOME STATEMENT DATA

 

000000000 000000000 000000000

Years Ended December 31,

(Millions)

   2011      2010      2009  

Revenues

        

Discount revenue, net card fees and other

   $ 10,648      $ 9,884      $ 9,043  

 

  

 

 

    

 

 

    

 

 

 

Securitization income, net(a)

                     400  

 

  

 

 

    

 

 

    

 

 

 

Interest income

     5,230        5,390        3,216  

Interest expense

     807        812        568  

 

  

 

 

    

 

 

    

 

 

 

Net interest income

     4,423        4,578        2,648  

 

  

 

 

    

 

 

    

 

 

 

Total revenues net of interest expense

     15,071        14,462        12,091  

Provisions for losses

     687        1,591        3,769  

 

  

 

 

    

 

 

    

 

 

 

Total revenues net of interest expense after provisions for losses

     14,384        12,871        8,322  

 

  

 

 

    

 

 

    

 

 

 

Expenses

        

Marketing, promotion, rewards and cardmember services

     6,593        5,744        4,362  

Salaries and employee benefits and other operating expenses

     3,662        3,623        3,385  

 

  

 

 

    

 

 

    

 

 

 

Total

     10,255        9,367        7,747  

 

  

 

 

    

 

 

    

 

 

 

Pretax segment income

     4,129        3,504        575  

Income tax provision

     1,449        1,279        171  

 

  

 

 

    

 

 

    

 

 

 

Segment income

   $ 2,680      $ 2,225      $ 404  

 

(a) In accordance with new GAAP governing consolidations and VIEs, the Company no longer reports securitization income, net in its income statement beginning January 1, 2010.

SELECTED STATISTICAL INFORMATION

 

000000000 000000000 000000000

As of or for the Years Ended December 31,

(Billions, except percentages
and where indicated)

   2011     2010     2009  

Card billed business

   $ 424.3     $ 378.1      $ 339.4   

Total cards-in-force (millions)

     40.9       39.9        39.5   

Basic cards-in-force (millions)

     30.4       29.7        29.5   

Average basic cardmember spending (dollars)*

   $ 14,124     $ 12,795      $ 10,957   

U.S. Consumer Travel:

      

Travel sales (millions)

   $ 3,603     $ 3,116      $ 2,561   

Travel commissions and fees/sales

     8.3     8.2 %       8.4

Total segment assets

   $ 97.8     $ 91.3      $ 57.6   

Segment capital (millions)

   $ 8,804     $ 7,411      $ 6,021   

Return on average segment capital(a)

     33.0     35.0 %       7.9 %  

Return on average tangible segment capital(a)

     34.8     37.8 %       8.6 %  

 

  

 

 

   

 

 

   

 

 

 

Cardmember receivables:

      

Total receivables

   $ 20.6     $ 19.2       $ 17.8   

30 days past due as a % of total

     1.9     1.5 %       1.8 %  

Average receivables

   $ 18.8     $ 17.1      $ 16.1   

Net write-off rate – principal only(b)

     1.7     1.6 %       3.8

Net write-off rate – principal and fees(b)

     1.9     1.8 %       4.2 %  

 

  

 

 

   

 

 

   

 

 

 

Cardmember loans – GAAP basis portfolio:

      

Total loans

   $ 53.7     $ 51.6      $ 23.5   

30 days past due loans as a % of total

     1.4     2.1 %       3.7 %  

Average loans

   $ 50.3     $ 49.8      $ 25.9   

Net write-off rate – principal only(b)

     2.9     5.8 %       9.1 %  

Net write-off rate – principal, interest and fees(b)

     3.2     6.3 %       10.4 %  

Net interest income divided by average loans(c)(d)

     8.8     9.2 %       10.2 %  

Net interest yield on cardmember loans(c)

     8.9     9.4 %       9.4 %  

 

  

 

 

   

 

 

   

 

 

 

Cardmember loans – Managed basis portfolio:

      

Total loans

   $ 53.7     $ 51.6      $ 52.6   

30 days past due loans as a % of total

     1.4     2.1 %       3.7 %  

Average loans

   $ 50.3     $ 49.8      $ 54.9   

Net write-off rate – principal only(b)

     2.9     5.8 %       8.7 %  

Net write-off rate – principal, interest and fees(b)

     3.2     6.3 %       9.9 %  

Net interest yield on cardmember loans(c)

     8.9     9.4 %       10.1 %  

 

* Proprietary cards only.
(a) Return on average segment capital is calculated by dividing (i) one-year period segment income ($2.7 billion, $2.2 billion and $404 million for 2011, 2010 and 2009, respectively) by (ii) one-year average segment capital ($8.1 billion, $6.4 billion and $5.1 billion for 2011, 2010 and 2009, 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, a non-GAAP measure, excludes from average segment capital average goodwill and other intangibles of $425 million, $459 million and $432 million as of December 31, 2011, 2010 and 2009 respectively. The Company believes return on average tangible segment capital is a useful measure of the profitability of its business.
(b) Refer to “Consolidated Results of Operations — Selected Statistical Information”, footnote (b) on page 20.
(c) See table on the following page for the calculation of net interest yield on cardmember loans, a non-GAAP measure, and net interest income divided by average loans, a GAAP measure.
(d) Refer to “Consolidated Results of Operations — Selected Statistical Information”, footnote (g) on page 20.

 

40


Table of Contents

AMERICAN EXPRESS COMPANY

2011 FINANCIAL REVIEW

 

Calculation of Net Interest Yield on Cardmember Loans

 

000000000 000000000 000000000

Years Ended December 31,

(Millions, except percentages
and where indicated)

   2011     2010     2009  

Calculation based on GAAP information:

      

Net interest income

   $ 4,423      $ 4,578      $ 2,648   

Average loans (billions)

   $ 50.3      $ 49.8      $ 25.9   

Adjusted net interest income

   $ 4,490      $ 4,684      $ 2,451   

Adjusted average loans (billions)

   $ 50.3      $ 49.8      $ 26.0   

Net interest income divided by average loans

     8.8 %     9.2 %     10.2 %

Net interest yield on cardmember loans

     8.9 %     9.4 %     9.4 %

Calculation based on managed information:

      

Net interest income

   $ 4,423      $ 4,578      $ 5,501   

Average loans (billions)

   $ 50.3      $ 49.8      $ 54.9   

Adjusted net interest income

   $ 4,490      $ 4,684      $ 5,558   

Adjusted average loans (billions)

   $ 50.3      $ 49.8      $ 55.0   

Net interest yield on cardmember loans

     8.9 %     9.4 %     10.1 %

RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 2011

The following discussion of USCS segment results of operations is presented on a GAAP basis.

USCS reported segment income of $2.7 billion for 2011, a $455 million or 20 percent increase from $2.2 billion in 2010, which increased $1.8 billion or greater than 100 percent from 2009.

Total Revenues Net of Interest Expense

In 2011, USCS total revenues net of interest expense increased $609 million or 4 percent to $15.1 billion due to increases in discount revenue, net card fees and other and a decrease in interest expense, partially offset by decreased interest income.

Discount revenue, net card fees and other of $10.6 billion in 2011 increased $764 million or 8 percent from 2010, primarily resulting from higher discount revenue, driven by billed business growth of 12 percent. The growth in billed business was driven by a 10 percent increase in average spending per proprietary basic cards-in-force. This line also reflects higher travel commissions and fees, driven by increased travel sales and was partially offset by lower other commissions and fees primarily due to reduced conversion revenue.

Interest income of $5.2 billion in 2011 was $160 million or 3 percent lower than in 2010, principally due to lower yields on cardmember loans.

Interest expense of $807 million in 2011 decreased $5 million or 1 percent as compared to a year ago, reflecting reduced cost of funds, partially offset by increased average cardmember receivable and loan balances.

Total revenues net of interest expense of $14.5 billion in 2010 were $2.4 billion or 20 percent higher than 2009, primarily as a result of increases in discount revenue, net card fees and other, and interest income, partially offset by increased interest expense.

Provisions for Losses

Provisions for losses decreased $904 million or 57 percent to $687 million for 2011 compared to 2010, principally reflecting lower reserve requirements driven by improving cardmember loan trends, partially offset by higher charge card provision resulting from higher cardmember receivable balances and a higher net write-off rate. The lending net write-off rate decreased to 2.9 percent in 2011 from 5.8 percent in 2010. The charge card net write-off rate increased to 1.7 percent in 2011 from 1.6 percent in 2010.

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 as a result of new GAAP governing consolidations and VIEs and a higher charge card provision.

Expenses

During 2011, USCS expenses increased $888 million or 9 percent to $10.3 billion, due to increased marketing, promotion, rewards and cardmember services expenses, and salaries and employee benefits and total other operating expenses. Expenses included a reengineering net benefit of $8 million in 2011, and charges of $55 million and $12 million in 2010 and 2009, respectively. Expenses in 2010 of $9.4 billion were $1.6 billion or 21 percent higher than in 2009, due to increased marketing, promotion, rewards and cardmember services expenses, and salaries and employee benefits and total operating expenses.

Marketing, promotion, rewards and cardmember services expenses increased $849 million or 15 percent in 2011 to $6.6 billion, driven by increased rewards costs, which reflect greater rewards related spending volumes, higher co-brand expense, increases in the ultimate redemption rate as the result of increased customer engagement, and the previously mentioned increase of the ultimate redemption rate estimate for the U.S. membership rewards program. Cardmember services expense also increased as a result of new benefits provided to cardmembers. These increases were partially offset by lower marketing and promotion expenses resulting from decreased product and media spending. Marketing, promotion, rewards and cardmember services expenses increased $1.4 billion or 32 percent in 2010 to $5.7 billion, 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.

Salaries and employee benefits and other operating expenses of $3.7 billion in 2011 increased $39 million or 1 percent from 2010, primarily reflecting increased salary and other employee benefit costs, offset by reengineering expense in the prior year. Salaries and employee benefits and other operating expenses of $3.6 billion in 2010 increased $238 million or 7 percent from 2009, primarily reflecting the higher reengineering-related costs, and higher technology development expenditures and other business building investments.

 

41


Table of Contents

AMERICAN EXPRESS COMPANY

2011 FINANCIAL REVIEW

 

 

Income Taxes

The effective tax rate was 35 percent for 2011 compared to 37 percent and 30 percent for 2010 and 2009, respectively. The tax rates for each of these years reflect the benefits from the resolution of certain prior years’ tax items and the relationship of recurring permanent tax benefits to varying levels of pretax income.

 

INTERNATIONAL CARD SERVICES

SELECTED INCOME STATEMENT DATA

 

000000000 000000000 000000000

Years Ended December 31,

(Millions)

   2011      2010      2009  

Revenues

        

Discount revenue, net card fees and other

   $ 4,361      $ 3,678      $ 3,442  

 

  

 

 

    

 

 

    

 

 

 

Interest income

     1,304        1,393        1,509  

Interest expense

     426        428        427  

 

  

 

 

    

 

 

    

 

 

 

Net interest income

     878        965        1,082  

 

  

 

 

    

 

 

    

 

 

 

Total revenues net of interest expense

     5,239        4,643        4,524  

Provisions for losses

     268        392        1,211  

 

  

 

 

    

 

 

    

 

 

 

Total revenues net of interest expense after provisions for losses

     4,971        4,251        3,313  

 

  

 

 

    

 

 

    

 

 

 

Expenses

        

Marketing, promotion, rewards and cardmember services

     1,857        1,612        1,221  

Salaries and employee benefits and other operating expenses

     2,352        2,050        1,821  

 

  

 

 

    

 

 

    

 

 

 

Total

     4,209        3,662        3,042  

 

  

 

 

    

 

 

    

 

 

 

Pretax segment income

     762        589        271  

Income tax provision (benefit)

     39        52        (59

 

  

 

 

    

 

 

    

 

 

 

Segment income

   $ 723      $ 537      $ 330  

SELECTED STATISTICAL INFORMATION

 

000000000 000000000 000000000

As of or for the Years Ended December 31,

(Billions, except percentages
and where indicated)

   2011     2010     2009  

Card billed business

   $ 124.2     $ 107.9     $ 94.9  

Total cards-in-force (millions)

     15.3       15.0       15.0  

Basic cards-in-force (millions)

     10.5       10.4       10.5  

Average basic cardmember spending (dollars)*

   $ 11,935     $ 10,366     $ 8,758  

International Consumer Travel:

      

Travel sales (millions)

   $ 1,324     $ 1,126     $ 985  

Travel commissions and fees/sales

     7.8     8.0     8.6

Total segment assets

   $ 29.1     $ 25.3     $ 23.0  

Segment capital (millions)

   $ 2,840     $ 2,199     $ 2,262  

Return on average segment capital(a)

     25.8     25.1     15.0

Return on average tangible segment capital(a)

     49.8     34.8     20.0

 

  

 

 

   

 

 

   

 

 

 

Cardmember receivables:

      

Total receivables

   $ 7.2     $ 6.7     $ 5.9  

90 days past billing as a % of total(b)

     0.9     1.0     2.1

Net loss ratio (as a % of charge volume)(b)

     0.15     0.24     0.36

 

  

 

 

   

 

 

   

 

 

 

Cardmember loans:

      

Total loans

   $ 8.9     $ 9.3     $ 9.2  

30 days past due loans as a % of total

     1.7     2.3     3.3

Average loans

   $ 8.8     $ 8.6     $ 8.9  

Net write-off rate — principal only(c)

     2.7     4.6     6.8

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

     3.3     5.5     8.0

Net interest income divided by average loans(d)(e)

     10.0     11.2     12.2

Net interest yield on cardmember loans(d)

     9.9     11.1     12.2

 

* Proprietary cards only.
(a) Return on average segment capital is calculated by dividing (i) one-year period segment income ($723 million, $537 million and $330 million for 2011, 2010 and 2009, respectively) by (ii) one-year average segment capital ($2.8 billion, $2.1 billion and $2.2 billion for 2011, 2010 and 2009, 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, a non-GAAP measure, excludes from average segment capital average goodwill and other intangibles of $1.3 billion, $592 million and $551 million as of December 31, 2011, 2010 and 2009, respectively. The Company 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 for USCS. 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”, footnote (b) on page 20.
(d) See table below for the calculation of net interest yield on cardmember loans, a non-GAAP measure, and net interest income divided by average loans, a GAAP measure.
(e) Refer to “Consolidated Results of Operations — Selected Statistical Information”, footnote (g) on page 20.

 

42


Table of Contents

AMERICAN EXPRESS COMPANY

2011 FINANCIAL REVIEW

 

Calculation of Net Interest Yield on Cardmember Loans

 

000000000 000000000 000000000

Years Ended December 31,

(Millions, except percentages
and where indicated)

   2011     2010     2009  

Net interest income

   $ 878     $ 965     $ 1,082  

Average loans (billions)

   $ 8.8     $ 8.6     $ 8.9  

Adjusted net interest income

   $ 855     $ 946     $ 1,087  

Adjusted average loans (billions)

   $ 8.6     $ 8.5     $ 8.9  

Net interest income divided by average loans

     10.0     11.2     12.2

Net interest yield on cardmember loans

     9.9     11.1     12.2

RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 2011

ICS reported segment income of $723 million for 2011, a $186 million or 35 percent increase from $537 million in 2010, which increased $207 million or 63 percent from 2009. The increase in segment income for 2011 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 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 2011, ICS total revenues net of interest expense increased $596 million or 13 percent to $5.2 billion compared to 2010 due to higher discount revenue, net card fees and other, partially offset by lower interest income.

Discount revenue, net card fees, and other increased $683 million or 19 percent to $4.4 billion in 2011 compared to 2010, primarily driven by a 15 percent increase in billed business and the inclusion of Loyalty Partner’s revenues following the closing of the acquisition in the first quarter of 2011. The 15 percent increase in billed business in 2011 reflected a 15 percent increase in average spending per proprietary basic cards-in-force. Assuming no changes in foreign currency exchange rates from 2010 to 2011, billed business and average spending per proprietary basic cards-in-force both increased 9 percent; volumes increased across the major geographic regions, including an increase of 10 percent in Latin America and Canada, 9 percent in Japan, Asia Pacific and Australia, and 7 percent in Europe, the Middle East and Africa4.

Interest income declined $89 million or 6 percent to $1.3 billion in 2011 compared to 2010, primarily reflecting a lower yield on cardmember loans, partially offset by slightly higher average loans.

Interest expense of $426 million in 2011 was flat compared to 2010, as lower average loan balances offset higher average receivable levels.

 

4  Refer to footnote 1 on page 21 under Consolidated Results of Operations for the Three Years Ended December 31, 2011 relating to changes in foreign exchange rates.

Total revenues net of interest expense of $4.6 billion in 2010 was $119 million or 3 percent higher than 2009 due to higher discount revenue, net card fees and other, partially offset by lower interest income.

Provisions for Losses

Provisions for losses decreased $124 million or 32 percent to $268 million in 2011 compared to 2010, primarily reflecting lower reserve requirements due to improving cardmember loan and charge card credit trends, partially offset by increased charge card provision expense driven by higher average receivable balances. The charge card net loss ratio (as a percentage of charge volume) was 0.15 percent in 2011 versus 0.24 percent in 2010. The lending net write-off rate was 2.7 percent in 2011 versus 4.6 percent in 2010.

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.

Expenses

During 2011, ICS expenses increased $547 million or 15 percent to $4.2 billion compared to 2010, due to higher marketing, promotion, rewards and cardmember services and increased salaries and employee benefits and other operating expenses. Expenses in 2011, 2010 and 2009 included $36 million, $19 million and $4 million, respectively, of reengineering costs, primarily related to the Company’s reengineering initiatives in 2011, 2010 and 2009. Expenses in 2010 of $3.7 billion were $620 million or 20 percent higher than 2009, due to higher marketing, promotion, rewards and cardmember services and increased salaries and employee benefits and other operating expenses.

Marketing, promotion, rewards and cardmember services expenses increased $245 million or 15 percent to $1.9 billion in 2011 compared to 2010, primarily due to greater volume-related rewards costs and co-brand expenses and the inclusion of Loyalty Partner following the closing of the acquisition in the first quarter of 2011. 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.

Salaries and employee benefits and other operating expenses increased $302 million or 15 percent to $2.4 billion in 2011 compared to 2010, reflecting the inclusion of Loyalty Partner expenses following the closing of the acquisition in the first quarter of 2011, as well as increased salary and benefit costs. Salaries and employee benefits and other operating expenses increased $229 million or 13 percent to $2.1 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.

 

43


Table of Contents

AMERICAN EXPRESS COMPANY

2011 FINANCIAL REVIEW

 

 

Income Taxes

The effective tax rate was 5 percent in 2011 compared to 9 percent in 2010 and negative 22 percent in 2009. The tax rate in 2011 reflects the allocated share of a tax benefit related to a distribution of foreign subsidiary earnings with associated foreign tax credits. 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 permanent 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 United States, which is allocated to ICS under the Company’s internal tax allocation process.

 

GLOBAL COMMERCIAL SERVICES

SELECTED INCOME STATEMENT DATA

 

000000000 000000000 000000000

Years Ended December 31,

(Millions)

   2011     2010     2009  

Revenues

      

Discount revenue, net card fees and other

   $ 4,880      $ 4,347     $ 3,882  

 

  

 

 

   

 

 

   

 

 

 

Interest income

     9        7       5  

Interest expense

     264        227       180  

 

  

 

 

   

 

 

   

 

 

 

Net interest expense

     (255     (220     (175

 

  

 

 

   

 

 

   

 

 

 

Total revenues net of interest expense

     4,625        4,127       3,707  

Provisions for losses

     76        157       177  

 

  

 

 

   

 

 

   

 

 

 

Total revenues net of interest expense after provisions for losses

     4,549        3,970       3,530  

 

  

 

 

   

 

 

   

 

 

 

Expenses

      

Marketing, promotion, rewards and cardmember services

     547        439       331  

Salaries and employee benefits and other operating expenses

     2,927        2,808       2,724  

 

  

 

 

   

 

 

   

 

 

 

Total

     3,474        3,247       3,055  

 

  

 

 

   

 

 

   

 

 

 

Pretax segment income

     1,075        723       475  

Income tax provision

     337        273       144  

 

  

 

 

   

 

 

   

 

 

 

Segment income

   $ 738      $ 450     $ 331  

SELECTED STATISTICAL INFORMATION

 

000000000 000000000 000000000

As of or for the Years Ended December 31,

(Billions, except percentages
and where indicated)

   2011     2010     2009  

Card billed business

   $ 154.2      $ 132.8      $ 111.2   

Total cards-in-force (millions)

     7.0        7.1        7.1   

Basic cards-in-force (millions)

     7.0        7.1        7.1   

Average basic cardmember

      

spending (dollars)*

   $ 21,898      $ 18,927      $ 15,544   

Global Corporate Travel:

      

Travel sales

   $ 19.6      $ 17.5      $ 14.6   

Travel commissions and fees/sales

     8.0     8.2     8.8

Total segment assets

   $ 18.8      $ 18.1      $ 16.1   

Segment capital (millions)

   $ 3,564      $ 3,650      $ 3,719   

Return on average segment capital(a)

     20.4     12.6     9.1

Return on average tangible segment capital(a)

     42.1     27.1     19.6

Cardmember receivables:

      

Total receivables

   $ 12.8      $ 11.3      $ 9.8   

90 days past billing as a% of total

     0.8     0.8     1.4

Net loss ratio (as a% of charge volume)(b)

     0.06     0.11     0.19

 

* Proprietary cards only.
(a) Return on average segment capital is calculated by dividing (i) one-year period segment income ($738 million, $450 million and $331 million for 2011, 2010 and 2009, respectively) by (ii) one-year average segment capital ($3.6 billion for each of the years 2011, 2010 and 2009, 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, a non-GAAP measure, excludes from average segment capital average goodwill and other intangibles of $1.9 billion at December 31, 2011, 2010 and 2009, respectively. The Company believes 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 GCS are written off to when they are 180 days past due or earlier, consistent with applicable bank regulatory guidance and the write-off methodology for USCS. 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 GCS 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.

 

44


Table of Contents

AMERICAN EXPRESS COMPANY

2011 FINANCIAL REVIEW

 

RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 2011

GCS reported segment income of $738 million for 2011, a $288 million or 64 percent increase from $450 million in 2010, which increased $119 million or 36 percent from 2009.

Total Revenues Net of Interest Expense

In 2011, GCS total revenues net of interest expense increased $498 million or 12 percent to $4.6 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 $533 million or 12 percent to $4.9 billion in 2011, primarily driven by higher cardmember spending and greater travel commissions and fees, partially offset by greater client incentives. The 16 percent increase in billed business in 2011 was driven by the 16 percent increase in average spending per proprietary basic cards-in-force. Adjusting for the impact of foreign exchange translation, both billed business and average spending per proprietary basic cards-in-force both grew 14 percent; volume increased 14 percent within the United States compared to an increase of 13 percent outside the United States5.

Interest income increased $2 million or 29 percent to $9 million in 2011 compared to 2010.

Interest expense increased $37 million or 16 percent to $264 million in 2011 compared to 2010 driven by increased funding requirements due to higher average cardmember receivable balances.

Total revenues net of interest expense of $4.1 billion in 2010 increased $420 million or 11 percent compared to 2009 due to increased discount revenue, net card fees, and other and higher interest income, partially offset by higher interest expense.

Provisions for Losses

Provisions for losses decreased $81 million or 52 percent to $76 million in 2011 compared to 2010, driven by improved credit performance within the underlying portfolio. The charge card net loss ratio (as a percentage of charge volume) was 0.06 percent in 2011 versus 0.11 percent in prior year. Provisions for losses decreased $20 million or 11 percent to $157 million in 2010

 

5  Refer to footnote 1 on page 21 under Consolidated Results of Operations for the Three Years Ended December 31, 2011 relating to changes in foreign exchange rates.

compared to 2009, principally reflecting lower reserve requirements driven by improved cardmember loan and charge credit trends.

Expenses

During 2011, GCS expenses increased $227 million or 7 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 2011, 2010 and 2009 included $37 million, $32 million and $101 million, respectively, of reengineering costs, primarily reflecting the Company’s reengineering initiatives in 2011, 2010 and 2009. Expenses in 2010 of $3.2 billion increased $192 million or 6 percent, due to higher marketing, promotion, rewards and cardmember services expense and increased salaries and employee benefits and other operating expenses.

Marketing, promotion, rewards and cardmember services expenses increased $108 million or 25 percent to $547 million in 2011 compared to 2010, primarily reflecting higher volume-related reward costs. Marketing, promotion, rewards and cardmember services expenses increased $108 million or 33 percent to $439 million in 2010 compared to 2009, reflecting higher rewards costs and greater marketing and promotion expenses.

Salaries and employee benefits and other operating expenses increased $119 million or 4 percent to $2.9 billion in 2011 compared to 2010, primarily driven by increased salary and benefit costs. Salaries and employee benefits and other operating expenses increased $84 million or 3 percent to $2.8 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.

Income Taxes

The effective tax rate was 31 percent in 2011 versus 38 percent in 2010 and 30 percent in 2009. The higher 2010 rate reflects the impact of increasing the valuation allowance against deferred tax assets associated with certain non-U.S. travel operations.

 

45


Table of Contents

AMERICAN EXPRESS COMPANY

2011 FINANCIAL REVIEW

 

GLOBAL NETWORK & MERCHANT SERVICES

SELECTED INCOME STATEMENT DATA

 

000000000 000000000 000000000

Years Ended December 31,

(Millions)

   2011     2010     2009  

Revenues

      

Discount revenue, fees and other

   $ 4,713     $ 4,101     $ 3,586  

 

  

 

 

   

 

 

   

 

 

 

Interest income

     5       4       1  

Interest expense

     (224     (200     (177

 

  

 

 

   

 

 

   

 

 

 

Net interest income

     229       204       178  

 

  

 

 

   

 

 

   

 

 

 

Total revenues net of interest expense

     4,942       4,305       3,764  

Provisions for losses

     75       61       135  

 

  

 

 

   

 

 

   

 

 

 

Total revenues net of interest expense after provisions for losses

     4,867       4,244       3,629  

 

  

 

 

   

 

 

   

 

 

 

Expenses

      

Marketing, promotion, rewards and cardmember services

     755       755       521  

Salaries and employee benefits and other operating expenses

     2,133       1,900       1,659  

 

  

 

 

   

 

 

   

 

 

 

Total

     2,888       2,655       2,180  

 

  

 

 

   

 

 

   

 

 

 

Pretax segment income

     1,979       1,589       1,449  

Income tax provision

     686       564       510  

 

  

 

 

   

 

 

   

 

 

 

Segment income

   $ 1,293     $ 1,025     $ 939  

SELECTED STATISTICAL INFORMATION

 

000000000 000000000 000000000

As of or for the Years Ended December 31,

(Billions, except percentages
and where indicated)

   2011     2010     2009  

Global Card billed business

   $ 822.2     $ 713.3      $ 619.8   

Global Network & Merchant Services:

      

Total segment assets

   $ 17.8     $ 13.6      $ 12.3   

Segment capital (millions)

   $ 2,037     $ 1,922      $ 1,443   

Return on average segment capital(a)

     66.3     61.6     65.8

Return on average tangible segment capital(a)

     74.3     64.3     67.6

Global Network Services:(b)

      

Card billed business

   $ 116.8     $ 91.7      $ 71.8   

Total cards-in-force (millions)

     34.2       29.0        26.3   

 

(a) Return on average segment capital is calculated by dividing (i) one-year period segment income ($1.3 billion, $1.0 billion and $939 million for 2011, 2010 and 2009, respectively) by (ii) one-year average segment capital ($1.9 billion, $1.7 billion and $1.4 billion for 2011, 2010 and 2009, 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, a non-GAAP measure, excludes from average segment capital average goodwill and other intangibles of $209 million, $70 million and $36 million as of December 31, 2011, 2010, and 2009, respectively. The Company believes return on average tangible segment capital is a useful measure of the profitability of its business.
(b) Since the third quarter of 2010, 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.

RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 2011

GNMS reported segment income of $1.3 billion in 2011, a $268 million or 26 percent increase from $1.0 billion in 2010, which increased $86 million or 9 percent from 2009.

Total Revenues Net of Interest Expense

GNMS total revenues net of interest expense increased $637 million or 15 percent to $4.9 billion in 2011 compared to 2010, due to increased discount revenue, net card fees and other and increased interest expense credit.

Discount revenue, fees and other increased $612 million or 15 percent to $4.7 billion in 2011 compared to 2010, 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 $24 million or 12 percent to $224 million in 2011 compared to 2010, 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 $4.3 billion in 2010 increased $541 million or 14 percent compared to 2009 due to increased discount revenue, net card fees and other and increased interest expense credit.

Provisions for Losses

Provisions for losses increased $14 million or 23 percent to $75 million in 2011 compared to 2010, primarily due to higher merchant-related debit balances. Provisions for losses in 2010 decreased $74 million or 55 percent to $61 million compared to 2009, primarily driven by lower merchant-related debit balances.

Expenses

During 2011, GNMS expenses increased $233 million or 9 percent to $2.9 billion compared to 2010 due to higher salaries and employee benefits and other operating expenses. Expenses in 2010 of $2.7 billion were $475 million or 22 percent higher than 2009, due to higher salaries and employee benefits and other operating expenses and an increase in marketing and promotion expenses.

Marketing and promotion expenses were flat year over year at $755 million in 2011 and 2010. Marketing and promotion expenses increased $234 million or 45 percent in 2010 to $755 million compared to 2009, reflecting higher network, merchant-related and brand marketing investments.

 

46


Table of Contents

AMERICAN EXPRESS COMPANY

2011 FINANCIAL REVIEW

 

Salaries and employee benefits and other operating expenses increased $233 million or 12 percent to $2.1 billion in 2011 compared to 2010, primarily due to increases in salary and other benefit costs, greater third-party merchant sales force commissions and legal costs. Salaries and employee benefits and other operating expenses increased $241 million or 15 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.

Income Taxes

The effective tax rate was 35 percent in 2011, 2010 and 2009.

CORPORATE & OTHER

Corporate & Other had net after-tax expense of $535 million and $180 million, and net income of $133 million, in 2011, 2010 and 2009, respectively. Results in 2011, 2010 and 2009 reflected $186 million, $372 million and $372 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 $49 million, $2 million and $35 million, for 2011, 2010 and 2009, respectively, primarily related to the Company’s reengineering initiatives.

Net after-tax expense in 2011 reflected various investments in Enterprise Growth initiatives and expenses related to legal exposures, partially offset by higher global prepaid income.

Net after-tax 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.

 

47


Table of Contents

AMERICAN EXPRESS COMPANY

2011 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. The receivables and loans of the Company’s Charge and Lending Trusts being securitized are reported as assets on the Company’s Consolidated Balance Sheets, while the related securities issued to third-party investors are reported as long-term debt.

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 cards that are issued and outstanding under network partnership agreements, except for supplemental cards and 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), corporate payments 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 American Express 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. Some charge card accounts have an additional lending-on-charge feature which allows revolving certain balances.

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

Discount revenue — Represents revenue earned from fees 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.

 

48


Table of Contents

AMERICAN EXPRESS COMPANY

2011 FINANCIAL REVIEW

 

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 owned loans. Unless the loan is classified as non-accrual, interest is recognized based upon the principal amount outstanding in accordance with the terms of the applicable account agreement until the outstanding balance is paid or written off. 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.

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 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 — principal only — 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.

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

Operating expenses — Represents salaries and employee benefits, professional services and other, net expenses.

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

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

Return on average tangible segment capital — Computed in the same manner as 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. Non-proprietary 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.

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.

 

49


Table of Contents

AMERICAN EXPRESS COMPANY

2011 FINANCIAL REVIEW

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which are subject to risks and uncertainties. The forward-looking statements, which address 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 American Express cards, delinquency rates, loan balances and other aspects of the Company’s business and results of operations;

 

 

changes in capital and credit market conditions, including sovereign credit worthiness, 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 the Company’s assets; or any reduction in the Company’s credit ratings or those of its subsidiaries, which could materially increase the cost and other terms of the Company’s funding, restrict its 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 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 the Company does business, including legislative and regulatory reforms in the United States, such as the Dodd-Frank Reform Act’s stricter regulation of large, interconnected financial institutions, changes in requirements relating to securitization and the establishment of the CFPB, which could make fundamental changes to many of the Company’s business practices or materially affect its capital requirements, results of operations, or ability to pay dividends or repurchase its stock; actions and potential future actions by the FDIC and credit rating agencies applicable to securitization trusts, which could impact the Company’s ABS program; or potential changes in the federal tax system that could substantially alter, among other things, the taxation of the Company’s international businesses, the allowance of deductions for significant expenses, or the incidence of consumption taxes on the Company’s transactions, products and services;

 

 

the ability of the Company to generate its on-average and over-time growth targets for revenues net of interest expense, earnings per share and return on average equity, which will depend on the factors such as the Company’s success in implementing its strategies and initiatives, meeting its targets for operating expenses and on factors outside management’s control including changes in the economic and business environment, the effectiveness of marketing and loyalty programs, and the willingness of cardmembers to sustain spending;

 

 

the Company’s net interest yield on U.S. cardmember loans not remaining at historical levels, which will be influenced by, among other things, the effects of the CARD Act (including the regulations requiring the Company to periodically reevaluate APR increases), interest rates, changes in consumer behavior that affect loan balances, such as paydown rates, the credit quality of the Company’s portfolio and the Company’s cardmember acquisition strategy, product mix, cost of funds, credit actions, including line size and other adjustments to credit availability, and potential pricing changes;

 

 

changes in the substantial and increasing worldwide competition in the payments industry, including competitive pressure that may impact the prices the Company charges merchants that accept the Company’s cards and the success of marketing, promotion or rewards programs;

 

 

changes in technology or in the Company’s ability to protect its 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 the Company’s businesses, including technology and intellectual property of third parties on whom the Company relies, all of which could materially affect the Company’s results of operations;

 

 

data breaches and fraudulent activity, which could damage the Company’s brand, increase the Company’s 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 the Company or the Company’s vendors;

 

50


Table of Contents

AMERICAN EXPRESS COMPANY

2011 FINANCIAL REVIEW

 

 

changes in the Company’s 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 the Company’s business partners, such as bankruptcies, restructurings or consolidations, involving merchants that represent a significant portion of the Company’s business, such as the airline industry, or the Company’s partners in Global Network Services or financial institutions that the Company relies on for routine funding and liquidity, which could materially affect the Company’s financial condition or results of operations;

 

 

uncertainties associated with business acquisitions, including the ability to realize anticipated business retention, growth and cost savings, accurately estimate the value of goodwill and intangibles associated with individual acquisitions, effectively integrate the acquired business into the Company’s existing operations or implement or remediate controls, procedures and policies at the acquired company;

 

 

uncertainty relating to the actual growth of operating expenses in 2012 and subsequent years, which will depend in part on the Company’s ability to balance the control and management of expenses and the maintenance of competitive service levels to its businesses and customers, unanticipated increases in significant categories of operating expenses, such as consulting or professional fees, compliance or regulatory costs and technology costs, higher than expected employee levels due to lower than expected attrition rates or employee needs not currently anticipated, the impact of changes in foreign currency exchange rates on costs and results, and the level of acquisition activity and related expenses;

 

 

changes affecting the success of the Company’s reengineering and other cost control initiatives, such as the ability to execute plans during the year with respect to certain of the Company’s facilities, which may result in the Company not realizing all or a significant portion of the benefits that the Company intends;

 

 

the actual amount to be spent by the Company on investments in the business, including on marketing, promotion, rewards and cardmember services and certain 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, promotion and rewards expenses as business expands or changes, including the changing behavior of cardmembers;

 

 

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 risk;

 

 

the Company’s lending write-off rates for 2012 not remaining below the average historical levels of the last ten years, which will depend in part on changes in the level of the Company’s loan balances, delinquency rates of cardmembers, unemployment rates, the volume of bankruptcies and recoveries of previously written-off loans;

 

 

the ability of the Company to maintain and expand its presence in the digital payments space, including as an online payments provider, which will depend on the Company’s success in evolving its business models and processes for the digital environment, building partnerships and executing programs with companies, and utilizing digital capabilities that can be leveraged for future growth;

 

 

changes affecting the Company’s ability to accept or maintain deposits due to market demand or regulatory constraints, such as changes in interest rates and regulatory restrictions on the Company’s ability to obtain deposit funding or offer competitive interest rates, which could affect the Company’s liquidity position and the Company’s ability to fund the Company’s business;

 

 

the potential failure of the U.S. Congress to renew legislation regarding the active financing exception to Subpart F of the Internal Revenue Code, which could increase the Company’s effective tax rate and have an adverse impact on net income;

 

 

factors beyond the Company’s 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 the Company’s global network systems and ability to process transactions; and

 

 

the Company’s funding plan for 2012 being implemented in a manner inconsistent with current expectations, which will depend on various factors such as future business growth, the impact of global economic, political and other events on market capacity, demand for securities offered by the Company, regulatory changes, ability to securitize and sell receivables and the performance of receivables previously sold in securitization 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, 2011 and the Company’s other reports filed with the SEC.

 

51


Table of Contents

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, 2011. 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, 2011, 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, 2011.

 

52


Table of Contents

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, 2011 and 2010, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2011, 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, 2011, 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.

 

LOGO

New York, New York

February 24, 2012

 

53


Table of Contents

AMERICAN EXPRESS COMPANY

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

CONSOLIDATED FINANCIAL STATEMENTS      PAGE   
Consolidated Statements of Income — For the Years Ended December 31, 2011, 2010 and 2009      55   
Consolidated Balance Sheets — December 31, 2011 and 2010      56   
Consolidated Statements of Cash Flows — For the Years Ended December 31, 2011, 2010 and 2009      57   
Consolidated Statements of Shareholders’ Equity — For the Years Ended December 31, 2011, 2010 and 2009      58   
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   
Note 1 — Summary of Significant Accounting Policies      59   
Note 2 — Acquisitions      62   
Note 3 — Fair Values      63   
Note 4 — Accounts Receivable and Loans      65   
Note 5 — Reserves for Losses      70   
Note 6 — Investment Securities      72   
Note 7 — Asset Securitizations      74   
Note 8 — Other Assets      75   
Note 9 — Customer Deposits      76   
Note 10 — Debt      77   
Note 11 — Other Liabilities      80   
Note 12 — Derivatives and Hedging Activities      80   
Note 13 — Guarantees      84   
Note 14 — Common and Preferred Shares and Warrants      85   
Note 15 — Changes in Accumulated Other Comprehensive (Loss) Income      86   
Note 16 — Restructuring Charges      87   
Note 17 — Income Taxes      88   
Note 18 — Earnings Per Common Share      90   
Note 19 — Details of Certain Consolidated Statements of Income Lines      91   

Includes further details of:

  

Other Commissions and Fees

  

Other Revenues

  

Marketing, Promotion, Rewards and Cardmember Services

  

Other, Net Expenses

  
Note 20 — Stock Plans      91   
Note 21 — Retirement Plans      93   
Note 22 — Significant Credit Concentrations      98   
Note 23 — Regulatory Matters and Capital Adequacy      99   
Note 24 — Commitments and Contingencies      100   
Note 25 — Reportable Operating Segments and Geographic Operations      101   
Note 26 — Parent Company      104   
Note 27 — Quarterly Financial Data (Unaudited)      106   

 

54


Table of Contents

AMERICAN EXPRESS COMPANY

CONSOLIDATED STATEMENTS OF INCOME

 

00000000000 00000000000 00000000000

Years Ended December 31 (Millions, except per share amounts)

   2011      2010      2009  

Revenues

        

Non-interest revenues

        

Discount revenue

   $ 16,734      $ 14,880      $ 13,202  

Net card fees

     2,183        2,102        2,151  

Travel commissions and fees

     1,971        1,773        1,591  

Other commissions and fees

     2,269        2,031        1,778  

Securitization income, net

                     400  

Other

     2,164        1,927        2,090  

 

  

 

 

    

 

 

    

 

 

 

Total non-interest revenues

     25,321        22,713        21,212  

 

  

 

 

    

 

 

    

 

 

 

Interest income

        

Interest and fees on loans

     6,537        6,783        4,468  

Interest and dividends on investment securities

     327        443        804  

Deposits with banks and other

     97        66        59  

 

  

 

 

    

 

 

    

 

 

 

Total interest income

     6,961        7,292        5,331  

 

  

 

 

    

 

 

    

 

 

 

Interest expense

        

Deposits

     528        546        425  

Short-term borrowings

     11        3        37  

Long-term debt and other

     1,781        1,874        1,745  

 

  

 

 

    

 

 

    

 

 

 

Total interest expense

     2,320        2,423        2,207  

 

  

 

 

    

 

 

    

 

 

 

Net interest income

     4,641        4,869        3,124  

 

  

 

 

    

 

 

    

 

 

 

Total revenues net of interest expense

     29,962        27,582        24,336  

 

  

 

 

    

 

 

    

 

 

 

Provisions for losses

        

Charge card

     770        595        857  

Cardmember loans

     253        1,527        4,266  

Other

     89        85        190  

 

  

 

 

    

 

 

    

 

 

 

Total provisions for losses

     1,112        2,207        5,313  

 

  

 

 

    

 

 

    

 

 

 

Total revenues net of interest expense after provisions for losses

     28,850        25,375        19,023  

 

  

 

 

    

 

 

    

 

 

 

Expenses

        

Marketing, promotion, rewards and cardmember services

     9,930        8,738        6,563  

Salaries and employee benefits

     6,252        5,566        5,080  

Professional services

     2,951        2,806        2,408  

Other, net

     2,761        2,301        2,131  

 

  

 

 

    

 

 

    

 

 

 

Total

     21,894        19,411        16,182  

 

  

 

 

    

 

 

    

 

 

 

Pretax income from continuing operations

     6,956        5,964        2,841  

Income tax provision

     2,057        1,907        704  

 

  

 

 

    

 

 

    

 

 

 

Income from continuing operations

     4,899        4,057        2,137  

Income (loss) from discontinued operations, net of tax

     36                (7

 

  

 

 

    

 

 

    

 

 

 

Net income

   $ 4,935      $ 4,057      $ 2,130  

 

  

 

 

    

 

 

    

 

 

 

Earnings per Common Share – Basic: (Note 18)

        

Income from continuing operations attributable to common shareholders(a)

   $ 4.11      $ 3.37      $ 1.55  

Income (loss) from discontinued operations

     0.03                (0.01

 

  

 

 

    

 

 

    

 

 

 

Net income attributable to common shareholders(a)

   $ 4.14      $ 3.37      $ 1.54  

 

  

 

 

    

 

 

    

 

 

 

Earnings per Common Share – Diluted: (Note 18)

        

Income from continuing operations attributable to common shareholders(a)

   $ 4.09      $ 3.35      $ 1.54  

Income (loss) from discontinued operations

     0.03                  

 

  

 

 

    

 

 

    

 

 

 

Net income attributable to common shareholders(a)

   $ 4.12      $ 3.35      $ 1.54  

 

  

 

 

    

 

 

    

 

 

 

Average common shares outstanding for earnings per common share:

        

Basic

     1,178        1,188        1,168  

Diluted

     1,184        1,195        1,171  

 

(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, (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 $58 million, $51 million and $22 million for the years ended December 31, 2011, 2010 and 2009, respectively.

See Notes to Consolidated Financial Statements.

 

55


Table of Contents

AMERICAN EXPRESS COMPANY

CONSOLIDATED BALANCE SHEETS

 

00000000000 00000000000

December 31 (Millions, except per share data)

   2011     2010  

Assets

    

Cash and cash equivalents

    

Cash and cash due from banks

   $ 3,514     $ 2,145  

Interest-bearing deposits in other banks (including securities purchased under resale agreements: 2011, $470; 2010, $372)

     20,572       13,557  

Short-term investment securities

     807       654  

 

  

 

 

   

 

 

 

Total

     24,893       16,356  

Accounts receivable

    

Cardmember receivables (includes gross receivables available to settle obligations of a consolidated variable interest entity: 2011, $8,027; 2010, $8,192), less reserves: 2011, $438; 2010, $386

     40,452       36,880  

Other receivables, less reserves: 2011, $102; 2010, $175

     3,657       3,554  

Loans

    

Cardmember loans (includes gross loans available to settle obligations of a consolidated variable interest entity: 2011 $33,834; 2010, $34,726), less reserves: 2011, $1,874; 2010, $3,646

     60,747       57,204  

Other, less reserves: 2011, $18; 2010, $24

     419       412  

Investment securities

     7,147       14,010  

Premises and equipment – at cost, less accumulated depreciation: 2011, $4,747; 2010, $4,483

     3,367       2,905  

Other assets (includes restricted cash of consolidated variable interest entities: 2011, $207; 2010, $3,759)

     12,655       15,368  

 

  

 

 

   

 

 

 

Total assets

   $ 153,337     $ 146,689  

 

  

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

    

Liabilities

    

Customer deposits

   $ 37,898     $ 29,727  

Travelers Cheques outstanding

     5,123       5,618  

Accounts payable

     10,458       9,691  

Short-term borrowings

     3,424       3,414  

Long-term debt (includes debt issued by consolidated variable interest entities: 2011, $20,856; 2010, $23,341)

     59,570       66,416  

Other liabilities

     18,070       15,593  

 

  

 

 

   

 

 

 

Total liabilities

   $ 134,543     $ 130,459  

 

  

 

 

   

 

 

 

Commitments and contingencies (Note 24)

    

Shareholders’ Equity

    

Common shares, $0.20 par value, authorized 3.6 billion shares; issued and outstanding 1,164 million shares as of December 31, 2011 and 1,197 million shares as of December 31, 2010

     232       238  

Additional paid-in capital

     12,217       11,937  

Retained earnings

     7,221       4,972  

Accumulated other comprehensive (loss) income

    

Net unrealized securities gains, net of tax: 2011, $(168); 2010, $(19)

     288       57  

Net unrealized derivatives losses, net of tax: 2011, $1; 2010, $4

     (1     (7

Foreign currency translation adjustments, net of tax: 2011, $459; 2010, $405

     (682     (503

Net unrealized pension and other postretirement benefit losses, net of tax: 2011, $233; 2010, $226

     (481     (464

 

  

 

 

   

 

 

 

Total accumulated other comprehensive loss

     (876     (917

 

  

 

 

   

 

 

 

Total shareholders’ equity

     18,794       16,230  

 

  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 153,337     $ 146,689  

 

See Notes to Consolidated Financial Statements.

 

56


Table of Contents

AMERICAN EXPRESS COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

00000000000 00000000000 00000000000

Years Ended December 31 (Millions)

   2011     2010     2009  

Cash Flows from Operating Activities

      

Net income

   $ 4,935     $ 4,057     $ 2,130  

(Income) loss from discontinued operations, net of tax

     (36            7  

 

  

 

 

   

 

 

   

 

 

 

Income from continuing operations

     4,899       4,057       2,137  

Adjustments to reconcile income from continuing operations to net cash provided by operating activities

      

Provisions for losses

     1,112       2,207       5,313  

Depreciation and amortization

     918       917       1,070  

Deferred taxes and other

     818       1,135       (1,429

Stock-based compensation

     301       287       230  

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

      

Other receivables

     663       (498     (730

Other assets

     (635     (590     526  

Accounts payable and other liabilities

     2,893       1,737       (98

Travelers Cheques outstanding

     (494     (317     (449

Net cash used in operating activities attributable to discontinued operations

                   (233

 

  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     10,475       8,935       6,337  

 

  

 

 

   

 

 

   

 

 

 

Cash Flows from Investing Activities

      

Sale of investments

     1,176       2,196       2,930  

Maturity and redemption of investments

     6,074       12,066       2,900  

Purchase of investments

     (1,158     (7,804     (13,719

Net (increase) decrease in cardmember loans/receivables

     (8,358     (6,389     6,154  

Proceeds from cardmember loan securitizations

                   2,244  

Maturities of cardmember loan securitizations

                   (4,800

Purchase of premises and equipment, net of sales: 2011, $16; 2010, $9; 2009, $50

     (1,189     (878     (722

Acquisitions/Dispositions, net of cash acquired

     (610     (400       

Net decrease (increase) in restricted cash

     3,574       (20     (1,935

Net cash provided by investing activities attributable to discontinued operations

                   196  

 

  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (491     (1,229     (6,752

 

  

 

 

   

 

 

   

 

 

 

Cash Flows from Financing Activities

      

Net increase in customer deposits

     8,232       3,406       11,037  

Net (decrease) increase in short-term borrowings

     (2     1,056       (6,574

Issuance of long-term debt

     13,982       5,918       6,697  

Principal payments on long-term debt

     (21,029     (17,670     (15,197

Issuance of American Express Series A preferred shares and warrants

                   3,389  

Issuance of American Express common shares

     594       663       614  

Repurchase of American Express Series A preferred shares

                   (3,389

Repurchase of American Express stock warrants

                   (340

Repurchase of American Express common shares

     (2,300     (590       

Dividends paid

     (861     (867     (924

Net cash provided by financing activities attributable to discontinued operations

                   40  

 

  

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (1,384     (8,084     (4,647

 

  

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash

     (63     135       7  

 

  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     8,537       (243     (5,055

Cash and cash equivalents at beginning of year includes cash of discontinued operations: 2011, $—; 2010, $—; 2009, $3

     16,356       16,599       21,654  

 

  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

   $ 24,893     $ 16,356     $ 16,599  

See Notes to Consolidated Financial Statements.

 

57


Table of Contents

AMERICAN EXPRESS COMPANY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

 

00000000000 00000000000 00000000000 00000000000 00000000000 00000000000

Three Years Ended December 31, 2011

(Millions, except per share amounts)

  Total     Preferred Shares     Common
Shares
    Additional
Paid-in Capital
    Accumulated
Other
 Comprehensive
(Loss) Income
    Retained
Earnings
 

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