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1 Morningstar Document Research FORM 10-K AMERICAN EXPRESS CO - axp Filed: February 26, 2010 (period: December 31, 2009) Annual report which provides a comprehensive overview of the company for the past year

2 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2009 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from Commission File No American Express Company (Exact name of registrant as specified in its charter) to New York (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) World Financial Center 200 Vesey Street New York, New York (Address of principal executive offices) (Zip Code) Registrant s telephone number, including area code: (212) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered Common Shares (par value $0.20 per Share) New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T ( of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files). Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. No No Large accelerated filer Accelerated filer Non-accelerated filer (Do not check if a smaller reporting company) Smaller reporting company Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes As of June 30, 2009, the aggregate market value of the registrant s voting shares held by non-affiliates of the registrant was approximately $27.6 billion based on the closing sale price as reported on the New York Stock Exchange. As of February 22, 2010, there were 1,196,727,420 common shares of the registrant outstanding. Documents Incorporated By Reference Parts I, II and IV: Portions of Registrant s 2009 Annual Report to Shareholders. No

3 Part III: Portions of Registrant s Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Annual Meeting of Shareholders to be held on April 26, 2010.

4 TABLE OF CONTENTS Form 10-K Item Number Page PART I 1. Business 1 Introduction 1 Global Network & Merchant Services 4 U.S. Card Services 16 International Card Services 26 Global Commercial Services 27 Corporate & Other 31 Foreign Operations 45 Sale of American Express Bank Ltd./Discontinued Operations 46 Segment Information and Classes of Similar Services 46 Executive Officers of the Company 46 Employees 48 Guide 3 Statistical Disclosure by Bank Holding Companies 49 1A. Risk Factors 67 1B. Unresolved Staff Comments Properties Legal Proceedings Submission of Matters to a Vote of Security Holders 88 PART II Market for Registrant s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management s Discussion and Analysis of Financial Condition and Results of Operations 90 7A. Quantitative and Qualitative Disclosures about Market Risk Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 90 9A. Controls and Procedures 90 9B. Other Information 91 PART III 10. Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accounting Fees and Services 92 PART IV 15. Exhibits, Financial Statement Schedules 93 Signatures 94 Index to Financial Statements F-1 Exhibit Index E-1

5 PART I* ITEM 1. Overview BUSINESS INTRODUCTION American Express Company, together with its consolidated subsidiaries ( American Express, the Company, we, us or our ), is a global service company that provides customers with access to products, insights and experiences that enrich lives and build business success. Our principal products and services are charge and credit payment card products and travel-related services offered to consumers and businesses around the world. We were founded in 1850 as a joint stock association. We were incorporated in 1965 as a New York corporation. American Express Company and its principal operating subsidiary, American Express Travel Related Services Company, Inc. ( TRS ), are bank holding companies under the Bank Holding Company Act of 1956 (the BHC Act ), subject to the supervision and examination by the Board of Governors of the Federal Reserve System (the Federal Reserve ). Our headquarters are located in New York, New York in lower Manhattan. We also have offices in other locations in North America, as well as throughout the world. We are principally engaged in businesses comprising four reportable operating segments: U.S. Card Services, International Card Services, Global Commercial Services, and Global Network & Merchant Services, all of which we describe below. Securities Exchange Act Reports and Additional Information We maintain an Investor Relations Web site on the Internet at We make available free of charge, on or through this Web site, our annual, quarterly and current reports and any amendments to those reports as soon as reasonably practicable following the time they are electronically filed with or furnished to the Securities and Exchange Commission ( SEC ). To access these, just click on the SEC Filings link under the caption Financial Information/Filings on our Investor Relations homepage. You can also access our Investor Relations Web site through our main Web site at by clicking on the About American Express link, which is located at the bottom of our homepage. Information contained on our Investor Relations Web site and our main Web site is not incorporated by reference into this report or any other report filed with or furnished to the SEC Highlights Compared with 2008, we delivered: total revenues net of interest expense of $24.5 billion, down 14% from $28.4 billion income from continuing operations of $2.1 billion, down 26% from $2.9 billion net income of $2.1 billion, down 21% from $2.7 billion * Some of the statements in this report constitute forward-looking statements. You can identify forward-looking statements by words such as believe, expect, anticipate, optimistic, intend, plan, aim, will, may, should, could, would, likely, estimate, predict, potential, continue or other similar expressions. We discuss certain factors that affect our business and operations and that may cause our actual results to differ materially from these forward-looking statements under Item 1A. Risk Factors below. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. We undertake no obligation to update publicly or revise any forward-looking statements. 1

6 diluted earnings per share based on income from continuing operations of $1.54, down 38% from $2.47 diluted earnings per share based on net income of $1.54, down 34% from $2.32 return on average equity of 14.6%, compared with 22.3% was a challenging year characterized by a weak economy, frozen credit markets in the first half of the year and high credit losses industrywide. In the first two quarters, the Company s spending and cardmember loan balances declined by double digits as compared to the corresponding periods in 2008 and credit metrics (e.g. past due and write-off rates) peaked at historically high levels. In the third quarter, the Company s credit actions began to positively impact past due and write-off rates and spending declines began to become less severe. The fourth quarter showed greater improvement. In the fourth quarter of 2009 the year-over-year growth rate in cardmember spending volumes was positive for the first time since the third quarter of 2008, benefiting from both easier comparisons to year-ago billings as well as higher levels of spending. Improvements in billed business trends were experienced in all business lines in the fourth quarter. In addition, for the first time during the year, the growth rate in both the number of card transactions and average transaction size were positive in the fourth quarter as compared to the corresponding period in Despite these favorable trends, the Company expects the global economy to continue to recover gradually and the resulting environment to be characterized by billings growth that is more modest than it experienced before the recession, as consumers and businesses remain cautious about their spending. For a complete discussion of our 2009 financial results, including financial information regarding each of our reportable operating segments, see pages of our 2009 Annual Report to Shareholders, which are incorporated herein by reference. For a summary of the Company and our reportable operating segments, and a discussion of our principal sources of revenue, see pages and pages 73-74, respectively, of the 2009 Annual Report to Shareholders. Products and Services 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 for the Company s network partners merchant acquisition and processing, point-of-sale, servicing and settlement and marketing and information products and services for merchants fee services, including market and trend analyses along with related consulting services and customer loyalty and rewards programs. The Company s products and services are sold globally to diverse customer groups, including consumers, small businesses, middle-market companies, and large corporations. These products and services are sold through various channels including direct mail, on-line, targeted sales forces, and direct response advertising. Our general-purpose card network, card-issuing and merchant-acquiring and processing businesses are global in scope. We are a world leader in providing charge and credit cards to consumers, small businesses and corporations. These cards include cards issued by American Express as well as cards issued by third-party banks 2

7 and other institutions that are accepted on the American Express network (collectively, Cards ). Our Cards permit our cardmembers ( Cardmembers ) to charge purchases of goods and services in most countries around the world at the millions of merchants that accept Cards bearing our logo. We have total worldwide Cards-in-force of 87.9 million (including Cards issued by third parties). In 2009, our worldwide billed business (spending on American Express Cards, including Cards issued by third parties) was $620 billion. Our business as a whole has not experienced significant seasonal fluctuations, although travel sales generally tend to be highest in the second and fourth quarters. Travelers Cheque sales and Travelers Cheques outstanding tend to be greatest each year in the summer months, peaking in the third quarter. American Express Gift Card sales are highest in the months of November and December; and Card billed business tends to be moderately higher in the fourth quarter than in other quarters. Organizational Changes To put us in a better position to grow within our traditional businesses, new revenue categories and emerging payments, we implemented a number of organizational changes in October To realize the full potential of our traditional card and network businesses, we grouped our global consumer and small business card-issuing, merchant and network businesses under the senior leadership of our Vice Chairman. This move will enable us to sharpen our focus on our strongest growth opportunities, while maintaining the appropriate confidentiality protections. We are also creating an Enterprise Growth Group that will focus exclusively on generating new sources of fee revenue from our existing assets and advancing our efforts in emerging payments. This includes developing new opportunities for growth that transcend individual businesses and take advantage of technological trends. In addition, under the leadership of our Group President and Chief Information Officer, we created a new Global Services Group that unites our U.S. and international cardmember servicing organizations, as well as most processing and support functions across the Company, including among others, technology support and certain key processing functions in areas such as finance and human resources. With this change to Global Services, the Company is organizing support functions by process rather than business unit, which the Company expects will streamline costs, reduce duplication of work, better integrate skills and expertise, and improve customer service. This organization has been tasked with generating an annualized level of gross expense savings of approximately $500 million by It is expected that a portion of any such savings would be reinvested in growth initiatives. Also, as part of the organizational changes, our Chief Executive Officer is now working directly with the leaders of our Global Commercial Card and Global Travel Services groups on overall strategies to capitalize on Business-to-Business growth opportunities. Spend-Centric Model is Competitive Advantage Despite the challenges of the current economic environment, we believe our spend-centric business model (which focuses on generating revenues primarily by driving spending on our Cards and secondarily by finance charges and fees) continues to give us significant competitive advantages, even when the overall spending level is down. Average spending on our Cards, which is substantially higher on a per-card basis for us versus our competitors, represents greater value to merchants in the form of loyal customers and higher sales. This enables us to earn a premium discount rate and thereby invest in greater value-added services for merchants and Cardmembers. As a result of the higher revenues generated from higher spending, we have the flexibility to offer more attractive rewards, other incentives to Cardmembers and targeted marketing programs for merchants, which in turn creates an incentive for Cardmembers to spend more on their Cards. The significant investments we make in rewards and other compelling value propositions for Cardmembers drives Card usage at merchants. This business model, along with our closed-loop network, in which we are both the Card issuer and, in most instances, the merchant acquirer, gives us a competitive advantage that we seek to leverage to provide more value to Cardmembers, merchants and our Card-issuing partners. The American Express Brand Our brand and its attributes trust, security, integrity, quality and customer service are key assets of the Company. We continue to focus on our brand by educating employees about these attributes and by incorporating them into our programs, products and services. Our brand has consistently been rated one of the most valuable brands in the world in published studies, and we believe it provides us with a significant competitive advantage. 3

8 We believe our brand and its attributes are critical to our success, and we invest heavily in managing, marketing and promoting it. In addition, we place significant importance on trademarks, service marks and patents, and diligently protect our intellectual property rights around the world. GLOBAL NETWORK & MERCHANT SERVICES The Global Network & Merchant Services ( GNMS ) segment operates a global general-purpose charge and credit card network for both proprietary Cards and Cards issued under the global network services business. It also manages merchant services globally, which includes signing merchants to accept Cards as well as processing and settling Card transactions for those merchants. This segment also offers merchants point-of-sale, servicing and settlement and marketing and information products and services. Cards bearing our logo are issued by our principal operating subsidiary, TRS, the Company s U.S. bank subsidiaries, American Express Centurion Bank ( Centurion Bank ) and American Express Bank, FSB ( AEBFSB ), and by other operating and bank subsidiaries outside the United States. They are accepted at all merchant locations worldwide that accept American Express-branded Cards. In addition, depending on the product, Cards bearing our logo are generally accepted at ATM locations worldwide that accept Cards. TRS and its subsidiaries, including Centurion Bank and AEBFSB, issue the majority of Cards on our network. Our Global Network Services ( GNS ) business establishes and maintains relationships with banks and other institutions around the world that issue Cards and, in certain countries, acquire local merchants on the American Express network. GNS is key to our strategy of broadening the Cardmember and merchant base for our network worldwide. Our Global Merchant Services ( GMS ) business provides us with access to rich transaction data through our closed-loop network, which encompasses relationships with both the Cardmember and the merchant. This capability helps us acquire new merchants, deepen relationships with existing merchants, process transactions, and provide targeted marketing, analytical and other value-added services to merchants in our network. In addition, it allows us to analyze trends and spending patterns among various segments of our customer base. A key asset of our network is the American Express brand, which is one of the world s most highly recognized and respected brands. Global Network Services We continue to pursue a strategy, through our GNS business, of inviting U.S. and foreign banks and other institutions to issue Cards and acquire merchants on the American Express network. By leveraging our global infrastructure and the appeal of the American Express brand, we broaden our Cardmember and merchant base for our network worldwide. The GNS business has established more than 130 card-issuing and/or merchant-acquiring arrangements with banks and other institutions in 129 countries. Historically, we had successfully implemented our GNS business strategy in a number of countries outside the United States. In contrast to the situation outside the United States, until 2004, no major U.S. banks had issued Cards in the United States on the American Express global network. This situation was the result of rules and policies of Visa Inc., Visa USA, and Visa International (collectively Visa ) and MasterCard International, Inc. ( MasterCard ) in the United States at the time, which mandated expulsion of members that issued American Express-branded Cards. These rules were struck down in 2004 in a lawsuit brought by the U.S. Department of Justice. As a result of this decision, beginning in 2004, we have been able to extend our network to other card issuers in the United States, just as we have done internationally. 4

9 In 2009, GNS signed 7 new partners to issue Cards and/or acquire merchants on the American Express network. Additionally, GNS partners launched approximately 100 new products during 2009, bringing the total number of American Express-branded GNS partner products launched to date to approximately 1,030. GNS focuses on partnering with qualified third-party banks and other financial institutions that choose to issue Cards accepted on our global network and/or acquire merchants on our network. Although we customize our network arrangements to the particular country and each partner s requirements, as well as to our strategic plans in that marketplace, all GNS arrangements are designed to help issuers develop products for their highest-spending and most affluent customers and to support the value of American Express Card acceptance to merchants. We choose to partner with institutions that share a core set of attributes compatible with the American Express brand, such as commitment to high quality standards and strong marketing expertise, and we require adherence to our product, brand and service standards.** With approximately 1,030 different Card products launched on our network so far by our partners, GNS is an increasingly important business that is strengthening our brand visibility around the world, driving more transaction volume onto our merchant network and increasing the number of merchants accepting the American Express Card. GNS enables us to expand our network s global presence generally without assuming additional Cardmember credit risk or having to invest a large amount of resources, as our GNS partners already have established attractive customer bases they can target with American Express-branded products, and are responsible for managing the credit risk associated with the Cards they issue. Since 1999, Cards-in-force issued by GNS partners have grown at a compound annual growth rate of 25%, and totaled over 26 million Cards at the end of Outside the United States, 74% of new Cards issued in 2009 were Cards issued by GNS partners. Spending on GNS Cards has grown at a compound annual rate of 25% since Year over year spending growth on these Cards in 2009 was 7%, with total spending equal to $72 billion. GNS Arrangements Although the structures and details of each of the GNS arrangements vary, all of them generate revenues for us from the Card transaction volumes they drive on the American Express network. Gross revenues we receive per dollar spent on a Card issued by a GNS partner are lower than those from our proprietary Card-issuing business. However, because the GNS partner is responsible for most of the operating costs and risk of its Card-issuing business, our operating expenses and credit losses are lower than those in our proprietary Card-issuing business. The GNS business model generates an attractive earnings stream and risk profile that requires a lower level of capital support. The return on equity in our GNS business can thus be significantly higher than that of our proprietary Card-issuing business. In addition, since the majority of GNS costs are fixed, the GNS business is highly scalable. GNS partners benefit from their association with the American Express brand and their ability to gain attractive revenue streams and expand and differentiate their product offerings with innovative marketing programs. Our GNS arrangements fall into the following three main categories: Independent Operator Arrangements, Network Card License Arrangements and Joint Venture Arrangements. Independent Operator Arrangements The first type of GNS arrangement is known as an independent operator ( IO ) arrangement. As of the end of 2009, we had 65 of these arrangements around the world. We pursue these arrangements to expand the presence of the American Express network in markets in which we do not offer a proprietary local currency Card. The partner s local presence and relationships help us enhance the impact of our brand in the market, reach ** The use of the term partner or partnering does not mean or imply a formal legal partnership, and is not meant in any way to alter the terms of American Express s relationship with third-party issuers and merchant acquirers. 5

10 merchant coverage goals more quickly, and operate at economic scale and cost levels that would be difficult for us to achieve on our own. Subject to meeting our standards, IO bank partners are licensed to issue local currency Cards in their markets, including the classic Green, Gold and Platinum American Express Cards. In addition, the majority of these partners serve as the merchant acquirer and processor for local merchants. American Express retains the relationship with multinational merchants. Our IO partners own the customer relationships and credit risk for the Cards they issue, and make the decisions about which customers will be issued Cards. GNS generates revenues in IO arrangements from Card licensing fees, royalties on Cardmember billings, foreign exchange conversion revenue, royalties on charge volume at merchants, share of discount revenue and, in some partnerships, royalties on net spread revenue or royalties on cards-in-force. Our IO partners are responsible for transaction authorization, billing and pricing, Cardmember and merchant servicing, and funding Card receivables for their Cards and payables for their merchants. We bear the credit risk arising from the IO partner s potential failure to meet its settlement obligations to us. We mitigate this risk by partnering with institutions that we believe are financially sound and will meet their obligations, and by monitoring their financial health, their compliance with the terms of their relationship with us and the political, economic and regulatory environment in which they operate. In addition, depending on an IO partner s credit rating and other indicators of financial health, we may require an IO partner to post a letter of credit, bank guarantee or other collateral to reduce this risk. Examples of countries where we have entered into IO arrangements include Brazil, Russia, China, Ecuador, Greece, South Korea, Pakistan, Croatia, Peru, Portugal, Vietnam, Georgia and Bangladesh. Through our IO partnerships, we believe we can accelerate growth in Cardmember spending, Cards-in-force and merchant acceptance in these countries. Network Card License Arrangements The second type of GNS arrangement is known as a network card license ( NCL ). At the end of 2009, we had 61 of these arrangements in place worldwide. We pursue these arrangements to increase our brand presence and gain market share in markets in which we have a proprietary Card-issuing and/or merchant acquiring business and, in a few cases, those in which we have IO partners. In an NCL arrangement, we grant the third-party financial institution a license to issue American Express-branded Cards. The NCL issuer owns the customer relationships for all Cards it issues, provides customer service to its Cardmembers, authorizes transactions, manages billing and credit, is responsible for marketing the Cards, and designs Card product features (including rewards and other incentives for Cardmembers), subject to meeting certain standards. We operate the merchant network, route and process Card transactions from the merchant s point-of-sale through submission to the issuer, and settle with issuers. The NCL is the type of arrangement we have implemented with banks in the United States, United Kingdom, Australia and Japan. GNS revenues in NCL arrangements are driven by a variety of factors, including the level of Cardmember spending, royalties, currency conversions and licensing fees paid by the partner and fees charged to the Card issuer based on charge volume, and our provision of value-added services such as Cardmember insurance products and other Card features and benefits for the issuer s Cards. As indicated above, the NCL issuer bears the credit risk for the issued Cards, as well as the Card marketing and acquisition costs, Cardmember fraud risks and costs of rewards and other loyalty initiatives. We bear the risk arising from the NCL partner s potential failure to meet its settlement obligations to us. We mitigate this risk by partnering with institutions that we believe are financially sound and will meet their obligations, and by monitoring their financial health, their compliance with the terms of their relationship with us and the political, economic and regulatory environment in which they operate. In addition, depending on an NCL issuer s credit rating and other indicators of financial health, we may require an NCL issuer to post a letter of credit, bank guarantee or other collateral to reduce this risk. Examples of NCL arrangements include our relationships with Bank of America in the United States, Lloyds TSB Bank in the United Kingdom and Westpac Banking Corporation in Australia. 6

11 Joint Venture Arrangements The third type of GNS arrangement is a joint venture ( JV ) arrangement. We have utilized this type of arrangement in Switzerland and Belgium, as well as in other countries. In these markets, we join with a third-party to establish a separate business in which we have a significant ownership stake. The JV typically signs new merchants to the American Express network and issues local currency Cards that carry our logo. In a JV arrangement, the JV is responsible for the Cardmember credit risk and bears the operating and marketing costs. Unlike the other two types of GNS arrangements, we share management, risk, and profit and loss responsibility with our JV partners. Income is generated by discount revenues, card fees and net spread revenues. The economics of the JV are similar to those of our proprietary Card-issuing business, which we discuss under U.S. Card Services, and we receive a portion of the JV s income depending on, among other things, the level of our ownership interest. Our subsidiary, AEOCC Ltd., purchases card receivables from certain of the GNS JVs from time to time. GNS Business Highlights Outside the United States we signed a number of agreements in 2009 to enhance our presence in existing markets and further expanded our global presence into new markets. Some of the highlights of our GNS business outside the United States in 2009 include: Announcement of new card partnerships in the Asia-Pacific region with ANZ, one of the largest banks in Australia and a leading bank in New Zealand and the South Pacific, Commonwealth Bank, which operates the largest financial services distribution network in Australia, and United Overseas Bank Limited (UOB), one of the leading credit card issuers in Singapore Announcement of our new partnership in Brazil with Banco do Brasil and the issuance of the Ourocard Estilo Platinum American Express and Ourocard Platinum American Express products Issuance of the City Bank American Express Gold Credit Card and the City Bank American Express Credit Card in Bangladesh, with our new partner, City Bank Launch of the American Express Card and the American Express Gold Card in Georgia, with our new partner, Bank of Georgia. GNS continues to expand its airline co-brand portfolio, launching 12 new airline co-brands in 2009 bringing the total to 49 airline co-brand products. Some of the key airline co-brand launches outside the United States in 2009 include: Launch of Quantas Airlines co-brand cards with National Australia Bank and ANZ in Australia Launch of the Turkish Airlines co-brand card with Garanti Bank. Some of the highlights of our GNS business in the United States in 2009 include: Launch of The PenFed Premium Travel Rewards American Express Card with our new partner Pentagon Federal Credit Union (PenFed) Expansion of our wealth management portfolio in the United States with Bank of America s launch of the Merrill Accolades American Express Card, developed for Bank of America Merrill Lynch s wealth management clients Launch of The Fidelity Private Client American Express Card, the fourth Card in Fidelity s American Express portfolio. 7

12 Global Merchant Services We operate a GMS business, which includes signing merchants to accept Cards, accepting and processing Card transactions, and settling with merchants that accept Cards for purchases made by Cardmembers with Cards ( Charges ). We also provide marketing, information and programs to merchants, leveraging the capabilities provided by our closed-loop structure, as well as point-of-sale products and servicing. Our objective is for Cardmembers to be able to use the Card wherever and however they desire, and to increase merchant coverage in key geographic areas and in selected new industries that have not traditionally accepted general-purpose credit and charge cards as a means of payment. We add new merchants to our network through a number of sales channels: a proprietary sales force, third-party sales and service agents, strategic alliances with banks and processors, the Internet, telemarketing and inbound Want to Honor calls (i.e., where merchants desiring to accept the Card contact us directly). As discussed in the Global Network Services section, our IO partners and JVs also add new local merchants to the American Express network. During 2009, we continued expanding our integrated American Express OnePoint solution for small- and medium-sized merchants. Under this program, third-party service agents provide payment processing services to merchants on our behalf for Card transactions, while we retain the acceptance contract with participating merchants, establish merchant pricing and receive the same transactional information we always have received through our closed-loop network. This program simplifies card processing for small- and medium-sized merchants by providing them with a single source for statements, settlement and customer service. GMS continues to significantly expand the number of merchants that accept our Card products as well as the kinds of businesses that accept the Card. Over the last several years, we have focused our efforts on increasing the use of our Cards for everyday spending. In 1990, 64% of our U.S. billings came from the travel and entertainment sectors and 36% came from retail and other sectors. That proportion has now been more than reversed. In 2009, U.S. non-travel and entertainment billings represented approximately 71% of the U.S. billed business on American Express Cards. This shift resulted from the growth, over time, in the types of merchants that began to accept charge and credit cards in response to consumers increased desire to use these cards for more of their purchases, and our focus on expanding Card acceptance to meet Cardmembers needs. During 2009, we continued our efforts to encourage consumers to use the Card for everyday spending and to increase the number and types of merchants in retail and everyday spending categories that accept the Card, such as quick-serve restaurants, mass transit and recurring billing merchants. For example, during 2009, we announced Card acceptance agreements in the United States with: Big Lots Hennes & Mauritz ( H&M ) Weis Markets Inc. Outside the United States, we signed card acceptance agreements with: McDonald s Restaurants of Canada Limited, now accepting the Card at 1,200 locations across Canada Air Asia, Asia s leading lowfare carrier Yahoo! Auction, now accepting the Card in Japan PTT Public Company Limited, the largest petrol retail distributor in Thailand, now accepting the Card at its more than 900 petroleum service stations. In addition, we continued our drive to bring Card acceptance to industries where cash or checks are the predominant form of payment. For example, we have made headway in promoting Card acceptance payments in 8

13 industries such as pharmaceuticals, construction, industrial supply and advertising. Acceptance agreements signed in 2009 in the United States include: Lehigh Hanson, one of North America s largest suppliers of heavy building materials to the construction industry Professional Veterinary Products, one of the nation s largest animal health products distributors. Internationally, among others, a Card acceptance agreement was reached with Travis Perkins, a leading builders merchant and home improvement retailer headquartered in the United Kingdom, with more than 1,000 locations. Globally, acceptance of general-purpose charge and credit cards continues to increase. As in prior years, during 2009, we continued to grow merchant acceptance of Cards around the world and to refine our approach to calculating merchant coverage in accordance with changes in the marketplace. Management estimates that, as of the end of 2009, our merchant network in the United States accommodated more than 90% of our Cardmembers general-purpose charge and credit card spending, and our international merchant network as a whole accommodated approximately 80% of our Cardmembers general-purpose charge and credit card spending. These percentages are based on comparing our Cardmembers spending on our network currently with our estimate of what our Cardmembers would spend on our network if all merchants that accept general-purpose credit and charge cards accepted American Express Cards. We earn discount revenue from fees charged to merchants for accepting Cards as payment for goods or services sold. The merchant discount is the fee charged to the merchant for accepting Cards and is generally expressed as a percentage of the amount charged on a Card. In some instances, an additional flat transaction fee is assessed. The merchant discount is generally deducted from the amount of the payment that the merchant acquirer (in most cases, TRS or one of its subsidiaries) pays to a merchant for Charges submitted. A merchant acquirer is the entity that contracts for Card acceptance with the merchant, accepts transactions from the merchant, pays the merchant for these transactions and submits the transactions to the American Express network, which submits the transactions to the appropriate Card issuer. When a Cardmember presents the Card for payment, the merchant creates a record of charge for the transaction and submits it to the merchant acquirer for payment. To the extent that TRS or one of its subsidiaries is the merchant acquirer, the merchant discount is recorded by us as discount revenue at the time the transaction is received by us from the merchant. Where we act as the merchant acquirer and the Card presented at a merchant is issued by a third-party bank or financial institution, such as in the case of our GNS partners, we will make financial settlement to the merchant and receive the discount revenue. In our role as the operator of the Card network, we will also receive financial settlement from the Card issuer, who receives an issuer rate (i.e., the individually negotiated amount that Card issuers receive for transactions charged on our network with Cards they issue, which is usually expressed as a percentage of the charged amount). The difference between the discount revenue (received by us in the form of the merchant discount) and the issuer rate received by the Card issuer generates a return to us. In cases where American Express is the Card issuer and the merchant acquirer is a third-party bank or financial institution (which can be the case in a country in which the IO is the local merchant acquirer), we receive an individually negotiated issuer rate in our settlement with the merchant acquirer, which is recorded by us as discount revenue. By contrast with networks such as Visa and MasterCard, there is no collectively set interchange rate on the American Express network. 9

14 The following diagrams depict the relationships among the parties in a point-of-sale transaction effected on the American Express network where we act as both the Card issuer and merchant acquirer (the 3-Party Model ) and under an NCL arrangement where third-party financial institutions act as Card issuers (the NCL Model ): The merchant discount we charge is principally determined by the value we deliver to the merchant and generally represents a premium over other networks. We deliver greater value to merchants through higher spending Cardmembers relative to users of cards issued on competing card networks, our marketing expertise, information and fraud services, and Cardmembers insistence on using their Cards when enrolled in rewards or other Card loyalty programs, including Cardmembers who are part of our Corporate Card program. The merchant discount varies, among other factors, with the industry in which the merchant does business, the merchant s Charge volume, the timing and method of payment to the merchant, the method of submission of Charges and, in certain instances, the geographic scope of the Card acceptance agreement signed with us (local or global) and the Charge amount. In 2009, as in prior years, we experienced some reduction in our global weighted average merchant discount rate. Over time, selective re-pricing initiatives, changes in the mix of business and volume-related pricing discounts likely will continue to result in some erosion in the average discount rate. While most merchants that accept our Cards understand our merchant discount pricing in relation to the value provided, we do encounter a relatively small number of merchants that accept our Cards, but tell their customers that they prefer to accept another type of payment and, consequently, suppress use of the Card. Subject to local legal requirements, we respond to this issue vigorously to ensure that our Cardmembers are able to use their Card where and when they want to and to protect the American Express brand. We have made progress limiting Card suppression by concentrating on acquiring merchants where Cardmembers want to use the Card; continuing to enhance the value we provide to merchants through programs such as DailyWish and American 10

15 Express Selects, which enable merchants of any size to gain valuable exposure and additional sales by providing exclusive offers and experiences to American Express Cardmembers; developing and providing new and innovative business insights and fraud tools using information available through our closed-loop network; providing better and earlier communication of our value proposition; and, when appropriate, cancelling merchants who suppress the use of our Card products. We recognize that it is the merchant s choice whether or not to accept American Express cards, and therefore we dedicate substantial resources to delivering value to attract and retain our merchant customers. The laws of certain countries and most states in the United States do not prohibit merchants from surcharging credit card purchases. American Express policy generally does not prohibit surcharging so long as it is permitted by law and a merchant does not discriminate against the Card by surcharging higher amounts on purchases with the Card than is imposed for purchases with other cards, or by imposing a surcharge only on Card purchases, but not on purchases made with other cards. American Express also does not prohibit merchants from offering discounts to customers who pay with cash or check. For information concerning the Department of Justice s information and document request regarding our policies relating to merchant surcharging and anti-steering, please see Other Matters within Legal Proceedings below beginning on page 87. Merchant satisfaction is a key goal of our GMS business. We focus on understanding and addressing factors that influence merchant satisfaction, including developing and executing innovative programs that increase Card usage at merchants, using technology resources, enhancing operational efficiencies and merchants ease of doing business with us, making our United States operating procedures easily available to merchants on our Web site, applying our closed-loop capabilities and deep marketing expertise, and strengthening our relationships with merchants through an expanding roster of services that helps them meet their business goals. We also offer our merchant customers a full range of point-of-sale solutions, including integrated point-of-sale terminals, software, online solutions, and direct links that allow merchants to accept American Express Cards (as well as credit and debit cards issued on other networks and checks). Virtually all proprietary point-of-sale solutions support direct processing (i.e., direct connectivity) to American Express, which can lower a merchant s cost of Card acceptance and enhance payment efficiency. We continue to focus our commitment to driving global interoperability in payment card specifications, making it easier for merchants to accept our Cards, for Cardmembers to have a more seamless experience at the point of sale, and for issuers who have more than one network relationship to have a standard across their card products. In January 2009, we became the fourth owner-member of EMVCo, the standards body that manages, maintains, and enhances specifications for chip-based payment cards and acceptance devices, including point-of-sale terminals. Our participation in this company will help drive secure and interoperable payments globally for transactions made with chip cards by aligning and progressing the EMV specifications. Further, as EMVCo s scope expands to include emerging payment technologies such as contactless cards and mobile phones, our participation will allow for our products and specifications to be universally compatible and ready for merchant acceptance. We continue to focus our efforts in areas that make use and acceptance of the Card more convenient for merchants and Cardmembers. For instance, ExpressPay from American Express, a contactless payment feature embedded in certain cards, continues to provide a fast, easy-to-use alternative for making everyday purchases at merchants where speed and convenience is important. In the U.S., top quick-service restaurants, movie theaters, drug and convenience stores and major retail chains readily accept payments through ExpressPay, which is powered by radio-frequency technology that is currently embedded within several Card products. Similarly, Automatic Bill Payment focuses on providing convenience by allowing merchants to bill Cardmembers on a regular basis for recurring charges approved by the Cardmember such as insurance premiums, newspaper subscriptions, health club memberships, commutation costs and telecommunication services. We have also made modifications to our host authorization system to approve more transactions and reduce Cardmember inconvenience at the point-of-sale including eliminating the signature requirement for transactions of $25 or less. 11

16 Wherever we manage both the acquiring relationship with merchants and the Card-issuing side of the business, there is a closed-loop, which distinguishes our network from the bankcard networks, in that we have access to information at both ends of the Card transaction. We maintain direct relationships with both our Cardmembers and our merchants, and we handle all key aspects of those relationships. Our relationships allow us to analyze information on Cardmember spend. This enables us to provide targeted marketing for merchants and special offers to Cardmembers through a variety of channels. At the same time, we protect the confidentiality of this data, and comply with our privacy and firewall policies and applicable legal requirements. We work closely with our Card-issuing and merchant-acquiring bank partners to maintain key elements of this closed-loop, which permits them to customize marketing efforts, deliver greater value to their Cardmembers and help us to direct increased business to merchants who accept the Card. As the merchant acquirer, we have certain exposures that arise if a billing dispute between a Cardmember and a merchant is settled in favor of the Cardmember. Drivers of this liability are returns in the normal course of business, disputes over fraudulent charges, the quality or non-delivery of goods and services and billing errors. Typically, we offset the amount due to the Cardmember against payments for the merchant s current or future Charge submissions. We can realize losses when a merchant s offsetting Charge submissions cease, such as when the merchant decides to no longer accept the Card, commences a bankruptcy proceeding or goes out of business. We actively monitor our merchant base to assess the risk of this exposure. When appropriate, we will take action to reduce the net exposure to a given merchant by holding cash reserves funded through Charge payable holdbacks from a merchant, lengthening the time between when the merchant submits a Charge for payment and when we pay the merchant by requiring the merchant to secure a letter of credit or a parent company guarantee, or implementing other appropriate risk management tools. We also establish reserves on our balance sheet for these contingencies in accordance with relevant accounting rules. With the increase in electronic transmission of payment card transaction data over merchants point-of-sale systems, American Express and the other major card networks recognized the necessity for merchants and merchant processors to secure this data against accidental or intentional compromise using a standard protocol that applies to all card types. In 2006, in order to strengthen the security practices of merchants and payment processing firms and to secure payment account data in a globally consistent manner, we and Discover Financial Services, JCB, MasterCard Worldwide and Visa formed PCI Security Standards Council, LLC ( PCI SSC ), an independent standards-setting organization. PCI SSC s role is to manage the Payment Card Industry (PCI) Data Security Standard, and more recently the PCI PIN Entry Device (PED) Security Requirements and the Payment Application Data Security Standard, which focus on improving payment card account security throughout the transaction process. By establishing PCI SSC, we and the other founders have developed common standards that are more accessible and efficient for participants in the payment card industry. All our merchants and service providers that store, process and transmit payment card data are required to comply with the PCI Data Security Standard. PCI SSC is dedicated to driving greater education, awareness and adoption of these security standards to ensure that all stakeholders involved in the payment process conduct their business responsibly. In some markets outside the United States, particularly in Asia, third-party processors and some bankcard acquirers have begun to offer merchants the capability of converting credit card transactions from the local currency to the currency of the cardholder s residence (i.e., the cardholder s billing currency) at the point-of-sale, and submitting the transaction in the cardholder s billing currency, thus bypassing the traditional foreign currency conversion process of the card network. This practice is known as dynamic currency conversion. If a merchant utilizes a dynamic currency conversion process, the merchant and processor share any fee assessed or spread earned for converting the transaction at the point-of-sale, thus reducing or eliminating revenue for card issuers and card networks relating to the conversion of foreign charges to the cardholder s billing currency. This practice is not widespread, and it is uncertain to what extent consumers will prefer to have foreign currency transactions converted by merchants in this way. Our policy generally requires merchants to submit Charges and be paid in the currency of the country in which the transaction occurs, and we convert the transaction to the Cardmember s billing currency. 12

17 GLOBAL NETWORK & MERCHANT SERVICES Competition Our global card network, including our Global Merchant Services and Global Network Services businesses, competes with other charge and credit card networks, including, among others, Visa, MasterCard, Diners Club International (which was acquired by Discover Financial Services), Discover (primarily in the United States), and JCB Co., Ltd. (primarily in Asia). We are the third largest general-purpose charge and credit card network based on charge volume, behind Visa and MasterCard, which are larger than we are in most markets. In addition, apart from such network services, a range of companies globally, including merchant acquirers and processors, carry out some activities similar to those performed by our GMS and GNS businesses. No single entity participates on a global basis in the full range of activities that are encompassed by our closed-loop business model. The principal competitive factors that affect the network and merchant service businesses include: the number of Cards-in-force and amount of spending on these Cards the quantity and quality of the establishments where the Cards can be used the economic attractiveness to card issuers and merchant acquirers of participating in the network the success of marketing and promotional campaigns reputation and brand recognition innovation in systems, technology and product offerings, particularly in on-line commerce the quality of customer service the security of Cardmember and merchant information the impact of existing litigation, legislation and government regulation the cost of Card acceptance relative to the value provided. Another aspect of network competition is the recent emergence and rapid growth of alternative payment mechanisms and systems, which include aggregators (such as PayPal), wireless payment technologies (including using mobile telephone networks to carry out transactions), prepaid systems and systems linked to credit cards, and bank transfer models. To the extent alternative payment mechanisms and systems, such as aggregators, continue to successfully expand in the online payments space, our merchant revenues and our ability to access transaction data through our closed-loop network could be negatively impacted. In the United States, alternative payment vehicles continue to emerge that seek to redirect online customers to payment systems based on ACH (automated clearing house, i.e., inter-bank transfer), and existing debit networks are making efforts to develop online PIN functionality, which could potentially reduce the relative use of charge and credit cards online. For a discussion concerning our recent acquisition of Revolution Money Inc. in the emerging payments area, please see Enterprise Growth beginning on page 34 below. Some of our competitors have attempted to replicate our closed-loop structure, such as Visa, with its Visa Incentive Network. Although it remains to be seen how effective Visa will be, efforts by Visa and other card networks and payment providers to replicate the closed-loop speak to its continued value and to the intense competitive environment in which we operate. GLOBAL NETWORK & MERCHANT SERVICES Regulation Local regulations governing the issuance of charge and credit cards have not been a significant factor impacting GNS arrangements with banks and qualifying financial institutions, because such banks and institutions generally are already authorized to issue general-purpose cards and, in the case of our IO arrangements, to operate merchant-acquiring businesses. Accordingly, our GNS partners have generally not had difficulty obtaining appropriate government authorization in the markets in which we have chosen to enter into GNS arrangements. As a network service provider to regulated U.S. banks, our GNS business is subject to review 13

18 by certain federal bank regulators, including the Federal Reserve, the Federal Deposit Insurance Corporation ( FDIC ), the Office of the Comptroller of the Currency and the Office of Thrift Supervision. As the operator of a general-purpose card network, we are also subject to certain provisions of the Currency and Foreign Transactions Reporting Act and the accompanying regulations issued by the U.S. Department of the Treasury (collectively referred to as the Bank Secrecy Act ), as amended by the USA PATRIOT Act of 2001 (the Patriot Act ). We conduct due diligence on our GNS partners to ensure that they have implemented and maintain sufficient anti-money laundering ( AML ) controls to prevent our network from being used for money laundering or terrorist financing purposes. As a result of American Express Company and TRS each becoming bank holding companies, our business is also subject to further regulation and regulatory oversight by the Federal Reserve. For additional information about this change in regulatory status, please see Supervision and Regulation General beginning on page 35 below. In recent years, regulators in several countries outside the United States have focused on the fees involved in the operation of card networks, including interchange fees paid to card issuers and the fees merchants are charged to accept cards. Regulators in the United Kingdom, Canada, New Zealand, Poland, Italy, Switzerland, Germany, Hungary, the European Union (EU), Australia, Brazil, Mexico, Venezuela, among others, have conducted investigations that are either ongoing or on appeal. The interchange fee, which is the collectively set fee paid by the bankcard merchant acquirer to the card issuing bank in four party payment networks, like Visa and MasterCard, is generally the largest component of the merchant service charge payable by merchants for bankcard debit and credit card acceptance in these systems. By contrast, the American Express network does not have collectively set interchange fees. Although the regulators focus has primarily been on Visa and MasterCard as the dominant card networks and their operations on a multilateral basis, antitrust actions and government regulation of the bankcard associations pricing could ultimately affect all networks. Lower interchange and/or merchant discount revenue may lead card issuers to look for other sources of revenue from consumers such as higher annual card fees or interest charges, as well as to reduce costs by scaling back or eliminating rewards programs. In certain countries where antitrust actions or regulations have led our competitors to lower their fees, we have made adjustments to our pricing to merchants to reflect local competitive trends. For example, reductions in bankcard interchange mandated by the Reserve Bank of Australia reforms in 2003 have resulted in lower merchant discount rates for Visa and MasterCard acceptance. As a result of changes in the marketplace, we have reduced our own merchant discount rates in Australia, although we have been able to increase billed business and the number of merchants accepting our Cards. In addition, under legislation enacted in Argentina, a merchant acquirer is required to charge the same merchant discount rate to all merchants in the same industry category, and merchant discount rates for credit cards cannot exceed 3%. The Central Bank of Venezuela has issued regulations regarding the maximum level of merchant discount rates by industry category. In Hungary, recently enacted legislation will require point-of-sale service charges not to exceed 2%. In Europe, investigations of interchange are usually handled by the domestic competition law authorities, as well as the European Commission. In its Final Report on the retail banking sector issued in January 2007, which included a review of the payment cards industry, including interchange fees, the European Commission appeared to favor competition law enforcement tools, rather than regulation of price levels, to address perceived competition issues. The conclusions of the European Commission in its Final Report do not have the force of law, but may be used as the basis for future regulation or antitrust enforcement action in the EU Member States. In December 2007, the European Commission ruled that MasterCard s multilateral interchange fees ( MIF ) for cross-border payment card transactions violate EC Treaty rules on restrictive business practices. The Commission s decision applies to cross-border consumer credit, charge and debit card transactions within the EU and to domestic transactions to which MasterCard has chosen to apply the cross-border MIF. The ruling does not prevent MasterCard and its member banks from adopting an alternative MIF arrangement that can be proven to comply with EU Competition rules. Although the Commission s investigation included commercial cards, it has 14

19 reserved judgment for the time being on the legality of MasterCard s cross-border MIF for commercial card transactions. MasterCard lodged an appeal against the Commission s findings, which is pending. An interim settlement has been agreed to between the Commission and MasterCard, capping MIF at 30 basis points for consumer card transactions and 20 basis points for debit card transactions. In 2002, the Commission granted an exemption to Visa regarding its MIFs. This exemption expired on December 31, 2007 and in March 2008 the Commission opened formal antitrust proceedings against Visa Europe Limited in relation to Visa s MIFs for cross-border consumer card transactions. The Commission has indicated that the MasterCard decision should provide Visa with guidance for the way ahead, although it stated that every MIF must be examined on its own merits. These developments may affect how the competition authorities in the Member States of the EU view domestic interchange. In 2007, for example, the competition regulator in Poland found insufficient basis for Visa and MasterCard interchange fees and ordered the associations and their members to stop their current interchange setting practices immediately. The banks appealed that decision, and in November 2008 the decision was overturned. The Polish Competition Authority has appealed that ruling. In August 2009, Visa and MasterCard settled an anti-trust case with the New Zealand regulatory authorities regarding whether the setting of interchange rates constituted price fixing and whether other scheme rules lessened competition. The settlement results in changes to the Visa and MasterCard scheme rules, which will set maximum interchange rates and also allow bilateral setting of lower interchange rates between issuers and acquirers, as well as remove the schemes no surcharging rules. The full extent of the impact of the changes to interchange on our discount rate in New Zealand is not likely to be known until the schemes publish their maximum interchange rates on April 17, Regulators have also considered the industry practice of prohibiting merchants from passing the cost of merchant discount fees along to consumers through surcharges on card purchases. In Australia, we have seen selective, but increasing, merchant surcharging on our Cards in certain industries and, in some cases, on a basis that is greater than that applied to cards issued on the bankcard networks. The European Union has adopted a new legislative framework for electronic payment services, including cards, referred to as the Payment Services Directive. The Payment Services Directive prescribes common rules for licensing and supervision of payment services providers, including card issuers and merchant acquirers, and for their conduct of business. The objective of the Payment Services Directive is to facilitate the creation of a single, internal payments market in the EU through harmonization of EU Member State laws governing payment services. One provision of the Payment Services Directive permits merchants to surcharge, subject to disclosure requirements, but also allows individual Member States to override this rule by prohibiting or limiting surcharging. To date, the United Kingdom has decided to permit surcharging (and the United Kingdom has for a number of years permitted merchants to levy a surcharge on credit card purchases). There are varied approaches in most of the other countries where some prohibit surcharging, others allow surcharging, and still others allow surcharging but limit it in some way, such as by capping the surcharge allowed or limiting the types of transactions where surcharging is permitted. All member states permit or propose to permit discounts. The Payment Services Directive complements another European initiative, the Single Euro Payments Area ( SEPA ), which is an industry-led initiative with support from EU institutions. Among other changes, SEPA will involve the adoption of new, pan-european technical standards for cards and card transactions. All of the foregoing requires significant costs to implement and maintain. In the United States, Congress continues to debate the interchange issue. There have been several hearings on Visa/MasterCard interchange over the last several years, and in 2009 at the request of Congress, the Government Accountability Office (GAO) completed a study on the structure of interchange fees and their impact on consumers and merchants. The report provides a balanced view of the interchange issue and explains how large merchants would benefit and how consumers could be harmed by the pending legislative proposals. In 2009, legislation was reintroduced in Congress that would give all U.S. merchants antitrust immunity to negotiate 15

20 collectively the price and terms of card acceptance on networks. The House Judiciary Committee bill covers networks with at least a 20% share of U.S. credit and debit card payments combined, which would not apply to the American Express network but, if enacted, would have an effect on American Express in the marketplace. The Senate version of the bill covers networks with at least 10% of U.S. credit or debit payments, which would apply to American Express. Both bills have a default process for having prices and terms set through government action rather than competitive forces. A similar version of the House bill (the Credit Card Fair Fee Act ) was passed in the House Judiciary Committee in No action was taken on either of these bills in The House Financial Services Committee held a hearing on a third piece of interchange-related legislation that was reintroduced in 2009 (the Credit Card Interchange Fees Act ), a bill that would regulate payment network rules, including the American Express network. No further action was taken on this bill. It is expected that Congressional hearings will continue in 2010 on the interchange issue. The Federal Reserve and various Federal Reserve Banks have been following developments on interchange and have held several conferences focused on interchange rates. While the Federal Reserve has expressed interest in monitoring this issue, it has not indicated the need to regulate interchange rates in the United States. During the last three years, there were also a number of bills proposed in individual state legislatures seeking to impose caps on credit card interchange or to prohibit card companies from charging merchant discount on the sales tax portion of credit card purchases. Other proposals were aimed at increasing the transparency of card network rules for merchants. In addition, a number of bills were proposed to establish merchant liability for the costs of a data security breach of a merchant s system or require merchants to adopt technical safeguards to protect sensitive card holder payment information. Proposed state legislation aimed at regulating pricing or other aspects of merchants card acceptance will continue during In the event that governmental or regulatory activity to limit interchange or merchant fees continues or increases, or state data security legislation is adopted, our revenues and profitability could be adversely affected. During the last few years as regulatory interest in credit card network pricing to merchants and related issues has increased, the Company has responded to many inquiries from banking and competition authorities throughout the world. For information about our ongoing response to a Civil Investigative Demand from the Antitrust Division of the United States Department of Justice, please see Other Matters within Legal Proceedings below. U.S. CARD SERVICES As a significant part of our proprietary Card-issuing business, our U.S. banking subsidiaries, Centurion Bank and AEBFSB, issue a wide range of Card products and services to consumers and small businesses in the United States. Our consumer travel business, which provides travel services to Cardmembers and other consumers, complements our core Card business, as does our Global Prepaid business. The proprietary Card business offers a broad set of card products to attract our target customer base. Core elements of our strategy are: focusing on acquiring and retaining high-spending, creditworthy Cardmembers designing Card products with features that appeal to specific customer segments the use of strong incentives to drive spending on our various Card products, including our Membership Rewards program and other rewards features the use of loyalty programs such as Delta SkyMiles, sponsored by our co-brand and other partners to drive spending the development and nurturing of wide-ranging relationships with co-brand and other partners promoting and using incentives for Cardmembers to use their Cards in new and expanded merchant categories, including everyday spend and traditional cash and check categories providing exceptional customer service. In September, 2009, J.D. Power and Associates released its annual nationwide credit card satisfaction study and ranked American Express highest in overall satisfaction among 21 of the largest card issuers in the United States, for the third consecutive year. 16

21 Consumer and Small Business Services We offer individual consumer charge Cards such as the American Express Card, the American Express Gold Card, the Platinum Card, and the ultra-premium Centurion Card; revolving credit Cards such as Blue from American Express, Blue Cash Card from American Express and Blue Sky from American Express; and a variety of Cards sponsored by and co-branded with other corporations and institutions, such as the Delta SkyMiles Credit Card from American Express, True Earnings Card exclusively for Costco members, Starwood Preferred Guest Credit Card and JetBlue Card from American Express. Centurion Bank and AEBFSB as Issuers of Certain Cards We have two U.S. bank subsidiaries, Centurion Bank and AEBFSB, which are wholly owned subsidiaries of TRS. Each bank is a Federal Deposit Insurance Corporation ( FDIC ) insured depository institution. The activities of Centurion Bank and AEBFSB are subject to examination by their respective regulators. Both banks take steps to maintain compliance programs to address the various safety and soundness, internal control and compliance requirements, including anti-money laundering requirements that apply to them. You can find a further discussion of the anti-money laundering initiatives affecting us under Corporate & Other below. Certain additional information regarding each bank is set forth in the table below: Centurion Bank AEBFSB Type of Bank Utah-chartered industrial bank Federal savings bank Regulatory Supervision Regulated, supervised and regularly examined by the Utah Department of Financial Institutions and the FDIC Regulated, supervised and regularly examined by the Office of Thrift Supervision ( OTS ), a bureau of the U.S. Department of the Treasury Types of cards issued Revolving credit cards Consumer charge cards Marketing methods Risk-based capital adequacy requirements*, based on Tier One risk-based capital, total risk-based capital and Tier One core capital ratios at December 31, 2009 Primarily direct mail and other remote marketing channels Well-capitalized Revolving credit cards Consumer charge cards All OPEN credit cards and charge cards Direct mail and other remote marketing channels In-person selling and third-party co-brand partners Well-capitalized** * The risk-based capital standards for both the FDIC and OTS are substantively identical. A bank generally is deemed to be well capitalized if it maintains a Tier One risk-based capital ratio of at least 6%, a total risk-based capital ratio of at least 10% and a leverage ratio of at least 5%. ** Since January 2009, AEBFSB has committed to maintain a Total capital ratio of no less than 15%. Charge Cards Our charge Cards, which generally carry no preset spending limits, are primarily designed as a method of payment and not as a means of financing purchases of goods or services. Charges are approved based on a variety of factors including a Cardmember s current spending patterns, payment history, credit record, and financial resources. Cardmembers generally must pay the full amount billed each month, and no finance charges are assessed on the balance. Charge Card accounts that are past due are subject, in most cases, to a delinquency 17

22 assessment and, if not brought to current status, may be cancelled. The no preset spending limit and pay-in-full nature of these products attract high-spending Cardmembers who want to use a charge Card to facilitate larger payments. The charge Cards also offer flexible payment features to Cardmembers. The Sign & Travel program gives qualified U.S. Cardmembers the option of extended payments for airline, cruise and certain travel charges that are purchased with our charge Cards. The Extended Payment Option offers qualified U.S. Cardmembers the option of extending payment for certain charges on the charge Card in excess of a specified amount. In 2009, we launched two new Card products to the charge Card portfolio. Premier Rewards Gold launched in October, targeting high-spending, frequent travelers who want to maximize rewards. This Card offers triple Membership Rewards points on airfare purchases, double points on gas and grocery and single points on all other spend. In addition, cardmembers receive 15,000 bonus points when they spend $30,000 in a year. In November, we piloted ZYNC SM Card from American Express, a new charge Card for a younger demographic with a low annual fee of $25. Cardmembers get core charge Card features and protections on the base card, and have the option of purchasing packs with specialized lifestyle-based features and benefits. During 2009, we launched the Don t Take Chances, Take Charge SM marketing campaign, which highlights the benefits of the American Express Charge Card. The campaign is part of an ongoing effort to inform consumers about the charge Card and illustrates how it can help customers, particularly during difficult economic times. Our charge Card products have global breadth, high average spend, lower losses and annual card fees. In addition, at a time when people are looking for financial discipline and value, charge Cards, being a pay-in-full product, allow consumers and companies to control their debt. In another effort to help Cardmembers achieve financial empowerment, we launched the online Money Manager, where Cardmembers can track spend across all of their financial accounts not just American Express. Cardmembers can set budgets by category and receive alerts to keep them apprised of their spending versus their budget. We also announced a unique, new service that helps American Express Charge Cardmembers to set, manage, and track spending limits on additional Cards on their account, which is available for anyone who is 15 years of age or older. Revolving Credit Cards We offer a variety of revolving credit Cards. These Cards have a range of different payment terms, interest rate and fee structures, rewards programs and Cardmember benefits. Revolving credit Card products, such as Blue from American Express, Blue Cash from American Express and Blue Sky from American Express, provide Card members with the flexibility to pay their bill in full each month or carry a monthly balance on their Cards to finance the purchase of goods or services. Along with charge Cards and co-brand Cards, these revolving credit Cards attract affluent Cardmembers and promote increased relevance for our expanding merchant network. Our non-co-brand proprietary lending products represent approximately 13% of our US Card Services billings. As we continue to scale back on these Cards and target premium charge Card and co-brand Card products, the Company s priority will be to drive billed business and average spend per card rather than achieve broad growth in cards-in-force. Co-brand Cards We issue Cards under co-brand agreements with selected commercial firms in the United States. The competition among card issuers and networks for attractive co-brand card partnerships is quite intense because these partnerships can generate high-spending loyal cardholders. The duration of our co-brand arrangements generally ranges from five to ten years. Cardmembers earn rewards provided by the partners respective loyalty programs based upon their spending on the co-brand Cards, such as frequent flyer miles, hotel loyalty points and cash back. We make payments to our co-brand partners, which can be significant, based primarily on the amount of Cardmember spending and corresponding rewards earned on such spending and, under certain arrangements, on the number of accounts acquired and retained. We expense amounts due under co-brand arrangements in the month earned. Payment terms vary by arrangement, but are monthly or quarterly. Generally, once we make 18

23 payment to the co-brand partner, the partner is solely liable for providing rewards to the Cardmember under the co-brand partner s own loyalty program. As the issuer of the co-brand Card, we retain all the credit risk with the Cardmember and bear the receivables funding and operating expenses for such Cards. The co-brand partner retains the risk associated with the miles, points or other currency earned by the Cardmember under the partner s loyalty program. During 2009, we extended our exclusive U.S. co-brand partnership with Starwood Hotel and Resorts Worldwide, Inc. and JetBlue for a multi-year period, allowing for the continued expansion of the programs and providing attractive economic and business benefits for both companies. We also unveiled a number of new benefits available on our Delta SkyMiles Credit Cards that allows Cardmembers to earn and redeem miles in more ways and places, on both Delta and Northwest-operated flights. In addition, we also launched a new premium co-branded credit Card called the Hilton HHonors Surpass Card from American Express, with several enhancements to the existing Hilton HHonors Card from American Express. Co-brand Partnerships with Financial Services Institutions We also issue Cards that are marketed under co-brand partnership arrangements with financial services partners. Such partnerships involve the offering of a standard product (issued by TRS or one of its subsidiaries) to customers of the financial services partner, generally co-branded with the partner s name on the Card. Under these arrangements, we make payments to the financial services partners that are primarily based on the number of accounts acquired and retained through the arrangement and the amount of Cardmember spending on such Cards. The duration of such arrangements generally ranges from three to seven years. Card Pricing and Account Management Certain Cards, particularly charge Cards, charge an annual fee that varies based on the type of Card and the number of Cards for each account. We also offer many revolving credit Cards with no annual fee but on which we assess finance charges for revolving balances. Depending on the product, we also charge Cardmembers an annual program fee to participate in the Membership Rewards programs and fees for account performance (e.g., late fees) or for certain services (e.g., additional copies of account statements). We apply standards and criteria for creditworthiness to each Cardmember through a variety of means both at the time of initial solicitation or application and on an ongoing basis during the Card relationship. We use sophisticated credit models and techniques in our risk management operations. For a further description of our risk management policies, please see Risk Management appearing on page 47 of our 2009 Annual Report to Shareholders, which information is incorporated herein by reference. Membership Rewards Program The Membership Rewards program from American Express has over 1,600 redemption partners worldwide. The program allows Cardmembers to earn one point for virtually every dollar charged on eligible, enrolled American Express Cards, and then redeem points for a wide array of rewards, including travel, retail merchandise, dining and entertainment, financial services and even donations to benefit tens of thousands of charities. Points generally have no expiration date and there is no limit on the number of points one can earn. A large majority of spending by eligible Cardmembers earns points under this program. The U.S. Membership Rewards program has over 150 redemption partners and features over 500 merchandise brands. Membership Rewards program tiers are aligned with specific Card products to better meet Cardmember lifestyle and reward program usage needs. American Express Cardmembers participate in one of three Membership Rewards program tiers based on the Credit or Charge Card they have in their wallet. For those Cardmembers with American Express Cards, such as Blue from American Express and ZYNC from American Express, we have the Membership Rewards Express program. American Express Charge Cardmembers with American Express Green and Gold Cards have the Membership Rewards program. Platinum Card members and Centurion Card members are enrolled in the Membership Rewards First program. 19

24 During the year we also expanded our list of redemption partners and announced a number of innovations to meet customer demand. We enhanced our Membership Rewards program with the introduction of new reward options designed to provide cardmembers with greater breadth and variety as well as utility. Specifically, these included: providing Cardmembers the ability to designate their points as payment for everyday charges within their online statement; the launch of the Membership Rewards Specials program featuring specials for popular reward options, including electronics and travel products and services; and the addition of a number of new partners, such as Zappos.Com and British Airways, which give Cardmembers a broader range of opportunities to redeem points with casual dining restaurants, retailers and airlines. When a Cardmember enrolled in the Membership Rewards program uses the Card, we establish reserves to cover the cost of estimated future reward redemptions for points earned to date. When a Membership Rewards program enrollee redeems a reward using Membership Rewards points, we make a payment to the Membership Rewards program partner providing the reward pursuant to contractual arrangements. Membership Rewards expense is driven by Cardmember charge volume, customer participation in the program, and contractual arrangements with redemption partners. At year end, we estimated that current Cardmembers will redeem approximately 90% of their points. For more information on our Membership Rewards Program, see Critical Accounting Policies Reserves for Membership Rewards Costs appearing on page 24 of our 2009 Annual Report to Shareholders, which information is incorporated herein by reference. Membership Rewards continues to be an important driver of Cardmember spending and loyalty. We believe, based on historical experience, that Cardmembers enrolled in rewards programs yield higher spend, stronger credit performance and greater profit for us. By offering a broader range of redemption choices, we have given our Cardmembers more flexibility in the use of their rewards points and favorably affected our average cost per point. We continually seek to optimize the overall economics of the program and make changes to enhance its value to Cardmembers. Our program is also valuable to merchants that become redemption partners as we bring them high-spending Cardmembers and new marketing channels to reach these Cardmembers. Cardmember Special Services and Programs Throughout the world, our Cardmembers have access to a variety of fee-free and fee-based special services and programs, depending on the type of Cards they have. Examples of these special services and programs include: the Membership Rewards program Global Assist Hotline Extended Warranty Car Rental Loss and Damage Insurance Plan Purchase Protection Plan Emergency Card Replacement Return Protection Manage Your Card Account Online Online Year-End Summary American Express Roadside Assistance Services American Express Bill Pay Advanced Ticket Sales Automatic Flight Insurance Premium Baggage Protection CreditSecure Account Protector Online Fraud Protection Guarantee Credit Card Registry My Free Credit Score and Report Identity Theft Assistance Event Ticket Protection Plan Platinum Office Program Online Money Manager Exclusive Access to Cardmember Events 20

25 OPEN In addition to our U.S. Consumer Card business, through AEBFSB we are also a leading provider of financial services to small businesses (generally, firms with less than 100 employees and/or annual sales up to $10 million). American Express OPEN ( OPEN ) offers small business owners a wide range of tools, services and savings designed to meet their evolving needs, including: charge and credit cards rewards on eligible spend and business relevant redemptions retail and travel protections such as purchase protection and baggage insurance travel services 3% - 10% or more discounts at select suppliers of travel, business services, and products through OPEN Savings expense management reporting enhanced online account management capabilities resources to help grow and manage a business through the community-driven website, OPEN Forum. All American Express OPEN Cardmembers are automatically enrolled in OPEN Savings, a program that offers discounts for all OPEN customers on travel and other major business expenses simply by using their American Express OPEN Card at participating companies. These savings may be combined with any existing discounts or offers. During 2009, American Express OPEN also launched several new initiatives including: a business co-brand with Lowe s Accept Pay SM an integrated online invoicing and electronic payment solution for small businesses OPEN Forum 2.0, with enhancements to our online resource and networking website for small business owners OPEN for Government Contracts: Victory in Procurement SM (VIP) for Small Business, a national program to help small business owners capitalize on the enormous growth opportunity provided through government contracts. Card-Issuing Business Competition Our proprietary Card business encounters substantial and intense competition in the United States and internationally. As a card issuer, we compete in the United States with financial institutions (such as Citibank, Bank of America, JPMorgan Chase, and Capital One Financial) that issue general-purpose charge and revolving credit cards, and Discover Financial Services, which issues the Discover Card on the Discover Business Services network. We also encounter limited competition from businesses that issue their own cards or otherwise extend credit to their customers, such as retailers and airline associations, although these cards are generally accepted only at limited locations. Because of continuing consolidations among banking and financial services companies and credit card portfolio acquisitions by major card issuers, there are now a smaller number of significant issuers. The largest competing issuers have continued to grow, in several cases by acquiring card portfolios, and also by cross-selling through their retail branch networks, and competition among all issuers remains intense. Competing card issuers offer a variety of products and services to attract cardholders, including premium cards with enhanced services or lines of credit, airline frequent flyer program mileage credits, cash rebates and 21

26 other reward or rebate programs, services for small business owners, teaser promotional interest rates for both credit card acquisition and balance transfers, and co-branded arrangements with partners that offer benefits to cardholders. In recent years we have encountered increasingly intense competition in the small business sector, as competitors have targeted OPEN s customer base and our leadership position in providing financial services to small businesses. Most financial institutions that offer demand deposit accounts also issue debit cards to permit depositors to access their funds. Use of debit cards for point-of-sale purchases has grown as most financial institutions have replaced ATM cards with general-purpose debit cards bearing either the Visa or MasterCard logo. As a result, the purchase volume and number of transactions made with debit cards in the United States has grown more rapidly than credit and charge card transactions. Debit cards are marketed as replacements for cash and checks, and transactions made with debit cards are typically for small dollar amounts. The ability to substitute debit cards for credit and charge cards is limited because there is no credit extended and the consumer must have sufficient funds in his or her demand deposit account to pay for the purchase at the time of the transaction as opposed to charge cards where payment is due at the end of the month or credit cards where payment can be extended over a period of time. We do not currently issue point-of-sale debit cards for use on the American Express network. The principal competitive factors that affect the card-issuing business include: features and the quality of the services, including rewards programs, provided to Cardmembers the number, spending characteristics and credit performance of Cardmembers the quantity and quality of the establishments that accept Cards the cost of Cards to Cardmembers pricing, payment and other Card account terms and conditions the number and quality of other charge and credit cards available to Cardmembers the nature and quality of expense management data capture and reporting capability the success of targeted marketing and promotional campaigns reputation and brand recognition the ability of issuers to manage credit and interest rate risk throughout the economic cycle the ability of issuers to implement operational and cost efficiencies the quality of customer service. As the payment industry continues to evolve, we are also beginning to face competition from non-traditional players, such as online networks and telecom providers, that leverage new technologies and customers existing charge and credit card account and bank relationships to create payment solutions. In addition, the evolution of payment products in emerging markets may be different than it has been in developed markets. Instead of migrating from cash to checks to plastic, technology and consumer behaviors in these markets may result in the skipping of one or more steps to alternative payment mechanisms such as mobile payments. For a discussion concerning our recent acquisition of Revolution Money Inc. in the emerging payments area, please see Enterprise Growth beginning on page 34 below. Financing Activities The Company meets its funding needs through a variety of sources, including cash or assets that are readily convertible into cash, deposits placed with the Company s U.S. banks, unsecured medium- and long-term notes, asset securitizations, and long-term committed bank borrowing facilities in certain non-u.s. markets. American Express Credit Corporation, a wholly owned subsidiary of TRS, along with its subsidiaries ( Credco ), acquires the majority of charge Card receivables arising from the use of corporate Cards issued in the 22

27 United States and consumer and corporate Cards issued in certain currencies outside the United States. Credco finances the acquisition of receivables principally through the sale of medium- and long-term notes. Centurion Bank and AEBFSB finance their revolving credit receivables and consumer and small business charge card receivables, in part, through the sale of medium-term notes and by offering consumer deposits in the United States. TRS, Centurion Bank and AEBFSB also typically have funded receivables through asset securitization programs. The cost of funding Cardmember receivables and loans is a major expense of Card operations. (You can find a discussion of our securitization and other financing activities on pages under the caption Financial Review, and Note 7 on pages of our 2009 Annual Report to Shareholders, which portions we incorporate herein by reference.) In addition, please see Difficult conditions in the global capital markets and economy generally, as well as political conditions in the United States and elsewhere, may materially adversely affect our business and results of operations and Adverse capital and credit market conditions may significantly affect the Company s ability to meet liquidity needs, access to capital and cost of capital in Item 1A Risk Factors below. Deposit Programs As an additional source of funding, our banking subsidiaries offer deposits to individuals through brokerage networks as well as directly to consumers. As of December 31, 2009, we had approximately $26.3 billion in total consumer deposits, a large portion of which was raised through brokerage networks. Our deposit-taking activities compete with other deposit-taking organizations that source deposits through telephone, internet and other electronic delivery channels, brokerage networks, and/or through branch locations. We compete primarily in the deposit markets on the basis of price and our brand reputation for safety and service. We seek to obtain the deposits of new customers as well as existing card customers by offering attractive rates and marketing our name brand. Our ability to obtain deposit funding and offer competitive interest rates on deposits is also dependent on capital levels of our bank subsidiaries. The Federal Deposit Insurance Act ( FDIA ) generally prohibits a bank, including our banking subsidiaries, from accepting brokered deposits or offering interest rates on any deposits significantly higher than the prevailing rate in its normal market area or nationally (depending upon where the deposits are solicited), unless (1) it is well-capitalized or (2) it is adequately capitalized and receives a waiver from the FDIC. A bank that is adequately capitalized generally may not pay an interest rate on any deposit, including direct-to-consumer deposits, in excess of 75 basis points over the national rate published by the FDIC. There are no such restrictions on a bank that is well-capitalized (provided such bank is not subject to a capital maintenance provision within a written agreement, consent order, order to cease and desist, capital directive, or prompt corrective action directive issued by its federal regulator). Card-Issuing Business Regulation The charge card and consumer lending businesses are subject to extensive regulation. In the United States, we are subject to a number of federal laws and regulations, including: the Equal Credit Opportunity Act (which generally prohibits discrimination in the granting and handling of credit) the Fair Credit Reporting Act ( FCRA ), as amended by the Fair and Accurate Credit Transactions Act ( FACT Act ) (which, among other things, regulates use by creditors of consumer credit reports and credit prescreening practices and requires certain disclosures when an application for credit is rejected) the Truth in Lending Act ( TILA ) (which, among other things, requires extensive disclosure of the terms upon which credit is granted), including the amendments to TILA that were adopted through the enactment of the Fair Credit and Charge Card Disclosure Act (which mandates certain disclosures on credit and charge card applications) 23

28 the Fair Credit Billing Act (which, among other things, regulates the manner in which billing inquiries are handled and specifies certain billing requirements) the Electronic Funds Transfer Act (which regulates disclosures and settlement of transactions for electronic funds transfers including those at ATMs) the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the CARD Act ) (which prohibits certain acts and practices in connection with consumer credit card accounts) Regulation Z (which was recently amended by the Federal Reserve to extensively revise the open end consumer credit disclosure requirements and to implement the requirements of the CARD Act) federal and state laws and regulations that generally prohibit engaging in unfair and deceptive business practices. Certain federal privacy-related laws and regulations govern the collection and use of customer information by financial institutions (see Corporate & Other below). Federal legislation also regulates abusive debt collection practices. In addition, a number of states, the European Union, and many foreign countries in which we operate have significant consumer credit protection and disclosure and privacy-related laws (in certain cases more stringent than the laws of the United States). Bankruptcy and debtor relief laws affect us to the extent that such laws result in amounts owed being classified as delinquent and/or charged off as uncollectible. As stated above, card issuers and card networks are subject to certain provisions of the Bank Secrecy Act as amended by the Patriot Act, with regard to maintaining effective anti-money laundering programs. For a discussion of these and other regulations and legislation that impact our business, please see Supervision & Regulation General within Corporate & Other below. Centurion Bank, AEBFSB and our other bank entities are subject to a variety of laws and regulations applicable to financial institutions. Changes in such laws and regulations or in the regulatory application or judicial interpretation thereof could impact the manner in which we conduct our business and the costs of compliance. The regulatory environment in which our Card and lending businesses operate has become increasingly complex and robust. The U.S. Congress and regulators, as well as various consumer advocacy groups, have continued their focus and attention on certain practices of credit card issuers, such as unfair and deceptive business practices, increases in APRs, changes in the terms of the account, and the types and levels of fees and financial charges charged by card issuers for, among other things, late payments, returned checks, payments by telephone, copies of statements and the like. We regularly review and, as appropriate, refine our business practices in light of existing and anticipated developments in laws, regulations and industry trends so we can continue to manage our business prudently and consistent with regulatory requirements and expectations. For information about the recently enacted CARD Act, please see Privacy and Fair Credit Reporting within Supervision and Regulatory- General below beginning on page 42. In June 2009, we announced that Centurion Bank and AEBFSB entered into separate settlement agreements with the FDIC and the OTS, respectively. The settlement agreements related to convenience checks used by certain Cardmembers, which were declined as a result of a change in the Cardmember s risk profile. Among other terms of the settlement agreements, the banks agreed to modify certain practices of their convenience check programs and disclosures and to assist qualifying Cardmembers in the removal of their respective names from any bad check registry or similar database and to refund certain amounts to affected Cardmembers. In January 2003, the Federal Financial Institutions Examination Council (the FFIEC ), an interagency body composed of the principal U.S. federal entities that regulate banks and other financial institutions, issued new guidance to the industry on credit card account management and loss allowance practices (the Guidance ). The Guidance covers five areas: (i) credit line management; (ii) over-limit practices; (iii) minimum payment and negative amortization practices; (iv) workout and forbearance practices; and (v) certain income (fee) recognition and loss allowance practices. The Guidance is generally applicable to all institutions under the supervision of the federal bank regulatory agencies that comprise the FFIEC, although it is primarily the result of the identification by bank regulators in their examinations of other credit card lenders practices deemed by them to be inappropriate, particularly, but not exclusively, with regard to subprime lending programs. At present, we do not 24

29 have any lending programs that target the subprime market. Centurion Bank and AEBFSB evaluate and discuss the Guidance with their respective regulators on an ongoing basis as part of their regulatory examination processes, and, as a result, may refine their practices from time to time based on regulatory input. The Guidance has not had, nor do we expect it to have, any material impact on our businesses or practices. American Express Consumer Travel Network USA The American Express Consumer Travel Network USA provides travel, financial and Cardmember services to consumers through American Express-owned travel service offices, call centers, participating American Express Representatives (independently owned travel agency locations that operate under the American Express brand) and the Consumer Travel Web site. U.S. Consumer Travel has distinguished itself in the luxury marketplace through its Platinum Travel Services and Centurion Travel Services. These services provide programs such as the International Airline Program, which offers special discount fares on certain international first- and business-class tickets, and the Fine Hotels & Resorts program, a luxury hotel program offering room upgrades and value-added amenities. Other premium programs developed by Consumer Travel for Centurion Card and Platinum Card members include the Cruise Privileges Program, Destinations Vacations Program and the Private Jet Services Program. Consumer Travel also provides other value-added programs such as Gold Card Destinations, a collection of travel benefits exclusively for Gold Card members, and Destination Family, a set of valuable benefits and offers across cruise, tour, hotel, and car rental designed for American Express Card members traveling with families. In addition, the Consumer Travel business operates a wholesale travel business in the United States through our Travel Impressions subsidiary. (A wholesaler purchases inventory, such as hotel rooms, from suppliers and then resells the services to the customer at retail prices that the wholesaler determines.) Our wholesale travel business manages and operates American Express Vacations, which is sold exclusively through the American Express Consumer Travel Network, and distributes travel packages through other retail travel agents and private label brands for third parties in the United States. Our Consumer Travel Web site, americanexpress.com/travel, offers a full range of travel rates and discounts on airfares, hotels, car rentals, last-minute deals, cruises and full vacation packages. The Web site offers unique American Express Cardmember benefits such as an American Express Travel Office locator, Travel Specialist finder tools, double Membership Rewards points, and travel planning resources and destination content through the Local Color portion of the Web site. In addition, Cardmembers are able to Pay With Points by redeeming Membership Rewards points for some categories of travel through our Web site, as well as through our call centers and Travel Offices. The ability to Pay With Points for travel is unique among our competitors and has been well received by our customers. Consumer Travel continues to attract agencies to our Representative Network to increase our network footprint in areas where American Express Cardmembers are concentrated. In 2009, 18 new member agencies joined the Representative Network. Key signings included Altour International, one of the largest travel companies in the United States, and National Travel Center in Charleston, West Virginia, a leading travel management company in the region. Furthermore, in 2009, the Representative Network launched a series of new services allowing Representatives to better service Cardmembers and customers. These services include Pay with Points, AgentPort a Tour and Cruise on-line search engine, and the Hotel Luxury Collection a value-added hotel program with over 700 properties worldwide. TRS travel network of retail travel locations is important in supporting the American Express brand and providing Cardmember servicing throughout the world. In 2009, we opened a flagship travel service office in Cambridge, Massachusetts, which, in addition to providing service from American Express travel agents, offers visitors new services including a Cardmember lounge, concierge services, unique virtual technology and special travel offers and events. 25

30 Consumer Travel Network USA Competition American Express Consumer Travel competes with a variety of different competitors including traditional brick and mortar travel agents, credit card issuers offering products with significant travel benefits, online travel agents and travel suppliers that distribute their products to consumers directly via the Internet or telephone-based customer service centers. In recent years we have experienced an increasing presence of niche players that are seeking to capitalize on the growth in the luxury travel segment by combining luxury travel offers with concierge-type services. INTERNATIONAL CARD SERVICES We issue our charge and credit Cards in numerous countries around the globe. Our geographic scope is widespread and we focus primarily on those markets that we believe offer us the greatest financial opportunity. For a discussion of Cards issued internationally through our GNS partner relationships, please see the section Global Network Services above. The Company continued to bolster its international proprietary Card business through the launch of numerous new or enhanced Card products during These are Cards that we issue, either on our own or, as further described below, as co-brands with partnering institutions. This past year, among other new proprietary products, we announced or launched Cards with SAS Scandinavian Airlines in Sweden, All Nippon Airways Co., Ltd. in Japan and The Express Rewards Credit Card SM in the United Kingdom. We offer many of the same programs and services in our international proprietary Card-issuing business as we do in our U.S. proprietary issuing business. For example, as in the United States, we offer various flexible payment options similar to our Sign & Travel program and our Extended Payment Option to Cardmembers in several international markets. Also, as in the United States, we issue Cards internationally under distribution agreements with banks. Another example of our distribution partnerships is affinity cards with fraternal, professional, educational and other organizations. For instance, we have been successful in penetrating the affinity card segment in Australia, where we issue Cards with the majority of the largest professional associations in that country. In Australia, affinity cards are a substantial part of our total revolving portfolio and contribute to our proprietary consumer lending activities. As in the United States, rewards programs are a strong driver of Cardmember spending in the international consumer business. We have more than 1,500 redemption partners across our international business, with an average of approximately 84 partners in each country; approximately 30% of these partners are in the travel industry. Cardmembers can redeem their points with more than 40 airlines and over 175 hotels. Our redemption options include travel, retail merchandise, entertainment, shopping and recreation gift certificates, experiences, financial services and charity rewards. In 2009, we continued to enhance our rewards programs in several markets, offering more flexible choices that enable Cardmembers to redeem Membership Rewards points more quickly. Membership Travel Services International provides premium travel and concierge services to our Platinum and Centurion Customers, through 24 exclusively dedicated call centers in 23 international countries. Additionally, Membership Travel Services operates 16 proprietary Travel Service Offices in Mexico, Italy and Argentina to provide all Cardmembers with travel and general card service assistance. We also provide foreign exchange services in Mexico and Italy. We have taken steps to enhance our capabilities to sell exclusively negotiated benefits and luxury travel packages with preferred suppliers through the Fine Hotels and Resorts Program, American Express Vacations and American Express s International Airline Program. Our International Airline Program (IAP), which is exclusively available to Platinum Card and Centurion Card members, allows these Card members to receive complimentary companion tickets or a class upgrade when flying on qualifying international flights in business or first class. We expanded the flexibility of payment for travel and concierge services by allowing International Consumer Cardmembers to use their Membership Rewards points to pay for their travel purchases in 14 international markets. 26

31 International Proprietary Consumer Card Competition Compared to the United States, consumers outside the United States use general-purpose charge and credit cards for a smaller percentage of their total payments, with some large emerging market countries just beginning to transition to card usage in any meaningful way. Although our geographic scope is widespread, we generally do not have significant share in the markets in which we operate outside the United States. Internationally, our proprietary Card-issuing business is subject to competition from multinational banks, such as Citibank, HSBC and Banco Santander, as well as many local banks and financial institutions. Globally, we view Citibank and HSBC as our strongest competitors, as they currently offer card products in a large number of markets. International Proprietary Consumer Card Regulation As discussed elsewhere in this Report, regulators in 2009 continued to introduce a variety of proposed reforms to the payments landscape in a number of our key international markets, some of which have already been adopted. We expect this activity to continue in Regulators continue to consider developments in the United States and other jurisdictions to help inform and guide their policy. While the nature of the proposals vary, a number of markets have been focused on pricing, disclosure and other card practices and we expect this to continue in As a consequence, international markets may consider and implement additional card practice regulation in As we move forward we continue to evaluate our business planning in light of changing market circumstances and the evolving political, economic, regulatory and media environment. GLOBAL COMMERCIAL SERVICES In our Global Commercial Services ( GCS ) segment, we provide expense management services to companies and organizations worldwide through Global Commercial Card and Global Travel Services. American Express is a leading global issuer of commercial cards and is also a leading global travel management company for corporations and businesses. During 2009, we added or retained several major Commercial Card clients in the United States and internationally including Affiliated Computer Services, Inc., International Business Machines Corporation, PepsiCo, Inc., Emerson Electric Co., Stryker, Tri-Pen Management Corporation and UPS. Additionally, in 2009, we added or retained several American Express Business Travel clients in the United States and internationally, including International Business Machines Corporation, Rio Tinto Limited, CBS Corporation, Zurich Insurance Company Ltd, and The Nielsen Company. GCS offers a number of products and services, which include: A comprehensive offering of Corporate Card Programs, such as: Corporate Cards, issued to individuals through a corporate account established by their employer and designed primarily for travel and entertainment ( T&E ) spending Corporate Meeting Cards, which are provided primarily to corporate meeting planners as a tool to help companies control their meeting and event expenses Business Travel Accounts, centrally billed accounts that companies can use to charge their employees travel expenses. A suite of Business-to-Business Payment Solutions, including: Corporate Purchasing Card, an account established by corporations to pay for everyday business expenses such as office and computer supplies Payment, which provides fast and efficient payment for large-ticket purchases and permits the processing of large transactions with effective fraud controls Buyer Initiated Payment, an electronic solution for companies looking to automate their payment processes. 27

32 American Express Business Travel, which helps businesses manage and optimize their travel expenses through a variety of travel-related products, services and solutions. Global Commercial Card Global Commercial Card ( GCC ) offers a range of expense management solutions to companies worldwide through our Corporate Card Programs and our Business-to-Business Payment Solutions. The American Express Corporate Card is a charge card that individuals may obtain through a corporate account established by their employer for business purposes. Through our Corporate Card Program, companies can manage their travel, entertainment and purchasing expenses and improve negotiating leverage with suppliers, among other benefits. We use our direct relationships with merchants to offer Corporate Card clients superior data about company spending, as well as streamlined dispute resolution. We issue local currency Corporate Cards in 41 countries and international dollar/euro Corporate Cards in 84 countries. In addition, we provide Corporate Cards issued through our GNS partner relationships for presence in 31 additional countries. With the heightened focus on cost containment, many companies increasingly are interested in our Corporate Meeting Card program, which helps businesses control meeting-related expenses. It allows clients to capture meeting spending, to simplify the payment process, and to gain access to data to support negotiations with suppliers. We also offer a series of Business-to-Business Payment Solutions to help companies manage non-t&e (or B2B) spending. This type of spending by corporations helps to diversify our spend mix beyond travel and entertainment. These solutions provide a variety of benefits to companies including cost savings, process efficiency, improved cash flow and increased visibility, control and security. The Corporate Purchasing Card helps large corporations and mid-sized companies manage their everyday spending. The Corporate Purchasing Card is used to pay for everyday goods and business expenses, such as office supplies, industrial supplies and business equipment in 22 markets around the world. vpayment allows corporate customers to make payments with enhanced controls, data capture and reconciliation capabilities. vpayment offers companies single-use virtual account numbers. Charges are authorized for a specified amount during a specified amount of time. The solution automates reconciliation; eliminates manual check requests; interfaces easily with enterprise resource planning (ERP), procurement and accounts payable systems; and can be used at one or more stages of the procurement-to-payables process. Buyer Initiated Payment allows American Express to pay B2B suppliers electronically on behalf of our clients, permitting them to manage payments, extend their own days payable outstanding or float, and increase their cash on hand. Buyer Initiated Payment has been offered first to clients in the United States and will be offered in other markets around the world in This solution is best suited for mid- to large-sized companies that want to transition rapidly to electronic payments, reduce supplier inquiries, convert paper to electronic payments, and optimize cash flow. In addition to providing expense management services to large and global corporations, GCC markets Commercial Card programs to middle-market companies (defined in the United States as firms with annual revenues of $10 million to $1 billion worldwide). GCC is focused on continuing to expand its business with mid-sized companies, which represent significant growth opportunities. Businesses of this size often do not have a Commercial Card program. However, once enrolled in a Commercial Card program, mid-sized companies, which usually do not have well-defined purchasing programs, typically put a significant portion of their business spending (both T&E and non-t&e, such as office supplies) on the Commercial Card because they can gain control, savings and employee benefits. American Express also partners with many other companies around the world to offer a number of co-brand corporate Cards in various markets. These products, typically suited for mid-sized companies, provide savings on everyday business spending and /or air travel. To date, American Express has 15 co-brand partnerships 28

33 worldwide. These include the two new co-brand corporate cards we added in 2009: the SAS American Express Corporate Card in Denmark, Norway and Sweden and the American Express BP Corporate Card in Australia, a unique card program that allows eligible clients to achieve savings and benefits on fuel expenses and on Qantas air travel. GCC offers the Savings at Work Program to mid-sized companies in the United States, as well as similar programs globally, which provides companies with cash back and/or discounted pricing on everyday business products and services, such as car rentals, hotels, restaurants and courier services. Corporate Cardmembers can also take advantage of our Membership Rewards program to redeem points for air travel and hotel stays, as well as shopping, home, and recreation items. Membership Rewards is a powerful tool for encouraging Card usage and corporate policy compliance leading to greater control and savings. GCC offers American Work, a secure, web-based suite of online tools that enables clients to manage their Corporate Card, Corporate Purchasing Card, BTA and Corporate Meeting Card programs on a 24/7 basis through a single user interface. American Work provides authorized client representatives online access to global management information to help them gain visibility into their spending patterns, as well as the ability to make changes to their program or Commercial Card accounts. American Work also feeds data to automated expense reporting solutions and includes reconciliation tools that together allow clients to enforce program compliance and effectively integrate spending information with their internal accounting systems. This suite of online tools assists companies in managing expenses more efficiently than offline alternatives, thereby decreasing both the direct and indirect costs associated with maintaining accounts and ensuring program compliance. Global Commercial Card Competition In the current economic environment, the interest in expense management tools is particularly strong, as clients aim to capture data, analyze trends and make decisions that enhance their cash flow and profitability. Both Visa and MasterCard continue to support card issuers such as U.S. Bank, JPMorgan Chase, and Citibank to build and support data collection and reporting necessary to satisfy customer requirements. Commercial card issuers have increasingly acquired niche technology offerings to enhance data capture capabilities and reporting functionality. Global servicing, data quality, technological functionality and simplicity, and customer experience are among the key competitive factors in the commercial card business. Global Commercial Card Regulation The Global Commercial Card business, which engages in the extension of commercial credit, is subject to more limited regulation than our consumer lending business. In the United States, we are subject to certain of the federal and state laws applicable to our consumer lending business, including the Equal Credit Opportunity Act, the FCRA (as amended by the FACT Act), as well laws that generally prohibit engaging in unfair and deceptive business practices. (For a discussion of this legislation, see Card-Issuing Business Regulation.) We are also subject to certain state laws that regulate fees and charges on our products. Additionally, as a global business, we are subject to U.S. state data security and breach notification laws and regulations, as well as significant data protection laws in the European Union and many foreign countries in which we operate. We are also subject to bankruptcy and debtor relief laws that can affect our ability to collect amounts owed to us. As discussed above, along with the rest of our business, we are subject to certain provisions of the Bank Secrecy Act as amended by the Patriot Act, with regard to maintaining effective anti-money laundering programs. (For a discussion of this legislation and its effect on our business, see Supervision & Regulation General within Corporate & Other below.) Global Travel Services Global Travel Services ( GTS ) consists of American Express Business Travel and Global Foreign Exchange Services. American Express Business Travel ( Business Travel ) provides globally integrated solutions, both online and offline, to help organizations manage and optimize their travel investments and service 29

34 their traveling employees. These solutions include travel reservation advice and transaction processing through a global network that is available 24 hours per day; travel expense management policy consultation; meeting management, supplier negotiation and consultation; advisory services; management information reporting, data analysis and benchmarking; and group and incentive travel services. In 2009, we announced, with Maritz Travel, the launch of MaXvantage SM, an alliance to provide end-to-end strategic meetings management services to support a business entire meeting, event and incentive travel portfolio. We have also launched the CXO Planning Dashboard, which is designed to help senior-level executives make informed, targeted decisions that support revenue generating activities within cost reduction parameters. We also introduced new online initiatives from Business Travel designed to provide companies with enhanced services and increased efficiencies. We continue to update our economic model and invest in new products, services and technologies to enhance the value that we deliver to our customers and address ongoing travel industry challenges and opportunities. For example, we have substantially reduced our reliance on commission revenues from suppliers (such as airlines or hotels), and now generate revenues primarily from customers who pay for the services that we provide. These services include solutions designed to provide our clients with savings, control, services and traveler care. For example, we offer customers savings and benefits through the Preferred Extra SM supplier value programs and advisory services, which provide preferred supplier rates and consulting solutions in all areas of travel and entertainment expense management. In 2009, we further developed our comprehensive cost-saving travel management offerings, including products such as Recession-Proof Your Travel Investment, a proprietary methodology that allows us to make travel program recommendations to maximize returns. We also established virtual meetings expert, an online / offline solution that aggregates both public and private telepresence inventory, makes it accessible to companies so they have a broader pool of virtual meeting options, and delivers the methodology and intelligence necessary to guide travelers to make informed decisions about traveling and potential alternatives. Additionally, we established expert insights, a new line that enables clients to benefit from the collective knowledge of numerous consultants and years of travel management experience, as well as gain access to our data repository, through a series of in-depth research reports. We also launched small meetings expert, a new online meetings marketplace that reinvents the way users plan and book meetings with fewer than 50 attendees and delivers real-time connection to browse content, compare rates and book guest rooms, meeting space, catering and audio visual equipment. Finally, we grew our online community for business travel, to nearly 8,000 members. Business Travel has moved many of its business processes and customer servicing online. In the United States, more than 50% of all Business Travel transactions continue to be processed online. In addition, the volume of online transactions is growing in other markets around the world. Global Foreign Exchange Services ( GFES ) consists of retail and wholesale foreign exchange services and FX International Payments. Other than in Australia and Singapore, where we operate foreign exchange offices in city locations, we concentrate our retail foreign exchange business in key international airports, for example at London Heathrow in the United Kingdom, Barajas Madrid in Spain and Changi Airport in Singapore. For corporate clients, our FX International Payments online product allows companies and financial institutions to make cross-border payments in major foreign currencies at competitive exchange rates. In 2009, we secured agreements to operate on an exclusive basis at Edinburgh airport in the United Kingdom. We also launched in 2009 our FX International Payments business in New Zealand and increased the global portfolio of active customers to over 10,000 by signing in excess of 2,500 new corporate clients, including 37 financial institutions in the United States. 30

35 Global Travel Services Competition Business Travel continues to face intense competition in the United States and internationally from numerous traditional and online travel management companies, as well as from direct sales by airlines and other travel suppliers. Competition among travel management companies is mainly based on price, service, value creation, convenience, global capabilities and proximity to the customer. Competition also comes from corporate customers themselves, as some companies have become accredited as in-house corporate travel agents. For many years, travel management companies have faced pressure on revenues from airlines, as most carriers have stopped paying base commissions to travel agents for tickets sold and significantly reduced other forms of travel agent compensation. Carriers have also increased the number of transactions they book directly through their Web sites and other means. These trends have reduced the revenue opportunities for travel management companies because they do not receive distribution revenue from directly booked transactions. In recent years, the airline industry has undergone bankruptcies, restructurings, consolidations and other similar events including expanded grants of antitrust immunity to airline alliances. This immunity enables airlines to closely coordinate their international operations and to launch highly integrated joint ventures in transatlantic and other markets. These types of structural changes may result in additional challenges to travel management companies. For additional information concerning these issues, please see Risk Factors We have agreements with business partners in a variety of industries, including the airline industry, that represent a significant portion of our business on page 78 below. Overall, intense competition among travel management companies, the ongoing trends of increasing direct sales by airlines, the rise of low-cost carriers and ongoing reductions in or elimination of airline commissions and fees, continue to put pressure on revenue for travel agents. Over the last few years we have evolved our business model allowing us to charge customers for the services we provide and the value we create, and restructured our expense base through the rationalization of our call center locations and the transitioning of many of our services online. This restructuring, as well as our global presence, has helped us to balance these revenue pressures. We continue to look for new ways to enhance the value we deliver for our customers both online and offline. Additionally, we are focusing on developing new and innovative products, services and technologies, which enhance the value we deliver to our customers and suppliers and address ongoing travel industry challenges and opportunities. CORPORATE & OTHER Corporate & Other consists of corporate functions and auxiliary businesses, including the Company s publishing business, Travelers Cheques and other prepaid products, as well as other company operations. We also discuss information relevant to the Company as a whole in this section. Global Prepaid We have been in the business of issuing and selling travelers checks since We sell the American Express Travelers Cheque ( Travelers Cheque or Cheque ) as a safe and convenient alternative to cash. Travelers Cheques are currently available in U.S. dollars and four foreign currencies, including Euros. We also issue and sell other forms of paper travelers checks, including American Express Gift Cheques, which are available in U.S. and Canadian dollars. Sales of Travelers Cheques continued to decline in In addition to travelers checks, Global Prepaid also offers prepaid gift cards in the United States and Canada, including the American Express Gift Card, which can be used in the United States and Canada at merchants that accept American Express Cards. On September 30, 2009, American Express announced that it had eliminated all monthly fees on its gift cards, becoming the first open system gift card (i.e., a gift card that can be used at multiple unaffiliated sellers of goods or services) to do so. Sales of gift cards continued to rise in 31

36 2009, reflecting the growing popularity of these products and our efforts to increase buying convenience for customers. Global Prepaid also offers a variety of incentive prepaid cards, such as prepaid rebate and reward card products. We sell American Express prepaid products through a variety of channels, including sales directly to customers via phone and the Internet. Travelers Cheques and Gift Cheques are sold primarily through a broad network of selling outlets worldwide, including American Express travel offices, independent travel agents and third-party financial institutions. Gift cards are primarily sold through travel offices and retail establishments, including supermarkets and drug stores. During 2009, we solidified our position as the largest gift card issuer in the United States by signing or renewing distribution deals with a number of large partners, including Simon Malls and General Growth Properties, and we continue to expand the network of retail locations at which our gift card products are sold. Global Prepaid Competition Travelers Cheques compete with a wide variety of financial payment products including cash, foreign currency, checks, other brands of travelers checks, debit, prepaid and ATM cards and, in some circumstances, other payment cards. Our prepaid cards compete with the same payment methods, and in particular, with cash, checks and other open-system and store-specific gift cards. The principal competitive factors affecting the travelers check and prepaid card industry are: the number and location of merchants willing to accept the form of payment the availability to the consumer of other forms of payment the amount of fees charged to the consumer the compensation paid to, and frequency of settlement by, selling outlets the accessibility of sales and refunds for the products the success of marketing and promotional campaigns the ability to service the customer satisfactorily, including for lost or stolen instruments. Global Prepaid Regulation As an issuer of travelers checks, we are regulated in the United States under the money transmitter or sale of check laws in effect in most states. These laws require travelers check (and, where applicable, prepaid card) issuers to obtain licenses, to meet certain safety and soundness criteria, to hold outstanding proceeds of sale in highly rated and secure investments, and to provide detailed reports. We invest the proceeds from sales of our Travelers Cheques and prepaid cards in accordance with applicable law, predominantly in highly rated debt securities consisting primarily of intermediate- and long-term federal, state and municipal obligations. Many states examine licensees annually. In addition, federal anti-money laundering regulations require, among other things, the registration of traveler check issuers as Money Service Businesses and compliance with anti-money laundering recordkeeping and reporting requirements by issuers and selling outlets. At this time, stored value issuers and redeemers, while considered to be Money Service Businesses, are not required to register under these regulations. Outside the United States, there are varying licensing and anti-money laundering requirements, including some that are similar to those in the United States. Travelers check issuers are required by the laws of many states to comply with state unclaimed and abandoned property laws under which such issuers must pay to states the face amount of any travelers check that is uncashed or unredeemed after 15 years. The abandoned property laws of numerous states also apply to prepaid cards in a variety of ways. 32

37 In May 2009, the CARD Act amended provisions of the Electronic Funds Transfer Act to impose new restrictions on the terms of gift cards and certain other prepaid cards, including restrictions on the fees that may be charged, expiration dates, and consumer disclosures. Under the CARD Act, the Federal Reserve must promulgate regulations to implements its gift card provisions, which regulations will become effective in August In addition, a number of states have also enacted laws pertaining to the issuance and the sale of gift cards. We continue to monitor state legislative activity restricting the terms of gift cards. In certain states where regulation continues to restrict fees and has made it unprofitable for us to offer gift cards, we have limited or withdrawn from selling these cards. American Express Publishing Through American Express Publishing, we publish luxury lifestyle magazines such as Travel + Leisure, Food & Wine and Departures ; travel resources such as SkyGuide ; business resources such as the American Express Appointment Book and SkyGuide Executive Travel, a business traveler supplement; a variety of general interest, cooking, travel, wine, financial and time management books; branded membership services; a growing roster of international magazine editions; as well as directly sold and licensed products. American Express Publishing also has a custom publishing group and is expanding its service-driven Web sites such as: travelandleisure.com, foodandwine.com, departures.com, tlgolf.com, tlfamily.com and eskyguide.com. We have an agreement with Time Inc. under which it manages our publishing business, and we share profits relating to this business. Global Services Group As part of the organizational changes announced in October 2009, management created a new Global Services organization to heighten the company s focus on customer service and to ensure all business operations are managed as effectively and efficiently as possible. We are organizing support functions by process rather than business unit, which the Company expects will streamline costs, reduce duplication of work, better integrate skills and expertise, and improve customer service. Global Services is comprised principally of the following divisions: World Service We have consolidated our U.S. and International service organizations for the first time. Our customer service units have worked over a number of years to ensure outstanding service to customers, while at the same time improving operating margins. As mentioned earlier in this Report, J.D. Power and Associates released its annual nationwide credit card satisfaction study and ranked American Express highest in overall satisfaction among 21 of the largest card issuers in the United States for the third consecutive year. Global Business Services The Global Business Services division is principally comprised of procurement, real estate, human resources processing and financial processing. By consolidating these internal process-driven activities, we will seek to simplify and standardize processes for increased quality, efficiency and cost savings. Corporate Development The Corporate Development Group is responsible for supporting AXP growth and profitability by working with our business units to identify and execute on acquisitions, investments, joint ventures, partnerships and divestitures. 33

38 Service and Technology Infrastructure We continue to make significant investments, both in the United States and internationally, in our Card systems and infrastructure to allow faster introduction and greater customization of products. We also are using technology to develop and improve our service capabilities to continue to deliver a high quality customer experience. For example, we maintain a service delivery platform that our employees use in the Card business to support a variety of customer servicing and account management activities such as account maintenance, updating of Cardmember information, the addition of new Cards to an account and resolving customer satisfaction issues. In international markets, we are enhancing our global platforms and capabilities, such as in revolving credit. We continue to leverage the Internet to lower costs, improve service quality and enhance our business model. During 2009, we continued to broaden our focus to use the Internet to drive revenue and build our brand, while continuing to migrate transaction volumes at lower costs. We also continue to have more online customer service interactions in the United States than we do by telephone or in person. As of year-end, customers had enrolled approximately 26 million Cards globally in our Manage Your Card Account service. This service enables Cardmembers to review and pay their American Express bills electronically, view and service their Membership Rewards program accounts and conduct various other functions quickly and securely online. We now have an online presence in 23 markets around the world, including the United Kingdom, Australia, Italy, France, Mexico and Japan. We continue to devote substantial resources to our technology platform to ensure the highest level of data integrity, security and privacy. In 2006, we and several other payment card networks formed PCI SSC, an independent standards-setting organization to manage the evolution of technical data security standards. In 2009, we became an owner-member of EMVCo, the standards body that manages, maintains, and enhances specifications for chip-based payment cards and acceptance devices, including point-of-sale terminals. (For a discussion of these organizations, see the Global Merchant Services section above.) In 2002, we outsourced most of our technology infrastructure management and support to IBM. The various arrangements covered under our agreement with IBM range in term from 8 to 12 years, with certain rights to extend. This arrangement currently enables us to benefit from IBM s expertise while lowering our information technology costs. IBM is currently responsible for managing most of our day-to-day technology infrastructure functions, including most of our mainframe and midrange computing systems; Web hosting; database administration; and a portion of our help desk services function. We also outsource other technology infrastructure functions to other third-party service providers. Our internal IT organization continues to retain the Company s key technology competencies, including information technology strategy, information security, managing strategic relationships with technologies partners, data center operations, developing and maintaining applications and databases and managing the technology portfolios of our businesses. Enterprise Growth As part of the organizational changes, we also are creating a new Enterprise Growth group to leverage existing assets, generate incremental fee revenue and drive our entry into new payment areas and related businesses. The objective for the Enterprise Growth organization is to develop opportunities for growth that transcend individual businesses that take advantage of some of the new technological trends that are emerging across the payments industry. Consistent with our focus on new payments areas, on January 15, 2010, we purchased Revolution Money Inc., a provider of secure person-to-person payment services through an internet based platform, for approximately $300 million. Revolution Money s online person-to-person payment accounts are FDIC insured and suited for social and instant messaging networks. Additionally, Revolution Money offers the RevolutionCard, a general-use PIN-based card with enhanced security; no name or account number appears on 34

39 the card and transactions are processed using PIN numbers. We believe Revolution Money s assets and expertise complement not only our existing payments and processing capabilities, but also provide us with innovative technology and expertise that can help extend our leadership beyond the traditional payments arena. Fee Services Our existing businesses, as well as our Enterprise Growth Group, are tasked with developing new fee-generating products and services by leveraging our Blue Box resources. Two recently introduced examples of these services from our existing businesses in other segments include: Business Insights, a new business that incorporates analytics and consulting to assist merchants with identifying new trends, enabling product innovation, expanding geographically, and improving the effectiveness of their marketing LoyaltyEdge SM, a new business line that will assist partners with developing, operating, and improving their own loyalty programs, which includes Delta Airlines as the first customer. Supervision and Regulation General Overview American Express Company and TRS are bank holding companies under the BHC Act and have elected to be treated as financial holding companies under the BHC Act. As a bank holding company under the BHC Act, the Company is subject to supervision and examination by the Federal Reserve. Under the system of functional regulation established under the BHC Act, the Federal Reserve supervises the Company, including all of its nonbank subsidiaries, as an umbrella regulator of the consolidated organization and generally defers to the primary U.S. regulators of the Company s U.S. depository institution subsidiaries, as applicable, and to the other U.S. regulators of the Company s U.S. non-depository institution subsidiaries that regulate certain activities of those subsidiaries, such as insurance companies regulated by state insurance authorities. Many aspects of our business are also subject to rigorous regulation by other U.S. federal and state regulatory agencies and securities exchanges and by non-u.s. government agencies or regulatory bodies and securities exchanges. Certain of our public disclosure, internal control environment and corporate governance principles are subject to the Sarbanes-Oxley Act of 2002 ( Sarbanes-Oxley ) and related regulations and rules of the SEC and the New York Stock Exchange, Inc. As a global financial institution, to the extent that different regulatory systems impose overlapping or inconsistent requirements on the conduct of our business, we face complexity and additional costs in our compliance efforts. New laws or regulations or changes to existing laws and regulations (including changes in interpretation or enforcement) could materially adversely affect our financial condition or results of operations. More specifically, severe market disruptions in 2008 have led to numerous proposals in the United States and internationally for potentially significant changes in the regulation of the financial services industry. Please see Risk Factors Proposed legislative and regulatory reforms could, if enacted or adopted, result in our business becoming subject to significant and extensive additional regulations, which could adversely affect our results of operations and financial condition on pages for a further discussion of some of these proposals and their potential impact on our results of operations and financial condition. Banking Regulation Federal and state banking laws, regulations and policies extensively regulate the Company, TRS, Centurion Bank and AEBFSB, including prescribing standards relating to capital, earnings, liquidity, dividends, the repurchase or redemption of shares, loans or extension of credit to affiliates and insiders, internal controls, information systems, internal audit systems, loan documentation, credit underwriting, asset growth and impaired assets. Such laws and regulations are intended primarily for the protection of depositors, other customers and the federal deposit insurance funds, as well as to minimize systemic risk, and not for the protection of holders of our 35

40 securities. Bank regulatory agencies have broad examination and enforcement power over bank holding companies and their subsidiaries, including the power to impose substantial fines, limit dividends, restrict operations and acquisitions and require divestitures. Bank holding companies and banks, as well as subsidiaries of both, are prohibited by law from engaging in practices that the relevant regulatory authority deems unsafe or unsound. Financial Holding Company Status and Activities The BHC Act limits the nonbanking activities of bank holding companies. Unless a bank holding company has qualified as a financial holding company, its nonbanking activities are restricted to those so closely related to banking as to be a proper incident thereto. An eligible bank holding company may elect to be a financial holding company, which is authorized to engage in a broader range of financial activities. A financial holding company may engage in any activity that has been determined by rule or order to be financial in nature, incidental to such financial activity, or (with prior Federal Reserve approval) complementary to a financial activity and that does not pose a substantial risk to the safety or soundness of a depository institution or to the financial system generally. American Express engages in various activities permissible only for a bank holding company that has elected to be treated as a financial holding company, including in particular providing travel agency services, acting as a finder and certain insurance underwriting and agency services. For a bank holding company to be eligible for financial holding company status, all of its subsidiary U.S. depository institutions must be well capitalized and well managed and have received at least a satisfactory rating on its most recent Community Reinvestment Act of 1977 (the CRA ) review. If, after becoming a financial holding company and undertaking activities in reliance on such qualification, the company fails to continue to meet applicable capital or managerial standards for financial holding company status, the company must enter into an agreement with the Federal Reserve to comply with applicable capital and managerial standards. Moreover, until all relevant conditions are satisfied, the Company, its subsidiaries and affiliates may not, without the Federal Reserve s prior approval, commence any additional activities, or acquire control or shares of any company, in reliance on the Company s status as a financial holding company, and the Company must comply with any additional limitations that the Federal Reserve imposes. If the company does not return to compliance within 180 days, the Federal Reserve may order the company to divest its subsidiary U.S. depository institutions or the company may discontinue or divest investments in companies engaged in activities permissible only for a bank holding company that has elected to be treated as a financial holding company. If any subsidiary U.S. depository institution fails to maintain a satisfactory rating under the CRA, American Express would be subject to substantially the same restrictions on activities and acquisitions as set forth above. Activities and Acquisitions The BHC Act requires a bank holding company to obtain the prior approval of the Federal Reserve before: (1) it may acquire direct or indirect ownership or control of any voting shares of any bank or savings and loan association, if after such acquisition, the bank holding company will directly or indirectly own or control more than 5% of any class of the voting securities of the institution; (2) it or any of its subsidiaries, other than a bank, may acquire all or substantially all of the assets of any bank or savings and loan association; or (3) it may merge or consolidate with any other bank holding company. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, as amended (the Interstate Banking Act ), generally permits bank holding companies to acquire banks in any state, and preempts all state laws restricting the ownership by a bank holding company of banks in more than one state. The Interstate Banking Act also permits (1) a bank to merge with an out-of-state bank and convert any offices into branches of the resulting bank if both states have not opted out of interstate branching, (2) a bank to acquire branches from an out-of-state bank if the law of the state where the branches are located permits the interstate branch acquisition and (3) banks to establish and operate de novo interstate branches whenever the host state opts-in to de novo branching. Bank holding companies and banks seeking to engage in transactions authorized by the Interstate Banking Act must be adequately capitalized and managed. 36

41 The Federal Reserve must approve certain additional capital contributions to an existing non-u.s. investment and certain direct and indirect acquisitions by the Company of an interest in a non-u.s. company, including in a foreign bank, as well as the establishment by Centurion Bank of foreign branches in certain circumstances. The Change in Bank Control Act prohibits a person, entity, or group of persons or entities acting in concert, from acquiring control of a bank holding company such as the Company unless the Federal Reserve has been given prior notice and has not objected to the transaction. Under Federal Reserve regulations, the acquisition of 10% or more of a class of voting stock of the Company would create a rebuttable presumption of acquisition of control of the Company under certain circumstances. In addition, any company is required to obtain the approval of the Federal Reserve under the BHC Act before acquiring control of the Company, which, among other things, includes the acquisition of ownership of or control over 25% or more of any class of voting securities of the Company or the power to exercise a controlling influence over the Company. In the case of an acquirer that is a bank or bank holding company, the BHC Act requires approval of the Federal Reserve for the acquisition of ownership or control of any voting securities of the Company, if the acquisition results in the bank or bank holding company controlling more than 5% of the outstanding shares of any class of voting securities of the Company. Source of Strength Under Federal Reserve policy, the Company is expected to act as a source of strength to Centurion Bank and to commit capital and financial resources to support it. Such support may be required by the Federal Reserve at times when, absent Federal Reserve policy, we otherwise might determine not to provide it. Capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary banks. In the event of a bank holding company s bankruptcy, any commitment by the bank holding company to a federal bank regulator to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment. Capital Adequacy The Company, TRS, Centurion Bank and AEBFSB are required to comply with the applicable capital adequacy standards established by the federal banking regulators. There are two risk-based measures of capital adequacy for bank holding companies that have been promulgated by the Federal Reserve, as well as a leverage measure. The Company currently calculates its risk-based capital ratios under guidelines adopted by the Federal Reserve, based on the 1998 Capital Accord ( Basel I ) of the Basel Committee on Banking Supervision (the Basel Committee ). The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in credit and market risk profiles among banks and financial holding companies, to account for off-balance-sheet exposure, and to minimize disincentives for holding liquid assets. Assets and off-balance-sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance-sheet items. Under Basel I, as adopted by the applicable federal bank regulatory agencies, the minimum guideline for the ratio of total capital to risk-weighted assets (including certain off-balance-sheet items, such as standby letters of credit) is 8%. At least half of the total capital must be composed of Tier 1 capital, which includes common equity, undivided profits, minority interests in the equity accounts of consolidated subsidiaries (including, for bank holding companies but not banks, trust preferred securities), non-cumulative perpetual preferred stock and for bank holding companies (but not banks) a limited amount of cumulative perpetual preferred stock, less goodwill and certain other intangible assets. Tier 2 capital may consist of, among other things, qualifying subordinated debt, mandatorily convertible debt securities, other preferred stock and trust preferred securities and a limited amount of the allowance for loan losses. Non-cumulative perpetual preferred stock, trust preferred securities and other so-called restricted core capital elements are generally limited to 25% of Tier 1 capital. The minimum guideline for the ratio of Tier 1 capital to risk weighted assets is 4%. 37

42 In June 2004, the Basel Committee published new international guidelines for determining regulatory capital ( Basel II ). In December 2007, the U.S. bank regulatory agencies jointly adopted a final rule based on Basel II. The Company, Centurion Bank and AEBFSB are required now to transition to the Basel II-based guidelines, absent a waiver. The final rule provides for a series of three transitional periods during which the Company must calculate its risk-based capital ratios under both the Basel I-based guidelines and the new Basel II-based guidelines, with the minimum capital requirements during the transitional periods being the greater of the required capital as calculated under the final rule and a designated percentage of required capital as calculated under Basel I. Prior to beginning the three transitional periods, we must complete a satisfactory parallel-run period of no less than four consecutive calendar quarters during which we will be required to confidentially report regulatory capital under both the Basel I and Basel II regulations. Under the final rule, we must adopt a board of directors-approved implementation plan for Basel II and begin the first transitional period for capital calculation under the final rule no later than January 1, 2013, unless this time is extended by the Federal Reserve. In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum ratio of Tier 1 capital to average total assets, less goodwill and certain other intangible assets (the Leverage Ratio ), of 3% for bank holding companies that meet certain specified criteria, including having the highest regulatory rating. All other bank holding companies generally are required to maintain a Leverage Ratio of at least 4%. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the Federal Reserve has indicated that it will consider a tangible Tier 1 capital leverage ratio (deducting all intangibles) and other indicators of capital strength in evaluating proposals for expansion or new activities. As a supervisory matter, federal bank regulatory agencies expect most bank holding companies, and in particular larger bank holding companies such as the Company, to maintain regulatory capital ratios that, at a minimum, qualify a bank holding company and its depository institution subsidiaries as well capitalized. The required ratios to qualify as well capitalized are a total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 6% and a leverage ratio of at least 5%. Following the recent financial crisis, the federal bank regulatory agencies have encouraged larger bank holding companies to maintain capital ratios appreciably above even the well-capitalized standard. Moreover, the Federal Reserve is focusing more on the regulatory requirement that common equity be the predominant element of Tier 1 capital. In addition, the Federal Reserve has assessed the capital adequacy of the country s 19 largest bank holding companies, including the Company, under a so-called stress test relating primarily to loan quality. For information regarding our capital ratios, please see Consolidated Capital Resources and Liquidity on pages of our 2009 Annual Report to Shareholders, which information is incorporated herein by reference. Proposed Capital and Liquidity Requirements In December 2009, the Basel Committee issued two consultative documents proposing reforms to bank capital and liquidity regulation. The Basel Committee s capital proposals would significantly revise the definitions of Tier 1 capital and Tier 2 capital. Among other things, they would: (i) re-emphasize that common equity is the predominant component of Tier 1 capital by (a) adding a minimum common equity to risk-weighted assets ratio, with the ratio itself to be determined based on the outcome of an impact study that the Basel Committee is conducting, and (b) requiring that goodwill, general intangibles and certain other items that currently must be deducted from Tier 1 capital instead be deducted from common equity as a component of Tier 1 capital; (ii) disqualify innovative capital instruments including U.S.-style trust preferred securities and other instruments that effectively pay cumulative dividends from Tier 1 capital status; (iii) strengthen the risk coverage of the capital framework, particularly with respect to counterparty credit risk exposures arising from derivatives, repos and securities financing activities; (iv) introduce a leverage ratio requirement as an international standard; and (v) implement measures to promote the build-up of capital buffers in good times that 38

43 can be drawn upon during periods of stress, introducing a countercyclical component designed to address the concern that existing capital requirements are procyclical that is, they encourage reducing capital buffers in good times, when capital could more easily be raised, and increasing capital buffers in times of distress, when access to capital markets may be limited or they may effectively be closed. The capital proposals do not specify a percentage for the new ratio of common equity to risk-weighted assets or changes in the current minimum Tier 1 capital and total capital risk-based capital requirements, which currently are 4% and 8%, respectively. Instead, they state that the minimum percentage requirements for the new ratio of common equity to risk-weighted assets and the other capital ratios including Tier 1 capital to risk-weighted assets, total capital to risk-weighted assets and the new leverage ratio will be included in a fully calibrated, comprehensive set of capital and liquidity proposals to be released by December 31, Independently, in September 2009, the Department of the Treasury issued a policy statement titled Principles for Reforming the U.S. and International Regulatory Capital Framework for Banking Firms setting forth core principles intended to address many of the same substantive items as the Basel Committee capital proposals and specifically calling for increased capital requirements for financial institutions, and substantially heightened capital requirements for large financial institutions. If implemented, the Basel Committee s liquidity proposals, although apparently similar in many respects to tests historically applied by banking organizations and regulators for management and supervisory purposes, would for the first time be formulaic and required by regulation. They would impose two measures of liquidity risk exposure, one based on a 30-day time horizon and the other addressing longer-term structural liquidity mismatches over a one-year time period. The Basel Committee indicated that it expects final provisions responsive to the proposals to be implemented by December 31, Ultimate implementation in individual countries, including the United States, is subject to the discretion of the bank regulators in those countries. The Basel Committee s final proposals may differ from the proposals released in December 2009, and the regulations and guidelines adopted by regulatory authorities having jurisdiction over the Company and our subsidiaries may differ from the final accord of the Basel Committee. Moreover, although some aspects of the Basel Committee proposals were quite specific (e.g., the definition of the components of capital), others were merely conceptual (e.g., the description of the leverage test) and others not specifically addressed (e.g., the minimum percentages for required capital ratios). We are not able to predict at this time the content of guidelines or regulations that will ultimately be adopted by regulatory agencies having authority over the Company and our subsidiaries or the impact of changes in capital and liquidity regulation upon us. However, a requirement that the Company and our depository institution subsidiaries maintain more capital, with common equity as a more predominant component, or manage the configuration of their assets and liabilities in order to comply with formulaic liquidity requirements, could significantly impact our return on equity, financial condition, operations, capital position and ability to pursue business opportunities. Prompt Corrective Action The FDIA requires, among other things, that federal banking regulators take prompt corrective action in respect of FDIC-insured depository institutions that do not meet minimum capital requirements. The FDIA specifies five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. A depository institution s capital tier will depend upon how its capital levels compare to various relevant capital measures and certain other factors, as established by regulation. A bank may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives an unsatisfactory examination rating. Once an institution becomes undercapitalized, the FDIA imposes progressively more restrictive constraints on operations, management and capital distributions, depending on the capital category in which an institution is classified. A depository institution that is not well capitalized is also subject to certain limitations on brokered deposits and Certificate of Deposit Account Registry Service deposits. The vast majority of the Company s U.S. retail deposits have to date been raised through broker channels. For a description of our deposit programs, please see Deposit Programs beginning on page 23 above and Deposit Programs on page 42 of our 2009 Annual Report to Shareholders, which information is incorporated herein by reference. 39

44 The FDIA generally prohibits an FDIC-insured depository institution from making any capital distribution (including payment of dividends) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are subject to restrictions on borrowing from the Federal Reserve and to growth limitations, and are required to submit a capital restoration plan. For a capital restoration plan to be acceptable, any holding company must guarantee the capital plan up to an amount equal to the lesser of 5% of the depository institution s assets at the time it became undercapitalized and the amount of the capital deficiency at the time it fails to comply with the plan. In the event of the holding company s bankruptcy, such guarantee would take priority over claims of its general unsecured creditors. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized. Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. Critically undercapitalized depository institutions are subject to appointment of a receiver or conservator. Dividends The Company and TRS as well as Centurion Bank and AEBFSB are limited by banking statutes and regulations in their ability to pay dividends. In general, federal and applicable state bank laws prohibit, without first obtaining regulatory approval, insured depository institutions, such as Centurion Bank and AEBFSB, from making dividend distributions if such distributions are not paid out of available recent earnings or would cause the institution to fail to meet capital adequacy standards. In addition to specific limitations on the dividends that subsidiary banks can pay to their holding companies, federal regulators could prohibit a dividend that would constitute an unsafe or unsound banking practice in light of the financial condition of the banking organization. It is Federal Reserve policy that bank holding companies should generally pay to common shareholders dividends on common stock only out of net income available to common shareholders over the past year and only if the prospective rate of earnings retention appears consistent with the organization s current and expected future capital needs, asset quality, and overall financial condition. Moreover, bank holding companies should not maintain dividend levels that place undue pressure on the capital of depository institution subsidiaries or that may undermine the bank holding company s ability to be a source of strength to its banking subsidiaries. The Federal Reserve could prohibit a dividend by the Company or TRS that would constitute an unsafe or unsound banking practice in light of the financial condition of the banking organization. Transactions between Centurion Bank or AEBFSB and Their Respective Affiliates Certain transactions (including loans and credit extensions from Centurion Bank and AEBFSB) between Centurion Bank and AEBFSB, on the one hand, and their affiliates (including the Company, TRS and their non-bank subsidiaries), on the other hand, are subject to quantitative and qualitative limitations, collateral requirements, and other restrictions imposed by statute and Federal Reserve regulation. Transactions subject to these restrictions are generally required to be made on an arms-length basis. These restrictions generally do not apply to transactions between a depository institution and its subsidiaries. FDIC Insurance Assessments Centurion Bank and AEBFSB accept deposits, and those deposits are insured by the FDIC up to the applicable limits. The FDIC s deposit insurance fund is funded by assessments on insured depository institutions, which depend on the risk category of an institution and the amount of insured deposits that the institution holds. The FDIC may increase or decrease the assessment rate schedule on a semi-annual basis. Furthermore, 40

45 assessment rates are subject to adjustments based upon the insured depository institution s ratio of (1) long-term unsecured debt to domestic deposits, (2) secured liabilities to domestic deposits, and (3) brokered deposits to domestic deposits (if greater than 10%). As part of its efforts to rebuild the deposit insurance fund, the FDIC adopted a rule imposing a special assessment of five basis points on each FDIC-insured depository institution s assets, minus its Tier 1 capital, as of June 30, This special assessment was collected on September 30, Additionally, also as part of its efforts to rebuild the deposit insurance fund, the FDIC required insured depository institutions, including Centurion Bank and AEBFSB, to prepay their estimated assessments for all of 2010, 2011 and 2012 on December 30, The prepaid assessment amount for our insured depository institution subsidiaries totaled approximately $95.2 million, $6.7 million of which was recorded as an expense for income statement purposes in 2009 and $88.5 million of which was recorded as a prepaid expense for balance sheet purposes as of December 31, Also as part of its efforts to rebuild the deposit insurance fund, the FDIC recently adopted a rule implementing a uniform increase of three basis points for assessment rates, effective January 1, Under the FDIA, the FDIC may terminate the insurance of an institution s deposits upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. We do not know of any practice, condition or violation that might lead to termination of our deposit insurance. FDIC Powers upon Insolvency of Insured Depository Institutions If the FDIC is appointed the conservator or receiver of an insured depository institution, such as Centurion Bank or AEBFSB, upon its insolvency or in certain other events, the FDIC has the power: (1) to transfer any of the depository institution s assets and liabilities to a new obligor without the approval of the depository institution s creditors; (2) to enforce the terms of the depository institution s contracts pursuant to their terms; or (3) to repudiate or disaffirm any contract or lease to which the depository institution is a party, the performance of which is determined by the FDIC to be burdensome and the disaffirmation or repudiation of which is determined by the FDIC to promote the orderly administration of the depository institution. In addition, under federal law, the claims of holders of U.S. deposit liabilities and certain claims for administrative expenses against an insured depository institution would be afforded a priority over other general unsecured claims against the institution, including claims of debt holders of the institution and depositors in non-u.s. offices, in the liquidation or other resolution of the institution by a receiver. As a result, whether or not the FDIC ever sought to repudiate any debt obligations of Centurion Bank or AEBFSB, the debt holders would be treated differently from, and could receive substantially less, if anything, than the depositors in U.S. offices of the depository institution. Cross-Guarantee Provisions Under the cross-guarantee provision of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ( FIRREA ), insured depository institutions, such as Centurion Bank and AEBFSB, may be liable to the FDIC with respect to any loss incurred or reasonably anticipated to be incurred by the FDIC in connection with the default of, or FDIC assistance to, any commonly controlled insured depository institution. Centurion Bank and AEBFSB are commonly controlled within the meaning of the FIRREA cross-guarantee provision. Community Reinvestment Act Centurion Bank and AEBFSB are subject to the provisions of the Community Reinvestment Act ( CRA ). Under the terms of the CRA, the primary federal regulator of a depository institution is required, in connection with its examination of the depository institution, to assess such depository institution s record in meeting the credit needs of the communities served by that depository institution, including low- and moderate-income neighborhoods. Furthermore, such assessment is also required of any depository institution that has applied to, 41

46 among other things, merge or consolidate with or acquire the assets or assume the liabilities of a federally regulated financial institution or to open or relocate a branch office. In the case of a bank holding company applying for approval to acquire a bank or bank holding company, the Federal Reserve will assess the record of each subsidiary depository institution of the applicant bank holding company in considering the application. In addition, as discussed previously, the failure of the Company s subsidiary depository institutions to maintain satisfactory CRA ratings could result in restrictions on the Company s and TRS ability to engage in activities in reliance on financial holding company authority. Privacy and Fair Credit Reporting We use information about our customers to develop and make available relevant, personalized products and services. Certain customers are given choices about how we use and disclose their information, and we give them notice regarding the measures we take to safeguard this information. Regulatory activity in the areas of privacy and data security continues to increase worldwide, spurred by advancements in technology and related concerns about the rapid and widespread dissemination and use of information. As noted above, as part of our efforts to enhance payment account data security, in 2006, we and several other payment card networks formed PCI SSC, an independent standards-setting organization to manage the evolution of the PCI Data Security Standard, which helps organizations that process card payments to prevent credit/charge card security breaches and fraud through increased controls around data and its exposure to compromise. The Gramm-Leach-Bliley Act ( GLBA ) became effective on July 1, GLBA requires consumer notice of a financial institution s privacy policies and practices and affords customers the right to opt out of the institution s disclosure of their personal financial information to unaffiliated third parties (with limited exceptions). This legislation does not preempt state laws that afford greater privacy protections to consumers, and several states have adopted such legislation. For example, in 2003 California enacted that state s Financial Information Privacy Act. As noted elsewhere in this Report, we are also subject to the FCRA, which, among other things, places restrictions (with limited exceptions) on the sharing and use of certain personal financial information of our customers with and by our affiliates. In addition, various federal banking regulatory agencies, and as many as 45 states, the District of Columbia, Puerto Rico, and the Virgin Islands, have enacted security breach laws and regulations, requiring varying levels of consumer notification in the event of a security breach. Data breach laws are also becoming more prevalent in other parts of the world where we operate, including Japan, Mexico and Germany. In many countries that have yet to impose automatic data breach notification requirements, regulators have increasingly used the threat of significant sanctions and penalties by data protection authorities to encourage voluntary notification and discourage data breaches. Beyond these data breach laws, a growing number of states, including Massachusetts and Nevada, have adopted broad-ranging data security regulations regarding the protection of customer and employee data that could result in higher compliance and technology costs for the Company. In 1995, the European Parliament and Council passed European Directive 95/46/EC on the protection of individuals with regard to the processing of personal data and on the free movement of such data (commonly referred to as the Data Protection Directive), which obligates the controller of an individual s personal data to, among other things, take the necessary technical and organizational measures to protect personal data. We continue our efforts to safeguard the data entrusted to us in accordance with applicable law and our internal data protection policies, including taking steps to reduce the potential for identity theft, while seeking to collect and use data properly to achieve our business objectives. In May 2009, the CARD Act was enacted to prohibit certain practices for consumer credit card accounts. The CARD Act, among other requirements, prohibits issuers from treating a payment as late for any purpose, including increasing the annual percentage rate or imposing a fee, unless a consumer has been provided a reasonable amount of time to make the payment. It also requires issuers to apply payment amounts in excess of the minimum payment first to the balance with the highest APR and then to balances with lower APRs. In 42

47 addition, the Act prohibits an issuer from increasing the APR on outstanding balances, except in limited circumstances such as when a promotional rate expires, a variable rate adjusts, or an account is seriously delinquent or completes a workout arrangement. These requirements became effective on February 22, Also, beginning on February 22, 2010, issuers must maintain reasonable written policies to consider a consumer s income or assets and current obligations prior to opening an account or increasing a credit line. This may require adjustments to our account opening decisioning and line increase decisioning processes. This is not expected to have any significant impact on these decisions if anything it could result in fewer applications for new accounts being accepted or fewer requests for line increases being approved. In addition, applicants for new accounts who are under the age of 21 must demonstrate an independent ability to make the required minimum periodic payments. This may decrease the number of applications that are approved for applicants under the age of 21. The Act also requires that penalty fees be reasonable and proportional, and that issuers review recent APR increases periodically to determine if a decrease is appropriate. These provisions become effective on August 22, Since the Federal Reserve has not yet published final rules implementing these provisions, it is difficult to assess the potential impact these requirements may have on our operations. The Federal Reserve also amended its rules on the format and content of consumer credit card disclosures. The amendments require revisions to the format and content of all main types of open-end consumer credit disclosures, including applications and solicitations, account-opening disclosures, and periodic billing statements. These amendments become effective on July 1, While the Company is making certain changes to its product terms and practices that are designed to mitigate the impact of the changes required by the CARD Act, there is no assurance that it will be successful. The long-term impact of the CARD Act on the Company s business practices and revenues will depend upon a number of factors, including its ability to successfully implement its business strategies, consumer behavior and the actions of the Company s competitors, which are difficult to predict at this time. If the Company is not able to lessen the impact of the changes required by the CARD Act, it will have a material adverse effect on results of operations. The Fair Credit Reporting Act of 1970 ( FCRA ) regulates the disclosure of consumer credit reports by consumer reporting agencies and the use of consumer credit report information by banks and other companies. FCRA was significantly amended by the enactment in December 2003 of the Fair and Accurate Credit Transactions Act (the FACT Act ). The FACT Act requires any company that receives information concerning a consumer from an affiliate, subject to certain exceptions, to permit the consumer to opt out from having that information used to market the company s products to the consumer. In November 2007, the federal banking agencies issued a final rule implementing the affiliate marketing provisions of the FACT Act. Companies subject to oversight by these agencies were required to comply with the rules by October 1, We qualify for an exception from the affiliate marketing provisions of the FACT Act, and as a result, we do not need to provide an affiliate marketing opt out. The FACT Act further amends the FCRA by adding several new provisions designed to prevent or decrease identity theft and to improve the accuracy of consumer credit information. The federal banking agencies and the FTC published a final rule in November 2007 requiring financial institutions to implement a program containing reasonable policies and procedures to address the risk of identity theft and to identify accounts where identity theft is more likely to occur. Companies subject to oversight by the federal banking agencies originally were required to comply with the rule by November 1, 2008, but the FTC has stated it will suspend enforcement of its rule until June 1, TRS continues to be regulated by the FTC with respect to this new rule and is currently evaluating what steps it will need to take to comply. The FACT Act also imposes new duties on both consumer reporting agencies and on businesses that furnish or use information contained in consumer credit reports. For example, a furnisher of information is required to implement procedures to prevent the reporting of any information that it learns is the result of identity theft. Also, if a consumer disputes the accuracy of information provided to a consumer reporting agency, the furnisher of that information must conduct an investigation and respond to the consumer in a timely fashion. The federal banking regulatory agencies and the FTC have issued rules that specify the circumstances under which furnishers of information would be 43

48 required to investigate disputes regarding the accuracy of the information provided to a consumer reporting agency. The FACT Act also requires grantors of credit that use consumer credit report information in making a determination to offer a borrower credit on terms that are materially less favorable than the terms offered to most of the lender s other customers to notify the borrower that the terms are based on a consumer credit report. In such a case the borrower is entitled to receive a free copy of the report from the consumer reporting agency. The federal bank regulatory agencies and the FTC have issued rules that specify the circumstances under which risk-based pricing notices must be provided to customers and the content, format and timing of such notices. Grantors of credit using prescreened consumer credit report information in credit solicitations are also required to include an enhanced notice to consumers that they have the right to opt out from receiving further prescreened offers of credit. The enactment of the FACT Act and the promulgation of rules implementing it are not expected to have a significant impact on our business or practices. Anti-Money Laundering Compliance In the United States, the USA Patriot Act was enacted in October 2001 in the wake of the September 11, 2001 terrorist attacks. The Patriot Act, in addition to substantially broadening existing anti-money laundering ( AML ) and terrorist financing legislation, amended the Bank Secrecy Act, the primary legislation governing AML requirements. The Patriot Act contains a wide variety of provisions aimed at fighting terrorism and money laundering, including provisions aimed at impeding terrorists ability to access and move funds used in support of terrorist activities. Among other things, the Bank Secrecy Act, as amended by the Patriot Act, requires financial institutions to establish AML programs that meet certain standards, including, in some instances, expanded reporting and enhanced information gathering and recordkeeping requirements. While American Express has long maintained AML programs in our businesses, certain of our business activities are subject to specific AML regulations that prescribe minimum standards for components of the AML programs. For example, our GNS business maintains a risk-based program to ensure that institutions that are licensed to issue cards or acquire merchants on their networks maintain adequate AML controls. We have also developed and implemented a Know Your Customer, or due diligence, program and an enhanced due diligence program, including a program for verifying the identity of our customers ( Customer Identification Program ) for applicable businesses. We will take steps to comply with any additional regulations or initiatives that are adopted, whether in the United States or in other jurisdictions in which we conduct business. Over the last several years, the industry has seen increased regulatory scrutiny of the AML compliance programs of financial institutions, with emphasis on record keeping and reporting requirements such as the requirement to identify and report suspicious activity, leading to enforcement actions for non-compliance. To meet this increased scrutiny, we continue to enhance our enterprise-wide AML compliance program. Our AML compliance programs primarily consist of risk-based policies, procedures and controls that are reasonably designed to prevent, detect and report money laundering. We have significant operations in the European Union, including a number of regulated businesses. We monitor developments in EU legislation, as well as in the other markets in which we operate, to ensure that we are in a position to comply with all applicable legal requirements, including European Union directives applicable to payment institutions, credit providers, insurance intermediaries and other financial institutions. Compensation Practices Our compensation practices are subject to oversight by the Federal Reserve. In October 2009, the Federal Reserve issued a comprehensive proposal on incentive compensation policies that applies to all banking organizations supervised by the Federal Reserve, including bank holding companies such as American Express. The proposal sets forth three key principles for incentive compensation arrangements that are designed to help ensure that incentive compensation plans do not encourage excessive risk-taking and are consistent with the safety and soundness of banking organizations. The three principles provide that a banking organization s incentive compensation arrangements should provide incentives that do not encourage risk-taking beyond the 44

49 organization s ability to effectively identify and manage risks, be compatible with effective internal controls and risk management, and be supported by strong corporate governance. Any deficiencies in compensation practices of a banking institution that are identified by the Federal Reserve in connection with its review of such organization s compensation practices may be incorporated into the organization s supervisory ratings, which can affect its ability to make acquisitions or perform other actions. The proposal provides that enforcement actions may be taken against a banking organization if its incentive compensation arrangements or related risk-management control or governance processes pose a risk to the organization s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies. Separately, the FDIC has solicited comments on whether to amend its risk-based deposit insurance assessment system to potentially increase assessment rates on financial institutions with compensation programs that put the FDIC deposit insurance fund at risk, and proposed legislation would subject compensation practices at financial institutions to heightened standards and increased scrutiny. The scope and content of the U.S. banking regulators policies on executive compensation are continuing to develop and are likely to continue evolving in the near future. It cannot be determined at this time whether compliance with such policies will adversely affect the ability of American Express and its subsidiaries to hire, retain and motivate its and their key employees. Foreign Corrupt Practices Act Our international operations are subject to U.S. laws governing the activities of U.S. companies transacting business abroad, including the Foreign Corrupt Practices Act (the FCPA ). The FCPA prohibits U.S. companies from making improper payments, or offers of payments, to foreign governments and their officials and political parties for the purpose of obtaining or retaining business. The FCPA also requires us to comply with certain accounting standards, which are enforced by the SEC. Violations of the FCPA may result in severe criminal and civil sanctions and other penalties. We have implemented safeguards to deter prohibited practices; however, if our employees or agents fail to comply with applicable laws governing our international operations, we may face investigations or prosecutions, which could have a material adverse effect on our financial condition or results of operations. FOREIGN OPERATIONS We derive a significant portion of our revenues from the use of our Card products, Travelers Cheques, travel and other financial products and services in countries outside the United States and continue to broaden the use of these products and services outside the United States. (For a discussion of our revenue by geographic region, see Note 25 to our Consolidated Financial Statements, which you can find on pages of our 2009 Annual Report to Shareholders and which is incorporated herein by reference.) Our revenues can be affected by political and economic conditions in these countries (including the availability of foreign exchange for the payment by the local Card issuer of obligations arising out of local Cardmembers spending outside such country, for the payment of Card bills by Cardmembers who are billed in other than their local currency, and for the remittance of the proceeds of Travelers Cheque sales). Substantial and sudden devaluation of local Cardmembers currency can also affect their ability to make payments to the local issuer of the Card in connection with spending outside the local country. As a result of our foreign operations, we are exposed to the possibility that, because of foreign exchange rate fluctuations, assets and liabilities denominated in currencies other than the U.S. dollar may be realized in amounts greater or less than the U.S. dollar amounts at which they are currently recorded in our Consolidated Financial Statements. Examples of transactions in which this may occur include the purchase by Cardmembers of goods and services in a currency other than the currency in which they are billed; the sale in one currency of a Travelers Cheque denominated in a second currency; and, in most instances, investments in foreign operations. These risks, unless properly monitored and managed, could have an adverse effect on our operations. For more information on how we manage risk relating to foreign exchange, see Risk Management Market Risk Management Process on pages of our 2009 Annual Report to Shareholders, which information is incorporated herein by reference. 45

50 SALE OF AMERICAN EXPRESS BANK LTD. / DISCONTINUED OPERATIONS On September 18, 2007, we entered into an agreement to sell our international banking subsidiary, American Express Bank Ltd. ( AEBL ), to Standard Chartered PLC ( Standard Chartered ), and to sell American Express International Deposit Company ( AEIDC ) through a put/call agreement to Standard Chartered 18 months after the close of the AEBL sale. The sale of AEBL was completed on February 29, In the third quarter of 2008, AEIDC qualified to be reported as a discontinued operation and the sale of AEIDC was completed on September 10, For all periods presented, all of the operating results, assets and liabilities, and cash flows of AEBL (except for certain components of AEBL that were not sold) and AEIDC have been removed from the Corporate & Other segment and are presented separately in discontinued operations in the Company s Consolidated Financial Statements. The Notes to the Consolidated Financial Statements have been adjusted to exclude discontinued operations unless otherwise noted. You can find more information regarding this transaction on page 21 under caption Financial Review and in Note 2 to our Consolidated Financial Statements, appearing on page 76 of our 2009 Annual Report to Shareholders, which are incorporated herein by reference. SEGMENT INFORMATION AND CLASSES OF SIMILAR SERVICES You can find information regarding the Company s reportable operating segments, geographic operations and classes of similar services in Note 25 to our Consolidated Financial Statements, which appears on pages of our 2009 Annual Report to Shareholders, which Note is incorporated herein by reference. EXECUTIVE OFFICERS OF THE COMPANY Set forth below in alphabetical order is a list of all our executive officers as of February 25, None of our executive officers has any family relationship with any other executive officer, and none of our executive officers became an officer pursuant to any arrangement or understanding with any other person. Each executive officer has been elected to serve until the next annual election of officers or until his or her successor is elected and qualified. Each officer s age is indicated by the number in parentheses next to his or her name. DOUGLAS E. BUCKMINSTER - President, International Consumer and Small Business Services Mr. Buckminster (49) has been President, International Consumer and Small Business Services of the Company since November Prior thereto he had been Executive Vice President, International Consumer Products and Marketing since July KENNETH I. CHENAULT - Chairman and Chief Executive Officer Mr. Chenault (58) has been Chairman since April 2001 and Chief Executive Officer since January L. KEVIN COX - Executive Vice President, Human Resources Mr. Cox (46) has been Executive Vice President, Human Resources of the Company since April Prior thereto, he had been Executive Vice President of The Pepsi Bottling Group since September

51 EDWARD P. GILLIGAN - Vice Chairman Mr. Gilligan (50) has been Vice Chairman of the Company and head of the Company s Global Consumer and Small Business Card Issuing, Network and Merchant businesses since October Prior thereto, he had been Vice Chairman of the Company and head of the Company s Global Business to Business Group since July Prior thereto, he had been Group President, American Express International & Global Corporate Services since July Prior thereto, he had been Group President, Global Corporate Services since June 2000 and Group President, Global Corporate Services & International Payments, since July WILLIAM H. GLENN - Executive Vice President, Global Merchant Services Mr. Glenn (52) has been Executive Vice President since September 2008 and President, Global Merchant Services since June Prior thereto, he had been President of Merchant Services North America and Global Merchant Network Group since September ASH GUPTA - President of Risk, Information Management and Banking Group and Chief Risk Officer Mr. Gupta (56) has been President of Risk, Information Management and Banking Group and Chief Risk Officer since July Prior thereto, he had been Executive Vice President and Chief Risk Officer of the Company since July JOHN D. HAYES - Executive Vice President and Chief Marketing Officer Mr. Hayes (55) has been Executive Vice President since May 1995 and Chief Marketing Officer of the Company since August DANIEL T. HENRY - Executive Vice President and Chief Financial Officer Mr. Henry (60) has been Executive Vice President and Chief Financial Officer of the Company since October Since February 2007, Mr. Henry had been serving as Executive Vice President and Acting Chief Financial Officer of the Company. Prior thereto, he had been Executive Vice President and Chief Financial Officer, U.S. Consumer, Small Business and Merchant Services since October 2005 and Executive Vice President and Chief Financial Officer, U.S. Consumer and Small Business Services since August ALFRED F. KELLY, JR. - President Mr. Kelly (51) has been President of the Company since July Prior thereto, he was Group President, Consumer, Small Business and Merchant Services since October Prior thereto, he had been President, U.S. Consumer and Small Business Services since June JUDSON C. LINVILLE - President and Chief Executive Officer, Consumer Services Mr. Linville (52) has been President and Chief Executive Officer of Consumer Services, since July Prior thereto, he had been President, U.S. Consumer Card Services Group from 2005 through Prior thereto, he was Executive Vice President, Service Delivery Network from 2001 through LOUISE M. PARENT - Executive Vice President and General Counsel Ms. Parent (59) has been Executive Vice President and General Counsel since May THOMAS SCHICK - Executive Vice President, Corporate and External Affairs Mr. Schick (63) has been Executive Vice President, Corporate and External Affairs since March

52 STEPHEN SQUERI - Group President, Global Services and Chief Information Officer Mr. Squeri (50) has been Group President, Global Services, since October Since May 2005, he served as Executive Vice President, Chief Information Officer. In July 2008, he took on the additional responsibilities as head of Corporate Development. Prior thereto, he had been President, Global Commercial Card Global Corporate Services since January We had approximately 58,300 employees on December 31, EMPLOYEES 48

53 GUIDE 3 STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES The accompanying supplemental information should be read in conjunction with the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements in the Company s 2009 Annual Report to Shareholders, which information is incorporated herein by reference ( Annual Report ). This information excludes discontinued operations unless otherwise noted. DISTRIBUTION OF ASSETS, LIABILITIES, AND SHAREHOLDERS EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL The following tables provide a summary of the Company s consolidated average balances including major categories of interest-earning assets and interest-bearing liabilities along with an analysis of net interest earnings. Consolidated average balances, interest, and average yields are segregated between U.S. and non-u.s. offices. Assets, liabilities, interest income and interest expense are attributed to U.S. and non-u.s. based on location of the office recording such items. Years Ended December 31, (Millions, except percentages) Average Balance (a) Interest Income Average Yield Average Balance (a) Interest Income Average Yield Average Balance (a) Interest-earning assets Interest-bearing deposits in other banks (b) (c) (d) U.S. (primarily U.S. in 2007) $ 6,986 $ % $ 8,575 $ % $ 3,796 $ 297 n.m.% Non-U.S. 1, n.m. n.m. n.m. Securities purchased under agreements to resell (d) Non-U.S Short-term investment securities U.S. 10, , Non-U.S Cardmember loans (e) (f) U.S. 26,114 2, ,962 4, ,298 4, Non-U.S. 8,696 1, ,670 1, ,774 1, Other loans U.S Non-U.S Taxable investment securities (g) U.S. 13, , , Non-U.S Non-taxable investment securities (g) U.S. 5, , , Other assets (h) Primarily U.S n.m n.m n.m. Total interest-earning assets (i) $ 74,656 $ 5, % $ 75,893 $ 7, % $ 65,782 $ 7, % U.S. 63,435 3,794 63,380 5,423 54,788 5,922 Non-U.S. 11,221 1,537 12,513 1,778 10,994 1, Interest Income Average Yield

54 Years Ended December 31, (Millions, except percentages) Average Balance (a) Average Balance (a) Average Balance (a) Non-interest-earning assets Cash and due from banks U.S. $ 603 $ 902 $ 728 Non-U.S Cardmember receivables, net U.S. 17,056 20,220 20,699 Non-U.S. 13,812 16,500 15,934 Other receivables, net U.S. 2,149 2, Non-U.S. 1,249 1, Reserves for cardmember and other loans losses U.S. (2,556) (1,923) (1,104) Non-U.S. (564) (432) (370) Other assets (j) U.S. 12,288 9,699 6,741 Non-U.S. 2,131 2,205 2,003 Total non-interest-earning assets 46,548 51,160 47,353 U.S. 29,540 31,247 28,055 Non-U.S. 17,008 19,913 19,298 Assets of discontinued operations 75 5,745 21,509 Total assets $ 121,279 $ 132,798 $ 134,644 U.S. 92,975 94,627 82,843 Non-U.S. 28,229 32,426 30,292 Assets of discontinued operations 75 5,745 21,509 Percentage of total average assets attributable to non-u.s. activities 23.3% 24.4% 22.5% (a) Averages based on monthly balances, except reserves for cardmember and other receivables/loans, which are based on quarterly averages. (b) Amounts include (i) average interest-bearing restricted cash balances of $417 million, $214 million, and $293 million for 2009, 2008 and 2007, respectively, which are included in other assets on the Consolidated Balance Sheets, and (ii) the associated interest income. (c) (d) (e) (f) (g) (h) (i) (j) Average balances in 2007 include negative cash balances not reclassified to liabilities which also could not be segregated between U.S. and non-u.s. As a result, the average yield on interest-bearing deposits in other banks has not been shown for 2007 as it would not be meaningful (n.m.). Certain reclassifications of prior year amounts have been made to conform to the current presentation. Card fees related to cardmember loans included in interest income were $107 million, $95 million, and $90 million in U.S. and $79 million, $51 million and $40 million in non-u.s. for 2009, 2008 and 2007, respectively. Average non-accrual loans were included in the average loan balances used to determine the average yield on loans in amounts of $554 million, $8 million and $34 million in U.S. as well as $15 million, $6 million and $5 million in non-u.s. for 2009, 2008 and 2007, respectively. Average yields for available-for-sale investment securities have been calculated using total amortized cost balances and do not include changes in fair value recorded in other comprehensive (loss) income. Average yield on non-taxable investment securities is calculated on a tax-equivalent basis using the U.S. federal statutory tax rate of 35 percent. Amounts include (i) average equity securities balances, which are included in investment securities on the Consolidated Balance Sheets, and (ii) the associated dividend income. The average yield on other assets has not been shown as it would not be meaningful. The average yield on total interest-earning assets is adjusted for the impacts of items mentioned in (g) above. Includes premises and equipment, net of accumulated depreciation. 50

55 Years Ended December 31, (Millions, except percentages) Average Balance (a) Interest Expense Average Rate Average Balance (a) Interest Expense Average Rate Average Balance (a) Interest Expense Interest-bearing liabilities Customer deposits U.S. $ 19,638 $ % $ 12,130 $ % $ 8,390 $ % Non-U.S , , Federal funds purchased and securities sold under agreements to repurchase U.S. 48 1, , Short-term borrowings (b) U.S. 2, , , Non-U.S , Long-term debt (b) U.S. 54,032 1, ,408 2, ,788 2, Non-U.S. 1, , , Other liabilities (c) Primarily U.S n.m n.m n.m. Total interest-bearing liabilities $ 79,209 $ 2, % $ 85,140 $ 3, % $ 75,232 $ 3, % U.S. 76,147 2,114 80,798 3,354 69,819 3,739 Non-U.S. 3, , , Non-interest-bearing liabilities Travelers Cheques outstanding U.S. 5,623 6,289 6,532 Non-U.S Accounts payable U.S. 5,726 6,933 6,679 Non-U.S. 3,075 2,666 2,390 Other liabilities U.S. 9,861 9,033 7,660 Non-U.S. 2,824 4,691 4,230 Total non-interest-bearing liabilities 27,439 30,022 27,955 U.S. 21,210 22,255 20,871 Non-U.S. 6,229 7,767 7,084 Liabilities of discontinued operations 61 5,561 20,706 Total liabilities 106, , ,893 U.S. 97, ,053 90,690 Non-U.S. 9,291 12,109 12,497 Liabilities of discontinued operations 61 5,561 20,706 Total shareholders equity 14,570 12,075 10,751 Total liabilities and shareholders equity $ 121,279 $ 132,798 $ 134,644 Percentage of total average liabilities attributable to non-u.s. activities 8.7% 10.0% 10.1% Interest rate spread 4.5% 5.5% 6.3% Net interest income and net average yield on interest-earning assets (d) $ 3, % $ 3, % $ 3, % Average Rate (a) (b) (c) Averages based on monthly balances. Interest expense incurred on derivative instruments in qualifying hedging relationships has been reported along with the related interest expense incurred on the hedged debt instrument. Amounts include (i) average deferred compensation liability balances which are included in other liabilities on the Consolidated Balance Sheets, and (ii) the associated interest expense. The average rate on other liabilities has not been shown as it would not be meaningful. (d) Net average yield on interest-earning assets is defined as net interest income divided by average total interest-earning assets as adjusted for the items mentioned in note (g) on page

56 CHANGES IN NET INTEREST INCOME -VOLUME AND RATE ANALYSIS (a) The following table presents the amount of changes in interest income and interest expense due to changes in both average volume and average rate. Major categories of interest-earning assets and interest-bearing liabilities have been segregated between U.S. and non-u.s. offices. Average volume/rate changes have been allocated between the average rate and average volume variances on a consistent basis based upon the respective percentage changes in average balances and average rates. Years Ended December 31, (Millions) 2009 versus versus 2007 Increase (Decrease) due to change in: Increase (Decrease) due to change in: Average Average Net Average Average Volume Rate Change Volume Rate Interest-earning assets Interest-bearing deposits in other banks (b) U.S. (Primarily U.S. in 2007) $ (25) $ (98) $ (123) $ 513 $ (655) $ (142) Non-U.S. 21 (12) 9 Securities purchased under agreements to resell (b) Non-U.S. (4) (4) Short-term investment securities U.S. 83 (128) (45) 234 (195) 39 Non-U.S. 11 (12) (1) 1 1 Cardmember loans U.S. (1,310) (170) (1,480) (44) (373) (417) Non-U.S. (305) 102 (203) Other loans U.S. (1) (1) 5 (27) (22) Non-U.S. (14) (22) (36) (20) (10) (30) Taxable investment securities U.S. 404 (280) Non-U.S. (5) (1) (6) 2 (2) Non-taxable investment securities U.S. (17) (31) (48) 5 (27) (22) Other assets Primarily U.S. 35 (91) (56) 38 (15) 23 Change in interest income (1,123) (747) (1,870) 874 (1,097) (223) Interest-bearing liabilities Customer deposits U.S. 227 (200) (264) (70) Non-U.S. (39) (17) (56) (38) (4) (42) Federal funds purchased and securities sold under agreements to repurchase U.S. (51) (2) (53) (24) (22) (46) Short-term borrowings U.S. (330) (38) (368) 4 (220) (216) Non-U.S. (5) (20) (25) (4) Long-term debt U.S. (17) (816) (833) 415 (471) (56) Non-U.S. (21) (6) (27) (10) (2) (12) Other liabilities Primarily U.S. 1 (14) (13) 3 3 Change in interest expense (235) (1,113) (1,348) 540 (966) (426) Change in net interest income $ (888) $ 366 $ (522) $ 334 $ (131) $ 203 Net Change (a) (b) Refer to the notes on pages 50 and 51 for additional information. Certain reclassifications of prior year amounts have been made to conform to the current presentation. 52

57 INVESTMENT SECURITIES PORTFOLIO The following table presents the fair value of the Company s available-for-sale investment securities portfolio. Refer to Note 6, Investment Securities on page 84 in the Annual Report for additional information. December 31, (Millions) State and municipal obligations (a) $ 6,250 $ 5,631 $ 7,131 U.S. Government treasury obligations 5,566 1,981 1,971 U.S. Government agency obligations 6,745 3,185 3,139 Mortgage-backed securities Retained subordinated securities 3, Equity securities Corporate debt securities 1, Foreign government bonds and obligations Other (a) (b) Total available-for-sale securities $ 24,337 $ 12,526 $ 13,214 (a) (b) Certain reclassifications of prior year amounts have been made to conform to the current presentation. Balances at December 31, 2009 and 2008, primarily include investments in various mutual funds. Balance at December 31, 2007, primarily includes short-term money market securities with original maturities of 91 days to one year, as well as investments in various mutual funds. The following table presents an analysis of remaining contractual maturities and weighted average yields for available-for-sale investment securities. Yields on tax-exempt obligations have been computed on a tax-equivalent basis as discussed earlier. Due in 1 year or less Due after 1 through 5 years 2009 Due after 5 through 10 years Due after 10 years Total December 31, (Millions, except percentages) State and municipal obligations (a) $ 303 $ 71 $ 361 $ 5,515 $ 6,250 U.S. Government treasury obligations 5, ,566 U.S. Government agency obligations 3,964 2, ,745 Mortgage-backed securities (a) Retained subordinated securities (b) 295 2, ,599 Corporate debt securities 185 1, ,335 Foreign government bonds and obligations Total fair value (c) $ 10,333 $ 6,919 $ 759 $ 5,756 $ 23,767 Weighted average yield (d) 1.44% 6.37% 6.28% 6.71% 4.29% (a) (b) (c) (d) The expected payments on state and municipal obligations and mortgage-backed securities may not coincide with their contractual maturities because borrowers have the right to call or prepay certain obligations. The Company s individual investments in the unrated classes of its retained subordinated securities contain multiple maturity dates over periods ranging from 2010 through Accordingly, in the table above, the Company has classified such investments based on the weighted-average maturity. Excludes equity securities and other securities included in the prior table above as these are not debt securities with contractual maturities. Average yields for available-for-sale investment securities have been calculated using the effective yield on the date of purchase. As of December 31, 2009, other than U.S. Government treasury and agency obligations, the Company s holdings in the American Express Credit Account Master Trust (the Lending Trust ) with a book value of $3.6 billion were the only investments that exceeded 10 percent of shareholders equity. The securities issued by the Lending Trust consist of investments in retained subordinated securities from the Company s cardmember loan securitization program. 53

58 LOANS AND CARDMEMBER RECEIVABLES PORTFOLIOS The following table presents gross loans, net of unearned income, and gross cardmember receivables by customer type segregated between U.S. and non-u.s., based on the domicile of the borrowers. Allowance for losses is presented beginning on page 60. Refer to Note 4, Accounts Receivable on page 80 and Note 5, Loans on page 82 in the Annual Report for additional information. December 31, (Millions) Loans U.S. loans Cardmember (a) $ 23,507 $ 32,684 $ 43,253 $ 33,543 $ 24,788 Other (b) Non-U.S. loans Cardmember (a) 9,265 9,527 11,155 9,685 8,234 Other (b) Total loans $ 33,305 $ 43,268 $ 55,215 $ 44,245 $ 34,858 Cardmember receivables U.S. cardmember receivables Consumer (c) $ 17,750 $ 17,822 $ 21,418 $ 20,586 $ 19,241 Commercial (d) 5,587 5,269 6,261 5,897 5,370 Non-U.S. cardmember receivables Consumer (c) 6,149 5,769 7,243 6,484 5,926 Commercial (d) 4,257 4,128 5,150 4,400 3,622 Total cardmember receivables $ 33,743 $ 32,988 $ 40,072 $ 37,367 $ 34,159 (a) (b) (c) (d) Represents loans to individual and small business consumers. Other loans at December 31, 2009 and 2008 primarily represent small business installment loans, a store card portfolio whose billed business is not processed on the Company s network, and small business loans associated with the acquisition of Corporate Payment Services. Other loans at December 31, 2008, also included a loan to an affiliate in discontinued operations and prior periods primarily represent small business installment loans. Represents receivables from individual and small business charge card consumers. Represents receivables from corporate charge card clients. 54

59 MATURITIES AND SENSITIVITIES TO CHANGES IN INTEREST RATES The following table presents contractual maturities of loans and cardmember receivables by customer type and segregated between U.S. and non-u.s. borrowers, and distribution between fixed and floating interest rates for loans due after one year based upon the stated terms of the loan agreements. Within 1 year (a) (b) 1-5 years (b) (c) 2009 After 5 years (c) Total December 31, (Millions) Loans U.S. loans Cardmember $ 23,459 $ 48 $ $ 23,507 Other Non-U.S. loans Cardmember 9, ,265 Other Total loans $ 33,171 $ 106 $ 28 $ 33,305 Loans due after one year at fixed interest rates $ 105 $ 22 $ 127 Loans due after one year at variable interest rates Total loans $ 106 $ 28 $ 134 Cardmember receivables U.S. cardmember receivables Consumer $ 17,723 $ 27 $ $ 17,750 Commercial 5,587 5,587 Non-U.S. cardmember receivables Consumer 6,149 6,149 Commercial 4,257 4,257 Total cardmember receivables $ 33,716 $ 27 $ $ 33,743 (a) (b) (c) Cardmember loans have no stated maturity and are therefore included in the due within one year category. However, many of the Company s cardmembers will revolve their balances, which may extend their repayment period beyond one year for balances due at December 31, Cardmember receivables are immediately due upon receipt of cardmember statements and have no stated interest rate and are included within the due within one year category. Receivables due after one year represent long-term modification programs or Troubled Debt Restructurings (TDR), wherein the terms of a receivable have been modified for cardmembers that are experiencing financial difficulties and a long-term concession (more than 12 months) has been granted to the borrower. Cardmember and other loans due after one year primarily represent installment loans and approximately $51 million of TDRs. 55

60 CARDMEMBER LOAN AND CARDMEMBER RECEIVABLE CONCENTRATIONS The following table presents the Company s exposure to any concentration of gross cardmember loans and cardmember receivables which exceeds 10 percent of total cardmember loans and cardmember receivables. Cardmember loan and cardmember receivable concentrations are defined as cardmember loans and cardmember receivables due from multiple borrowers engaged in similar activities that would cause these borrowers to be impacted similarly to certain economic or other related conditions. December 31, (Millions) 2009 (a) Individuals $ 56,671 Commercial (b) $ 9,844 Total on-balance sheet $ 66,515 Unused lines of credit-individuals (c) $ 222,415 (a) (b) (c) Refer to Note 22, Significant Credit Concentrations on page 118 in the Annual Report for additional information on concentrations, including those from airlines and for a discussion of how the Company manages concentration exposures. Certain distinctions between categories require management judgment. Includes corporate charge card receivables of $513 million from financial institutions, $12 million from U.S. Government agencies and $9.3 billion from other corporate institutions. Because charge card products have no preset spending limit, the associated credit limit on cardmember receivables is not quantifiable. Therefore, the quantified unused line-of-credit amounts only include the approximate credit line available on cardmember loans (including both for on-balance sheet loans and loans previously securitized). 56

61 RISK ELEMENTS The following table presents the amounts of non-performing loans and cardmember receivables that are either non-accrual, past due, or restructured, segregated between U.S. and non-u.s. borrowers. Past due loans are loans that are contractually past due 90 days or more as to principal or interest payments. Restructured loans and cardmember receivables are those that meet the definition of Troubled Debt Restructurings. December 31, (Millions) Loans Non-accrual loans (a) U.S. (b) $ 480 $ 8 $ 8 $ 112 $ 274 Non-U.S Total non-accrual loans Loans contractually 90 days past-due and still accruing interest U.S. (c) Non-U.S Total loans contractually 90 days past-due and still accruing interest Restructured loans (c) (d) U.S Non-U.S Total restructured loans Total non-performing loans $ 872 $ 1,006 $ 808 $ 666 $ 608 Cardmember receivables Restructured cardmember receivables (c) (d) U.S Total restructured cardmember receivables $ 35 $ 6 $ 4 $ $ (a) (b) (c) (d) The Company s policy is generally to cease accruing interest income once a related cardmember loan is 180 days past due at which time the cardmember loan is written off. The Company establishes loan loss reserves for estimated uncollectible interest receivable balances prior to write-off. Beginning with 2009, certain cardmember loans placed with outside collection agencies are put on non-accrual status. As of December 31, 2009, these amounts primarily include certain cardmember loans placed with outside collection agencies. Non-accrual loans at December 31, 2006 and 2005 included a single loan to a U.S. commercial airline of approximately $104 million and $266 million, respectively, which was paid off in full during the second quarter of The loan was put on non-accrual status in the third quarter of Represents long-term modification programs or TDR, wherein the terms of a loan or receivable have been modified for cardmembers that are experiencing financial difficulties and a long-term concession (more than 12 months) has been granted to the borrower. The Company may modify cardmember loans and receivables and such modifications may include reducing the interest rate/delinquency fees on the loans and receivables and/or placing the cardmember on a fixed payment plan not exceeding 60 months. If the cardmember does not comply with the modified terms, then the loan or receivable agreement reverts back to its original terms. In addition to TDRs, the Company has instituted other modification programs that include short-term (12 months or less) interest rate and fee reductions to cardmembers experiencing financial difficulty ( Short Term Modification Programs ). As of December 31, 2009, 2008 and 2007, approximately $701 million, $497 million and $0, respectively, in cardmember loans and receivables have been modified under these Short Term Modification Programs and are not included in the schedule above, except for $46 million, $69 million and $0, respectively, which are included within loans contractually 90 days past due and still accruing interest. Certain reclassifications of prior year amounts have been made to conform to the current presentation. 57

62 IMPACT OF NON-PERFORMING LOANS ON INTEREST INCOME The following table presents the gross interest income for both non-accrual and restructured loans for 2009 that would have been recognized if such loans had been current in accordance with their original contractual terms, and had been outstanding throughout the period or since origination if held for only part of The table also presents the interest income related to these loans that was actually recognized for the period. These amounts are segregated between U.S. and non-u.s. borrowers Year Ended December 31, (Millions) U.S. Non-U.S. Total Gross amount of interest income that would have been recorded in accordance with the original contractual terms (a) $ 53 $ 4 $ 57 Interest income actually recognized Total interest revenue foregone $ 50 $ 3 $ 53 (a) Based on the contractual rate that was being charged at the time the loan was restructured or placed on non-accrual status. POTENTIAL PROBLEM RECEIVABLES This disclosure presents outstanding amounts as well as specific reserves for certain receivables where information about possible credit problems of borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present repayment terms. At December 31, 2009, the Company did not identify any potential problem loans or receivables within the cardmember loans and receivables portfolio that were not already included in Risk Elements above. 58

63 CROSS-BORDER OUTSTANDINGS Cross-border disclosure is based upon the Federal Financial Institutions Examination Council s ( FFIEC ) guidelines governing the determination of cross-border risk. The Company has adopted the FFIEC guidelines for its cross-border disclosure starting with 2009 reporting. Accordingly, the amounts for 2008 and 2007 have been revised from the previously reported amounts to conform to the current presentation. The primary differences between the FFIEC and Guide 3 guidelines for reporting cross-border exposure are: i) available-for-sale investment securities are reported based on amortized cost for FFIEC instead of fair values for Guide 3; ii) net local country claims are reduced by local country liabilities (regardless of currency denomination) excluding any debt that is funding the local assets through a foreign domiciled subsidiary for FFIEC compared to Guide 3 where only amounts in the same currencies are offset and such debt noted above is a reduction to local country claims; iii) the FFIEC methodology includes mark-to-market exposures of derivative assets which are excluded under Guide 3; and iv) investment in unconsolidated subsidiaries are included under FFIEC but excluded under Guide 3. The following table presents the aggregate amount of cross-border outstandings from borrowers or counterparties for each foreign country that exceeds 1 percent of consolidated total assets for any of the periods reported below. Cross-border outstandings include loans, receivables, interest-bearing deposits with other banks, other interest-bearing investments and monetary assets that are denominated in either dollars or other non-local currency. The table separately presents the amounts of cross-border outstandings by type of borrower including governments and official institutions, banks and other financial institutions and other, along with an analysis of local country assets net of local country liabilities. Years Ended December 31, (Millions) Governments and official institutions Banks and other financial institutions Net local country claims Total cross-border outstandings Cross-border commitments (b) Total exposure Other Australia 2009 $ $ 1,026 $ 1 $ 3,869 $ 4,896 $ $ 4, ,686 3,969 3, ,517 4,568 4,568 United Kingdom ,264 2,537 2, ,286 3,509 3, ,067 3,043 3,043 France , ,019 2, , ,022 2, ,130 1,130 Canada ,667 1,699 1, ,451 2,241 2, ,432 1,596 1,596 Netherlands ,292 1, Other countries (a) ,156 2,385 2, , ,984 3,214 3, ,992 2,530 2,530 (a) (b) Includes the following countries each of whose cross-border outstandings are between 0.75 percent and 1.0 percent of consolidated total assets: (i) Mexico; (ii) Italy; and (iii) Sweden. Generally, all charge and credit cards have revocable lines of credit, and therefore, are not disclosed as cross border commitments. Refer to loan concentrations on page 56 for amount of unused lines of credit. 59

64 SUMMARY OF LOAN LOSS EXPERIENCE ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES The following table summarizes the changes to the Company s allowance for cardmember loan losses. The table segregates such changes between U.S. and non-u.s. borrowers. Years Ended December 31, (Millions, except percentages) Cardmember loans Allowance for loan losses at beginning of year U.S. loans $ 2,164 $ 1,457 $ 836 $ 727 $ 727 Non-U.S. loans Total allowance for losses 2,570 1,831 1, Cardmember lending provisions (a) U.S. loans 3,276 3,490 2, Non-U.S. loans Total cardmember lending provisions 4,266 4,231 2,761 1,623 1,349 Write-offs U.S. loans (2,914) (2,816) (1,630) (946) (867) Non-U.S. loans (810) (708) (655) (600) (412) Total write-offs (3,724) (3,524) (2,285) (1,546) (1,279) Recoveries U.S. loans Non-U.S. loans Total recoveries Net write-offs (b) (c) (3,397) (3,223) (1,990) (1,359) (1,155) Other (d) U.S. loans (215) (174) (126) (46) (84) Non-U.S. loans 44 (95) 15 (43) (86) Total other (171) (269) (111) (89) (170) Allowance for loan losses at end of year U.S. loans 2,541 2,164 1, Non-U.S. loans Total allowance for losses $ 3,268 $ 2,570 $ 1,831 $ 1,171 $ 996 Net write-offs / average cardmember loans outstanding (b) (c) (e) 8.5% 5.5% 3.5% 3.3% 3.5% (a) (b) (c) (d) (e) Refer to Note 5 on page 82 in the Annual Report for a discussion of management s process for evaluating allowance for loan losses. In the third quarter of 2008, the Company revised its method of reporting the cardmember lending net write-off rate. Historically, the net write-off rate has been presented using net write-off amounts for principal, interest, and fees. However, industry convention is generally to include only the net write-offs related to principal in write-off rate disclosures. The write-off rate for 2009, 2008 and 2007 is a principal only write-off rate consistent with industry convention. The write-off rate for 2006 and 2005 reflects principal only write-offs in the U.S. and total write-offs (principal, interest, and fees) outside the U.S. as principal only write-off information was not available outside the U.S. for 2006 and prior periods. For purposes of calculating the net write-off rate in accordance with (b) above, net write-offs were $2.9 billion, $2.6 billion, $1.6 billion, $1.2 billion and $985 million for , respectively. The amount for 2009 primarily includes $160 million of reserves that were removed in connection with securitizations during the year. The offset is in the allocated cost of the associated retained subordinated securities. For 2008, this amount includes reclassification of waived fee reserves to contra-cardmember loans. This amount, for all periods, also includes foreign currency translation adjustments. Average cardmember loans are based on monthly balances. 60

65 The following table summarizes the changes to the Company s allowance for other loan losses. The table segregates such changes between U.S. and non-u.s. borrowers. (a) (b) Years Ended December 31, (Millions, except percentages) Other loans Allowance for loan losses at beginning of year U.S. loans $ 15 $ 12 $ 16 $ 19 Non-U.S. loans Total allowance for losses $ 17 Provisions for other loan losses (c) U.S. loans Non-U.S. loans Total provisions for other loan losses Write-offs U.S. loans (19) (8) (9) (6) Non-U.S. loans (50) (72) (36) (19) Total write-offs (69) (80) (45) (25) Recoveries U.S. loans Non-U.S. loans Total recoveries Net write-offs (58) (72) (38) (19) Other (d) U.S. loans Non-U.S. loans (4) 3 (2) (1) Total other (4) 3 (2) (1) Allowance for loan losses at end of year U.S. loans Non-U.S. loans Total allowance for losses $ 27 $ 39 $ 45 $ 40 $ 38 Net write-offs/average other loans outstanding (e) 8.7% 8.8% 4.0% 1.2% (a) (b) (c) (d) (e) Not all information for 2005 has been presented as the information was not available. Certain reclassifications of prior year amounts have been made to conform to the current presentation. Provisions for other loan losses are determined based on a specific identification methodology and models that analyze specific portfolios statistics. Includes primarily foreign currency translation adjustments. Calculated as net write-offs as a percentage of average other loans, which are based on monthly balances. 61

66 The following table summarizes the changes to the Company s allowance for losses on cardmember receivables. The table segregates such changes between U.S. and non-u.s. borrowers. Years Ended December 31, (Millions, except percentages) Cardmember receivables Allowance for losses at beginning of year U.S. receivables Consumer $ 474 $ 844 $ 666 $ 659 $ 533 Commercial Total U.S. receivables Non-U.S. receivables Consumer Commercial Total non-u.s. receivables Total allowance for losses 810 1, Provisions for losses (a) U.S. receivables Consumer Commercial Total U.S. provisions 598 1, Non-U.S. receivables Consumer Commercial Total non-u.s. provisions Total provisions for losses 857 1,363 1, ,038 Write-offs U.S. receivables Consumer (984) (1,326) (748) (671) (654) Commercial (154) (142) (111) (84) (115) Total U.S. write-offs (1,138) (1,468) (859) (755) (769) Non-U.S. receivables Consumer (261) (214) (208) (193) (172) Commercial (81) (57) (43) (39) (38) Total non-u.s. write-offs (342) (271) (251) (232) (210) Total write-offs (1,480) (1,739) (1,110) (987) (979) 62

67 Years Ended December 31, (Millions, except percentages) Cardmember receivables Recoveries U.S. receivables Consumer $ 268 $ 115 $ 139 $ 121 $ 99 Commercial Total U.S. recoveries Non-U.S. receivables Consumer Commercial Total non-u.s. recoveries Total recoveries Net write-offs (b) (1,131) (1,552) (907) (810) (820) Other (c) U.S. receivables Consumer 6 (58) (37) (10) (15) Commercial (1) (6) (2) (1) (2) Total U.S. other 5 (64) (39) (11) (17) Non-U.S. receivables Consumer 3 (69) (15) (76) (51) Commercial 2 (17) (11) 1 (14) Total non-u.s. other 5 (86) (26) (75) (65) Total other 10 (150) (65) (86) (82) Allowance for losses at end of year U.S. receivables Consumer Commercial Total U.S. receivables Non-U.S. receivables Consumer Commercial Total non-u.s. receivables Total allowance for losses $ 546 $ 810 $ 1,149 $ 981 $ 942 Net write-offs / average cardmember receivables outstanding (d) 3.6% 4.1% 2.4% 2.4% 2.6% Net loss ratio as a percentage of charge volume (e) 0.24% 0.24% 0.26% (a) Refer to Note 4 on page 80 in the Annual Report for a discussion of management s process for evaluating allowance for loan losses. (b) In the fourth quarter of 2008, the Company revised the time period in which past due cardmember receivables in U.S. Card Services are written off to 180 days past due, consistent with applicable regulatory guidance. Previously, receivables were written off when 360 days past billing. The net write-offs for 2008 include approximately $341 million resulting from this write-off methodology change. (c) Includes foreign currency translation adjustments for all periods. For 2008, this amount also included other adjustments primarily related to the reclassification of waived fee reserves to a contra-cardmember receivable. (d) The net write-off rate presented is on a worldwide basis and is based on write-offs of principal and fees. The U.S. Card Services write-off rate was 3.8 percent for 2009 and 3.6 percent for 2008 and is based on principal-only write-offs. Averages are based on monthly balances. If the $341 million referenced in (b) above had been included in U.S. Card Services write-offs, the net write-off rate would have been 5.4 percent for (e) The net loss ratio represents the worldwide 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 percent of gross amounts billed to customers. As a result of the change discussed in (b) above, the Company stopped calculating the worldwide net loss ratio beginning in The net loss ratio for 2009 and 2008 for International Card Services was 0.36 percent and 0.24 percent, respectively and for Global Commercial Services was 0.19 percent and 0.13 percent, respectively. 63

68 ALLOCATION OF ALLOWANCE FOR LOSSES The following table presents an allocation of the allowance for losses for loans and cardmember receivables and the percent of loans and cardmember receivables in each category of total loans and cardmember receivables, respectively, by customer type. The table segregates loans and cardmember receivables and related allowances for losses between U.S. and non-u.s. borrowers. December 31, (Millions, except percentages) Percent of Percent of Percent of Percent of loans/ loans/ loans/ loans/ receivables receivables receivables receivables in each in each in each in each category category category category to total to total to total to total loans/ loans/ loans/ loans/ receivables Amount receivables Amount receivables Amount receivables Amount Allowance for losses at end of year applicable to Amount Percent of loans/ receivables in each category to total loans/ receivables Loans U.S. loans Cardmember $ 2,541 71% $ 2,164 76% $ 1,457 79% $ % $ % Other Non-U.S. loans Cardmember Other $ 3, % $ 2, % $ 1, % $ 1, % $ 1, % Cardmember receivables U.S. cardmember receivables Consumer $ % $ % $ % $ % $ % Commercial Non-U.S. cardmember receivables Consumer Commercial $ % $ % $ 1, % $ % $ % 64

69 CUSTOMER DEPOSITS The following table presents the average balances and average interest rate paid for types of customer deposits segregated between U.S. and non-u.s. offices. Refer to Note 9, Customer Deposits on page 93 in the Annual Report for additional information. Years Ended December 31, (Millions, except percentages) Average Average Average Balance (a) Average Rate Balance (a) Average Rate Balance (a) U.S. customer deposits Savings $ 7, % $ 3, % $ 3, % Time 11, , , Other (b) (c) Total U.S. customer deposits 19, , , Non-U.S. customer deposits Time , Other (c) Total Non-U.S. customer deposits , , Total customer deposits $ 20, % $ 13, % $ 10, % Average Rate (a) (b) (c) Averages are based on monthly balances. The average balances include primarily non-interest-bearing and interest-bearing demand deposits. Includes primarily non-interest-bearing demand, interest-bearing demand and savings deposits. None of these customer deposit categories exceeded 10 percent of average total customer deposits for any of the periods presented. TIME CERTIFICATES OF DEPOSIT OF $100,000 OR MORE The following table presents the amount of time certificates of deposit of $100,000 or more issued by the Company in its U.S. offices, further segregated by time remaining until maturity. By remaining maturity as of December 31, 2009 (Millions) 3 months or less but within 6 months but within 12 months Over 12 months Total U.S. time certificates of deposits ($100,000 or more) $ 71 $ 2 $ 15 $ 108 $ 196 Over 3 months As of December 31, 2009, the Company did not have time deposits of $100,000 or more issued by non-u.s. offices. RETURN ON EQUITY AND ASSETS The following table presents the Company s return on average total assets, return on average shareholders equity, dividend payout ratio, and average shareholders equity to average total assets ratio. Over 6 months Years Ended December 31, (Millions, except percentages and per share amounts) Net income $ 2,130 $ 2,699 $ 4,012 Net income per share basic (a) $ 1.54 $ 2.33 $ 3.40 Dividends declared per share $ 0.72 $ 0.72 $ 0.63 Return on average total assets (b) 1.8% 2.0% 3.0% Return on average shareholders equity (c) 14.6% 22.3% 37.3% Dividend payout ratio (d) 46.8% 30.9% 18.5% Average shareholders equity to average total assets ratio 12.0% 9.1% 8.0% (a) (b) (c) (d) Effective January 1, 2009, guidance for determining whether instruments granted in share-based payment transactions are participating securities requires that restricted stock awards be included in the computation of basic and diluted earnings per share pursuant to the two-class method. Accordingly, the Company has retrospectively adjusted EPS for 2008 and Based on the year s net income as a percentage of average total assets calculated using monthly average balances. Based on the year s net income as a percentage of average shareholders equity calculated using monthly average balances. Calculated on the year s dividends declared per share as a percentage of the year s net income per basic share. 65

70 SHORT-TERM BORROWINGS The following table presents amounts and weighted average rates for categories of short-term borrowings. Refer to Note 10, Debt on page 94 in the Annual Report for additional information. Years Ended December 31, (Millions, except percentages) Commercial paper Balance at the end of the year $ 975 $ 7,272 $ 10,490 Monthly average balance outstanding during the year $ 1,990 $ 10,638 $ 7,807 Maximum month-end balance during the year $ 5,201 $ 14,634 $ 10,490 Stated rate at December 31 (a) 0.19% 2.20% 4.36% Weighted average rate during the year 1.50% 2.90% 5.15% Federal funds purchased and securities sold under repurchase agreements (b) Balance at the end of the year $ $ 470 $ 2,434 Monthly average balance outstanding during the year $ 48 $ 1,493 $ 1,974 Maximum month-end balance during the year $ 86 $ 2,972 $ 3,358 Stated rate at December 31 (a) % 1.30% 4.98% Weighted average rate during the year 0.76% 3.58% 5.01% Other short-term borrowings Balance at the end of the year $ 1,369 $ 1,251 $ 4,837 Monthly average balance outstanding during the year $ 956 $ 2,794 $ 5,794 Maximum month-end balance during the year $ 1,369 $ 4,244 $ 6,632 Stated rate at December 31 (a) 0.85% 1.90% 4.83% Weighted average rate during the year 0.70% 4.33% 3.98% (a) (b) For floating rate debt issuances, the stated interest rates are based on the floating rates in effect as of December 31, 2009, 2008, and 2007, respectively. Includes term federal funds purchased and overnight federal funds purchased. Short-term borrowings, including commercial paper and federal funds purchased, are defined as any debt instrument with an original maturity of 12 months or less. Federal funds purchased represent overnight and term funds as well as Federal Home Loan Bank advances. Commercial paper generally is issued in amounts not less than $100,000 and with maturities of 270 days or less. Other short-term borrowings include interest-bearing overdrafts with banks, interest bearing amounts due to merchants in accordance with merchant service agreements, as well as other short-term borrowings. 66

71 ITEM 1A. RISK FACTORS This section highlights specific risks that could affect our Company and its businesses. You should carefully consider each of the following risks and all of the other information set forth in this Annual Report on Form 10-K. Based on the information currently known to us, we believe the following information identifies the most significant risk factors affecting our Company. However, the risks and uncertainties our Company faces are not limited to those described below. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business. If any of the following risks and uncertainties develops into actual events or if the circumstances described in the risks and uncertainties occur or continue to occur, these events or circumstances could have a material adverse effect on our business, financial condition or results of operations. These events could also have a negative effect on the trading price of our securities. Current Economic and Political Risks Difficult conditions in the global capital markets and economy generally, as well as political conditions in the United States and elsewhere, may materially adversely affect our business and results of operations. Our results of operations are materially affected by conditions in the global capital markets and the economy generally, both in the United States and elsewhere around the world. Ongoing concerns over the availability and cost of credit, the mortgage and real estate markets, sovereign debt crises, fear of a double-dip recession and geopolitical issues have contributed to uncertain expectations for the economy and the markets going forward. These factors, combined with still relatively low levels of business and consumer confidence and increased unemployment, continue to impact global economies, which helped drive declines in credit and charge card usage and adverse changes in payment patterns by consumers and businesses. It is unclear the degree to which the U.S. government s economic stimulus spending will foster economic growth in the United States during the remainder of This environment has had, and may continue to have, an adverse effect on us, in part because we are very dependent upon consumer and business behavior. If the economy were to worsen, customer behaviors could change further. For example, Cardmembers could decide to redeem Membership Rewards points at abnormally high levels to replace cash expenditures. Factors such as consumer spending, business investment, government spending, interest rates, the volatility and strength of the capital markets and inflation all affect the business and economic environment and, ultimately, our profitability. An economic downturn characterized by higher unemployment, lower family income, lower corporate earnings, lower business investment and lower consumer spending is likely to materially and adversely affect our business, results of operations and financial condition. Furthermore, the factors discussed above may cause our earnings, credit metrics and margins to fluctuate and diverge from expectations of analysts and investors, who may have differing assumptions regarding their impact on our business, and may impact the trading price of our common shares. The scarcity of available credit, lack of confidence in the financial markets, reduced consumer and business spending, and credit metric performance also pose other risks to our results of operations and financial condition. In particular, we may face the following risks, among others, in connection with these events: The processes we use to estimate losses may no longer be reliable because they rely on complex judgments, including forecasts of economic conditions, that may no longer be capable of accurate estimation. Our ability to assess the creditworthiness of our customers may be impaired if the models and approaches we use to select, manage, and underwrite credit to our customers become less predictive of future write-offs. 67

72 In the event the respective three-month average rate of excess spread earned on credit card loans and charge card receivables securitized by us falls below certain designated levels, the securitization trusts established by us would be required to fund a cash reserve account (from cash that would normally revert back to us through the collection process), or, in the event such three-month average should fall below zero, the securitization trusts established by us would be required to amortize earlier than scheduled, which would accelerate our need for additional funding. Political or economic instability in certain regions or countries could also affect our commercial or other lending activities, among other businesses, or result in restrictions on convertibility of certain currencies. In addition, our travel network may be adversely affected by world geopolitical and other conditions. Travel expenditures are sensitive to business and personal discretionary spending levels and tend to decline during general economic downturns. Terrorist attacks, natural disasters or other catastrophic events may have a negative effect on our business. Because of our proximity to the World Trade Center, our headquarters were damaged as a result of the terrorist attacks of September 11, Similar events or other disasters or catastrophic events in the future could have a negative effect on our businesses and infrastructure, including our information technology systems. Because we derive a portion of our revenues from travel-related spending, our business will be sensitive to safety concerns, and thus is likely to decline during periods in which travelers become concerned about safety issues or when travel might involve health-related risks. If the conditions described above (or similar ones) persist or worsen, we could experience continuing or increased adverse effects on our results of operations and financial condition. Adverse capital and credit market conditions may significantly affect our ability to meet liquidity needs, access to capital and cost of capital. The global money and capital markets, while demonstrating generally improved conditions, remain susceptible to volatility and disruption, which could negatively impact market liquidity conditions. We need liquidity to pay operating expenses, interest on debt and dividends on capital stock and to repay maturing liabilities. Without sufficient liquidity, we could be forced to limit our investments in growth opportunities or curtail operations. The principal sources of our liquidity are payments from Cardmembers, cash flow from our investment portfolio and assets, consisting mainly of cash or assets that are readily convertible into cash, deposits placed with the Company s U.S. banks, debt instruments such as unsecured medium- and long-term notes and asset securitizations, and long-term committed bank borrowing facilities in certain non-u.s. markets. Notwithstanding our solid financial position, we are not immune from pressures experienced broadly across the financial markets. The fragility of the credit markets and the current economic and regulatory environment have impacted financial services companies. Although the market for our unsecured term debt and asset securitizations has improved since the third quarter of 2009, there is no assurance that the markets will be open to us in the future. Therefore, our ability to obtain financing in the debt capital markets for unsecured term debt and asset securitizations is dependent on investor demand. In addition, our liquidity position will be impacted by our ability to meet our objectives with respect to the growth of our brokered retail CD program and brokerage sweep account program and the implementation of our direct deposit initiative. We also would have less flexibility in accessing the commercial paper market as a short-term funding vehicle due to Credco s short-term debt rating and the volatility in the commercial paper market generally. In the event that current sources of liquidity, including internal sources, do not satisfy our needs, we would be required to seek additional financing. The availability of additional financing will depend on a variety of factors such as market conditions, the general availability of credit and consumer deposits, the overall availability of credit to the financial services industry, our credit ratings (which were downgraded in April 2009 by two of the major ratings agencies), and credit capacity, as well as the possibility that lenders or depositors could develop a negative perception of our long- or short-term financial prospects if we incur large credit losses or if the level of our business activity decreases due to an economic downturn. 68

73 Similarly, our access to funds may be impaired if regulatory authorities or rating agencies take negative actions against us. While we experienced some positive credit trends in the latter half of 2009, if the performance of our charge card and credit card portfolios were to weaken through increasing delinquencies and write-offs, our long-term and short-term debt ratings could be further downgraded and our access to capital could be materially adversely affected and our cost of capital could increase. Disruptions, uncertainty or volatility in the capital and credit markets may also limit our access to capital required to operate our business. Such market conditions may limit our ability to replace, in a timely manner, maturing liabilities, satisfy regulatory capital requirements and access the capital necessary to grow our business. As such, we may be forced to delay raising capital or bear an unattractive cost to raise capital, which could decrease profitability and significantly reduce financial flexibility. If levels of market disruption and volatility worsen, there can be no assurance that we will not experience an adverse effect, which may be material, on our ability to access capital and on our business, financial condition and results of operations. For a further discussion of our liquidity and funding needs, see Financial Review Funding Programs and Activities on pages of our 2009 Annual Report to Shareholders, which information is incorporated herein by reference. We can be adversely affected by the impairment of other financial institutions. Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial services institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We routinely execute transactions with counterparties in the financial services industry, including commercial banks, investment banks and insurance companies. Defaults or non-performance by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by one or more of our counterparties, which, in turn, could have a material adverse effect on our results of operations and financial condition. Any reduction in the Company s and its subsidiaries credit ratings could increase the cost of our funding from, and restrict our access to, the capital markets and have a material adverse effect on our results of operations and financial condition. Although the Company s and its subsidiaries long-term debt is currently rated investment grade by the major rating agencies, the ratings of that debt have been downgraded during the second quarter of 2009 by Moody s Investors Services ( Moody s ) and Standard & Poor s ( S&P ), two of the major rating agencies. The rating agencies regularly evaluate the Company and its subsidiaries, and their ratings of the Company s and its subsidiaries long-term and short-term debt are based on a number of factors, including their financial strength as well as factors not entirely within their control, including conditions affecting the financial services industry generally, and the wider state of the economy. There can be no assurance that the Company and its subsidiaries will maintain their current respective ratings. Failure to maintain those ratings could, among other things, adversely limit our access to the capital markets and adversely affect the cost and other terms upon which the Company and its subsidiaries are able to obtain funding. We cannot predict what actions rating agencies may take. As with other companies in the financial services industry, the Company s and its subsidiaries ratings could be downgraded at any time and without any notice by any of the rating agencies. Adverse currency fluctuations and foreign exchange controls could decrease revenue we receive from our international operations. During 2009, over 32% of our revenue net of interest expense was generated from activities outside the United States. We are exposed to foreign exchange risk from our international operations, and some of the revenue we generate outside the United States is subject to unpredictable and indeterminate fluctuations if the 69

74 values of other currencies change relative to the U.S. dollar. Resulting exchange gains and losses are included in our net income. Furthermore, we may become subject to exchange control regulations that might restrict or prohibit the conversion of our other revenue currencies into U.S. dollars. The occurrence of any of these events or circumstances could decrease the revenues we receive from our international operations and have a material adverse effect on our results of operations. Legal and Regulatory Risks The Credit Card Accountability Responsibility and Disclosure Act of 2009 will significantly impact our business practices and could have a material adverse effect on our results of operations. The CARD Act requires the Company to make fundamental changes to many of our current business practices, including marketing, underwriting, pricing and billing. Among other things, the CARD Act prohibits an issuer from increasing the APR on outstanding balances (with limited exceptions), requires additional account disclosures, provides consumers with the right to opt out of significant changes to account terms, and restricts penalty fees and charges that may be imposed by an issuer. Most of the requirements of the CARD Act become effective in February Additional amendments to Regulation Z revising the open-end credit disclosure requirements become effective on July 1, Two provisions of the CARD Act do not come into effect until August 22, One of these provisions addresses the reasonableness and proportionality of penalty fees charged. The other provision requires issuers to evaluate past interest rate increases twice per year. The Federal Reserve is required to adopt regulations implementing these provisions, but has not yet done so. Because implementing regulations are not final, it is difficult to assess the impact of these two provisions. However, the regulations implementing these provisions could have a significant impact on our results of our operations. While the Company is making certain changes to its product terms and practices that are designed to mitigate the impact of the changes required by the CARD Act, there is no assurance that it will be successful. The long-term impact of the CARD Act on the Company s business practices and revenues will depend upon a number of factors, including its ability to successfully implement its business strategies, consumer behavior and the actions of the Company s competitors, which are difficult to predict at this time. If the Company is not able to lessen the impact of the changes required by the CARD Act, it will have a material adverse effect on results of operations. Proposed legislative and regulatory reforms could, if enacted or adopted, result in our business becoming subject to significant and extensive additional regulations, which could adversely affect our results of operations and financial condition. The extreme disruptions in the capital markets since mid-2007 and the resulting instability and failure of numerous financial institutions have led to numerous proposals for legislative and regulatory reform that could substantially intensify the regulation of the financial services industry and that may significantly impact the Company. These proposals include the following: Establishing a federal consumer financial protection agency that would have, among other things, broad authority to regulate, and take enforcement actions against, providers of credit, savings, payment and other consumer financial products and services. Requiring heightened scrutiny and stricter regulation of any financial institution whose combination of size, leverage and interconnectedness could pose a threat to financial stability if it failed, restricting the activities of such institutions, and allowing regulators to dismantle large or systemically important banks and financial institutions, even healthy ones, if they are considered a grave risk to the economy. 70

75 Requiring large financial institutions, including, as proposed, American Express, to contribute to a fund that would be used to recover the cost of dismantling a bank or financial institution that is dismantled because it poses a grave risk to the economy. Changing requirements for the securitization market, including requiring sponsors of securitizations to retain a material economic interest in the credit risk associated with the underlying securitization, as well as enhanced disclosure requirements for asset securitizations. Tightening controls on the ability of banking institutions to engage in transactions with affiliates. Assessing financial institutions with over $50 billion in consolidated assets, including, as proposed, American Express, with a financial crisis responsibility fee assessed at approximately 0.15% of total assets (less Tier 1 capital and less FDIC-assessed deposits). The fee as proposed would last for at least the next ten years and has been proposed for the purpose of recovering projected losses from the Troubled Asset Relief Program. Limiting the size and activities of financial institutions, including proposals to repeal portions of the Gramm-Leach-Bliley Act. Amending regulatory capital standards, and increasing regulatory capital requirements, for banks and other financial institutions, including American Express and its insured depository institution subsidiaries, and establishing new formulaic liquidity requirements applicable to financial institutions, including those proposals described above under Supervision and Regulation Proposed Capital and Liquidity Requirements on pages Establishing heightened standards for and increased scrutiny of compensation policies at financial institutions, including those proposals described above under Supervision and Regulations Compensation Practices on pages Lawmakers and regulators in the United States and worldwide continue to consider these and a number of other wide-ranging and comprehensive proposals for altering the structure, regulation and competitive relationships of the nation s financial institutions. For example, separate comprehensive financial reform bills were introduced in both houses of Congress in the second half of 2009, and the U.S. House of Representatives passed a financial reform bill in December of 2009, but similar action has not been taken by the U.S. Senate. In addition to proposed legislation effecting the financial services industry, our results of operations could be adversely impacted by other legislative action or inaction, including the potential failure of the U.S. Congress to extend the active financing exception to Subpart F of the Internal Revenue Code, which could increase our effective tax rate and have an adverse impact on our net income. We cannot predict the final form, or effects on American Express, of these or other potential or proposed reforms. These and other potential or proposed legislative and regulatory changes could impact the profitability of the Company s business activities, limit our ability to pursue business opportunities, require the Company to change certain of its business practices or alter its relationships with customers, affect retention of key Company personnel, or expose the Company to additional costs (including increased compliance costs). Such changes also may require us to invest significant management attention and resources to make any necessary changes and could adversely affect our results of operations and financial condition. Please see Supervision and Regulation on pages for more information about the regulation to which we are subject. Potential actions by the FDIC and the rating agencies could impact the Company s ABS program. The credit rating agencies are assessing the potential impact of the adoption of recently issued accounting standards for transfers of financial assets and for consolidation of variable interest entities (the New Accounting Standards ) on credit ratings of the securities issued by securitization trusts within the overall asset-backed 71

76 securities market. (The New Accounting Standards, previously issued as FASB Statements Nos. 166 and 167, are discussed further in Note 1 to our Consolidated Financial Statements, which you can find on page 76 of our 2009 Annual Report to Shareholders and which is incorporated herein by reference.) In particular, the agencies are assessing the FDIC s safe harbor rule relating to the FDIC s treatment of securitized assets in the event of a sponsoring financial institution s receivership or conservatorship. Pursuant to the safe harbor rule, the FDIC will not reclaim any financial asset transferred in connection with a securitization, provided that such transfer meets all conditions for GAAP sale accounting. Although the FDIC extended, on an interim basis, the safe harbor rule to some transfers of financial assets in connection with securitizations where the transfer will no longer qualify for sale accounting treatment under GAAP as a result of the New Accounting Standards, the Company cannot predict how the FDIC will act and whether or to what extent the safe harbor rule might apply in the future. Because the adoption of the New Accounting Standards may cause some asset transfers to securitization trusts to no longer be deemed asset sales for accounting purposes within a company s consolidated group, the rating agencies have indicated that they may ultimately conclude that the safe harbor no longer applies and, in certain cases, that the highest rating an ABS security could receive would be based on the sponsoring bank s unsecured debt rating, rather than relying on their separate evaluation of the securitization trust. Accordingly, the ability of the Company s securitization programs to receive or maintain AAA ratings on ABS securities under the same terms and conditions as it has done in the past, or at all, is subject to uncertainty. Any action by the rating agencies as described above could adversely impact the Company s ability to utilize ABS as a source of funding for its business. Our financial condition and results of operations could be adversely affected by increases in FDIC deposit insurance assessments. FDIC deposit insurance assessments have become considerably higher recently because market developments have significantly depleted the FDIC deposit insurance fund and reduced the ratio of reserves to insured deposits. The failure of additional insured depository institutions could result in further depletion of the deposit insurance fund. Assessments may continue to increase, and special assessments may be levied, until the value of the fund has returned to levels the FDIC determines appropriate. We generally cannot control the amount of premiums that we are required to pay for FDIC insurance. We cannot predict whether, or to what extent, the FDIC will increase deposit insurance assessments further or whether the FDIC will levy additional special assessments. Further increase in assessments, or imposition of special assessments, by the FDIC could have a material adverse effect on our results of operations and financial condition. Our business, financial condition and results of operations could be adversely affected by new regulation and supervision to which we are subject as a result of becoming a bank holding company. On November 14, 2008, American Express Company and TRS each became bank holding companies under the BHC Act and have elected to be treated as financial holding companies under the BHC Act. As a result of becoming a bank holding company, we are subject to regulation by the Federal Reserve, including, without limitation, consolidated capital regulation at the holding company level, maintenance of certain capital and management standards in connection with our two U.S. depository institutions and restrictions on our non-banking activities under the Federal Reserve s regulations. For additional information about this change in regulatory status, please see Supervision and Regulation General beginning on page 35 above. If we fail to satisfy regulatory requirements applicable to bank holding companies, our financial condition and results of operations could be adversely affected. We are subject to restrictions that limit our ability to pay dividends and repurchase our capital stock. We are limited in our ability to pay dividends by our regulators who could prohibit a dividend that would be considered an unsafe or unsound banking practice. For example, it is the policy of the Federal Reserve that bank holding companies should generally pay dividends on common stock only out of earnings, and only if 72

77 prospective earnings retention is consistent with the organization s expected future needs, asset quality, and financial condition. For more information on bank holding company dividend restrictions, please see Financial Review Share Repurchases and Dividends on page 40 and Note 23 on page 119 of our 2009 Annual Report to Shareholders, which information is incorporated herein by reference. Banks, card issuers and card network operators generally are the subject of increasing global regulatory focus, which may impose costly new compliance burdens on our Company and lead to decreased transaction volumes and revenues through our network. We are subject to regulations that affect banks and the payments industry in the United States and many other countries in which our charge and credit Cards are used and where we conduct banking and Card activities. In particular, we are subject to numerous regulations applicable to financial institutions in the United States and abroad. We are also subject to regulations as a provider of services to financial institutions. Regulation of the payments industry has increased significantly in recent years. For example, we are subject to certain provisions of the Bank Secrecy Act as amended by the Patriot Act, with regard to maintaining effective anti-money laundering programs. Increased regulatory focus in this area could result in additional obligations or restrictions with respect to the types of products and services we may offer to consumers, the countries in which our charge and credit Cards may be used, and the types of cardholders and merchants who can obtain or accept our charge and credit Cards. In addition, the European Union has adopted a new legislative directive, called the Payment Services Directive, for electronic payment services, including cards, that puts in place a common legal framework for licensing and supervision of payment services providers, including card issuers and merchant acquirers, and for their conduct of business. The U.S. Congress is also presently considering, or may consider, legislative initiatives in the area of Internet transactions, such as Internet prescription drug purchases and copyright and trademark infringement, among others, that could impose additional compliance burdens on our Company. Federal and state law enforcement authorities have also contacted payment companies concerning these issues. If implemented, these initiatives may require us to monitor, filter, restrict, or otherwise oversee various categories of charge and credit card transactions, thereby increasing our costs or decreasing our transaction volumes. Various regulatory agencies and legislatures are also considering regulations and legislation covering identity theft, account management guidelines, disclosure rules, security, and marketing that would impact us directly, in part due to increased scrutiny of our underwriting standards. These new requirements may restrict our ability to issue charge and credit cards or partner with other financial institutions, which could decrease our transaction volumes. In some circumstances, new regulations and legislation could have the effect of limiting our ability to offer new types of charge or credit cards or restricting our ability to offer existing Cards, such as stored value cards, which could materially and adversely reduce our revenues and revenue growth. In recent years, regulators in several countries outside the United States have focused on the fees involved in the operation of card networks, including interchange fees paid to card issuers and the fees merchants are charged to accept cards. Regulators in the United Kingdom, Canada, New Zealand, Poland, Italy, Switzerland, Germany, Hungary, the European Union (EU), Australia, Brazil, Mexico, and Venezuela, among others, have conducted investigations that are either ongoing or on appeal. The interchange fee, which is the collectively set fee paid by the bankcard merchant acquirer to the card issuing bank in four party payment networks, like Visa and MasterCard, is generally the largest component of the merchant service charge charged to merchants for bankcard debit and credit card acceptance in these systems. By contrast, the American Express network does not have collectively set interchange fees. Although the regulators focus has primarily been on Visa and MasterCard as the dominant card networks and on their operations on a multilateral basis, antitrust actions and government regulation of the bankcard associations pricing could ultimately affect all networks. Lower interchange and/or merchant discount revenue may lead card issuers to look for other sources of revenue such as higher annual card fees or interest charges, as well as to reduce costs by scaling back or eliminating rewards programs. 73

78 In the United States, Congress continues to debate the interchange issue. There have been several hearings on Visa/MasterCard interchange over the last several years, and in 2009 at the request of Congress, the Government Accountability Office (GAO) completed a study on the structure of interchange fees and their impact on consumers and merchants. The report provides a balanced view of the interchange issue and explains how large merchants would benefit and how consumers could be harmed by the pending legislative proposals. In 2009, legislation was reintroduced in Congress that would give all U.S. merchants antitrust immunity to negotiate collectively the price and terms of card acceptance on networks. The House Judiciary Committee bill covers networks with at least a 20% share of U.S. credit and debit card payments combined, which would not apply to the American Express network but, if enacted, would have an effect on American Express in the marketplace. The Senate version of the bill covers networks with at least 10% of U.S. credit or debit payments, which would apply to American Express. Both bills have a default process for having prices and terms set through government action rather than competitive forces. A similar version of the House bill (the Credit Card Fair Fee Act ) was passed in the House Judiciary Committee in No action was taken on either of these bills in The House Financial Services Committee held a hearing on a third piece of interchange-related legislation that was reintroduced in 2009 (the Credit Card Interchange Fees Act ), a bill that would regulate payment network rules, including the American Express network. No further action was taken on this bill. It is expected that Congressional hearings will continue in 2010 on the interchange issue. The Federal Reserve and various Federal Reserve Banks have been following developments on interchange and have held several conferences focused on interchange rates. While the Federal Reserve has expressed interest in monitoring this issue, it has not indicated the need to regulate interchange rates in the United States. Increased regulatory focus on our Company, such as in connection with the matters discussed above, may increase our compliance costs or result in a reduction of transactions processed on our networks or merchant discount revenues from such transactions, which could materially and adversely impact our results of operations. If we are not able to protect our intellectual property, and invest successfully in, and compete at the leading edge of, technological developments across all our businesses, our revenue and profitability could be negatively affected. Our industry is subject to rapid and significant technological changes. In order to compete in our industry, we need to continue to invest in business process and technology advances across all areas of our business, including in transaction processing, data management, customer interactions and communications, travel reservations systems, prepaid products, alternative payment mechanisms and risk management and compliance systems. We rely in part on third parties, including some of our competitors and potential competitors, for the development of and access to new technologies. We expect that new technologies applicable to the payments industry will continue to emerge, and these new technologies may be superior to, or render obsolete, the technologies we currently use in our Cards, networks and other services. Our ability to develop, acquire, or access competitive technologies or business processes on acceptable terms may be limited by patent rights that third parties, including competitors and potential competitors, may assert. In addition, our ability to adopt new technologies that we develop may be inhibited by a need for industry-wide standards or by resistance from Cardmembers or merchants to such changes. We rely on a variety of measures to protect our intellectual property and proprietary information, including copyrights, trademarks, patents and controls on access and distribution. These measures may not prevent misappropriation or infringement of our intellectual property or proprietary information and a resulting loss of competitive advantage. In addition, competitors or other third parties may allege that our systems, processes or technologies infringe their intellectual property rights. Given the complex, rapidly changing and competitive technological and business environment in which we operate and the potential risks and uncertainties of intellectual property related litigation, we cannot assure you that a future assertion of an infringement claim against us will not cause us to lose significant revenues, incur significant license, royalty or technology development expenses, or pay significant monetary damages. 74

79 Regulation in the areas of privacy and data security could increase our costs and decrease the number of charge and credit cards issued. We are subject to regulations related to privacy and data security/breach, and we could be negatively impacted by these regulations. For example, in the United States, we are subject to the data security rule under the Gramm-Leach-Bliley Act. The data security rule requires that each financial institution develop, implement, and maintain a written, comprehensive information security program containing safeguards that are appropriate to the financial institution s size and complexity, the nature and scope of the financial institution s activities, and the sensitivity of any customer information at issue. Further, a growing number of states, including, notably, Massachusetts and Nevada, have adopted broad-ranging data security regulations regarding the protection of customer and employee data that could result in higher compliance and technology costs for the Company, as well as potentially significant fines and penalties for non-compliance. Many foreign jurisdictions in which we operate are also expanding the scope of their data security requirements and standards, as well as increasing enforcement activity in this area. In 1995, the European Parliament and Council passed European Directive 95/46/EC on the protection of individuals with regard to the processing of personal data and on the free movement of such data (commonly referred to as the Data Protection Directive), which obligates the controller of an individual s personal data to take the necessary technical and organizational measures to protect personal data. The Data Protection Directive has been implemented through local laws regulating data protection in European Union Member States. As these laws expand throughout the European Union where we have a significant commercial presence, compliance costs are increasing, particularly in the context of ensuring that adequate data privacy protections and data transfer mechanisms are in place. In addition to the foregoing enhanced data security requirements, various federal banking regulatory agencies, and as many as 45 states, the District of Columbia, Puerto Rico, and the Virgin Islands, have enacted data breach regulations and laws requiring varying levels of consumer notification in the event of a security breach. Data breach laws are also becoming more prevalent in other parts of the world where we operate, including Japan, Mexico and Germany. In many countries that have yet to impose automatic data breach notification requirements, regulators have increasingly used the threat of significant sanctions and penalties by data protection authorities to encourage voluntary notification and discourage data breaches. Many of these regulations also apply broadly to retailers/merchants that accept our cards; thus, to the extent they experience data security breaches, this presents additional risks for American Express and our Cardmembers. The heightened legislative and regulatory focus on data privacy and security, including requiring consumer notification in the event of a data breach, continues. The current 111th Congress will likely consider data security/data breach legislation in 2010 that, if implemented, could present new risks and costs for us. We continue to seek ways to minimize these risks and costs internally by improving our own data privacy and security policies and practices, and externally through regular improvements to the PCI Data Security Standard and by placing strong contractual obligations on retailers/merchants that accept our Cards, as well as on our service providers, relating to data security and data breach. Still, increased regulation and enforcement activity throughout the world in the areas of data privacy and data security/breach may materially increase our costs and may decrease the number of our Cards that we issue, or restrict our ability to fully exploit our closed-loop capability, which could materially and adversely affect our profitability. Our failure to comply with the privacy and data security/breach laws and regulations to which we are subject could result in fines, sanctions, and damage to our global reputation and our brand. Our success is dependent, in part, upon our executive officers and other key personnel, and the loss of key personnel could materially adversely affect our business. Our success depends, in part, on our executive officers and other key personnel. Our senior management team has significant industry experience and would be difficult to replace. Our senior management team is 75

80 relatively small and we believe we are in a critical period of competition in the financial services and payments industry. The market for qualified individuals is highly competitive, and we may not be able to attract and retain qualified personnel or candidates to replace or succeed members of our senior management team or other key personnel. As further described in Supervision and Regulation Compensation Practices on pages 44-45, our compensation practices are subject to review and oversight by the Federal Reserve. As a large financial and banking institution, we may be subject to limitations on compensation practices, which may or may not affect our competitors, by the Federal Reserve, the FDIC or other regulators worldwide. These limitations, including any incentive compensation policies, could further affect our ability to attract and retain our executive officers and other key personnel. The loss of key personnel could materially adversely affect our business. Litigation and regulatory actions could subject us to significant fines, penalties and/or requirements resulting in increased expenses. Businesses in the credit card industry have historically been subject to significant legal actions, including class action lawsuits and patent claims. Many of these actions have included claims for substantial compensatory or punitive damages. In addition, we may be involved in various actions or proceedings brought by governmental regulatory agencies in the event of noncompliance with laws or regulations, which could subject us to significant fines, penalties or other requirements resulting in increased expenses and damage to our global reputation and our brand. Business Risks Our operating results may suffer because of substantial and increasingly intense competition worldwide in the payments industry. The payments industry is highly competitive and includes, in addition to charge and credit card networks, evolving alternative payment mechanisms and systems. We are the third largest general-purpose charge and credit card network based on charge volume, behind Visa and MasterCard, which are larger than we are in most markets. As a result, other card issuers may be able to benefit from the strong position and marketing and pricing power of Visa and MasterCard. Because of continuing consolidations among banking and financial services companies and credit card portfolio acquisitions by major card issuers, there are now a smaller number of significant issuers. Continuing consolidation in the banking industry may result in a financial institution with a strong relationship with us being acquired by an institution that has a strong relationship with a competitor, resulting in a potential loss of business for us. The largest competing issuers have continued to grow, in several cases by acquiring card portfolios, and also by cross-selling through their retail branch networks, and competition among all issuers remains intense. We are also subject to increasing pricing pressure from our competitors. In addition, some of our competitors have developed, or may develop, substantially greater financial and other resources than we have, may offer a wider range of programs and services than we offer or may use more effective advertising and marketing strategies to achieve broader brand recognition or merchant acceptance than we have. We may not continue to be able to compete effectively against these threats. Our competitors may also be more efficient in introducing innovative products, programs and services than we are. Spending on our Cards could be impacted by consumer usage of debit cards, as we do not currently issue point-of-sale debit cards for use on the American Express Network. In fact, the purchase volume and number of transactions made with debit cards in the United States has grown more rapidly than credit and charge card transactions. In addition, to the extent alternative payment mechanisms and systems, such as aggregators, continue to successfully expand in the online payments space, our merchant revenues and our ability to access transaction data through our closed-loop network could be negatively impacted. Regulators have recently put forward various proposals that may impact our businesses, including proposals relating to restrictions on the type of activities in which financial institutions are permitted to engage and the size of financial institutions, and proposals to impose taxes or fees on certain financial institutions. These or similar proposals, which may not apply to all of our competitors, could impact our ability to compete effectively. 76

81 We face increasingly intense competitive pressure that may impact the prices we charge merchants who accept our Cards for payment for goods and services. Unlike our competitors in the payments industry that rely on high revolving credit balances to drive profits, our business model is focused on Cardmember spending. Discount revenue, which represents fees charged to merchants when Cardmembers use their Cards to purchase goods and services on our network, is primarily driven by billed business volumes and is our largest single revenue source. In recent years, we have been under market pressure to reduce merchant discount rates and undertake other repricing initiatives. This pressure arises, in part, due to the regulatory pressure on our competitors outside the United States, which has been increasing. If we continue to experience a decline in the average merchant discount rate we charge merchants or are unable to sustain premium merchant discount rates on our Cards without experiencing overall volume growth or an increase in merchant coverage, our revenues and profitability could be materially and adversely affected. We may not be successful in our efforts to promote Card usage through our marketing, promotion and rewards programs or to effectively control the costs of such programs, both of which may impact our profitability. Our business is characterized by the high level of spending by our Cardmembers. Increasing consumer and business spending and borrowing on our payment services products, particularly credit and charge Cards and Travelers Cheques and other prepaid products, and growth in Card lending balances, depend in part on our ability to develop and issue new or enhanced Card and prepaid products and increase revenues from such products. One of the ways in which we attract new Cardmembers, reduce Cardmember attrition and seek to capture a greater share of customers total spending on Cards issued on our network, both in the United States and in our international operations, is through our Membership Rewards program, as well as other Cardmember benefits. We may not be able to cost effectively manage and expand Cardmember benefits, including containing the growth of marketing, promotion and rewards expenses and Cardmember services expenses. In addition, many credit card issuers have instituted rewards and co-brand programs that are similar to ours, and issuers may in the future institute programs that are more attractive to cardmembers than our programs. Our ability to continue to invest in marketing, promotion and rewards programs, as well as our overall profitability, may be negatively impacted if we are unable to replace the payments provided to us under our previously disclosed litigation settlements with Visa and MasterCard once the aggregate settlement amounts have been paid in full through the fourth and second quarters of 2011, respectively. Our brand and reputation are key assets of our Company, and our business may be affected by how we are perceived in the marketplace. Our brand and its attributes are key assets of the Company. Our ability to attract and retain consumer Cardmembers and corporate clients is highly dependent upon the external perceptions of our level of service, trustworthiness, business practices and financial condition. Negative perceptions or publicity regarding these matters could damage our reputation among existing and potential Cardmembers and corporate clients, which could make it difficult for us to attract new Cardmembers and maintain existing ones. Adverse developments with respect to our industry may also, by association, negatively impact our reputation, or result in greater regulatory or legislative scrutiny or litigation against us. Although we monitor developments for areas of potential risk to our reputation and brand, negative perceptions or publicity could materially and adversely affect our revenues and profitability. An increase in account data breaches and fraudulent activity using our Cards could lead to reputational damage to our brand and could reduce the use and acceptance of our charge and credit Cards. We and other third parties store Cardmember account information in connection with our charge and credit Cards. Criminals are using increasingly sophisticated methods to capture various types of information relating to Cardmembers accounts, including Membership Rewards accounts, to engage in illegal activities such as fraud and identity theft. As outsourcing and specialization become a more acceptable and common way of doing business in the payments industry, there are more third parties involved in processing transactions using our Cards. If data breaches or fraud levels involving our Cards were to rise, it could lead to regulatory intervention 77

82 (such as mandatory card reissuance) and reputational and financial damage to our brand, which could reduce the use and acceptance of our Cards, and have a material adverse impact on our business. We have agreements with business partners in a variety of industries, including the airline industry, that represent a significant portion of our business. We are exposed to risks associated with these industries, including bankruptcies, restructurings, consolidations and alliances of our partners, and the possible obligation to make payments to our partners. In the ordinary course of our business we enter into different types of contractual arrangements with business partners in a variety of industries. For example, we have partnered with Costco and Delta Air Lines to offer co-branded cards for consumers and small businesses, and through our Membership Rewards program we have partnered with businesses in many industries, most notably the airline industry, to offer benefits to Cardmember participants. The airline industry represents a significant portion of our billed business and in recent years has undergone bankruptcies, restructurings, consolidations and other similar events. In addition, under some types of these contractual arrangements, upon the occurrence of certain triggering events, we may be obligated to make payments to certain co-brand partners, merchants, vendors and customers. If we are not able to effectively manage the triggering events, we could unexpectedly have to make payments to these partners, which could have a negative effect on our financial condition and results of operations. Similarly, we have credit risk to certain co-brand partners relating to our prepayments for loyalty program points that will not be fully redeemed for multi-year periods. We are also exposed to risk from bankruptcies, restructurings, consolidations and other similar events that may occur in any industry representing a significant portion of our billed business, which could negatively impact particular card products and services (and billed business generally) and our financial condition and results of operations. For example, we could be materially impacted if we were obligated to or elected to reimburse Cardmembers for products and services purchased from merchants that are bankrupt or have ceased operations. There could be continued significant consolidation in the airline industry, particularly in the United States, through mergers and/or grants of antitrust immunity to airline alliances and joint ventures. The United States Department of Transportation has granted antitrust immunity to members of the Skyteam Alliance and the Star Alliance, enabling them to closely coordinate their international operations and to launch highly integrated joint ventures in transatlantic and other markets. The Department of Transportation has granted preliminary approval of a similar request by members of the Oneworld Alliance for antitrust immunity. Among other things, this immunity permits alliance members to jointly price and manage capacity on covered routes, share revenues and costs, and coordinate sales and corporate contracts, outside of the scope of the antitrust laws. The European Commission s review of each of these alliances is continuing. Increasing consolidation and expanded antitrust immunity could create challenges for our relationships with the airlines including by reducing our profitability on our airline business. Airlines are also some of the most important and valuable partners in our Membership Rewards program. If a participating airline merged with an airline that did not participate in Membership Rewards, the combined airline would have to determine whether or not to continue participation. Similarly, if one of our co-brand airline partners merged with an airline that had a competing co-brand card, the combined airline would have to determine which co-brand cards it would offer. If a surviving airline determined to withdraw from Membership Rewards or to cease offering an American Express co-brand card, our business could be adversely affected. For additional information relating to the agreements with Delta and general risks related to the airline industry, see Financial Review Exposure to Airline Industry on page 60 of our 2009 Annual Report to Shareholders, which is hereby incorporated by reference. Our reengineering and other cost control initiatives may not prove successful, and we may not realize all or a significant portion of the benefits we intended. We have regularly undertaken, and are currently undertaking, a variety of efforts to reengineer our business operations in order to achieve cost savings and other benefits (including the reinvestment of such savings in key areas such as marketing, promotion, rewards and infrastructure), enhance revenue-generating opportunities and 78

83 improve our operating expense to revenue ratio both in the short-term and over time. These efforts include cost management, structural and strategic measures such as vendor, process, facilities and operations consolidation, outsourcing functions (including, among others, technologies operations), relocating certain functions to lower cost overseas locations, moving internal and external functions to the Internet to save costs and planned staff reductions relating to certain of these reengineering actions. If we do not successfully achieve these efforts in a timely manner or if we are not able to capitalize on these efforts, including the ability of the Global Services Group to generate an annualized level of gross expense savings of approximately $500 million by 2012, we may not realize all or a significant portion of the benefits we intended. Failure to achieve these benefits could have a negative effect on our financial condition and results of operations. Our risk management policies and procedures may not be effective. We must effectively manage credit risk related to consumer debt, business loans, settlement risk with regard to GNS partners, merchant bankruptcies, the rate of bankruptcies, and other credit trends that can affect spending on Card products, debt payments by individual and corporate customers and businesses that accept our Card products. Credit risk is the risk of loss from obligor or counterparty default. We are exposed to both consumer credit risk, principally from Cardmember receivables and our other consumer lending activities, and institutional credit risk from merchants, GNS partners and GCC clients. Third parties may default on their obligations to us due to bankruptcy, lack of liquidity, operational failure or other reasons. Country, regional and political risks are components of credit risk. Rising delinquencies and rising rates of bankruptcy are often precursors of future write-offs and may require us to increase our reserve for loan losses. Higher write-off rates and an increase in our reserve for loan losses adversely affect our profitability and the performance of our securitizations, and may increase our cost of funds. Although we make estimates to provide for credit losses in our outstanding portfolio of loans and receivables, these estimates may not be accurate. In addition, the information we use in managing our credit risk may be inaccurate or incomplete. Although we regularly review our credit exposure to specific clients and counterparties and to specific industries, countries and regions that we believe may present credit concerns, default risk may arise from events or circumstances that are difficult to foresee or detect, such as fraud. We may also fail to receive full information with respect to the credit risks of our customers. We must also effectively manage market risk to which we are exposed. Market risk represents the loss in value of portfolios and financial instruments due to adverse changes in market variables. We are exposed to market risk from interest rates in our Card business and in our investment portfolios. Changes in the interest rates at which we borrow and lend money affect the value of our assets and liabilities. If the rate of interest we pay on our borrowings increases more than the rate of interest we earn on our loans, our net interest yield, and consequently our net income, could fall. We must also accurately estimate the fair value of the assets in our investment portfolio and, in particular, those investments that are not readily marketable. Additionally, we must effectively manage liquidity risk to which we are exposed. Liquidity risk is defined as the inability to access cash and equivalents needed to meet business requirements and satisfy our obligations. If we are unsuccessful in managing our liquidity risk, we may maintain too much liquidity, which can be costly and limit financial flexibility, or we may be too illiquid, which could result in financial distress during a liquidity event. For additional information regarding our management of liquidity risk, see Adverse capital and credit market conditions may significantly affect our ability to meet liquidity needs, access to capital and cost of capital above. Finally, we must also manage the operational risks to which we are exposed. We consider operational risk to be the risk of not achieving our business objectives due to failed processes, people or information systems, or from the external environment, such as natural disasters. Operational risks include the risk that we may not 79

84 comply with specific regulatory or legal requirements, exposing us to fines and/or penalties and possibly brand damage; employee error or intentional misconduct that results in a material financial misstatement; or a failure to monitor an outsource partner s compliance with a service level agreement, resulting in economic harm to us. Although we have devoted significant resources to develop our risk management policies and procedures and expect to continue to do so in the future, our hedging strategies and other risk management techniques may not be fully effective. See Financial Review Risk Management on pages of our 2009 Annual Report to Shareholders for a discussion of the policies and procedures we use to identify, monitor and manage the risks we assume in conducting our businesses. Management of credit, market and operational risk requires, among other things, policies and procedures to record properly and verify a large number of transactions and events, and these policies and procedures may not be fully effective. An inability to accept or maintain deposits due to market demand or regulatory constraints could materially adversely affect our liquidity position and our ability to fund our business. As an additional source of funding, our banking subsidiaries offer deposits to individuals through brokerage networks as well as directly to consumers. As of December 31, 2009, we had approximately $26.3 billion in total customer deposits, a large portion of which was raised through brokerage networks. Many other financial services firms are increasing their use of deposit funding, and as such we may experience increased competition in the deposit markets, particularly as to brokerage networks. We cannot predict how this increased competition will affect deposit renewal rates, costs or availability. If we are required to offer higher interest rates to attract or maintain deposits, our funding costs will be adversely impacted. Our ability to obtain deposit funding and offer competitive interest rates on deposits is also dependent on capital levels of our bank subsidiaries. The FDIA generally prohibits a bank, including our banking subsidiaries, from accepting brokered deposits or offering interest rates on any deposits significantly higher than the prevailing rate in its normal market area or nationally (depending upon where the deposits are solicited), unless (1) it is well-capitalized or (2) it is adequately capitalized and receives a waiver from the FDIC. A bank that is adequately capitalized generally may not pay an interest rate on any deposit, including direct-to-consumer deposits, in excess of 75 basis points over the national rate published by the FDIC. There are no such restrictions on a bank that is well-capitalized (provided such bank is not subject to a capital maintenance provision within a written agreement, consent order, order to cease and desist, capital directive, or prompt corrective action directive issued by its federal regulator). While we met the FDIC s definition of well-capitalized as of December 31, 2008 and December 31, 2009, there can be no assurance that we will continue to meet this definition. Additionally, our regulators can adjust the requirements to be well-capitalized at any time and have authority to place limitations on our deposit businesses, including the interest rate we pay on deposits. An inability to attract or maintain deposits in the future could materially adversely affect our liquidity position and our ability to fund our business. If our global network systems are disrupted or we are unable to process transactions efficiently or at all, our revenue and profitability would be materially reduced. Our transaction authorization, clearing and settlement systems may experience service interruptions as a result of fire, natural disasters, power loss, disruptions in long distance or local telecommunications access, fraud, terrorism or accident. A natural disaster or other problem at our facilities could interrupt our services. Additionally, we rely on third-party service providers for the timely transmission of information across our global network. If a service provider fails to provide the communications capacity or services we require, as a result of natural disaster, operational disruption, terrorism or any other reason, the failure could interrupt our services, adversely affect the perception of our brands reliability and materially reduce our revenue and profitability. 80

85 We rely on third-party providers of various computer systems and other services integral to the operations of our businesses. These third parties may act in ways that could harm our business. We operate a service network around the world. In order to achieve cost and operational efficiencies, we outsource to third-party vendors many of the computer systems and other services that are integral to the operations of our global businesses. A significant amount of this outsourcing occurs in developing countries. We are subject to the risk that certain decisions are subject to the control of our third-party service providers and that these decisions may adversely affect our activities. In addition, the management of multiple third-party vendors increases our operational complexity and decreases our control. It is also possible that the cost efficiencies of certain outsourcings will decrease as the demand for these services increases around the world. Special Note About Forward-Looking Statements We have made various statements in this Report that may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of Forward-looking statements may also be made in our other reports filed with or furnished to the SEC, in our press releases and in other documents. In addition, from time to time, we, through our management, may make oral forward-looking statements. Forward-looking statements are subject to risks and uncertainties, including those identified above, which could cause actual results to differ materially from such statements. The words believe, expect, anticipate, optimistic, intend, plan, aim, will, may, should, could, would, likely and similar expressions are intended to identify forward-looking statements. We caution you that the risk factors described above are not exclusive. There may also be other risks that we are unable to predict at this time that may cause actual results to differ materially from those in forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. We undertake no obligation to update publicly or revise any forward-looking statements. ITEM 1B. Not applicable. UNRESOLVED STAFF COMMENTS ITEM 2. PROPERTIES Our principal executive offices are in a 51-story, 2.2 million square foot building located in lower Manhattan. This building, which is on land leased from the Battery Park City Authority for a term expiring in 2069, is one of four office buildings in a complex known as the World Financial Center. We have a 49% ownership interest in the building. Brookfield Financial Properties owns the remaining 51% interest in the building. We also lease space in the building from Brookfield. Other owned or leased principal locations include: the American Express Service Centers in Fort Lauderdale, Florida; Phoenix, Arizona; Greensboro, North Carolina; and Salt Lake City, Utah; the American Express Data Centers in Phoenix, Arizona and in Minneapolis, Minnesota; the American Express Finance Center in Phoenix, Arizona; the headquarters for American Express Services Europe Limited in London, England; the Amex Canada Inc. headquarters in Markham, Ontario, Canada; and service centers located in Mexico City, Mexico; Sydney, Australia; Gurgaon, India and Brighton, United Kingdom. During 2004 and 2005, we engaged in several sale-leaseback transactions pursuant to which we sold various owned properties to third parties and leased back the properties under long-term net leases whereby each American Express entity that leases back the property is responsible for all costs and expenses relating to the property (including maintenance, repair, utilities, operating expenses and insurance costs) in addition to annual rent. The sale-leaseback transactions have not materially impacted our financial results in any year. Gains resulting from completed sale and leaseback transactions are amortized over the initial ten-year lease periods. We continue to consider whether sale-leaseback transactions are appropriate for other properties that we currently own. 81

86 Generally, we lease the premises we occupy in other locations. We believe that the facilities we own or occupy suit our needs and are well maintained. ITEM 3. LEGAL PROCEEDINGS The Company and its subsidiaries are involved in a number of legal and arbitration proceedings, including class actions, concerning matters arising in connection with the conduct of their respective business activities. The Company believes it has meritorious defenses to each of these actions and intends to defend them vigorously. In the course of its business, the Company and its subsidiaries are also subject to governmental examinations, information gathering requests, subpoenas, inquiries and investigations. The Company believes that it is not a party to, nor are any of its properties the subject of, any pending legal, arbitration, regulatory, tax or investigative proceedings that would have a material adverse effect on the Company s consolidated financial condition or liquidity. However, it is possible that the outcome of any such proceeding could have a material impact on results of operations in any particular reporting period as the proceedings are resolved. Certain legal proceedings involving the Company are described below. Corporate Matters Beginning in mid-july 2002, 12 putative class action lawsuits were filed in the United States District Court for the Southern District of New York. In October 2002, these cases were consolidated under the caption In re American Express Company Securities Litigation. These lawsuits allege violations of the federal securities laws and the common law in connection with alleged misstatements regarding certain investments in high-yield bonds and write-downs in the timeframe. The purported class covers the period from July 26, 1999 to July 17, The actions seek unspecified compensatory damages as well as disgorgement, punitive damages, attorneys fees and costs, and interest. On March 31, 2004, the Court granted the Company s motion to dismiss the lawsuit. Plaintiffs appealed the dismissal to the United States Court of Appeals for the Second Circuit. In August 2006, the Court of Appeals, without expressing any views whatsoever on the merits of the cases, vacated the District Court s judgment and remanded all claims to the District Court for further proceedings. Plaintiffs filed an amended complaint on January 5, The Company subsequently filed a motion to dismiss the amended complaint, which motion was granted in September Plaintiffs have appealed the dismissal. On November 24, 2009, a putative class action captioned Amick v. American Express Travel Related Services Co., was filed in the U.S. District Court for the Southern District of New York seeking to recover unpaid wages and overtime compensation at one of the Company s call centers. The Plaintiff seeks to represent all similarly situated employees in a collective action under the Fair Labor Standards Act ( FLSA ) and in a Rule 23 class action under the North Carolina Wage and Hour Act. On January 26, 2010, the Court granted the Company s motion to transfer the case to the U.S. District Court for the Middle District of North Carolina. In May 2008, a shareholders derivative suit was filed in New York State Supreme Court in Manhattan naming American Express Company and certain current and former directors and senior executives as defendants. The case captioned as City of Tallahassee Retirement System v. Akerson et al. alleges breaches of fiduciary duty arising from knowing breaches of fiduciary obligations by certain current and former officers and directors of the Company that have led to the imposition of deferred criminal charges on a bank that at the time such charges were entered was owned by American Express, as well as the Company s payment of approximately $65 million in penalties to federal and state regulators related to American Express Bank Limited s (AEBL) and TRS s anti-money laundering programs. The complaint also states that the sale of AEBL took place after American Express had allowed the value of its banking business unit to be dramatically impaired on account of the systemic violations of law and resulting deferred criminal charges. The complaint seeks monetary damages on behalf of the Company. The defendants filed a motion to dismiss the complaint and in October 2009, the Court dismissed the complaint against all defendants. The plaintiff has filed a Notice of Appeal of the dismissal. 82

87 In December 2008, a putative class action captioned Obester v. American Express Company, et. al. was filed in the United States District Court for the Southern District of New York. The complaint alleges that the defendants violated certain ERISA obligations by: allowing the investment of American Express Retirement Savings Plan assets in American Express common stock when American Express common stock was not a prudent investment; misrepresenting and failing to disclose material facts to Plan participants in connection with the administration of the Plan; and breaching certain fiduciary obligations. The Company is also a defendant in three other putative class actions making allegations similar to those made in the Obester matter: Tang v. American Express Company, et. al., filed on December 29, 2008 in the United States District Court for the Southern District of New York, Miner v. American Express Company et. al., filed on February 4, 2009 in the United States District Court for the Southern District of New York, and DiLorenzo v. American Express Company et. al., filed on February 10, 2009 in the United States District Court for the Southern District of New York. American Express has filed a motion to dismiss these actions. In April 2009, these actions were consolidated into a Consolidated Amended complaint, captioned In Re American Express ERISA Litigation. American Express motion to dismiss this action is pending with the Court. On February 20, 2009, a putative class action captioned, Brozovich v. American Express Co., Kenneth I. Chenault and Daniel T. Henry, was filed in the United States District Court for the Southern District of New York. The lawsuit alleged violations of the federal securities laws in connection with certain alleged misstatements regarding the credit quality of the Company s credit card customers. The purported class covered the period from March 1, 2007 to November 12, The action sought unspecified damages and costs and fees. The Brozovich action was subsequently voluntarily dismissed. On March 27, 2009, a putative class action, captioned Baydale v. American Express Co., Kenneth I. Chenault and Daniel Henry, which makes similar allegations to those made in the Brozovich action, was filed in the United States District Court for the Southern District of New York. On October 13, 2009, plaintiff in the Baydale action filed an Amended Consolidated Class Action Complaint in the action. The Company has filed a motion to dismiss and that motion is pending with the Court. U.S. Card Services and Global Merchant Services Matters Beginning July 2003 the Company has been named in a number of putative class actions in which the plaintiffs allege an unlawful antitrust tying arrangement between certain of the Company s charge cards and credit cards in violation of various state and federal laws. These cases have since all been consolidated in the U.S. District Court for the Southern District of New York under the caption: In re American Express Merchants Litigation. A case making similar allegations was also filed in the Southern District of New York in July 2004 captioned: The Marcus Corporation v. American Express Company et al., The Marcus case is not consolidated. The plaintiffs in these actions seek injunctive relief and an unspecified amount of damages. On April 30, 2004, the Company filed a motion to dismiss all the actions filed prior to the date of its motion. On March 15, 2006, that motion was granted, with the Court finding the claims of the plaintiffs to be subject to arbitration. Plaintiffs asked the Court to reconsider its dismissal. That request was denied. The plaintiffs appealed the Court s arbitration ruling and on January 30, 2009, the United States Court of Appeals for the Second Circuit reversed the District Court. The Company has filed with the United States Supreme Court a petition of certiorari from the Second Circuit s arbitration ruling. That petition is pending. The Company also filed a motion to dismiss the action filed by the Marcus Corporation, which was denied in July On October 1, 2007, Marcus filed a motion seeking certification of a class. On March 30, 2009, the Court denied the plaintiffs motion for class certification without prejudice to renew upon resolution of the pending summary judgment motion. In April 2009, the Court denied plaintiffs motion for reconsideration of the March 30th order. In September 2008, American Express moved for summary judgment seeking dismissal of Marcus complaint and the plaintiff Marcus cross-moved for partial summary judgment on the issue of liability. A decision on the summary judgment motions is pending. One case making similar allegations was filed and remains in the Superior Court of California, Los Angeles County (filed December 2003). The Company continues to request the California Superior Court hearing the Hayama action referenced above to stay that action. To date the Hayama action has been stayed. 83

88 On February 19, 2009, an amended complaint was filed in In Re: American Express Merchants Litigation. The amended complaint contains a single count alleging a violation of federal antitrust laws through an alleged unlawful tying of: (a) corporate, small business and/or personal charge card services; and (b) Blue, Costco and standard GNS credit card services. In addition, on February 19, 2009, a new complaint making the same allegations as made in the amended complaint filed in In Re: American Express Merchants Litigation was also filed in the United States District Court for the Southern District of New York. That new case is captioned: Greenporter LLC and Bar Hama LLC, on behalf of themselves and all others similarly situated v. American Express Company and American Express Travel Related Services Company, Inc. Proceedings in the Greenporter action and on the amended complaint filed in In Re: American Express Merchant s Litigation have been held in abeyance pending the disposition of the motions for summary judgment in the Marcus case. Beginning August 2005, the Company has been named in a number of putative class actions alleging that the Company s policy prohibiting merchants from imposing restrictions on the use of American Express Cards violates U.S. antitrust laws. These cases are now all consolidated in the U.S. District Court for the Southern District of New York under the caption: In Re: American Express Anti-Steering Rules Antitrust Litigation. The plaintiffs complaint seeks injunctive relief and unspecified damages. These plaintiffs have agreed that a stay would be imposed with regard to their respective actions pending the appeal of the Court s arbitration ruling discussed above. Given the ruling of the Second Circuit (discussed above), the stay has been lifted, and American Express s response to the complaint was filed in April On December 1, 2009, the United States Judicial Panel on Multi-District Litigation denied the plaintiffs motion to consolidate their cases with the individual suits discussed below pending in the U.S. District Court for the Eastern District of New York. The U.S. District Court for the Southern District of New York entered a scheduling order on December 28, In June 2008, five separate lawsuits were filed against American Express Company in the U.S. District Court for the Eastern District of New York alleging that the Company s anti-steering rules in its merchant acceptance agreements violate federal antitrust laws. As alleged by the plaintiffs, these rules prevent merchants from offering consumers incentives to use alternative forms of payments when consumers wish to use an American Express-branded card. The five suits were filed by each of Rite-Aid Corp., CVS Pharmacy Inc., Walgreen Co., Bi-Lo LLC., and H.E. Butt Grocery Company. The plaintiff in each action seeks damages and injunctive relief. American Express filed its answer to these complaints and also filed a motion to dismiss these complaints as time barred. The Court has not yet ruled on the motion to dismiss and entered a scheduling order on January 26, In July, 2009, a putative class action, captioned The Wild Grape v. American Express Company, et al., was filed in the U.S. District Court for the Central District of California. The complaint challenges American Express s policy of retaining the discount charged to certain merchants when underlying purchases are returned to the merchant by an American Express cardmember for a refund. The complaint seeks certification of a California-only class. American Express has filed a motion to dismiss the complaint. In June 2009, a putative class action, captioned Mesi v. American Express Centurion Bank, was filed in U.S. District Court for the Central District of California. The complaint seeks to certify a class of American Express cardmembers with billing addresses in 16 different states whose interest rates on their outstanding balances were retroactively increased by the Company. The complaint seeks, among other things, damages in excess of $5,000,000 and unspecified injunctive relief. The complaint has been amended twice by plaintiff. On December 7, 2009, the Court ordered that the matter be stayed pending decisions on relevant legal issues in other cases not involving American Express. In October 2009, a putative class action, captioned Lopez, et al. v. American Express Bank, FSB and American Express Centurion Bank, was filed in the U.S. District Court for the Central District of California. The complaint seeks to certify a nationwide class of American Express cardmembers whose interest rates were changed from fixed to variable in or around August 2009 or otherwise increases. American Express filed a motion to compel arbitration, and plaintiff has indicated they will amend their complaint to limit the class to California residents only. 84

89 In January 2006, in a matter captioned Hoffman, et al. v. American Express Travel Related Services Company, Inc., No , Superior Court of the State of California, County of Alameda, the Court certified a class action against TRS. In a case management order dated April 8, 2008, the Court defined two classes as follows: (1) all persons who obtained American Express charge cards governed by New York law with billing addresses in California who purchased American Express fee based travel related insurance plans from September 6, 1995, through February 12, 2008, and (2) all persons who obtained American Express charge cards governed by New York law with billing addresses in states other than California who purchased American Express fee based travel related insurance plans from September 6, 1995, through February 12, The Court denied the plaintiff s motion to certify a class to pursue claims on behalf of persons who held American Express credit cards governed by Utah law. Plaintiffs allege that American Express violated California and New York law by allegedly billing customers for flight and baggage insurance that they did not receive. American Express denies the allegations. American Express filed a motion for summary judgment asking that the case be dismissed as a matter of law. The summary judgment motion was partially granted in July 2008 when the Court dismissed certain claims against American Express including claims for punitive damages. Certain other claims survived summary judgment. A trial on the remaining claims began in November The Company prevailed in Phase 1 of that trial with the Court ruling that the contract between the Company and its cardmembers was not ambiguous and that the Company operated the air-flight and baggage insurance program consistent with the contract. On March 25, 2009, the Court entered a preliminary order in the Company s favor in Phase 2 of the trial, finding that: (1) the contract is not unconscionable; (2) the Company did not violate California consumer protection laws; and (3) the Company did not violate New York consumer protection laws. The Court also awarded as-yet-to-be-determined costs to the Company. Plaintiff has filed a Notice of Appeal in the case. In addition, a matter making related allegations to those raised in the Hoffman case is pending in the U.S. District Court for the Eastern District of New York. That matter, captioned Environment Law Enforcement Systems v. American Express et al., has effectively been stayed pending the proceedings in the Hoffman action. Following the favorable March 25, 2009, ruling in Hoffman, the plaintiff in Environmental Law Enforcement Systems asked the Court to lift the stay and to allow plaintiff to obtain certain cardmember information. The Company opposed that request, and the Court denied the request. Lastly, on October 30, 2008, a case making allegations similar to those raised in the Hoffman case was filed in the United States District Court for the Southern District of Florida. That matter, captioned Kass v. American Express Card Services, Inc., American Express Company and American Express Travel Related Services, was filed as a putative class action on behalf of American Express credit card holders. On March 11, 2009, the Kass Court entered an order granting the joint motion of the parties to stay the case, and the Court also administratively closed the case. In July 2004, a purported class action captioned Ross, et al. v. American Express Company, American Express Travel Related Services and American Express Centurion Bank was filed in the U.S. District Court for the Southern District of New York. The complaint alleges that American Express conspired with Visa, MasterCard and Diners Club in the setting of foreign conversion rates and in the inclusion of arbitration clauses in certain of their cardmember agreements. The suit seeks injunctive relief and unspecified damages. The class is defined as all Visa, MasterCard and Diners Club general-purpose cardholders who used cards issued by any of the MDL Defendant Banks. American Express cardholders are not part of the class. In September 2005, the Court denied the Company s motion to dismiss the action and preliminarily certified an injunction class of Visa and MasterCard cardholders to determine the validity of Visa s and MasterCard s cardmember arbitration clauses. American Express filed a motion for reconsideration with the District Court, which motion was denied in September The Company filed an appeal from the District Court s order denying its motion to compel arbitration. In October 2008, the U.S. Court of Appeals for the Second Circuit denied the Company s appeal and remanded the case to the District Court for further proceedings. On January 22, 2010, the Court (1) certified a damage class of all Visa, MasterCard and Diners Club general purpose cardholders who used cards issued by any of the alleged co-conspiring banks during the period July 22, 2000 to November 8, 2006, and who were assessed a foreign transaction fee or surcharge and who have submitted valid claims in In Re Currency Conversion Antitrust Litigation.; and (2) the Court denied American Express motion to amend its answer to add the affirmative defense of release. 85

90 In June 2006, a putative class action captioned Homa v. American Express Company et al. was filed in the U.S. District Court for the District of New Jersey. The case alleges, generally, misleading and fraudulent advertising of the tiered up to 5 percent cash rebates with the Blue Cash card. The complaint initially sought certification of a nationwide class consisting of all persons who applied for and received an American Express Blue Cash card during the period from September 30, 2003 to the present and who did not get the rebate or rebates provided for in the offer. On December 1, 2006, however, plaintiff filed a First Amended Complaint dropping the nationwide class claims and asserting claims only on behalf of New Jersey residents who while so residing in New Jersey, applied for and received an American Express Blue Cash card during the period from September 30, 2003 to the present. The plaintiff seeks unspecified damages and other unspecified relief that the Court deems appropriate. In May 2007, the Court granted the Company s motion to compel individual arbitration and dismissed the complaint. Plaintiff appealed that decision to the U.S. Court of Appeals for the Third Circuit, and on February 24, 2009, the Third Circuit reversed the decision and remanded the case back to the District Court for further proceedings. On October 22, 2009, a putative class action captioned Pagsolingan v. American Express Company, et al. was filed in the U.S. District Court for the Northern District of California. That case makes allegations that are largely similar to those made in Homa, except that Pagsolingan alleges multiple theories of liability and seeks to certify a nationwide class of [a]ll persons who applied for and received an American Express Blue Cash card during the period from September 30, 2003 to the present and who did not get the rebate or rebates provided for in the offer. In January 2009, the Company signed a Memorandum of Understanding to resolve claims raised in a putative class action captioned Kaufman v. American Express Travel Related Services, pending in the United States District Court for the Northern District of Illinois. Since such time, the parties have entered into a settlement agreement that was submitted to the Court for preliminary approval, and a final ruling on preliminary approval remains pending. The allegations in Kaufman relate primarily to monthly service fee charges, with the critical claim being that the Company s gift card product violates consumer protection statutes because consumers allegedly have difficulty spending small residual amounts on the gift cards prior to the imposition of monthly service fees. The proposed Settlement Class consists of All purchasers, recipients and holders of all gift cards issued by American Express from January 1, 2002 through the date of preliminary approval of the Settlement, including without limitation, gift cards sold at physical retail locations, via the internet, or through mall co-branded programs. Under the terms of the proposed settlement, in addition to certain non-monetary relief, the Company would pay $3 million into a settlement fund. Members of the settlement class would then be entitled to submit claims against the settlement fund to receive refunds of certain gift card fees, and any monies remaining in the settlement fund after payment of all claims would be paid to charity. In addition, the Company would make available to the settlement class for a period of time the opportunity to buy gift cards with no purchase fee. Finally, the Company would be responsible for paying class counsel s reasonable fees and expenses and certain expenses of administering the class settlement. The Company is also a defendant in two other putative class actions making allegations similar to those made in Kaufman: Goodman v. American Express Travel Related Services, pending in the United States District Court for the Eastern District of New York, and Jarratt v. American Express Company, filed in California state court in San Diego. If the Kaufman settlement ultimately receives final approval, all related gift cards claims and suits would also be released. International Matters In May 2006, in a matter captioned Marcotte v. Bank of Montreal et al., filed in the Superior Court of Quebec, District of Montreal (originally filed in April 2003) the Court authorized a class action against Amex Bank of Canada, Bank of Montreal, Toronto-Dominion Bank, Royal Bank of Canada, Canadian Imperial Bank of Commerce, Scotiabank, National Bank of Canada, Laurentian Bank of Canada and Citibank Canada. The action alleges that conversion commissions made on foreign currency transactions are credit charges under the Quebec Consumer Protection Act (the QCPA) and cannot be charged prior to the 21-day grace period under the QCPA. The class includes all persons holding a credit card issued by one of the defendants to whom fees were charged since April 17, 2000, for transactions made in foreign currency before expiration of the period of 21 days following the statement of account. The class claims reimbursement of all foreign currency conversions, 86

91 CDN$400 per class member for trouble, inconvenience and punitive damages, interest and fees and costs. The trial in the Marcotte action commenced in September 2008 and was completed in November. The Court rendered a judgment in favor of the plaintiffs against Amex Bank of Canada on June 11, 2009, and awarded damages in the amount of CDN$7.1 million plus interest on the QCPA claims and individual claims to be made on the non-disclosure claims. In addition, the Court awarded punitive damages in the amount of CDN$21.52 per cardmember. The judgment has been appealed by all banks, including Amex Bank of Canada. The appeal is expected to be heard by the Quebec Court of Appeal in the fall of In November 2006, in a matter captioned Sylvan Adams v. Amex Bank of Canada filed in the Superior Court of Quebec, District of Montreal (originally filed in November 2004), the Court authorized a class action against Amex Bank of Canada. The plaintiff alleges that prior to December 2003, Amex Bank of Canada charged a foreign currency conversion commission on transactions to purchase goods and services in currencies other than Canadian dollars and failed to disclose the commissions in monthly billing statements or solicitations directed to prospective cardmembers. The class, consisting of all Cardmembers in Quebec that purchased goods or services in a foreign currency prior to December 2003, claims reimbursement of all foreign currency conversion commissions, CDN$1,000 in punitive damages per class member, interest and fees and costs. The trial in the Adams action commenced, and was completed, in December 2008 after the conclusion of the trial in the Marcotte action. The Court rendered a judgment in favor of the plaintiffs against Amex Bank of Canada on June 11, 2009, and awarded damages in the amount of CDN$11.2 million plus interest on the non-disclosure claims. In addition, the Court awarded punitive damages in the amount of CDN$2.2 million. The judgment has been appealed by Amex Bank of Canada. The appeal is expected to be heard by the Quebec Court of Appeal in the fall of In November 2006, in a matter captioned Option Consommateurs and Benoit Fortin v. Amex Bank of Canada et al. filed in the Superior Court of Quebec, District of Montreal (originally filed in July 2003), the Court authorized a class action against Amex Bank of Canada, Citibank Canada, MBNA Canada, Diners Club International, Capital One and Royal Bank of Canada. The plaintiff alleges that the defendants have violated the Quebec Consumer Protection Act ( QCPA ) by imposing finance charges on credit card transactions prior to 21 days following the receipt of the statement containing the charge. It is alleged that the QCPA provisions which require a 21-day grace period prior to imposing finance charges applies to credit cards issued by Amex Bank of Canada in Quebec and that finance charges imposed prior to this grace period violate the Act. The class seeks reimbursement of all finance charges imposed in violation of the Act, CDN$200 in punitive damages per class member, interest and fees and costs. In May 2005, Amex Bank of Canada was added as a defendant to a motion to authorize a class action captioned Option Consommateurs and Joel-Christian St-Pierre v. Bank of Montreal et al. filed in the Superior Court of Quebec, District of Quebec. The motion, which also names as defendants Royal Bank of Canada, Toronto-Dominion Bank, HSBC Bank of Canada, among others, alleges that the defendants violated QCPA by imposing finance charges on credit card transactions prior to 21 days following the receipt of the statement containing the charge. It is alleged that the QCPA provisions, which require a 21-day grace period prior to imposing finance charges, applies to credit cards issued by Amex Bank of Canada in Quebec and that finance charges imposed prior to this grace period violate the QCPA. The proposed class seeks reimbursement of all finance charges imposed in violation of the QCPA, CDN$100 in punitive damages per class member, interest and fees and costs. Other Matters During the last few years as regulatory interest in credit card network pricing to merchants and related issues has increased, the Company has responded to many inquiries from banking and competition authorities throughout the world. On October 14, 2008, the Company received a Civil Investigative Demand ( CID ), dated October 10, 2008, from the Antitrust Division of the United States Department of Justice ( DOJ ). A CID is a request for information in the course of a civil investigation and does not constitute the commencement of legal 87

92 proceedings. The DOJ is permitted by statute to issue a CID to anyone whom it believes may have information relevant to an investigation. The receipt of a CID does not presuppose that there is probable cause to believe that a violation of the antitrust laws has occurred or that a formal complaint ultimately will be filed. The DOJ has requested the production of documents and information regarding the Company s policies relating to merchant surcharging and its anti-steering policies that prohibit merchants from discriminating against the Card in favor of other forms of payment. The Company is cooperating with the DOJ s request. The Company has also received a similar civil investigative demand from the attorney general of the state of Ohio. These investigations are ongoing. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS We did not submit any matters to a vote of our security holders during the last quarter of our fiscal year ended December 31,

93 PART II ITEM 5. MARKET FOR REGISTRANT S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES (a) Our common stock trades principally on The New York Stock Exchange under the trading symbol AXP. As of December 31, 2009, we had 41,273 common shareholders of record. You can find price and dividend information concerning our common stock in Note 27 to our Consolidated Financial Statements, which can be found on page 127 of our 2009 Annual Report to Shareholders, which note is incorporated herein by reference. For information on dividend restrictions, please see Financial Review Share Repurchases and Dividends on page 40 and Note 23 on page 119 of our 2009 Annual Report to Shareholders, which information is incorporated herein by reference. You can find information on securities authorized for issuance under our equity compensation plans under the captions Executive Compensation Share Plans, and Executive Compensation Equity Compensation Plan Information to be contained in the Company s definitive 2010 proxy statement for our Annual Meeting of Shareholders, which is scheduled to be held on April 26, The information to be found under such captions is incorporated herein by reference. Our definitive 2010 proxy statement for our Annual Meeting of Shareholders is expected to be filed with the SEC in March 2010 (and, in any event, not later than 120 days after the close of our most recently completed fiscal year). Under the Treasury s Capital Purchase Program pursuant to the Emergency Economic Stabilization Act of 2008, we announced on January 9, 2009, the receipt of aggregate proceeds of $3.39 billion from the Treasury in exchange for the sale to the Treasury of (i) 3,388,890 shares of our Fixed Rate Cumulative Perpetual Preferred Stock, Series A, par value $1.66 2/3 per share (the Series A Preferred Stock ), having a liquidation preference per share equal to $1,000 and (ii) a ten-year warrant (the Warrant ) to purchase up to 24,264,129 shares of our common shares at an initial per share exercise price of $20.95 per share. We repurchased all of the Series A Preferred Stock in June 2009 and repurchased the Warrant in July For additional information about these transactions, please see our Current Reports on Form 8-K filed on January 9, 2009, June 17, 2009 and July 29, (b) Not applicable. (c) The table below sets forth the information with respect to purchases of our common stock made by or on behalf of the Company during the quarter ended December 31, Total Number of Shares Maximum Purchased as Number of Shares Part of Publicly that May Yet Be Total Number Announced Purchased Under Period October 1-31, 2009 Repurchase program (1) Employee transactions (2) of Shares Purchased 456 $ Average Price Paid Per Share Plans or Programs (3) N/A the Plans or Programs 100,018,968 N/A November 1-30, 2009 Repurchase program (1) Employee transactions (2) 20,254 $ N/A 100,018,968 N/A December 1-31, 2009 Repurchase program (1) Employee transactions (2) 433,920 $ N/A 100,018,968 N/A Total Repurchase program (1) Employee transactions (2) 454,630 $ N/A 100,018,968 N/A 89

94 (1) At December 31, 2009, there are approximately 100 million shares of common stock remaining under Board authorization. Such authorization does not have an expiration date, and at present, there is no intention to modify or otherwise rescind such authorization. Since September 1994, the Company has acquired 670 million shares under various Board authorizations to repurchase up to an aggregate of 770 million shares of common stock, including purchases made under agreements with third parties. (2) Includes: (a) shares delivered by or deducted from holders of employee stock options who exercised options (granted under the Company s incentive compensation plans) in satisfaction of the exercise price and/or tax withholding obligation of such holders and (b) restricted shares withheld (under the terms of grants under the Company s incentive compensation plans) to offset tax withholding obligations that occur upon vesting and release of restricted shares. The Company s incentive compensation plans provide that the value of the shares delivered or attested to, or withheld, shall be the average of the high and low price of the Company s common stock on the date the relevant transaction occurs. (3) Share purchases under publicly announced programs are made pursuant to open market purchases or privately negotiated transactions (including with employee benefit plans) as market conditions warrant and at prices the Company deems appropriate. ITEM 6. SELECTED FINANCIAL DATA The Consolidated Five-Year Summary of Selected Financial Data appearing on page 128 of our 2009 Annual Report to Shareholders is incorporated herein by reference. ITEM 7. MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information set forth under the heading Financial Review appearing on pages of our 2009 Annual Report to Shareholders is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information set forth under the heading Risk Management appearing on pages and in Note 12 to our Consolidated Financial Statements on pages of our 2009 Annual Report to Shareholders is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Report of Independent Registered Public Accounting Firm (PricewaterhouseCoopers LLP), the Consolidated Financial Statements and the Notes to Consolidated Financial Statements appearing on pages of our 2009 Annual Report to Shareholders are incorporated herein by reference. ITEM 9. Not applicable. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ITEM 9A. CONTROLS AND PROCEDURES The Company s management, with the participation of the Company s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act ) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company s disclosure controls and procedures are effective. 90

95 There have not been any changes in the Company s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the Company s fourth quarter that have materially affected, or are reasonably likely to materially affect, the Company s internal control over financial reporting. Management s Report on Internal Control over Financial Reporting, which sets forth management s evaluation of internal control over financial reporting, and the Report of Independent Registered Public Accounting Firm on the effectiveness of the Company s internal control over financial reporting as of December 31, 2009, appearing on pages 66 and 67 of our 2009 Annual Report to Shareholders, are incorporated herein by reference. ITEM 9B. OTHER INFORMATION Not applicable. 91

96 PART III ITEMS 10, 11, 12 and 13. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE; EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS; CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE We expect to file with the SEC, in March 2010 (and, in any event, not later than 120 days after the close of our last fiscal year), a definitive proxy statement, pursuant to SEC Regulation 14A in connection with our Annual Meeting of Shareholders to be held April 26, 2010, which involves the election of directors. The following information to be included in such proxy statement is incorporated herein by reference: information included under the caption Corporate Governance Summary of the Company s Corporate Governance Principles Independence of Directors information included in the table under the caption Corporate Governance Membership on Board Committees information under the captions Corporate Governance Compensation and Benefits Committee Compensation Committee Interlocks and Insider Participation and Compensation Committee Report information included under the caption Corporate Governance Audit and Risk Committee information included under the caption Compensation of Directors information included under the caption Ownership of Our Common Shares information included under the caption Item 1 Election of Directors information included under the caption Executive Compensation information under the caption Certain Relationships and Transactions information under the caption Section 16(a) Beneficial Ownership Reporting Compliance. In addition, the information regarding executive officers called for by Item 401(b) of Regulation S-K may be found under the caption Executive Officers of the Company in this Report. We have adopted a set of Corporate Governance Principles, which together with the charters of the four standing committees of the Board of Directors (Audit; Compensation and Benefits; Nominating and Governance; and Public Responsibility), our Code of Conduct (which constitutes the Company s code of ethics), and the Code of Business Conduct for the Members of the Board of Directors, provide the framework for the governance of the Company. A complete copy of our Corporate Governance Principles, the charters of each of the Board committees, the Code of Conduct (which applies not only to our Chief Executive Officer, Chief Financial Officer and Comptroller, but also to all other employees of the Company) and the Code of Business Conduct for the Members of the Board of Directors may be found by clicking on the Corporate Governance link found on our Investor Relations Web site at You may also access our Investor Relations Web site through the Company s main Web site at by clicking on the About American Express link, which is located at the bottom of the Company s homepage. (Information from such sites is not incorporated by reference into this Report.) You may also obtain free copies of these materials by writing to our Secretary at the Company s headquarters. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information set forth under the heading Item 2 Ratification of the Appointment of Independent Registered Public Accounting Firm Audit Fees; Audit-Related Fees; Tax Fees; All Other Fees; and Policy on Pre-Approval of Services Provided by Independent Registered Public Accounting Firm, which will appear in the Company s definitive proxy statement in connection with our Annual Meeting of Shareholders to be held April 26, 2010, is incorporated herein by reference. 92

97 PART IV ITEM 15. (a) EXHIBITS, FINANCIAL STATEMENT SCHEDULES 1. Financial Statements: The financial statements filed as a part of this report are listed on page F-1 hereof under Index to Financial Statements, which is incorporated herein by reference. 2. Financial Statement Schedules: All schedules are omitted since the required information is either not applicable, not deemed material, or is shown in the respective financial statements or in notes thereto. 3. Exhibits: The list of exhibits required to be filed as exhibits to this report are listed on pages E-1 through E-5 hereof under Exhibit Index, which is incorporated herein by reference. 93

98 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICAN EXPRESS COMPANY February 25, 2010 /s/ DANIEL T. HENRY Daniel T. Henry Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the date indicated. /S/ KENNETH I. CHENAULT Kenneth I. Chenault Chairman, Chief Executive Officer and Director /S/ JAN LESCHLY Jan Leschly Director /S/ DANIEL T. HENRY Daniel T. Henry Executive Vice President and Chief Financial Officer /S/ RICHARD C. LEVIN Richard C. Levin Director /S/ JOAN C. AMBLE Joan C. Amble Executive Vice President and Comptroller /S/ RICHARD A. MCGINN Richard A. McGinn Director /S/ DANIEL F. AKERSON Daniel F. Akerson Director /S/ EDWARD D. MILLER Edward D. Miller Director /S/ CHARLENE BARSHEFSKY Charlene Barshefsky Director /S/ STEVEN S REINEMUND Steven S Reinemund Director /S/ URSULA M. BURNS Ursula M. Burns Director /S/ ROBERT D. WALTER Robert D. Walter Director /S/ PETER CHERNIN Peter Chernin Director /S/ RONALD A. WILLIAMS Ronald A. Williams Director February 25,

99 AMERICAN EXPRESS COMPANY INDEX TO FINANCIAL STATEMENTS (Items 15(a)(1) and 15(a)(2) of Form 10-K) Annual Report to Shareholders Form 10-K (Page) American Express Company and Subsidiaries: Data incorporated by reference from 2009 Annual Report to Shareholders: Management s report on internal control over financial reporting 66 Report of independent registered public accounting firm (PricewaterhouseCoopers LLP) 67 Consolidated statements of income for each of the three years in the period ended December 31, Consolidated balance sheets at December 31, 2009 and Consolidated statements of cash flows for each of the three years in the period ended December 31, Consolidated statements of shareholders equity for each of the three years in the period ended December 31, Notes to consolidated financial statements Consent of independent registered public accounting firm F-2 Schedules: All schedules for American Express Company and subsidiaries have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the respective financial statements or notes thereto. Refer to Notes 4, 5 and 26 to the Consolidated Financial Statements in our 2009 Annual Report to Shareholders for information on accounts receivable reserves, loan reserves and condensed financial information of the Parent Company Only, respectively. * * * The Consolidated Financial Statements of American Express Company (including the report of independent registered public accounting firm) listed in the above index, which are included in our 2009 Annual Report to Shareholders, are hereby incorporated by reference. With the exception of the pages listed in the above index, unless otherwise incorporated by reference elsewhere in this Annual Report on Form 10-K, our 2009 Annual Report to Shareholders is not to be deemed filed as part of this report. F-1

100 Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the Registration Statements (Form S-8 No , No , No , No , No , No , No , No , No , No , No , No , No , No , No , No , No , No , No , No ; and No ; Form S-3 No , No , No , No , No , No , No , No , No , No , No and ) of American Express Company of our report dated February 25, 2010, relating to the consolidated financial statements and the effectiveness of internal control over financial reporting, which appears in the 2009 Annual Report to Shareholders, which is incorporated by reference in this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP New York, New York February 25, 2010 F-2

101 EXHIBIT INDEX The following exhibits are filed as part of this Annual Report. The exhibit numbers preceded by an asterisk (*) indicate exhibits electronically filed herewith. All other exhibit numbers indicate exhibits previously filed and are hereby incorporated herein by reference. Exhibits numbered 10.1 through 10.28, through 10.35, 10.39, 10.40, and are management contracts or compensatory plans or arrangements. 3.1 Company s Restated Certificate of Incorporation (incorporated by reference to Exhibit 4.1 of the Company s Registration Statement on Form S-3, dated July 31, 1997 (Commission File No )). 3.2 Company s Certificate of Amendment of the Certificate of Incorporation (incorporated by reference to Exhibit 3.1 of the Company s Quarterly Report on Form 10-Q (Commission File No ) for the quarter ended March 31, 2000). 3.3 Company s Certificate of Amendment of the Certificate of Incorporation (incorporated by reference to Exhibit 3.3 of the Company s Quarterly Report on Form 10-Q (Commission File No ) for the quarter ended March 31, 2008). 3.4 Company s Certificate of Amendment of the Certificate of Incorporation (incorporated by reference to Exhibit 3.1 of the Company s Current Report on Form 8-K (Commission File No ), dated January 7, 2009 (filed January 9, 2009)). 3.5 Company s By-Laws, as amended through February 23, 2009 (incorporated by reference to Exhibit 3.5 of the Company s Annual Report on Form 10-K (Commission File No ) for the year ended December 31, 2008). 4.1 The instruments defining the rights of holders of long-term debt securities of the Company and its subsidiaries are omitted pursuant to Section (b)(4)(iii)(a) of Item 601 of Regulation S-K. The Company hereby agrees to furnish copies of these instruments to the SEC upon request. 4.2 Warrant to Purchase Common Stock (incorporated by reference to Exhibit 4.1 of the Company s Current Report on Form 8-K (Commission File No ), dated January 7, 2009 (filed January 9, 2009)). 4.3 Form of Global Note for $1,250,000,000 principal amount of 7.25% Notes due May 20, 2014 (incorporated by reference to Exhibit 4.1 of the Company s Current Report on Form 8-K (Commission File No ) dated May 19, 2009). 4.4 Form of Global Note for $1,750,000,000 principal amount of 8.125% Notes due May 20, 2019 (incorporated by reference to Exhibit 4.2 of the Company s Current Report on Form 8-K (Commission File No ) dated May 19, 2009) American Express Company 1998 Incentive Compensation Plan, as amended through July 25, 2005 (incorporated by reference to Exhibit 10.4 of the Company s Annual Report on Form 10-K (Commission File No ) for the year ended December 31, 2005) American Express Company 1998 Incentive Compensation Plan Master Agreement, dated April 27, 1998 (for awards made prior to January 22, 2007) (incorporated by reference to Exhibit 10.1 of the Company s Quarterly Report on Form 10-Q (Commission File No ) for the quarter ended September 30, 2004) Amendment of American Express Company 1998 Incentive Compensation Plan Master Agreement, dated April 27, 1998 (for awards made prior to January 22, 2007) (incorporated by reference to Exhibit 10.1 of the Company s Quarterly Report on Form 10-Q (Commission File No ) for the quarter ended March 31, 2000) American Express Company 1998 Incentive Compensation Plan Master Agreement, dated January 22, 2007 (for awards made on or after such date) (as amended and restated effective January 1, 2009) (incorporated by reference to Exhibit 10.4 of the Company s Annual Report on Form 10-K (Commission File No ) for the year ended December 31, 2008). E-1

102 10.5 Form of award agreement for executive officers in connection with Portfolio Grants under the American Express Company 1998 Incentive Compensation Plan, as amended (for awards made after January 22, 2007) (incorporated by reference to Exhibit 10.1 to the Company s Current Report on Form 8-K (Commission File No ), dated January 22, 2007 (filed January 26, 2007)) Section 409A Amendments to form of award agreement for Portfolio Grants made under the American Express Company 1998 Incentive Compensation Plan, as amended (for awards made after January 22, 2007) (incorporated by reference to Exhibit 10.6 of the Company s Annual Report on Form 10-K (Commission File No ) for the year ended December 31, 2008) American Express Company 2007 Incentive Compensation Plan, (incorporated by reference to Exhibit 10.1 of the Company s Current Report on Form 8-K (Commission File No ), dated April 23, 2007 (filed April 27, 2007)) American Express Company 2007 Incentive Compensation Plan Master Agreement (as amended and restated effective January 1, 2009) (incorporated by reference to Exhibit 10.8 of the Company s Annual Report on Form 10-K (Commission File No ) for the year ended December 31, 2008) Form of award agreement for executive officers in connection with Portfolio Grants under the American Express Company 2007 Incentive Compensation Plan (incorporated by reference to Exhibit of the Company s Annual Report on Form 10-K (Commission File No ) for the year ended December 31, 2007) Section 409A Amendments to form of award agreement for Portfolio Grants made under the American Express Company 2007 Incentive Compensation Plan (incorporated by reference to Exhibit of the Company s Annual Report on Form 10-K (Commission File No ) for the year ended December 31, 2008) Form of award agreement for executive officers in connection with Performance Grant awards (a/k/a Incentive Awards) under the American Express Company 2007 Incentive Compensation Plan (as amended and restated effective January 1, 2009) (incorporated by reference to Exhibit of the Company s Annual Report on Form 10-K (Commission File No ) for the year ended December 31, 2008) Description of Compensation Payable to Non-Management Directors (incorporated by reference to Exhibit 10.1 of the Company s Current Report on Form 8-K (Commission File No ), dated November 21, 2005 (filed January 13, 2006)) American Express Company Deferred Compensation Plan for Directors and Advisors, as amended through January 1, 2009 (incorporated by reference to Exhibit of the Company s Annual Report on Form 10-K (Commission File No ) for the year ended December 31, 2008) American Express Company 2007 Pay-for-Performance Deferral Program Document (incorporated by reference to Exhibit 10.1 of the Company s Current Report on Form 8-K (Commission File No ), dated November 20, 2006 (filed November 22, 2006)) Description of amendments to Pay-for-Performance Deferral Programs (incorporated by reference to Exhibit of the Company s Annual Report on Form 10-K (Commission File No ) for the year ended December 31, 2006) American Express Company 2006 Pay-for-Performance Deferral Program Guide (incorporated by reference to Exhibit 10.1 of the Company s Current Report on Form 8-K (Commission File No ), dated November 21, 2005 (filed November 23, 2005)) American Express Company 2005 Pay-for-Performance Deferral Program Guide (incorporated by reference to Exhibit of the Company s Annual Report on Form 10-K (Commission File No ) for the year ended December 31, 2004). E-2

103 10.18 Description of American Express Company Pay-for-Performance Deferral Program (incorporated by reference to Exhibit 10.2 of the Company s Current Report on Form 8-K (Commission File No. l-7657), dated November 22, 2004 (filed January 28, 2005)) Amendment to the Pre-2008 Nonqualified Deferred Compensation Plans of American Express Company (incorporated by reference to Exhibit of the Company s Annual Report on Form 10-K (Commission File No ) for the year ended December 31, 2008) American Express Company Retirement Plan for Non-Employee Directors, as amended (incorporated by reference to Exhibit of the Company s Annual Report on Form 10-K (Commission File No ) for the year ended December 31, 1988) Certificate of Amendment of the American Express Company Retirement Plan for Non-Employee Directors dated March 21, 1996 (incorporated by reference to Exhibit of the Company s Annual Report on Form 10-K (Commission File No ) for the year ended December 31, 1995) American Express Key Executive Life Insurance Plan, as amended (incorporated by reference to Exhibit of the Company s Annual Report on Form 10-K (Commission File No ) for the fiscal year ended December 31, 1991) Amendment to American Express Company Key Executive Life Insurance Plan (incorporated by reference to Exhibit 10.3 of the Company s Quarterly Report on Form 10-Q (Commission File No ) for the quarter ended September 30, 1994) Amendment to American Express Company Key Executive Life Insurance Plan, effective as of January 22, 2007 (incorporated by reference to Exhibit of the Company s Annual Report on Form 10-K (Commission File No ) for the year ended December 31, 2006) American Express Key Employee Charitable Award Program for Education (incorporated by reference to Exhibit of the Company s Annual Report on Form 10-K (Commission File No ) for the year ended December 31, 1990) American Express Directors Charitable Award Program (incorporated by reference to Exhibit of the Company s Annual Report on Form 10-K (Commission File No ) for the year ended December 31, 1990) American Express Company Salary/Bonus Deferral Plan (incorporated by reference to Exhibit of the Company s Annual Report on Form 10-K (Commission File No ) for the year ended December 31, 1988) Amendment to American Express Company Salary/Bonus Deferral Plan (incorporated by reference to Exhibit 10.4 of the Company s Quarterly Report on Form 10-Q (Commission File No ) for the quarter ended September 30, 1994) Tax Allocation Agreement, dated May 27, 1994, between Lehman Brothers Holdings Inc. and the Company (incorporated by reference to Exhibit 10.2 of Lehman Brothers Holdings Inc. s Transition Report on Form 10-K (Commission File No ) for the transition period from January 1, 1994 to November 30, 1994) American Express Company 1993 Directors Stock Option Plan, as amended (incorporated by reference to Exhibit of the Company s Quarterly Report on Form 10-Q (Commission File No ) for the quarter ended March 31, 2000) American Express Senior Executive Severance Plan, effective January 1, 1994 (as amended and restated through January 1, 2009) (incorporated by reference to Exhibit of the Company s Annual Report on Form 10-K (Commission File No ) for the year ended December 31, 2008). E-3

104 10.32 Amendments of (i) the American Express Supplemental Retirement Plan, (ii) the American Express Salary/Bonus Deferral Plan and (iii) the American Express Key Executive Life Insurance Plan (incorporated by reference to Exhibit of the Company s Annual Report on Form 10-K (Commission File No ) for the year ended December 31, 1997) American Express Supplemental Retirement Plan (as amended and restated effective January 1, 2009) (incorporated by reference to Exhibit of the Company s Annual Report on Form 10-K (Commission File No ) for the year ended December 31, 2008) American Express Directors Stock Plan (incorporated by reference to Exhibit 4.4 of the Company s Registration Statement on Form S-8, dated December 9, 1997 (Commission File No )) American Express Annual Incentive Award Plan (as amended and restated effective January 1, 2009) (incorporated by reference to Exhibit of the Company s Annual Report on Form 10-K (Commission File No ) for the year ended December 31, 2008) Agreement dated February 27, 1995 between the Company and Berkshire Hathaway Inc. (incorporated by reference to Exhibit of the Company s Annual Report on Form 10-K (Commission File No ) for the year ended December 31, 1994) Agreement dated July 20, 1995 between the Company and Berkshire Hathaway Inc. and its subsidiaries (incorporated by reference to Exhibit 10.1 of the Company s Quarterly Report on Form 10-Q (Commission File No ) for the quarter ended September 30, 1995) Amendment dated September 8, 2000 to the agreement dated February 27, 1995 between the Company and Berkshire Hathaway Inc. (incorporated by reference to Exhibit 99.3 of the Company s Current Report on Form 8-K (Commission File No ) dated January 22, 2001) Description of a special grant of a stock option and restricted stock award to Kenneth I. Chenault, the Company s President and Chief Operating Officer (incorporated by reference to Exhibit 10.2 of the Company s Quarterly Report on Form 10-Q (Commission File No ) for the quarter ended June 30, 1999) American Express Company 2003 Share Equivalent Unit Plan for Directors, as amended and restated, effective January 1, 2009 (incorporated by reference to Exhibit of the Company s Annual Report on Form 10-K (Commission File No ) for the year ended December 31, 2008) Separation and Distribution Agreement between American Express Company and Ameriprise Financial, Inc., dated August 24, 2005 (incorporated by reference to Exhibit 10.1 of the Company s Current Report on Form 8-K (Commission File No ), dated August 24, 2005 (filed August 30, 2005)) Employee Benefits Agreement, dated as of September 30, 2005, by and between American Express Company and Ameriprise Financial, Inc. (incorporated by reference to Exhibit 10.1 of the Company s Current Report on Form 8-K (Commission File No ), dated October 6, 2005) Tax Allocation Agreement, dated as of September 30, 2005, by and between American Express Company and Ameriprise Financial, Inc. (incorporated by reference to Exhibit 10.2 of the Company s Current Report on Form 8-K (Commission File No ), dated October 6, 2005) Letter Agreement, dated January 9, 2009, between American Express Company and the United States Department of the Treasury, which includes the Securities Purchase Agreement Standard Terms attached thereto (incorporated by reference to Exhibit 10.1 of the Company s Current Report on Form 8-K (Commission File No ), dated January 7, 2009 (filed January 9, 2009)) Form of award agreement for executive officers in connection with Portfolio Grant under the American Express Company 2007 Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 of the Company s Quarterly Report on Form 10-Q (Commission File No ) for the quarter ended March 31, 2009). E-4

105 10.46 Letter Agreement, dated October 2, 2009, between the Company and Alfred F. Kelly, Jr. (incorporated by reference to Exhibit 10.1 of the Company s Quarterly Report on Form 10-Q (Commission File No ) for the quarter ended September 30, 2009). *12 Computation in Support of Ratio of Earnings to Fixed Charges. *13 Portions of the Company s 2009 Annual Report to Shareholders that are incorporated herein by reference. *21 Subsidiaries of the Company. *23.1 Consent of PricewaterhouseCoopers LLP (contained on page F-2 of this Annual Report on Form 10-K). *31.1 Certification of Kenneth I. Chenault, Chief Executive Officer, pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. *31.2 Certification of Daniel T. Henry, Chief Financial Officer, pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. *32.1 Certification of Kenneth I. Chenault, Chief Executive Officer, and Daniel T. Henry, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of INS 101.SCH 101.CAL 101.DEF 101.LAB 101.PRE XBRL Instance Document** XBRL Taxonomy Extension Schema Document** XBRL Taxonomy Extension Calculation Linkbase Document** XBRL Taxonomy Extension Definition Linkbase.** XBRL Taxonomy Extension Label Linkbase Document** XBRL Taxonomy Extension Presentation Linkbase Document** ** These interactive data files are furnished and deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. E-5

106 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2009 Commission File No American Express Company (Exact name of Company as specified in charter) EXHIBITS

107 EXHIBIT 12 AMERICAN EXPRESS COMPANY COMPUTATION IN SUPPORT OF RATIO OF EARNINGS TO FIXED CHARGES (Dollars in Millions) Year Ended December 31, Years Ended December 31, Earnings: Pretax income from continuing operations $ 2,841 $ 3,581 $ 5,694 $ 5,152 $ 3,979 Interest expense 2,208 3,628 4,525 3,258 2,415 Other adjustments Total earnings (a) $ 5,178 $ 7,353 $ 10,362 $ 8,549 $ 6,544 Fixed charges: Interest expense $ 2,208 $ 3,628 $ 4,525 $ 3,258 $ 2,415 Other adjustments Total fixed charges (b) $ 2,329 $ 3,742 $ 4,631 $ 3,364 $ 2,566 Ratio of earnings to fixed charges (a/b) Included in interest expense in the above computation is interest expense related to the cardmember lending activities, international banking operations, and charge card and other activities in the Consolidated Statements of Income. Interest expense does not include interest on liabilities recorded under GAAP governing accounting for uncertainty in income taxes. The Company s policy is to classify such interest in income tax provision in the Consolidated Statements of Income. For purposes of the earnings computation, other adjustments include adding the amortization of capitalized interest, the net loss of affiliates accounted for under the equity method whose debt is not guaranteed by the Company, the minority interest in the earnings of majority-owned subsidiaries with fixed charges, and the interest component of rental expense, and subtracting undistributed net income of affiliates accounted for under the equity method. For purposes of the fixed charges computation, other adjustments include capitalized interest costs and the interest component of rental expense.

108 Exhibit FINANCIAL RESULTS 18 FINANCIAL REVIEW 66 MANAGEMENT S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING 67 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 68 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 69 CONSOLIDATED FINANCIAL STATEMENTS 73 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 128 CONSOLIDATED FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA 129 COMPARISON OF FIVE-YEAR TOTAL RETURN TO SHAREHOLDERS

109 2009 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY FINANCIAL REVIEW The financial section of American Express Company s (the Company) Annual Report consists of this Financial Review, the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements. The following discussion is designed to provide perspective and understanding regarding the Company s consolidated financial condition and results of operations. Certain key terms are defined in the Glossary of Selected Terminology, which begins on page 61. This Financial Review and the Notes to Consolidated Financial Statements have been adjusted to exclude discontinued operations unless otherwise noted. EXECUTIVE OVERVIEW American Express is a global service company that provides customers with access to products, insights and experiences that enrich lives and build business success. The Company s principal products and services are charge and credit payment card products and travel-related services offered to consumers and businesses around the world. The Company s range of products and services include: charge and credit card products; expense management products and services; consumer and business travel services; stored value products such as Travelers Cheques and other prepaid products; network services for the Company s network partners; merchant acquisition and processing, point-of-sale, servicing and settlement and marketing products and services for merchants; and fee services, including market and trend analyses along with related consulting services and customer loyalty and rewards programs. The Company s products and services are sold globally to diverse customer groups, including consumers, small businesses, middle-market companies, and large corporations. These products and services are sold through various channels including direct mail, on-line applications, targeted direct and third-party sales forces, and direct response advertising. The Company s products and services generate the following types of revenue for the Company: Discount revenue, which is the Company s largest revenue source, represents fees charged to merchants when cardmembers use their cards to purchase goods and services on the Company s network; Net card fees, which represent revenue earned for annual charge card memberships; Travel commissions and fees, which are earned by charging a transaction or management fee for airline or other travel-related transactions; Other commissions and fees, which are earned on foreign exchange conversions and card-related fees and assessments; Securitization income, net, which is the net earnings related to cardmember loans financed through securitization activities; 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 lending portfolio. In addition to funding and operating costs associated with these types of revenue, other major expense categories are related to marketing and reward programs that add new cardmembers and promote cardmember loyalty and spending, and provisions for anticipated cardmember credit and fraud losses. In 2009, to better position the Company to grow its traditional businesses, and to develop new revenue categories and emerging payments, the Company implemented the following organizational changes: Grouped the Company s global consumer and small business card-issuing, merchant and network businesses under the senior leadership of the Vice Chairman of American Express, which will enable the Company to sharpen its focus on its strongest growth opportunities, while maintaining appropriate confidentiality protections; The Company is creating the Enterprise Growth Group, which will focus exclusively on generating new sources of fee revenue from existing assets and advancing the Company s efforts in emerging payments; Formed a new Global Services Group under the leadership of the Company s Group President and Chief Information Officer, which unites the Company s U.S. and international cardmember servicing organizations, as well as most processing and support functions across the Company including, among others,

110 technology support and certain key processing functions in areas such as finance and human resources. With this change to Global Services, the Company is organizing support functions by process rather than business unit, which the Company expects will streamline costs, reduce duplication of work, better integrate skills and expertise, and improve customer 18

111 2009 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY service. The expenses that now fall within Global Services account for just under half of the Company s consolidated operating expense. This organization has been tasked with generating an annualized level of gross expense savings of approximately $500 million by It is expected that a portion of any such savings would be reinvested in growth initiatives; and Also, as part of the organizational changes, the Company s Chief Executive Officer is now working directly with the leaders of the Global Commercial Card and Global Travel Services groups on overall strategies to capitalize on Business-to-Business growth opportunities. Historically, the Company has sought to achieve a number of financial targets, on average and over time: Revenues net of interest expense growth of at least 8 percent; Earnings per share (EPS) growth of 12 to 15 percent; and Return on average equity (ROE) of 33 to 36 percent. In addition, assuming achievement of such financial targets, the Company has sought to return at least 65 percent of the capital it generates to shareholders as a dividend or through the repurchase of common stock. The Company met or exceeded these targets for most of the past decade. However, during 2008 and 2009, its performance fell short of the targets due to the effects of the continuing global economic downturn. As long as these difficult conditions persist, it is unlikely that the Company will achieve all of its on average and over time financial objectives. The Company s share repurchase program was suspended in 2008 and, as a result, the amount of capital generated that is returned to shareholders has been and will likely continue to be below the levels achieved earlier in the decade. The Company believes it will be positioned, over the long term, to generate revenue and earnings growth in line with its historical target levels. However, evolving market, regulatory and rating agency expectations will likely cause the Company, as well as other financial institutions, to maintain in future years a higher level of capital than they would have historically maintained. These higher capital requirements would in turn lead, all other things being equal, to lower future ROE than the Company has historically targeted. While the Company is not establishing a new target at this time, it currently believes that it will ultimately be positioned to deliver a ROE in excess of 20 percent over time. As the capital requirements for financial institutions become clearer, management will have greater visibility into this area. At that time, the Company will provide updated long-term ROE and capital distribution targets. BANK HOLDING COMPANY During the fourth quarter of 2008, the Company became a bank holding company under the Bank Holding Company Act of 1956, and the Federal Reserve Board (Federal Reserve) became 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 2009 was a challenging year characterized by a weak economy, frozen credit markets in the first half of the year and high credit losses industry wide. In the first two quarters, the Company s spending and cardmember loan balances declined by double digits as compared to the corresponding periods in 2008 and credit metrics (e.g. past due and write-off rates) peaked at historically high levels. In the third quarter, the Company s credit actions began to positively impact past due and write-off rates, and spending declines began to become less severe. The fourth quarter showed greater improvement. In the fourth quarter of 2009 the year-over-year growth rate in cardmember spending volumes was positive for the first time since the third quarter of 2008, benefiting from both easier comparisons to year-ago billings as well as higher levels of spending. Improvements in billed business trends were experienced in all business lines in the fourth quarter. In addition, for the first time during the year, the growth rate in both the number of card transactions and average transaction size were positive in the fourth quarter as compared to the corresponding period in Despite these favorable trends, the Company expects the global economy to continue to recover gradually and the resulting environment to be characterized by billings growth that is more modest than it experienced before the recession, as consumers and businesses remain cautious about their spending. The favorable credit trends experienced in the third quarter of 2009 continued to show overall improvement in the fourth quarter. Charge card write-off rates and past-due trends in the United States continued to improve significantly during the fourth quarter, reaching historic lows by the end of the year and contributing to lower provision levels. Worldwide lending write-off rates also continued to decline in the fourth quarter, improving for the second quarter in a row. This was driven in part by a broad range of credit and business actions, such as enhanced credit and collection policies and practices. Lending past-due trends also continued to improve in the fourth quarter. If past-due trends, recoveries and bankruptcies remain stable, the Company expects managed U.S. lending write-offs in the first quarter of 2010 to be similar to those in the fourth quarter of 2009, and 19

112 2009 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY further expects these write-offs in the second quarter of 2010 to be lower than the first quarter. 1 In 2010, the Company intends to invest a substantial portion of expected benefits from its improving credit performance. The Company will focus on launching new products and services, improving long-term margins with investments in infrastructure, and driving growth for the moderate to long-term. As the Company continues to scale back its issuance of proprietary lending cards and targets more premium cards, the Company s priority will be to drive billed business and average spend per card rather than achieve broad growth in cards-in-force. The Company s net interest yield in 2009 was impacted by re-pricing actions, the Credit Card Accountability Responsibility and Disclosure Act (CARD Act), and changing consumer behavior. Going forward, these same dynamics will apply, with more impact from the CARD Act expected in the future. As such, the Company expects net interest yields to trend down closer to historic levels over time. The Company expects its 2010 EPS growth to be well above its long-term EPS target of 12 percent to 15 percent. REENGINEERING INITIATIVES In the fourth quarter of 2008, the Company announced various reengineering initiatives which were expected to produce cost benefits of approximately $1.8 billion in 2009 versus the previously anticipated spending levels. These initiatives included: reducing staffing levels and compensation expenses (expected benefits of $700 million in 2009), reducing certain operating costs (expected benefit of $125 million in 2009) and scaling back investment spending (expected benefit of $1.0 billion in 2009). The Company began the execution and implementation of these initiatives in the fourth quarter of 2008, and as such, recorded a fourth quarter of 2008 restructuring charge of $404 million ($262 million after-tax) in continuing operations, primarily associated with severance and other costs related to the elimination of approximately 7,000 positions, in addition to $17 million ($11 million after-tax) of other net reengineering costs. In the second quarter of 2009, the Company announced another phase of reengineering initiatives which were 1 The managed basis presentation includes on-balance sheet cardmember loans and off-balance sheet securitized cardmember loans. The difference between the owned basis (GAAP) information and the managed basis information is attributable to the effects of securitized activities. The Company is not presenting estimates of owned net write-off rates comparable to the managed data above because the owned net write-off rates are not determinable at this time. For further discussion of the Company s owned and managed basis presentation, refer to the information set forth under U.S. Card Services in the section captioned Differences Between GAAP and Managed Presentations. expected to produce incremental cost benefits of approximately $800 million in These initiatives included: reducing staffing levels and compensation expenses (expected benefit of $175 million in 2009), scaling back investment spending on marketing and business development (expected benefit of $500 million in 2009) and cutting certain professional services, travel and general overhead expenses (expected benefit of $125 million in 2009). The Company began the implementation of these initiatives in the second quarter of 2009, and as such, recorded a second quarter 2009 net reengineering charge of $182 million ($118 million after-tax) in continuing operations, primarily associated with severance and other costs related to the elimination of approximately 4,000 positions. Cumulatively, through these reengineering initiatives, the Company expected to eliminate approximately 11,000 positions, which accounted for approximately 17 percent of its global workforce as of September 30, As the Company has previously indicated, business results in the second half of 2009 have been stronger than initially forecasted primarily due to favorable credit and business trends. The benefits from these favorable trends have been utilized to increase spending on marketing and other business-building initiatives during the latter part of These increased investments have in turn reduced the targeted savings from our reengineering initiatives of approximately $2.6 billion described above. These favorable trends also drove other business changes and modifications to previously planned reengineering initiatives which have resulted in a lower level of employee staff reductions and higher employee redeployment to other positions in the Company, further reducing targeted savings. As of December 31, 2009, employee count has declined 8,200 or 12 percent since September 30, 2008 primarily due to the above initiatives. ACQUISITIONS On January 15, 2010, the Company purchased Revolution Money, a provider of secure person-to-person payment services through an internet based platform, for approximately $300 million. Revolution Money offers online person-to-person payment accounts that are FDIC insured and suited for social and instant messaging networks and offers the RevolutionCard, a general-use PIN-based card with enhanced security. The Company believes that Revolution Money s assets and expertise complement both its existing payments and processing capabilities, and also provides it with an innovative technology platform which can help extend the Company s leadership beyond the traditional payments arena. On March 28, 2008, the Company purchased Corporate Payment Services (CPS), General Electric Company s commercial card and corporate purchasing business unit. The Company acquired $2.2 billion in assets and assumed $63 million in liabilities. The total cash consideration of $2.3 20

113 2009 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY billion paid by the Company consisted of the contractual purchase price of approximately $1.1 billion plus the repayment of CPS $1.2 billion in outstanding debt as of the acquisition date. DISCONTINUED OPERATIONS For the applicable periods, the operating results, assets and liabilities, and cash flows of American Express Bank Ltd. (AEB), which was sold to Standard Chartered PLC (Standard Chartered) in 2008, and American Express International Deposit Company (AEIDC), which was sold to Standard Chartered in the third quarter of 2009, have been removed from the Corporate & Other segment and reported separately within the discontinued operations captions on the Company s Consolidated Financial Statements. Refer to Note 2 to the Consolidated Financial Statements for further discussion of the Company s discontinued operations. FINANCIAL SUMMARY A summary of the Company s recent financial performance follows: Years Ended December 31, (Millions, except per share amounts and ratio data) Percent Decrease Total revenues net of interest expense $ 24,523 $ 28,365 (14)% Provisions for losses $ 5,313 $ 5,798 (8)% Expenses $ 16,369 $ 18,986 (14)% Income from continuing operations $ 2,137 $ 2,871 (26)% Net income $ 2,130 $ 2,699 (21)% Earnings per common share from continuing operations diluted (a)(b) $ 1.54 $ 2.47 (38)% Earnings per common share diluted (a) $ 1.54 $ 2.32 (34)% Return on average equity (c) 14.6% 22.3% Return on average tangible common equity (d) 17.6% 28.0% (a) Earnings per common share from continuing operations diluted and Earnings per common share diluted were both reduced by the impact of (i) accelerated preferred dividend accretion of $212 million for the year ended December 31, 2009 due to the repurchase of $3.39 billion of preferred shares issued as part of the Capital Purchase Program (CPP), (ii) preferred share dividends and related accretion of $94 million for the year ended December 31, 2009, and (iii) earnings allocated to participating share awards and other items of $22 million and $15 million for the years ended December 31, 2009 and 2008, respectively. (b) Effective January 1, 2009, guidance for determining whether instruments granted in share-based payment transactions are participating securities requires that restricted stock awards be included in the computation of basic and diluted earnings per share pursuant to the two-class method. Accordingly, the Company has retrospectively adjusted EPS for all prior periods presented. Refer to Note 18 to the Company s Consolidated Financial Statements. (c) ROE is calculated by dividing (i) net income ($2.1 billion and $2.7 billion for 2009 and 2008, respectively), by (ii) average total shareholders equity ($14.6 billion and $12.1 billion for 2009 and 2008, respectively). (d) Return on average tangible common equity is computed in the same manner as ROE except the computation of average tangible common shareholders equity (TCE) excludes average goodwill and other intangibles of $3.0 billion and $2.5 billion as of December 31, 2009 and 2008, respectively. The Company believes that return on average tangible common equity is a useful measure of profitability of its business. See Consolidated Results of Operations, beginning on page 31, for discussion of the Company s results. The Company follows U.S. generally accepted accounting principles (GAAP). In addition to information provided on a GAAP basis, the Company discloses certain data on a managed basis. This information, which should be read only as a supplement to GAAP information, assumes, in the Consolidated Selected Statistical Information and U.S. Card Services (USCS) segment, there have been no cardmember loans securitization transactions. These managed basis adjustments, and management s rationale for such presentation, are discussed further in the USCS section below under Differences between GAAP and Managed Basis Presentation. Certain of the statements in this Annual Report are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of See Forward-Looking Statements at the end of this discussion. 21

114 2009 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY CRITICAL ACCOUNTING POLICIES Refer to Note 1 to the Consolidated Financial Statements for a summary of the Company s significant accounting policies referenced, as applicable, to other notes. The following chart provides information about five critical accounting policies that are important to the Consolidated Financial Statements and that require significant management assumptions and judgments. RESERVES FOR CARDMEMBER LOSSES Description Assumptions/Approach Used Reserves for cardmember losses relating to cardmember loans and receivables represent management s best estimate of the losses inherent in the Company s outstanding portfolio of loans and receivables. Reserves for cardmember loans and receivables losses are primarily based upon models that analyze portfolio performance and reflect management s judgment regarding overall reserve adequacy. The analytic models take into account several factors, including average losses and recoveries over an appropriate historical period. Management considers whether to adjust the analytic models for specific factors such as increased risk in certain portfolios, impact of risk management initiatives on portfolio performance and concentration of credit risk based on factors such as tenure, industry or geographic regions. In addition, management adjusts the reserves for losses for other external environmental factors including leading economic and market indicators such as the unemployment rate, Gross Domestic Product (GDP), home price indices, non-farm payrolls, personal consumption expenditures index, consumer confidence index, purchasing manager s index, bankruptcy filings, and the legal and regulatory environment. Generally, due to the short-term nature of cardmember receivables, the impact of the other external environmental factors on the inherent losses within the cardmember receivable portfolio is not significant. As part of this evaluation process, management also considers various reserve coverage metrics, such as reserves as a percentage of past-due amounts, reserves as a percentage of cardmember loans and receivables, and net write-off coverage. Cardmember loans and receivables are written off when management deems amounts to be uncollectible and is generally determined by the number of days past due. Cardmember loans and USCS cardmember receivables are generally written off when (continued on next page) Effect if Actual Results Differ from Assumptions To the extent historical credit experience updated for emerging market trends in credit are not indicative of future performance, actual losses could differ significantly from management s judgments and expectations, resulting in either higher or lower future provisions for losses, as applicable. As of December 31, 2009, an increase in write-offs equivalent to 20 basis points of cardmember loan and receivable balances at such date would increase the provision for cardmember losses by approximately $133 million. This sensitivity analysis does not represent management s expectations of the deterioration in write-offs but is provided as a hypothetical scenario to assess the sensitivity of the provision for cardmember losses to changes in key inputs. The process of determining the reserve for cardmember losses requires a high degree of judgment. It is possible that others, given the same information, may at any point in time reach different reasonable conclusions. 22

115 2009 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY RESERVES FOR CARDMEMBER LOSSES (CONTINUED) Description Assumptions/Approach Used 180 days past due. International Card Services (ICS) and Global Commercial Services (GCS) cardmember receivables are generally written off when they are 360 days past billing. Cardmember loans and receivables in bankruptcy or owed by deceased individuals are written off upon notification. Recoveries of both cardmember loans and receivables are recognized on a cash basis. Effect if Actual Results Differ from Assumptions 23

116 2009 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY RESERVES FOR MEMBERSHIP REWARDS COSTS Description Assumptions/Approach Used The Membership Rewards program is the largest card-based rewards program in the industry. Eligible cardmembers can earn points for purchases charged and many of the Company s card products offer the ability to earn bonus points for certain types of purchases. Membership Rewards points are redeemable for a broad variety of rewards including travel, entertainment, retail certificates and merchandise. Points typically do not expire and there is no limit on the number of points a cardmember may earn. A large majority of spending by eligible cardmembers earns points under the program. While cardmember spend, redemption rates, and the related expense have increased, the Company believes it has historically benefited through higher revenues, lower cardmember attrition and credit losses and more timely payments. The Company establishes balance sheet reserves that represent the estimated future cost of points earned to date that are ultimately expected to be redeemed. These reserves reflect management s judgment regarding overall adequacy. The provision for the cost of Membership Rewards is included in marketing, promotion, rewards and cardmember services expenses. A weighted-average cost per point redeemed during the previous 12 months, adjusted as appropriate for recent changes in redemption costs, is used to approximate future redemption costs and is affected by the mix of rewards redeemed. Management uses models to estimate ultimate redemption rates based on historical redemption statistics, card product type, year of program enrollment, enrollment tenure, and card spend levels. These models incorporate sophisticated statistical and actuarial techniques to estimate ultimate redemption rates of points earned to date by current cardmembers given redemption trends and projected future redemption behavior. The global ultimate redemption rate assumption for current participants is approximately 90 percent. The Company continually evaluates its reserve methodology and assumptions based on developments in redemption patterns, cost per point redeemed, contract changes, and other factors. Effect if Actual Results Differ from Assumptions The reserve for the estimated cost of points expected to be redeemed is impacted over time by enrollment levels, the number of points earned and redeemed, and the weighted-average cost per point, which is influenced by redemption choices made by cardmembers, reward offerings by partners and other Membership Rewards program changes. The reserve is most sensitive to changes in the estimated ultimate redemption rate. This rate is based on the expectation that a large majority of all points earned will eventually be redeemed. As of December 31, 2009, 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 $250 million. 24

117 2009 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY FAIR VALUE MEASUREMENT Description Assumptions/Approach Used The Company holds investment securities, certain subordinated interests in securitized cardmember loans from the Company s securitization program and derivative instruments. These financial instruments are reflected at fair value on the Company s Consolidated Balance Sheets. Management makes significant assumptions and judgments when estimating fair value for these financial instruments. Investment Securities The Company s investment securities are comprised of predominantly fixed-income securities issued by states and municipalities as well as the U.S. Government and Agencies (e.g., Fannie Mae, Freddie Mac or Ginnie Mae) and retained subordinated securities described further below. The investment securities are classified as available-for-sale with changes in fair value recorded in accumulated other comprehensive (loss) income within shareholders equity on the Company s Consolidated Balance Sheets (except for approximately $213 million, as of December 31, 2008, of investment securities included in discontinued operations, for which changes in fair value are recorded in (loss) income from discontinued operations in the Company s Consolidated Statements of Income). Securitized Cardmember Loans When the Company securitizes cardmember loans, they are accounted for as sales and the loans are removed from the Company s Consolidated Balance Sheets. The Company retains certain subordinated interests in the securitized cardmember loans, which may include one or more investments in tranches of the securitization (retained subordinated securities) and an interest-only strip. 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 valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to the measurement of fair value based on unadjusted quoted prices in active markets for identical assets or liabilities (Level 1), followed by the measurement of fair value based on pricing models with significant observable inputs (Level 2), with the lowest priority given to the measurement of fair value based on pricing models with significant unobservable inputs (Level 3). Investment Securities The fair market values for the Company s investment securities (excluding its retained subordinated securities, which are discussed further below) are obtained primarily from pricing services engaged by the Company. The fair values provided by the pricing services are estimated by using pricing models where the inputs to those models are based on observable market inputs. The inputs to the valuation techniques applied by the pricing services vary depending on the type of security being priced but are typically benchmark yields, benchmark security prices, credit spreads, prepayment speeds, reported trades and/or broker-dealer quotes, all with reasonable levels of transparency. The pricing services do not apply any adjustments to the pricing models used. In addition, the Company did not apply any adjustments to prices received from the pricing services. The Company has reaffirmed its understanding of the valuation techniques used by its pricing services. In addition, the Company corroborates the prices provided by its pricing services to test their reasonableness by comparing their prices to valuations (continued on next page) Effect if Actual Results Differ from Assumptions Investment Securities In the measurement of fair value for the Company s investment securities (excluding its retained subordinated securities, which are discussed further below), 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. Retained Subordinated Securities and Interest-Only Strip In measuring the fair value for the Company s retained subordinated securities, the fair value is impacted by external market factors including London Interbank Offered Rate (LIBOR) forward rates and credit spreads, and therefore, the use of different inputs to the measurement of the fair value of the Company s retained subordinated securities could result in a different fair value measurement. The fair value of the interest-only strip is impacted by changes in the estimates and assumptions used in the valuation models. The use of different inputs to the measurement of fair value of these financial instruments could result in a different fair value measurement. Refer to Note 7 to the Company s Consolidated Financial Statements, including sensitivity analyses relating to changes in key assumptions for the retained subordinated securities and interest-only strip. 25

118 2009 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY FAIR VALUE MEASUREMENT (CONTINUED) Description Assumptions/Approach Used Retained Subordinated Securities Accounting for the retained subordinated securities aligns with that described under investment securities above. Interest-Only Strip The interest-only strip is reported at fair value in other assets on the Company s Consolidated Balance Sheets. Changes in the fair value of the interest-only strip are also recorded in securitization income, net in the Company s Consolidated Statements of Income. Due to changes in GAAP governing the accounting for transfers of financial assets, effective January 1, 2010, the Company s retained subordinated securities and interest-only strip will be eliminated in consolidation and no longer measured at fair value. Defined Benefit Pension Plan Assets Defined benefit pension plan (the Plan) assets are measured at fair value, changes in which are included in the determination of the Plan s net funded status which is reported in other liabilities on the Company s Consolidated Balance Sheets. from different pricing sources as well as comparing prices to the sale prices received from sold securities. As of December 31, 2009 and 2008, all of the Company s investment securities are classified in either Level 1 or Level 2 of the fair value hierarchy. Refer to Note 3 to the Company s Consolidated Financial Statements. Retained Subordinated Securities and Interest-Only Strip The fair value of the Company s retained subordinated securities and interest-only strip are determined using discounted cash flow models. The discount rate for the retained subordinated securities is estimated based on an interest rate curve that is observable in the marketplace plus an unobservable credit spread commensurate with the risk of the securities and similar financial instruments. The fair value of the Company s interest-only strip is the present value of estimated future positive excess spread expected to be generated by the securitized loans over the estimated remaining life of those loans. Management utilizes certain estimates and assumptions to determine the fair value of the interest-only strip asset including estimates for finance charge yield, credit losses, LIBOR (which determines future certificate interest costs), monthly payment rate and the discount rate. The Company s retained subordinated securities and interest-only strip are classified in Level 3 of the fair value hierarchy. Refer to Note 3 to the Company s Consolidated Financial Statements. Other-Than-Temporary Impairment Realized losses are recognized when management determines that a decline in value is other-than-temporary, which requires judgment regarding the amount and timing of recovery. The Company reviews and evaluates its investment securities, including retained subordinated securities at least quarterly, and more often as market conditions may require, to (continued on next page) Effect if Actual Results Differ from Assumptions Other-Than-Temporary Impairment In determining whether any of the Company s investment securities (including retained subordinated 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 collectability and credit quality of the issuer, or the Company s intent to sell the investment securities, and whether it is more likely than not that the Company will not be required to sell the investment securities before recovery of any unrealized losses. Therefore, it is at least reasonably possible that a change in estimate will occur in the near term relating to other-than-temporary impairment. This could result in the Company recording an other-than-temporary impairment loss through earnings with a corresponding offset to accumulated other comprehensive (loss) income. As of December 31, 2009 and 2008, the Company had approximately $0.3 billion and $1.6 billion, respectively, in gross unrealized losses in its investment securities portfolio (including its retained subordinated securities) which were deemed not to be other-than-temporarily impaired. Defined Benefit Pension Plan Assets The fair value measurements for the Plan assets contain a similar amount of subjectivity as described under investment securities above, and therefore differing judgments in how the underlying inputs are modeled could result in different estimates of fair value. 26

119 2009 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY FAIR VALUE MEASUREMENT (CONTINUED) Description Assumptions/Approach Used Derivative Instruments The Company s primary derivative instruments include interest rate swaps, foreign currency forward agreements, and cross-currency swaps. Derivative instruments are reported at fair value in other assets and other liabilities on the Company s Consolidated Balance Sheets. Changes in fair value are recorded in accumulated other comprehensive (loss) income, and/or in the Consolidated Statements of Income, depending on (i) the documentation and designation of the derivative instrument, and (ii) if the derivative instrument is in a hedging relationship, its effectiveness in offsetting the changes in the designated risk being hedged. identify investment securities that have indications of other-than-temporary impairment. The determination of other-than-temporary impairment is a subjective process, requiring the use of judgments and assumptions. Accordingly, the Company considers several metrics when evaluating investment securities for an other-than-temporary impairment. The key factors considered when assessing other-than-temporary impairment include the determination of the extent to which the decline in fair value of the investment security is due to increased default risk for the specific issuer, or market interest rate risk. With respect to increased default risk, the Company assesses the collectibility of principal and interest payments by monitoring a number of issuer specific factors, and the extent to which amortized cost exceeds fair value and the duration and size of that difference. With respect to market interest rate risk, including benchmark interest rates and credit spreads, the Company assesses whether it has the intent to sell the investment securities, and whether it is more likely than not that the Company will not be required to sell the investment securities before recovery of any unrealized losses. Refer to Note 6 to the Company s Consolidated Financial Statements. Defined Benefit Pension Plan Assets The fair value measurements for the Plan assets align with those described under investment securities above. Refer to Note 21 to the Company s Consolidated Financial Statements. Derivative Instruments The fair value of the Company s derivative instruments is estimated by using either a third-party valuation service that uses proprietary pricing models, or by using internal pricing models, neither of which contains a high level of subjectivity as the valuation techniques used do not require significant judgment and inputs to those (continued on next page) Effect if Actual Results Differ from Assumptions Derivative Instruments In the measurement of fair value for the Company s derivative instruments, although the underlying inputs used in the pricing models are readily observable from actively quoted markets, the pricing models do entail a certain amount of subjectivity and therefore, differing judgments in how the underlying inputs are modeled could result in different estimates of fair value. In addition, any necessary credit valuation adjustments are based on observable default rates. A change in facts and circumstances could lead to a change in management judgment about counterparty credit quality, which could result in the Company recognizing an additional counterparty credit valuation adjustment. As of December 31, 2009, the credit and nonperformance risks associated with the Company s derivative instrument counterparties were not significant. 27

120 2009 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY FAIR VALUE MEASUREMENT (CONTINUED) Description Assumptions/Approach Used models are readily observable from actively quoted markets. In each case, the valuation models used are consistently applied and reflect the contractual terms of the derivatives, including the period of maturity, and market-based parameters such as interest rates, foreign exchange rates, equity indices or prices, and volatility. Credit valuation adjustments are necessary when the market parameters (for example, a benchmark curve) used to value the derivative instruments are not indicative of the credit quality of the Company or its counterparties. The Company considers the counterparty credit risk by applying an observable forecasted default rate to the current exposure. The Company manages derivative instrument counterparty credit risk by considering the current exposure, which is the replacement cost of contracts on the measurement date, as well as estimating the maximum potential value of the contracts over the next 12 months, considering such factors as the volatility of the underlying or reference index. To mitigate derivative instrument credit risk, counterparties are required to be pre-approved and rated as investment grade. The Company s derivative instruments are classified in Level 2 of the fair value hierarchy. Refer to Notes 3 and 12 to the Company s Consolidated Financial Statements. Effect if Actual Results Differ from Assumptions 28

121 2009 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY GOODWILL Description Assumptions/Approach Used Goodwill represents the excess of acquisition cost of an acquired company over the fair value of assets acquired and liabilities assumed. In accordance with GAAP, goodwill is not amortized but is tested for impairment, at the reporting unit level, annually at June 30 and between annual tests if events or circumstances arise, such as adverse changes in the business climate, that would more likely than not reduce the fair value of the reporting unit below its carrying value. The Company assigns goodwill to its reporting units for the purpose of impairment testing. A reporting unit is defined as either an operating segment, or a business one level below an operating segment for which discrete financial information is available that management regularly reviews. The goodwill impairment test utilizes a two-step approach. The first step identifies whether there is potential impairment by comparing the fair value of a reporting unit to its carrying amount, including goodwill. If the fair value of a reporting unit is less than its carrying amount, the second step of the impairment test is required to measure the amount of any impairment loss. Goodwill impairment testing involves management judgment, requiring an assessment of whether the carrying value of the reporting unit can be supported by its fair value using widely accepted valuation techniques, such as the market approach (earnings multiples or transaction multiples for the industry in which the reporting unit operates) or the income approach (discounted cash flow methods). The fair values of the reporting units were determined using a combination of valuation techniques consistent with the market approach and the income approach. When preparing discounted cash flow models under the income approach, the Company estimates future cash flows using the reporting unit s internal five year forecast and a terminal value calculated using a growth rate that management believes is appropriate in view of current and expected future economic conditions. The Company then applies a discount rate to discount these future cash flows to arrive at a net present value amount, which represents the estimated fair value of the reporting unit. The discount rate applied approximates the expected cost of equity financing, determined using a capital asset pricing model. The model generates an appropriate discount rate using internal and external inputs to value future cash flows based on the time value of money and the price for bearing the uncertainty inherent in an investment. The Company believes the resulting rate, 11.4 percent, appropriately reflects the risks and uncertainties in the financial markets generally and in the Company s internally developed forecasts. Effect if Actual Results Differ from Assumptions The Company has approximately $2.3 billion of goodwill as of December 31, The fair value of each of the Company s reporting units is above its carrying value; accordingly, the Company has concluded its goodwill is not impaired at December 31, 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. 29

122 2009 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY INCOME TAXES Description Assumptions/Approach Used The Company is subject to the income tax laws of the United States, its states and municipalities and those of the foreign jurisdictions in which the Company operates. These tax laws are complex, and the manner in which they apply to the taxpayer s facts is sometimes open to interpretation. In establishing a provision for income tax expense, the Company must make judgments about the application of these inherently complex tax laws. Unrecognized Tax Benefits The Company establishes a liability for unrecognized tax benefits, which are the differences between a tax position taken or expected to be taken in a tax return and the benefit recognized in the financial statements. Deferred Taxes Deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using the enacted tax rates expected to be in effect for the years in which the differences are expected to reverse. A valuation allowance is established when management determines that it is more likely than not that all or some portion of the benefit of the deferred tax asset will not be realized. Unrecognized Tax Benefits In establishing a liability for an unrecognized tax benefit, assumptions may be made in determining whether a tax position is more likely than not to be sustained upon examination by the taxing authority and also in determining the ultimate amount that is likely to be realized. A tax position is recognized only when, based on management s judgment regarding the application of income tax laws, it is more likely than not that the tax position will be sustained upon examination. The amount of tax benefit recognized is based on the Company s assessment of the most likely outcome on ultimate settlement with the taxing authority. This measurement is based on many factors, including whether a tax dispute may be settled through negotiation with the taxing authority or is only subject to review in the courts. As new information becomes available, the Company evaluates its tax positions, and adjusts its unrecognized tax benefits, as appropriate. Deferred Taxes Since deferred taxes measure the future tax effects of items recognized in the financial statements, certain estimates and assumptions are required to determine whether it is more likely than not that all or some portion of the benefit of a deferred tax asset will not be realized. In making this assessment, management analyzes and estimates the impact of future taxable income, reversing temporary differences and available tax planning strategies. These assessments are performed quarterly, taking into account any new information. Effect if Actual Results Differ from Assumptions Unrecognized Tax Benefits If the tax benefit ultimately realized differs from the amount previously recognized in the income tax provision, the Company recognizes an adjustment of the unrecognized tax benefit through the income tax provision. Deferred Taxes Should a change in facts or circumstances lead to a change in judgment about the ultimate realizability of a deferred tax asset, the Company records or adjusts the related valuation allowance in the period that the change in facts or circumstances occurs, along with a corresponding increase or decrease to the income tax provision. 30

123 2009 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY AMERICAN EXPRESS COMPANY CONSOLIDATED RESULTS OF OPERATIONS SUMMARY OF THE COMPANY S FINANCIAL PERFORMANCE Years Ended December 31, (Millions, except per share amounts and ratio data) Total revenues net of interest expense $ 24,523 $ 28,365 $ 27,559 Provisions for losses $ 5,313 $ 5,798 $ 4,103 Expenses $ 16,369 $ 18,986 $ 17,762 Income from continuing operations $ 2,137 $ 2,871 $ 4,126 Net income $ 2,130 $ 2,699 $ 4,012 Earnings per common share from continuing operations diluted $ 1.54 $ 2.47 $ 3.44 Earnings per common share diluted $ 1.54 $ 2.32 $ 3.34 Return on average equity (a) 14.6% 22.3% 37.3% Return on average tangible common equity (b) 17.6% 28.0% 44.0% (a) ROE is calculated by dividing (i) net income ($2.1 billion, $2.7 billion, and $4.0 billion for 2009, 2008, and 2007, respectively) by (ii) average total shareholders equity ($14.6 billion, $12.1 billion, and $10.8 billion for 2009, 2008, and 2007, respectively). (b) Return on average tangible common equity is computed in the same manner as ROE except the computation of average TCE excludes average goodwill and other intangibles of $3.0 billion, $2.5 billion, and $1.6 billion as of December 31, 2009, 2008, and 2007, respectively. The Company believes that return on average tangible common equity is a useful measure of profitability of its business. SELECTED STATISTICAL INFORMATION ( a) Years Ended December 31, (Billions, except percentages and where indicated) Card billed business (b) : United States $ $ $ Outside the United States Total $ $ $ Total cards-in-force (millions) (c) : United States Outside the United States Total Basic cards-in-force (millions) (c) : United States Outside the United States Total Average discount rate (d) 2.54% 2.55% 2.56% Average basic cardmember spending (dollars) (e) $ 11,213 $ 12,025 $ 12,106 Average fee per card (dollars) (e) $ 36 $ 34 $ 32 Average fee per card adjusted (dollars) (e) $ 40 $ 39 $ 36 (a) See Glossary of Selected Terminology for the definitions of certain key terms and related information. (b) Card billed business includes activities (including cash advances) related to proprietary cards, cards issued under network partnership agreements, and certain insurance fees charged on proprietary cards. Card billed business is reflected in the United States or outside the United States based on where the cardmember is domiciled. 31

124 2009 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY (c) Total cards-in-force represents the number of cards that are issued and outstanding. Proprietary basic consumer cards-in-force includes basic cards issued to the primary account owner and does not include additional supplemental cards issued on that account. Proprietary basic small business and corporate cards-in-force include basic and supplemental cards issued to employee cardmembers. Non-proprietary basic cards-in-force includes all cards that are issued and outstanding under network partnership agreements. (d) This calculation is designed to approximate merchant pricing. It represents the percentage of billed business (both proprietary and GNS) retained by the Company from merchants it acquires, prior to payments to third parties unrelated to merchant acceptance. (e) 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 $186 million, $146 million and $130 million for the years ended December 31, 2009, 2008 and 2007, respectively. The adjusted average fee per card is computed in the same manner, but excludes amortization of deferred direct acquisition costs (a portion of which is charge card related and included in net card fees and a portion of which is lending related and included in interest and fees on loans). The amount of amortization excluded was $243 million, $320 million and $288 million for the years ended December 31, 2009, 2008 and 2007, respectively. The Company presents adjusted average fee per card because management believes that this metric presents a useful indicator of card fee pricing across a range of its proprietary card products. AMERICAN EXPRESS COMPANY SELECTED STATISTICAL INFORMATION ( a) As of or for the Years Ended December 31, (Billions, except percentages and where indicated) Worldwide cardmember receivables: Total receivables $ 33.7 $ 33.0 $ 40.1 Loss reserves (millions): Beginning balance $ 810 $ 1,149 $ 981 Provision 857 1,363 1,140 Net write-offs (b) (1,131) (1,552) (907) Other 10 (150) (65) Ending balance $ 546 $ 810 $ 1,149 % of receivables 1.6% 2.5% 2.9% Net write-off rate USCS (b) 3.8% 3.6% N/A 30 days past due as a % of total USCS 1.8% 3.7% N/A Net loss ratio as a % of charge volume ICS 0.36% 0.24% 0.26% 90 days past billing as a % of total ICS (c) 2.1% 3.1% 1.8% Net loss ratio as a % of charge volume GCS 0.19% 0.13% 0.10% 90 days past billing as a % of total GCS (c) 1.4% 2.7% 2.1% Worldwide cardmember lending owned basis (d) : Total loans $ 32.8 $ 42.2 $ days past due as a % of total 3.6% 4.4% 2.8% Loss reserves (millions): Beginning balance $ 2,570 $ 1,831 $ 1,171 Provision 4,209 4,106 2,615 Net write-offs principal (2,949) (2,643) (1,636) Write-offs interest and fees (448) (580) (354) Other (e) (114) (144) 35 Ending balance $ 3,268 $ 2,570 $ 1,831 Ending Reserves principal $ 3,172 $ 2,379 $ 1,691 Ending Reserves interest and fees $ 96 $ 191 $ 140 % of loans 10.0% 6.1% 3.4% % of past due 279% 137% 119% Average loans $ 34.8 $ 47.6 $ 47.1 Net write-off rate 8.5% 5.5% 3.5% Net interest income divided by average loans (f)(h) 9.0% 7.7% 7.3% Net interest yield on cardmember loans (f) 9.7% 8.8% 8.9% Worldwide cardmember lending managed basis (g) : Total loans $ 61.8 $ 72.0 $ days past due as a % of total 3.6% 4.6% 2.8% Net write-offs principal (millions) $ 5,366 $ 4,065 $ 2,280 Average loans $ 63.8 $ 75.0 $ 68.2 Net write-off rate 8.4% 5.4% 3.3% Net interest yield on cardmember loans (f) 10.2% 9.2% 9.0% 32

125 2009 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY (a) See Glossary of Selected Terminology for the definitions of certain key terms and related information. (b) In the fourth quarter of 2008, the Company revised the time period in which past due cardmember receivables in USCS are written off to 180 days past due, consistent with applicable regulatory guidance. Previously, receivables were written off when 360 days past billing. The net write-offs for 2008 include approximately $341 million resulting from this write-off methodology change, which is not reflected in the net write-off rate for USCS. If the $341 million had been included in USCS write-offs, the net write-off rate would have been 5.4 percent for (c) A cardmember account is considered 90 days past billing if payment has not been received within 90 days of the cardmember s billing statement date. In addition, if the Company initiates collection procedures on an account prior to the account becoming 90 days past billing, the associated cardmember receivable balance is considered as 90 days past billing. A cardmember account becomes past due if payment is not received within 30 days after the billing statement date. (d) Owned, a GAAP basis measurement, reflects only cardmember loans included on the Company s Consolidated Balance Sheets. (e) This amount includes reserves of $160 million for the year ended December 31, 2009, that were removed in connection with securitizations during the period. The offset is in the allocated cost of the associated retained subordinated securities. This amount also includes foreign currency translation adjustments. The prior period included foreign currency translation and other adjustments primarily related to the reclassification of certain waived fee reserves to a contra-cardmember receivable. (f) See below for calculations of net interest yield on cardmember loans and the ratio of net interest income divided by average loans presented on an owned basis. The Company believes net interest yield on cardmember loans (on both an owned and managed basis) is useful to investors because it provides a measure of profitability of the Company s cardmember loans portfolio. (g) Includes on-balance sheet cardmember loans and off-balance sheet securitized cardmember loans. The difference between the owned basis (GAAP) information and managed basis information is attributable to the effects of securitization activities. Refer to the information set forth under USCS Selected Financial Information for further discussion of the managed basis presentation. (h) This calculation includes elements of total interest income and total interest expense that are not attributable to the cardmember loan portfolio, and thus is not representative of net interest yield on cardmember loans. The calculation includes interest income and interest expense attributable to investment securities and other interest-bearing deposits as well as to cardmember loans, and interest expense attributable to other activities, including cardmember receivables. CALCULATION OF NET INTEREST YIELD ON CARDMEMBER LOANS (a) Years Ended December 31, (Millions) Owned Basis: Net interest income $ 3,124 $ 3,646 Average loans (billions) $ 34.8 $ 47.6 Adjusted net interest income $ 3,392 $ 4,199 Adjusted average loans (billions) $ 34.9 $ 47.7 Net interest income divided by average loans 9.0% 7.7% Net interest yield on cardmember loans 9.7% 8.8% Managed Basis: Net interest income (b) $ 5,977 $ 6,328 Average loans (billions) $ 63.8 $ 75.0 Adjusted net interest income $ 6,500 $ 6,881 Adjusted average loans (billions) $ 63.9 $ 75.0 Net interest yield on cardmember loans 10.2% 9.2% (a) See Glossary of Selected Terminology for the definitions of certain key terms and related information. (b) Includes the GAAP to managed basis securitization adjustments to interest income and interest expense as set forth under USCS Selected Financial Information managed basis presentation. The following discussions regarding Consolidated Results of Operations and Consolidated Liquidity and Capital Resources are presented on a basis consistent with GAAP unless otherwise noted. CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 2009 The Company s 2009 consolidated income from continuing operations decreased $734 million or 26 percent to $2.1 billion and diluted EPS from continuing operations declined $0.93 or 38 percent to $1.54. Consolidated income from continuing operations for 2008 decreased $1.3 billion or 30 percent from 2007 and diluted EPS from continuing operations for 2008 declined $0.97 or 28 percent from The Company s 2009 consolidated net income decreased $569 million or 21 percent to $2.1 billion, and diluted EPS decreased $0.78 or 34 percent to $1.54. Consolidated net income for 2008 and 2007 was $2.7 billion and $4.0 billion, respectively. Net income included losses from discontinued operations of $7 million, $172 million and $114 million for 2009, 2008 and 2007, respectively. The Company s total revenues net of interest expense, provisions for losses, and total expenses decreased by approximately 14 percent, 8 percent and 14 percent, respectively, in Assuming no changes in foreign currency exchange rates from 2008 to 2009, total revenues net of interest expense, provisions for losses and total expenses decreased approximately 12 percent, 7 percent and 12 33

126 2009 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY percent, respectively, in Currency rate changes had a minimal impact on the growth rates in Results from continuing operations for 2009 included: A $180 million ($113 million after-tax) benefit in the third quarter related to the accounting for a net investment in the Company s consolidated foreign subsidiaries. See also Business Segment Results Corporate & Other below for further discussion; A $211 million ($135 million after-tax) gain in the second quarter of 2009 on the sale of 50 percent of the Company s equity holdings of Industrial and Commercial Bank of China (ICBC); and A $190 million ($125 million after-tax) net charge related to the Company s reengineering initiatives. Results from continuing operations for 2008 included: A $600 million ($374 million after-tax) addition to U.S. lending credit reserves reflecting a deterioration of credit indicators in the second quarter of 2008; A $449 million ($291 million after-tax) net charge, primarily reflecting the restructuring costs related to the Company s reengineering initiatives in the fourth quarter of 2008; A $220 million ($138 million after-tax) reduction to the fair market value of the Company s interest-only strip; and A $106 million ($66 million after-tax) charge in the fourth quarter of 2008 to increase the Company s Membership Rewards liability, in connection with the Company s extension of its partnership arrangements with Delta. Results from continuing operations for 2007 included: A $1.13 billion ($700 million after-tax) gain for the initial payment due March 31, 2008, from Visa as part of the litigation settlement; An $80 million ($50 million after-tax) gain in connection with derivative and hedging instruments; A $63 million ($39 million after-tax) gain relating to amendments to the Company s U.S. pension plans, effective July 1, 2007, that reduced projected pension obligations to plan participants; 2 These currency rate adjustments assume a constant exchange rate between periods for purposes of currency translation into U.S. dollars (i.e., assumes the foreign exchange rates used to determine results for the current year apply to the corresponding year-earlier period against which such results are being compared). Management believes that this presentation is helpful to investors by making it easier to compare the Company s performance from one period to another without the variability caused by fluctuations in currency exchange rates. A $685 million ($430 million after-tax) charge related to enhancements to the method of estimating Membership Rewards liability; A $438 million ($274 million after-tax) credit-related charge due to experienced deterioration of credit indicators in the latter part of This fourth quarter charge was split between USCS cardmember loans and cardmember receivables of $288 million and $96 million, respectively, and included $54 million relating to a reduction in the fair value of the Company s retained subordinated interest in securitized cardmember loans; $211 million ($131 million after-tax) of incremental business-building costs; $74 million ($46 million after-tax) of Visa litigation-related costs; and A $50 million ($31 million after-tax) contribution to the American Express Charitable Fund. Also included in the 2007 results were $66 million ($43 million after-tax) of reengineering costs related to the Company s business travel, prepaid services, international payments business and technology areas. Total Revenues Net of Interest Expense Consolidated total revenues net of interest expense for 2009 of $24.5 billion were down $3.8 billion or 14 percent from 2008, due to lower discount revenue, lower total interest income, reduced securitization income, net, lower other commissions and fees, reduced travel commissions and fees, and decreased other revenues, partially offset by lower total interest expense. Consolidated total revenues net of interest expense of $28.4 billion for 2008 were $806 million or 3 percent higher than 2007 primarily due to greater discount revenue, lower total interest expense, higher other revenues, increased net card fees and greater travel commissions and fees, partially offset by lower securitization income, net, decreased interest income and lower other commissions and fees. Discount revenue for 2009 declined $1.6 billion or 11 percent as compared to 2008 to $13.4 billion as a result of a 9 percent decrease in worldwide billed business. The greater decrease in discount revenue compared to billed business primarily reflects growth in billed business related to GNS where the Company shares the discount revenue with card issuing partners, as well as a slight decline in the average discount rate. The 9 percent decrease in worldwide billed business in 2009 reflected decline in proprietary billed business of 11 percent, offset by a 7 percent increase in billed business related to GNS. The average discount rate was 2.54 percent, 2.55 percent, and 2.56 percent for 2009, 2008, and 2007, respectively. Over time, selective repricing initiatives, changes in the mix of business, and volume-related pricing discounts likely will result in some erosion of the average discount rate.

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128 2009 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY U.S. billed business and billed business outside the United States were down 10 percent and 8 percent, respectively, in The decline in billed business within the United States reflected a decrease in basic cards-in-force and average spending per proprietary basic card. The decline in billed business outside the United States reflected a decrease in average spending per proprietary basic card and decreases within the Company s consumer card, small business and Corporate Services business. The table below summarizes selected statistics for billed business and average spend: Percentage Increase (Decrease) Percentage Increase (Decrease) Assuming No Changes in Foreign Exchange Percentage Increase Rates(f) (Decrease) Percentage Increase (Decrease) Assuming No Changes in Foreign Exchange Rates(f) Worldwide (a) Billed business (9)% (7)% 6% 5% Proprietary billed business (11) (9) 4 3 GNS volumes (b) Average spending per proprietary basic card (7) (5) (1) (1) United States (a) Billed business (10) 3 Average spending per proprietary basic card (6) (3) Proprietary consumer card billed business (c) (10) (1) Proprietary small business billed business (c) (13) 7 Proprietary Corporate Services billed business (d) (11) 4 Outside the United States (a) Billed business (8) (1) Average spending per proprietary basic card (9) (3) 6 4 Proprietary consumer and small business billed business (e) (10) (4) 8 7 Proprietary Corporate Services billed business (d) (19) (12) 9 8 (a) Captions in the table above not designated as proprietary include both proprietary and GNS data. (b) Included in the GNMS segment. (c) Included in the USCS segment. (d) Included in the GCS segment. (e) Included in the ICS segment. (f) Refer to footnote 2 on page 34 relating to changes in foreign exchange rates. Assuming no changes in foreign exchange rates, total billed business outside the United States reflected mid-single digit volume increases in Latin America and Asia Pacific, and mid-single digit declines in Canada and Europe. During 2008, discount revenue rose $429 million or 3 percent to $15 billion compared to 2007 as a result of a 6 percent increase in worldwide billed business, partially offset by a lower average discount rate, relatively faster growth in billed business related to GNS, and higher cash-back rewards costs and corporate incentive payments, which are reported as reductions to revenue (contra-revenue). The 6 percent increase in worldwide billed business in 2008 reflected growth in proprietary billed business of 4 percent, and a 27 percent increase in billed business related to GNS. Net card fees in 2009 remained unchanged compared to 2008 as the decline in total proprietary cards in force was offset by an increase in the average fee per card. Net card fees in 2008 of $2.2 billion increased $231 million or 12 percent compared to 2007 due to higher average fee per proprietary card. Travel commissions and fees decreased $416 million or 21 percent to $1.6 billion in 2009 compared to 2008, primarily reflecting a 28 percent decrease in worldwide travel sales, partially offset by higher sales commission and fee rates. 35

129 2009 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY Travel commissions and fees in 2008 of $2.0 billion increased $84 million or 4 percent compared to 2007, primarily reflecting a 3 percent increase in worldwide travel sales. Other commissions and fees decreased $529 million or 23 percent to $1.8 billion in 2009 compared to 2008, due to lower delinquency fees reflecting decreased owned loan balances and the impacts of various customer assistance programs, in addition to reduced spending-related foreign currency conversion revenues. Other commissions and fees decreased $110 million or 5 percent in 2008 to $2.3 billion compared to 2007 due to the reclassification to other revenues in USCS of certain card service-related fees beginning in the first quarter of 2008 and a lower level of fees related to a lower average balance of owned loans, which were partially offset by increased assessment revenues. Securitization income, net decreased $670 million or 63 percent to $400 million in 2009 compared to 2008, primarily due to lower excess spread, net, driven by increased write-offs and a decrease in interest income on cardmember loans and fee revenues. These unfavorable impacts were partially offset by a decrease in interest expense due to lower coupon rates paid on variable-rate investor certificates, as well as a favorable fair value adjustment of the interest-only strip. Securitization income, net decreased $437 million or 29 percent to $1.1 billion in 2008 compared to 2007, primarily due to lower excess spread, net, driven by increased write-offs, charges to the fair value of the interest-only strip reflecting lower expected future cash flows, and a net loss on sales compared to net gains in the prior year. These impacts were partially offset by higher finance charges and fees due to a greater average balance of securitized loans and lower interest expense due to lower rates paid on investor certificates. Other revenues in 2009 decreased $70 million or 3 percent to $2.1 billion compared to 2008, primarily reflecting decreased revenues from CPS, due to the migration of clients to the American Express network, and lower publishing revenues, partially offset by the ICBC gain. Other revenues increased $406 million or 23 percent to $2.2 billion in 2008 compared to 2007, primarily reflecting the benefits of the CPS acquisition, higher network and partner-related revenues, a reclassification from other commissions and fees from USCS as discussed above, and greater foreign exchange-related revenues. Interest income decreased $1.9 billion or 26 percent to $5.3 billion in 2009 compared to Interest and fees on loans decreased $1.7 billion or 27 percent due to decline in the average owned loan balance, reduced market interest rates and the impact of various customer assistance programs, partially offset by the benefit of certain repricing initiatives. Interest and dividends on investment securities increased $33 million or 4 percent, primarily reflecting increased investment levels partially offset by reduced investment yields. Interest income from deposits with banks and other decreased $212 million or 78 percent, primarily due to a reduced yield and a lower balance of deposits in other banks. During 2008, interest income decreased $223 million or 3 percent to $7.2 billion compared to 2007, reflecting primarily a decrease in interest and fees on loans, which declined $192 million or 3 percent due to a lower portfolio yield, reduced market interest rates on variably priced assets, partially offset by a slightly higher average owned loan balance. Interest expense decreased $1.3 billion or 38 percent to $2.2 billion in 2009 compared to Interest expense related to deposits decreased $29 million or 6 percent, primarily due to a lower cost of funds which more than offset increased balances. Interest expense related to short-term borrowings decreased $446 million or 92 percent, due to significantly lower short-term debt levels and a lower cost of funds. Interest expense related to long-term debt and other decreased $873 million or 33 percent, primarily reflecting a lower cost of funds driven by reduced market rates on variably priced debt, as well as a lower average balance of long-term debt outstanding. Interest expense of $3.6 billion in 2008 was $426 million or 11 percent lower than 2007 reflecting a $248 million decrease in interest expense on short-term borrowing, primarily due to a lower cost of funds and a decrease in average short-term debt. Provisions for Losses Provisions for losses of $5.3 billion in 2009 decreased $485 million or 8 percent compared to Charge card provisions for losses decreased $506 million, or 37 percent, primarily driven by improved credit performance. Cardmember loans provisions for losses increased $35 million, or 1 percent, primarily due to a higher cardmember reserve level due to the challenging credit environment, partially offset by a lower owned loan balance. Provisions for losses of $5.8 billion in 2008 increased $1.7 billion or 41 percent compared to Charge card provisions for losses increased $223 million or 20 percent in 2008 primarily due to higher loss and delinquency rates compared to 2007, partially offset by the credit-related charge in the fourth quarter of Cardmember loans provisions for losses increased $1.5 billion or 53 percent due to higher write-off and delinquency rates and higher average owned loan balances. Expenses Consolidated expenses for 2009 were $16.4 billion, down $2.6 billion or 14 percent from $19.0 billion in The decrease in 2009 was primarily driven by lower other, net expenses, reduced salaries and employee benefits expenses, lower marketing and promotion expense and decreased cardmember rewards expense partially offset by greater cardmember services expense. Consolidated expenses for 2008 were $19.0 billion, up $1.2 billion or 7 percent from $17.8 billion in The increase in 2008 was primarily driven by higher other, net expenses, greater salaries and employee 36

130 2009 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY benefits expenses, higher occupancy and equipment expenses, increased professional services costs and greater cardmember services expense, partially offset by decreased cardmember rewards expense and lower marketing and promotion expense. Consolidated expenses in 2009, 2008, and 2007 also included $190 million, $449 million and $66 million, respectively, of reengineering costs, of which $185 million, $417 million, and $49 million, respectively, represent restructuring charges. Refer to the discussion earlier regarding the Company s 2008 and 2009 reengineering initiatives and Note 16 to the Consolidated Financial Statements for restructuring activities for all periods. Marketing and promotion expenses decreased $516 million or 21 percent to $1.9 billion in 2009 from $2.4 billion in 2008, due to lower spending levels in the first three quarters of 2009, partially offset by higher expense in the fourth quarter of Marketing and promotion for 2008 decreased $132 million or 5 percent to $2.4 billion, reflecting decreased investments as compared to 2007, which included the incremental business-building costs. Cardmember rewards expenses decreased $353 million or 8 percent to $4.0 billion in 2009 from $4.4 billion in 2008, reflecting lower rewards-related spending volumes, partially offset by higher redemption rates and costs in Membership Rewards and higher costs with relatively lower declines in co-brand spending volumes. Cardmember rewards decreased $388 million or 8 percent to $4.4 billion in 2008 from $4.8 billion in 2007, reflecting the Membership Rewards-related charge in 2007, which was partially offset by the Delta-related charge in 2008 to increase the Membership Rewards liability and higher volume-driven rewards costs. Salaries and employee benefits expenses decreased $1.0 billion or 17 percent to $5.1 billion in 2009 from $6.1 billion in 2008, reflecting lower employee levels and costs related to the Company s reengineering initiatives, as well as the restructuring charge in the fourth quarter of Salaries and employee benefits expenses in 2008 increased $652 million or 12 percent to $6.1 billion from $5.4 billion in 2007 reflecting the fourth quarter of 2008 restructuring charge related to the Company s reengineering initiatives, an increase in average headcount, greater merit and sales force-related incentive costs and the pension-related gain in Professional services expenses in 2009 compared to 2008 remained flat. Professional services expenses in 2008 compared to 2007 increased $133 million or 6 percent. Other, net expenses in 2009 decreased $708 million or 23 percent to $2.4 billion compared to 2008, reflecting the full year of settlement payments from MasterCard in 2009 versus two quarters in 2008, a $180 million third quarter benefit related to the accounting for a net investment in the Company s consolidated foreign subsidiaries (as discussed further in Business Segment Results Corporate & Other below), a $59 million benefit in the second quarter of 2009 from the completion of certain account reconciliations related to prior periods, and lower travel and entertainment and other expenses due to the Company s reengineering activities. These were partially offset by a $9 million favorable impact in the fourth quarter of 2008 related to fair value hedge ineffectiveness. Other, net expenses in 2008 increased $895 million or 40 percent to $3.1 billion compared to 2007 primarily due to the initial $1.13 billion Visa litigation settlement gain in the fourth quarter of 2007, net of litigation expenses, the related contribution to the American Express Charitable Fund and the 2008 expenses related to the CPS acquisition. These impacts were partially offset by the 2008 settlement payments from MasterCard and Visa. Income Taxes The effective tax rate was 25 percent in 2009 compared to 20 percent in 2008 and 28 percent in The tax rates for these years reflect tax benefits related to the resolution of certain prior years tax items and recurring permanent tax benefits in relation to the level of pretax income. Discontinued Operations Loss from discontinued operations, net of tax, was $7 million, $172 million and $114 million in 2009, 2008, and 2007, respectively. Loss from discontinued operations, net of tax, primarily reflected AEIDC and AEB results from operations, including AEIDC s $15 million ($10 million after-tax), $275 million ($179 million after-tax) and $105 million ($69 million after-tax) of losses related to mark-to-market adjustments and sales within the AEIDC investment portfolio in 2009, 2008 and 2007, respectively, as well as AEB s compliance-related remediation costs of $71 million ($45 million after-tax) to implement a more robust compliance program, and regulatory and legal expenses and monetary penalties of $60 million pretax and after-tax in CASH FLOWS Cash Flows from Operating Activities In 2009 and 2008, net cash provided by operating activities exceeded net income, primarily due to provisions for losses, which do not require cash at the time of provision. Similarly, depreciation and amortization represent non-cash expenses. In addition, net cash was provided by net income and higher accounts payable and other liabilities balances (including the Membership Rewards liability). These accounts vary significantly in the normal course of business due to the amount and timing of various payments. For the year ended December 31, 2009, net cash provided by operating activities of $6.4 billion decreased compared to The decrease was primarily due to a decrease in deferred taxes, acquisition costs and other, fluctuations in the Company s other receivables, accounts payable and other liabilities, as well as a reduction in income from continuing operations, partially offset by changes in other assets. 37

131 2009 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY Net cash provided by operating activities increased in 2008 compared to 2007 primarily due to the increase in non-cash provisions for losses and deferred taxes, acquisition cost and other, offset by the outflow of cash resulting from fluctuations in the Company s other assets. Cash Flows from Investing Activities The Company s investing activities primarily include funding cardmember loans and receivables, securitizations of cardmember loans and receivables, and the Company s available-for-sale investment portfolio. For the year ended December 31, 2009, increased net cash used in investing activities of $6.8 billion compared to net cash provided by investing activities of $7.6 billion in 2008, due to lower proceeds from cardmember loan securitizations primarily due to a decrease in maturities and redemptions of investments, and an increase in restricted cash required for related securitization activities. In 2008, net cash used in investing activities increased from 2007 primarily due to net decreases in cardmember receivables and loans balances and cash provided by the sale of investments attributable to discontinued operations offset by cash used for acquisitions. Cash Flows from Financing Activities The Company s financing activities primarily include issuing and repaying debt, taking customer deposits, paying dividends, and repurchasing its common and preferred shares. In 2009, net cash used in financing activities of $4.6 billion decreased compared to 2008, primarily due to an increase in customer deposits in 2009 and a reduction in cash used in financing activities attributable to discontinued operations in In 2008, net cash used in financing activities increased compared to 2007, primarily due to net repayments of debt and the net cash used in financing activities attributable to discontinued operations, partially offset by a decrease in the repurchase of American Express common shares from CERTAIN LEGISLATIVE, REGULATORY AND OTHER DEVELOPMENTS As a participant in the financial services industry, the Company is subject to a wide array of regulations applicable to its businesses. The Company is a bank holding company and is subject to the supervision of the Federal Reserve. As such, the Company is subject to the Federal Reserve s regulations and policies, including its regulatory capital requirements. In addition, the extreme disruptions in the capital markets since mid-2007 and the resulting instability and failure of numerous financial institutions have led to a number of proposals for changes in the financial services industry, including significant additional regulation and the potential formation of additional regulatory bodies. To that end, in the summer of 2009 legislation proposing significant structural reforms to the financial services industry was introduced in the U.S. Congress. Among other things, the legislation proposes the establishment of a Consumer Financial Protection Agency, which would have broad authority to regulate providers of credit, savings, payment and other consumer financial products and services. Additional legislative proposals also call for substantive regulation across the financial services industry, such as new requirements for the securitization market, including requiring sponsors of securitizations to retain a material economic interest in the credit risk associated with the underlying securitization. Legislative and regulatory changes could impact the profitability of the Company s business activities, require the Company to change certain of its business practices and expose it to additional costs (including increased compliance costs). In recent years, there has been a heightened level of regulatory attention on banks and the payments industry in many countries. In May 2009, the U.S. Congress passed, and the President of the United States signed into law, legislation to fundamentally reform credit card billing practices, pricing and disclosure requirements. This legislation accelerated the effective date and expanded the scope of amendments to the rules regarding Unfair or Deceptive Acts or Practices (UDAP) and Truth in Lending Act that restrict certain credit and charge card practices and require expanded disclosures to consumers, which were adopted in December 2008 by federal bank regulators in the United States. Together, the legislation and the regulatory amendments, portions of which became effective commencing August 2009, include, among other matters, rules relating to the imposition by card issuers of interest rate increases on outstanding balances and the allocation of payments in respect of outstanding balances with different interest rates. The Company is undertaking various actions to mitigate the impact of the legislation and the amendments on its business and operations. In the event any actions undertaken by the Company to offset their impact are not effective, the legislation and amendments will likely have a material adverse effect on the Company s results of operations. The credit and charge card industry also faces continuing scrutiny in connection with the fees merchants are charged to accept cards. Although investigations into the way bankcard network members collectively set the interchange (that is, the fee paid by the bankcard merchant acquirer to the card issuing bank in four party payment networks, like Visa and MasterCard) had largely been a subject of regulators outside the United States, legislation has been introduced in Congress designed to give merchants antitrust immunity to negotiate interchange collectively with card networks and to regulate certain card network practices. Although, unlike the Visa and 38

132 2009 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY MasterCard networks, the American Express network does not collectively set fees, antitrust actions and government regulation of the bankcard networks pricing could ultimately affect all networks. In addition to the legislative and regulatory initiatives in the United States regarding card practices and merchant fees, other countries in which the Company operates have been considering and in some cases adopting similar legislation and rules that would impose changes on certain practices of card issuers and bankcard networks, which could have a material adverse effect on the Company s results of operations. 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 satisfy all maturing financing obligations for at least a 12 month period should some or all of its funding sources become inaccessible. CAPITAL STRATEGY The Company s objective is to retain sufficient levels of capital generated through earnings and other sources to maintain a solid equity capital base and to provide flexibility to satisfy future business growth. The Company believes capital allocated to growing businesses with a return on risk-adjusted equity in excess of its costs will generate shareholder value. The level and composition of the Company s equity capital are determined in large part by the Company s internal assessment of its business activities, as well as rating agency and regulatory capital requirements. They are also influenced by subsidiary capital requirements, the business environment, and by conditions in the debt capital markets. The Company, as a bank holding company, is 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 Financial Accounting Standards Board (FASB) amended the accounting for off-balance sheet securitization activities beginning January 1, 2010, which resulted in the Company having to consolidate the assets (primarily cardmember loans) and liabilities (primarily debt certificates) of the American Express Credit Account Master Trust (the Lending Trust). Both the cardmember loans and the debt will be consolidated by American Express Travel Related Services (TRS), a wholly-owned subsidiary of the Company and a leading global payments and travel company, net of reserves for expected credit losses. The following table presents the regulatory risk-based capital ratios and leverage ratio for the Company and its significant banking subsidiaries, as well as some additional ratios for the Company widely utilized in the marketplace, at December 31, The respective pro forma ratios are also presented, assuming the Lending Trust was consolidated in the fourth quarter of 2009: Well- Capitalized Ratio 2009 Actual 2009 ProForma (a) (b) Risk-Based Capital Tier 1 6% American Express Company 9.8% 8.6% Centurion Bank 13.7% 13.7% FSB 14.2% 14.2% Total 10% American Express Company 11.9% 10.8% Centurion Bank 15.0% 15.0% FSB 16.7% 16.7% Tier 1 Leverage 5% American Express Company 9.7% 7.0% Centurion Bank 17.1% 17.1% FSB 15.1% 15.1% Tier 1 Common Risk-Based American Express Company 4%(d) 9.8% 8.6% Common Equity to Risk- Weighted Assets (c) American Express Company 12.4% 11.0% Tangible common Equity to Risk-Weighted Assets (c) American Express Company 9.7% 8.4% (a) Assumes the impact of the recognition of corresponding reserves and other adjustments on the Company would be as follows: Tangible common shareholders equity (TCE), common equity and risk-weighted assets decreasing by $1.8 billion; Tier 1 common equity, Tier 1 capital and total capital decreasing by $1.6 billion; and total average assets increasing by $23.7 billion. (b) TRS will be the consolidating entity for the off-balance sheet securitized trust (Lending Trust) and therefore there would be no impact to the capital ratios of Centurion Bank and FSB. (c) Common shareholders equity equals the Company s shareholders equity of $14.4 billion at December 31, 2009, and TCE equals common shareholders equity, less goodwill and intangibles of $3.0 billion. Risk-weighted assets at December 31, 2009, were $116.6 billion. The Company believes that presenting the ratio of TCE to risk-weighted assets is a useful measure of evaluating the strength of the Company s capital position. See also footnote (a) above. (d) The regulatory benchmark of 4 percent was used within the Supervisory Capital Assessment Program, conducted earlier in

133 2009 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY The Company seeks to maintain capital levels and ratios in excess of the minimum regulatory requirements; failure to maintain minimum capital levels could cause the respective regulatory agencies to take actions that could limit the Company s business operations. The Company s primary source of equity capital has been through the generation of net income. Historically, capital generated through net income and other sources, such as the exercise of stock options by employees, has exceeded the growth in its capital requirements. To the extent capital has exceeded business, regulatory and rating agency requirements, the Company has returned excess capital to shareholders through its regular common dividend and the share repurchase program. The Company maintains certain flexibility to shift capital across its businesses as appropriate. For example, the Company may infuse additional capital into subsidiaries to maintain capital at targeted levels in consideration of debt ratings and regulatory requirements. These infused amounts can affect the capital profile and liquidity levels for American Express Parent Company (Parent Company). During 2009, the Company returned $855 million in dividends to shareholders, which represents approximately 46 percent of total capital generated. U.S. DEPARTMENT OF TREASURY CAPITAL PURCHASE PROGRAM On January 9, 2009, under the United States Department of the Treasury (Treasury Department) Capital Purchase Program (CPP), the Company issued to the Treasury Department for aggregate proceeds of $3.39 billion: (1) 3.39 million shares of Fixed Rate (5 percent) Cumulative Perpetual Preferred Shares, Series A, and (2) a ten-year warrant (the Warrant) for the Treasury Department to purchase up to 24 million common shares at an exercise price of $20.95 per share. The Company repurchased the Preferred Shares from the Treasury Department at par on June 17, 2009, and repurchased the Warrant for $340 million on July 29, Refer to Note 14 to the Consolidated Financial Statements for further discussion of this program. SHARE REPURCHASES AND DIVIDENDS The Company has a share repurchase program to return excess capital to shareholders. These share repurchases reduce shares outstanding and offset, in whole or part, the issuance of new shares as part of employee compensation plans. On a cumulative basis, since 1994 the Company has distributed 67 percent of capital generated through share repurchases and dividends. No shares have been repurchased over the past seven quarters, as share repurchases were suspended during the first quarter of 2008 in light of the challenging global economic environment and limitations while under the CPP. FUNDING STRATEGY The Company seeks 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 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 borrowing 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 borrowing needs associated with general corporate purposes. FUNDING PROGRAMS AND ACTIVITIES The Company meets its funding needs through a variety of sources, including debt instruments such as senior unsecured debentures, asset securitizations, deposits placed with the Company s U.S. banks by individuals and long-term committed bank borrowing facilities in certain non-u.s. markets. 40

134 2009 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY The following discussion includes information on both a GAAP and managed basis. The managed basis presentation includes debt issued in connection with the Company s lending securitization activities, which are off-balance sheet. For a discussion of managed basis and management s rationale for such presentation, refer to the USCS discussion below. The Company had the following consolidated debt, on both a GAAP and managed basis, and customer deposits outstanding as of December 31: (Billions) Short-term borrowings $ 2.3 $ 9.0 Long-term debt Total debt (GAAP basis) Off-balance sheet securitizations Total debt (managed basis) Customer deposits Total debt (managed) and customer deposits $ $ The Company s funding strategy for 2010 is to raise funds to meet short-term borrowings outstanding, which includes short-term deposits, seasonal and other working capital needs, changes in receivables and other asset balances, while maintaining sufficient cash and readily-marketable securities, which are easily convertible to cash, in order to be able to satisfy all maturing funding obligations for a 12 month period. The Company has $7.4 billion of unsecured long-term debt, $10.2 billion of asset securitizations, and $2.6 billion of long-term deposits that will mature during The Company s equity capital and funding strategies are designed to maintain appropriate and stable debt ratings from the major credit rating agencies (collectively the Credit Rating Agencies ), Moody s Investor Services (Moody s), Standard & Poor s (S&P), Fitch Ratings (Fitch), and Dominion Bond Rating Services (DBRS). There have been no changes to the ratings since second quarter 2009, however, both DBRS and S&P have recently revised their ratings outlook from Negative to Stable. Credit Agency Entity Rated Short- Term ratings Long- Term ratings Outlook DBRS All rated entities R-1 A Stable (middle) (high) Fitch All rated entities F1 A+ Negative Moody s TRS and rated operating Prime-1 A2 Stable subsidiaries American Express Company Prime-2 A3 Negative S&P All rated entities A-2 BBB+ Stable Downgrades in the Company s unsecured debt or asset securitization program s securities ratings could result in higher interest expense on the Company s unsecured debt and asset securitizations, as well as higher fees related to borrowings under its unused lines of credit. In addition to increased funding costs, declines in credit ratings could reduce the Company s borrowing capacity in the unsecured debt and asset securitization capital markets. The Company believes that the change in its funding mix, which now includes an increasing proportion of U.S. retail deposits, should reduce the impacts that credit rating downgrades would have on the Company s funding capacity and costs. SHORT-TERM FUNDING PROGRAMS Short-term borrowings, such as commercial paper, are defined as any debt or time deposit with an original maturity of 12 months or less. The Company s short-term funding programs are used primarily to meet working capital needs, such as managing seasonal variations in receivables balances. Short-term borrowing decreased significantly in 2009 as part of the change in the Company s funding mix. The amount of short-term borrowing 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: (Billions) Credco: Commercial paper $ 1.0 $ 7.3 Other 0.1 Centurion Bank and FSB: Federal funds purchased 0.5 Other Total $ 2.3 $ 9.0 The Company s short-term borrowings as a percentage of total debt as of December 31 were as follows: Short-term borrowings as a percentage of total debt (GAAP basis) 4.3% 13.0% The Company had continuous access to the commercial paper market during 2009, and as of December 31, 2009, the Company had $1.0 billion of commercial paper outstanding. Average commercial paper outstanding was $2.0 billion and $10.8 billion in 2009 and 2008, respectively. American Express Credit Corporation s (Credco) total back-up liquidity coverage, which includes its undrawn committed bank facilities, was in excess of 100 percent of its net short-term borrowings as of December 31, 2009 and

135 2009 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY DEPOSIT PROGRAMS The Company offers deposits within its Centurion Bank and FSB subsidiaries (together, the Banks ). These funds are currently insured up to $250,000 through the Federal Deposit Insurance Corporation (FDIC). During the second quarter of 2009, the Company, through FSB, launched a direct deposit-taking program, Personal Savings from American Express, to supplement its distribution of deposit products through third-party distribution channels. This program, which currently represents a small portion of the Company s deposit program, makes FDIC-insured CDs and high-yield savings account products available directly to consumers. As of December 31, 2009, the Company held the following deposits: (Billions) U.S. retail deposits: Cash sweep and savings accounts $ 10.5 $ 7.2 Certificates of deposit (a) Institutional and other deposits Total customer deposits $ 26.3 $ 15.5 (a) The average original maturity and annual interest rate on outstanding U.S. retail CDs were 29 months and 2.3 percent, respectively. LONG-TERM DEBT PROGRAMS In 2009, the Company and its subsidiaries issued debt and asset securitizations with maturities ranging from 2 to 10 years. These amounts included approximately $2.25 billion of AAA-rated lending securitization certificates and $6.7 billion of unsecured debt across a variety of maturities and markets. During the year, the Company retained approximately $2.0 billion of subordinated securities, as the pricing and yields for these securities were not attractive for the Company due to market conditions. The subordinated securities issued in the year included $1.5 billion of the new Class D securities, created as part of the actions to add further credit enhancement to the Lending Trust. The Company s 2009 offerings, which include those made by the Parent Company, Credco, American Express Canada Credit Corporation and the Lending Trust, are presented in the following table on both a GAAP and managed basis: (Billions) Amount American Express Company (Parent Company only): Fixed Rate Senior Notes at an average coupon of 7.76% $ 3.0 American Express Credit Corporation: Fixed Rate Senior Notes at an average coupon of 5.17% (a) 2.8 American Express Canada Credit Corporation: Fixed Rate Senior Notes at a coupon of 4.85% 0.8 Floating Rate Senior Notes at a spread of 170 basis points to 3 month CDOR (b) 0.1 GAAP Basis 6.7 American Express Credit Account Master Trust: Trust Investor Certificates at an average spread of 129 basis points to 1 month LIBOR (c) (d) 4.3 Managed Basis $ 11.0 (a) Credco s issuance includes $79 million of unsecured debt issued within the retail note market. (b) Canadian Dealer Offered Rate. (c) Issuances from the Lending Trust, an off-balance sheet entity, include $2.0 billion of subordinated securities retained by American Express during the year. (d) The average coupon relates to those securities issued into the market and does not include the rates on retained securities. ASSET SECURITIZATION PROGRAMS The Company periodically securitizes cardmember receivables and loans arising from its card business, as the securitization market provides the Company with cost-effective funding. Securitization of cardmember receivables and loans is accomplished through the transfer of those assets to a Trust, which in turn issues certificates or notes (securities) to third-party investors 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. Securitization transactions are accounted for as either a sale or secured borrowing, based upon the structure of the transaction and GAAP requirements applicable prior to January 1, Refer to Note 1 to the Consolidated Financial Statements for a description of the changes in GAAP requirements related to Accounting for Transfers of Financial Assets, effective January 1, Securitization of cardmember receivables generated under designated consumer charge card, small business charge card and corporate charge card accounts is accomplished through the transfer of cardmember receivables to the American Express Issuance Trust (the Charge Trust). 42

136 2009 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY Securitization of the Company s cardmember loans generated under designated consumer lending accounts is accomplished through the transfer (as a sale) of cardmember loans to the Lending Trust. In a securitization structure like the Lending Trust (a revolving master trust), credit card accounts are selected and the rights to the current cardmember loans, as well as future cash flows related to the corresponding accounts, are transferred to the Trust for the life of the accounts. Since the third quarter of 2007, the Company has typically been retaining some or all of subordinated securities issued as part of a transaction, due to prevailing market conditions. Under the respective terms of the Lending Trust and the Charge Trust agreements, the occurrence of certain events could result in payment of trust expenses, establishment of reserve funds, or in a worst-case scenario, early amortization of investor certificates. For additional information about the Company s asset securitizations that could affect the Company s liquidity position, including three-month average excess spread rates and other key metrics, refer to Note 7 to the Consolidated Financial Statements. On March 3, 2009, the Treasury Department and the Federal Reserve launched the Term Asset-Backed Securities Loan Facility (TALF), which is currently set to expire on March 31, Securitized credit and charge card receivables are eligible collateral under the TALF, provided the securities qualify for AAA ratings from two or more major nationally recognized statistical rating organizations (NRSROs). The Company issued $2.25 billion in AAA rated TALF eligible securities during In an effort to address the concerns of the Credit Rating Agencies and the decline in the trust excess spread due to the performance of the underlying credit card receivables in the Lending Trust and the related American Express Credit Account Secured Note Trusts (the Note Trusts ), the subsidiaries of the Company that are the transferors of the Lending Trust undertook certain actions during the second quarter of 2009 to adjust the credit enhancement structure of substantially all of the then outstanding series of securities previously issued by the Lending Trust and the Note Trusts. The actions entailed the issuance of two new series of asset-backed securities, to provide additional credit enhancement to substantially all of the then outstanding series, and the exercise of a discount option with respect to new principal receivables arising in the Lending Trust. The Company believes that these actions will not have a material impact on the Company s results of operations. These actions resulted in the inclusion of the Lending Trust s assets as risk-weighted assets for regulatory capital purposes. For additional information regarding such actions, see Note 7 to the Consolidated Financial Statements. The Credit Rating Agencies are assessing the potential impact of the adoption of recently issued accounting standards for transfers of financial assets and for consolidation of variable interest entities (the Accounting Standards ) on credit ratings of the securities issued by securitization trusts within the overall asset-backed securities market. (The Accounting Standards, previously issued as FASB Statements Nos. 166 and 167, are discussed further in Note 1 to the Consolidated Financial Statements.) In particular, the Credit Rating Agencies are assessing the FDIC s safe harbor rule relating to the FDIC s treatment of securitized assets in the event of a sponsoring financial institution s receivership or conservatorship. Pursuant to the safe harbor rule, the FDIC will not reclaim any financial asset transferred in connection with a securitization, provided that such transfer meets all conditions for GAAP sale accounting. Because the adoption of the Accounting Standards may cause some asset transfers to securitization trusts to no longer be deemed asset sales for accounting purposes within a company s consolidated group, the Credit Rating Agencies have indicated that they may ultimately conclude that the safe harbor no longer applies and, in certain cases, that the highest rating an asset-backed security (ABS) could receive would be based on the sponsoring bank s unsecured debt rating, rather than relying on their separate evaluation of the securitization trust. Accordingly, the ability of the Company s securitization programs to receive or maintain AAA ratings on ABS securities under the same terms and conditions as it has done in the past, or at all, is subject to uncertainty. Any action by the rating agencies as described above could adversely impact the Company s ability to utilize ABS as a source of funding for its business. LIQUIDITY STRATEGY The Company seeks to ensure that it has adequate liquidity in the form of cash and readily-marketable securities easily convertible into cash, to satisfy all maturing funding obligations for a 12 month period, in addition to having access to significant additional contingent liquidity sources. This objective is managed by regularly accessing capital through a broad and diverse set of funding programs, by maintaining a portfolio of cash and readily-marketable securities, as well as a variety of contingent sources of cash and financing. The Company maintains a liquidity plan that enables it to continuously meet its financing obligations even when access to its primary funding sources become impaired or markets become inaccessible. In addition to its cash and readily-marketable securities, the Company continues to maintain a variety of contingent liquidity resources, such as access to secured borrowing from the Federal Reserve Bank of San Francisco through the Federal Reserve discount window and committed bank credit facilities. As a result of the Company s funding activities during 2009, the Company raised funds that substantially exceeded its 2009 funding needs. The excess increased the amount of cash and readily-marketable securities the Company holds. 43

137 2009 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY As of December 31, 2009, the Company s cash and readily-marketable securities available to fund maturities were as follows: (Billions) Total Cash $ 19.0(a) Readily-marketable securities 13.3(b) Cash and readily marketable securities 32.3 Less: Operating cash (3.2)(c) Short-term obligations outstanding (3.2)(d) Cash and readily-marketable securities available to fund maturities $ 25.9 (a) Includes cash and cash equivalents of $15.5 billion and $3.5 billion held in other assets and other receivables on the Consolidated Balance Sheet for certain forthcoming asset-backed securitization maturities in the first quarter of (b) Consists of certain available-for-sale investment securities (U.S. Treasury and agency securities, and government-guaranteed debt) that are considered highly liquid. (c) Cash on hand for day-to-day operations. (d) Consists of commercial paper, and U.S. retail CDs with original maturities of three and six months. The upcoming approximate maturities of the Company s long-term unsecured debt, debt issued in connection with off-balance sheet securitizations, and long-term customer deposits are as follows: (Billions) Debt Maturities Quarter Ending: Unsecured Debt Asset-Backed Securitizations Certificates of Deposit Total March 31, 2010 $ 0.5 $ 4.5 $ 0.8 $ 5.8 June 30, September 30, December 31, Total $ 7.4 $ 10.2 $ 2.6 $ 20.2 The Company s funding needs for 2010 are expected to arise from these debt and deposit maturities as well as changes in business needs, primarily changes in outstanding cardmember loans and receivables. 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, the cost and availability of alternative liquidity sources, and regulatory and Credit Rating Agency considerations. The yield the Company receives on its cash and readily-marketable securities is, generally, less than the interest expense on the sources of funding for these balances. Thus, the Company incurs substantial net interest costs on these amounts. The level of net interest costs will be dependent on the size of its cash and readily-marketable securities holdings, as well as the difference between its cost of funding these amounts and their investment yields. Cash and Readily-Marketable Securities As of December 31, 2009, the Company held, as part of its contingent liquidity plan, a total of $19.0 billion of short-term instruments and $13.3 billion of longer-term readily-marketable securities. These investments are of high credit quality, highly liquid short-term instruments and longer-term, highly liquid instruments, such as U.S. Treasury securities, government-sponsored entity debt, or government-guaranteed debt. These instruments are managed to either mature prior to the maturity of borrowings that will occur within the next 12 months, or are sufficiently liquid that the Company can sell them or enter into sale/repurchase agreements to immediately raise cash proceeds to meet liquidity needs. Federal Reserve Discount Window The Banks are insured depository institutions that have the capability of borrowing from the Federal Reserve Bank of San Francisco, subject to the amount of qualifying collateral that they pledge. The Banks are approved to access the discount window, subject to the discretion of the Federal Reserve Bank of San Francisco and sufficient credit and charge card receivables pledged as collateral, thereby providing them with an additional source of liquidity, if needed. The Company had approximately $33.2 billion as of December 31, 2009, 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 The Company maintained committed bank credit facilities as of December 31, 2009 as follows: (Billions) Parent Company Credco Centurion Bank FSB Total Committed (a) $ 1.3 $ 10.1 $ 0.4 $ 0.4 $ 12.2 Outstanding $ $ 3.2 $ $ $ 3.2 (a) Committed lines were supplied by 34 financial institutions as of year end. However, effective January 20, 2010, the agreements in which Aurora Bank FSB (previously Lehman Brothers Bank FSB) participated, were amended, and their participation waived. This reduced the total committed lines by $175 million. 44

138 2009 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY The Company s committed facilities expire as follows: (Billions) 2010 $ Total $ 12.2 The availability of the credit lines is subject to the Company s compliance with certain financial covenants, including the maintenance by the Company of consolidated tangible net worth of at least $4.1 billion, the maintenance by Credco of a 1.25 ratio of combined earnings and fixed charges to fixed charges, and the compliance by the Banks with applicable regulatory capital adequacy guidelines. As of December 31, 2009, the Company s consolidated tangible net worth was approximately $11.6 billion, Credco s ratio of combined earnings and fixed charges to fixed charges was 1.59 and Centurion Bank and FSB each exceeded their regulatory capital adequacy guidelines. Committed bank credit facilities do not contain material adverse change clauses, which may preclude borrowing under the credit facilities. The facilities may not be terminated should there be a change in the Company s credit rating. In consideration of all the funding sources described above, the Company believes it would have access to liquidity to satisfy all maturing funding obligations for at least a 12-month period in the event that access to the secured and unsecured fixed income capital markets is completely interrupted for that length of time. These events are not considered likely to occur. Parent Company Funding Parent Company long-term debt outstanding was $10.2 billion and $7.9 billion as of December 31, 2009 and 2008, respectively. During 2009, the Parent Company issued $1.25 billion of 7.25 percent fixed-rate Senior Notes due 2014 and $1.75 billion of 8.13 percent fixed-rate Senior Notes due The Parent Company is authorized to issue commercial paper. This program is supported by a $1.25 billion multi-purpose committed bank credit facility. The credit facility will expire in 2010 and 2012 in the amounts of $500 million and $750 million, respectively. There was no Parent Company commercial paper outstanding during 2009 and 2008, 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. 45

139 2009 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY CONTRACTUAL OBLIGATIONS The table below identifies transactions that represent contractually committed future obligations of the Company. Purchase obligations include agreements to purchase goods and services that are enforceable and legally binding on the Company and that specify significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. Payments due by year (Millions) and thereafter Total(a) Long-term debt $10,829 $ 17,986 $ 12,766 $ 10,757 $ 52,338 Interest payments on long-term debt (b) 1,556 2,589 1,636 3,812 9,593 Other long-term liabilities (c) Operating lease obligations ,316 2,337 Purchase obligations (d) Total $ 13,210 $ 21,162 $ 14,817 $ 16,048 $ 65,237 (a) The above table excludes approximately $1.1 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 at December 31, 2009, and reflects the effect of existing interest rate swaps. Actual cash flows may differ from estimated payments. (c) At December 31, 2009, there were no minimum required contributions, and no contributions are currently planned, for the U.S. American Express Retirement Plan. For the U.S. American Express Supplemental Retirement Plan and non-u.s. defined benefit pension and postretirement benefit plans, contributions in 2010 are anticipated to be approximately $88 million, and this amount has been included within other long-term liabilities. Remaining obligations under defined benefit pension and postretirement benefit plans aggregating $642 million have not been included in the table above as the timing of such obligations is not determinable. Additionally, other long-term liabilities do not include $4.3 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 at December 31, 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 $6.0 billion as of December 31, 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, 2009, the Company had guarantees totaling approximately $67 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, 2009, the Company had approximately $222 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. As discussed in the Consolidated Liquidity and Capital Resources section, the Company s securitizations of cardmember loans are also off-balance sheet. The Company s cardmember receivables securitizations remain on the Consolidated Balance Sheets. Refer to Note 24 to the Consolidated Financial Statements for discussion regarding the Company s other off-balance sheet arrangements. 46

140 RISK MANAGEMENT 2009 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY GOVERNANCE The Audit and Risk Committee of the Board 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 risk. The Policy focuses on the major risks that are relevant to the Company given its business model credit risk (institutional and individual), operational risk, market risk and reputational risk. Internal management committees, including the Enterprise Risk Management Committee (ERMC), chaired by the Company s Chief Risk Officer, and the Asset-Liability Committee (ALCO), chaired by the Company s Chief Financial Officer, are responsible for implementing the Policy across the Company. CREDIT RISK MANAGEMENT PROCESS Credit risk is defined as the risk of loss due to obligor or counterparty default. Credit risks in the Company are divided into two broad categories: individual and institutional. Each has distinct risk management tools and metrics. Business units that create individual or institutional credit risk exposures of significant importance are supported by dedicated risk management teams, each led by Chief Credit Officers. 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 borrowers across multiple geographies, occupations, industries and levels of net worth. The Company benefits from the attractive profile of its cardmembers, which is driven by brand, underwriting, and customer management policies, premium customer servicing, and product reward features. The risk in these portfolios is correlated with broad economic trends, such as unemployment rates, GDP growth, and home values, as well as customer liquidity, which can have a material effect on credit performance. General principles and the overall framework for managing individual credit risk across the Company are defined in the Individual Credit Risk Policy approved by the ERMC. The Credit Policy Committee is responsible for implementation and enforcement of this policy and for providing guidance to the Underwriting and Credit Strategy Committees as well as to the Chief Credit Officers of respective business units. This policy is further supported by subordinate policies and practices covering all facets of credit extension, including prospecting, approvals, authorizations, line management, collections, and fraud prevention. These policies 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 customers, such as spending and payment history, data feeds from credit bureaus, and mortgage information. Additional data, such as home value and other new commercial variables designed to better manage small business risk, were integrated into the Company s models in the early stages of the recent economic downturn to further mitigate risk. The Company has developed unique decision logic for each customer interaction, including prospect targeting, new account approvals, line assignment, balance transfers, cross selling and overall account management and collection. INSTITUTIONAL CREDIT RISK Institutional credit risk arises principally within the Company s Global Corporate Card Services, Merchant Services and Network Services businesses, and from the Company s investment 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 company-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. General principles and the overall framework for managing institutional credit risk across the Company are defined in the Institutional Credit Risk Policy approved by the ERMC. The Institutional Risk Management Committee (IRMC) is responsible for implementation and enforcement of this policy and for providing guidance to the credit officers of each business unit with substantial institutional credit risk exposures, who in turn make investment decisions in core risk capabilities, ensure proper implementation of the underwriting standards and contractual rights of risk mitigation, monitor risk exposures, and determine risk mitigation actions. The IRMC formally reviews large institutional exposures to ensure compliance with ERMC guidelines and procedures and escalates them to the ERMC as appropriate. At the same time, the IRMC provides guidance to business unit risk teams to optimize risk-adjusted returns on capital. A company-wide risk rating utility and a specialized airline risk group provide risk assessment of institutional obligors. MARKET RISK MANAGEMENT PROCESS Market risk is the risk to earnings or value resulting from movements in market prices. The Company s market risk exposure is primarily generated by: Interest rate risk in its card, insurance and Travelers Cheque businesses, as well as its investment portfolios; and Foreign exchange risk in its international operations. 47

141 2009 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY General principles and the overall framework for managing market risk across the Company are defined in the Market Risk Policy, which is the responsibility of the ALCO. Market Risk limits and escalation triggers within that policy are approved by ALCO and by the ERMC. Market risk is centrally monitored for compliance with policy and limits by the Market Risk Committee, which reports into the ALCO and is chaired by the Chief Market Risk Officer. Market risk management is also guided by policies covering the use of derivative financial instruments, funding and liquidity and investments. Derivative financial instruments derive their value from an underlying variable or multiple variables, including interest rate, foreign exchange, and equity indices or prices. These instruments enable end users to increase, reduce or alter exposure to various market risks and, for that reason, are an integral component of the Company s market risk management. Use of derivative financial instruments is incorporated into the discussion below as well as Note 12. The Company s market exposures are in large part by-products of the delivery of its products and services. Interest rate risk arises through the funding of cardmember receivables and fixed-rate loans with variable-rate borrowings as well as through the risk to net interest margin from changes in the relationship between benchmark rates such as Prime and LIBOR. Interest rate exposure within the Company s charge card and fixed-rate lending products is managed by varying the proportion of total funding provided by short-term and variable-rate debt and deposits compared to fixed-rate debt and deposits. In addition, interest rate swaps are used from time to time to effectively convert fixed-rate debt to variable- rate or to convert variable-rate debt to fixed-rate. The Company may change the mix between variable-rate and fixed-rate funding based on changes in business volumes and mix, among other factors. The majority of its cardmember loans, which are linked to a benchmark rate such as PRIME that can reprice monthly, are funded with variable-rate funding, the majority of which are linked to LIBOR that reprice monthly. The Company regularly reviews its interest rate exposure profile and may modify it. Derivative financial instruments, primarily interest rate swaps, with notional amounts of approximately $17 billion and $18 billion were outstanding at December 31, 2009 and 2008, respectively. These derivatives generally qualify for hedge accounting. A portion of these derivatives outstanding as of December 31, 2009, extend to The Company does not engage in derivative financial instruments for trading purposes. The detrimental effect on the Company s pretax earnings of a hypothetical 100 basis point increase in interest rates would be approximately $117 million ($75 million related to the U.S. dollar), based on the 2009 year-end positions. This effect, which is calculated using a static asset liability gapping model, is primarily determined by the volume of variable-rate funding of charge card and fixed-rate lending products for which the interest rate exposure is not managed by derivative financial instruments. As of year end 2009, the percentage of total worldwide managed loans that were deemed to be fixed-rate was 34 percent, with the remaining 66 percent 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, including asset securitizations. Simultaneous and identically-sized changes in the same direction of these two indices do not contribute to the market risk described above, as there is no material mismatch in the effective repricing frequency of these two indices. However, differences in the rate of change of these two indices, commonly referred to as basis risk, would impact the Company s variable-rate U.S. lending net interest margins because the Company borrows at rates based on LIBOR but lends to its customers based on the Prime rate. The detrimental effect on the Company s pretax earnings of a hypothetical 10 basis point decrease in the spread between Prime and 1 month LIBOR over the next 12 months is estimated to be $38 million. The Company currently has approximately $38.2 billion of Prime-based, variable-rate U.S. lending receivables that are funded with LIBOR-indexed debt, including asset securitizations. The spread relationship has been more volatile over the last 2 1 /2 years than in preceding historical periods. For example, the spread experienced during the fourth quarter of 2008 was very low by historical standards and reduced net interest margins; during the fourth quarter of 2009, the spread was high by historical standards, which had the effect of temporarily increasing the Company s net interest margin from prior periods. Foreign exchange risk is generated by cardmember cross-currency charges, foreign subsidiary equity and foreign currency earnings in international units. 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 forwards, options, and cross-currency swap contracts, which can help lock in the value of the Company s exposure to specific currencies. At December 31, 2009 and 2008, foreign currency hedge instruments with total notional amounts of approximately $19 billion and $17 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 48

142 2009 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY of a hypothetical 10 percent change in the value of the U.S. dollar would be immaterial as of December 31, 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 $112 million as of December 31, 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, 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 Funding & liquidity risk is defined as the inability to access cash and equivalents needed to meet business requirements and satisfy the Company s obligations. General principles and the overall framework for managing liquidity risk across the Company are defined in the Liquidity Risk Policy, which is the responsibility of the ALCO. The Company balances the trade-offs between maintaining too much liquidity, which can be costly and limit financial flexibility, with having inadequate liquidity, which may result in financial distress during a liquidity event. Liquidity risk is centrally managed by the Funding and Liquidity Committee, which reports into the ALCO and is chaired by the Corporate Treasurer. The Company has developed a liquidity plan that enables it to meet its daily cash obligations when access to both unsecured and secured funds in the debt capital markets is impaired or unavailable. This plan is designed to ensure that the Company and all of its main operating entities could continuously meet their maturing debt obligations for a 12-month period in which their access to all capital markets and deposit financing is interrupted. 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 manages the forecasts of the Company s aggregate and subsidiary cash positions and financing requirements, the funding plans designed to satisfy those requirements under normal conditions, establishes guidelines to identify the amount of liquidity resources required, and monitors positions and determines any actions to be taken. Liquidity planning also takes into account operating cash flexibilities. OPERATIONAL RISK MANAGEMENT PROCESS The Company defines operational risk as the risk of not achieving business objectives due to inadequate or failed processes or information systems, human error or the external environment (e.g., 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 or regulatory penalties. Current areas of significant focus include data protection, anti-money laundering, vendor risk, impact of organizational change, financial reporting risk and both internal and external fraud. The general principles and the overall framework for managing operational risk across the Company are defined in the Operational Risk Policy approved by the ERMC. The Operational Risk Management Committee (ORMC) provides governance for the operational risk framework. In order to appropriately measure operational risk, the Company has developed a comprehensive operational risk model. This model assesses (i) risk events, i.e. what occurred or could have occurred; (ii) root causes, i.e. why did it occur or could have occurred; and (iii) impact, i.e. how was the Company affected or might have been affected. The impact on the Company is assessed from a financial, brand, regulatory and legal perspective. The operational risk model also assesses the frequency and likelihood that events may occur again so that the appropriate mitigation steps may be taken. Additionally, the Company uses an operational risk framework to identify, measure, monitor, and report inherent and emerging operational risks. This framework consists of a) the ORMC oversight, b) an operational risk event capture process, and c) process and entity-level risk self-assessments. The process risk self-assessment methodology is used to facilitate compliance with Section 404 of the Sarbanes-Oxley Act, and is also used for non-financial operational risk self- assessments. This methodology involves identifying key processes across the Company and then determining the inherent operational risks. Once these risks have been identified, the existing control environment is defined, key controls are tested and relevant issues are escalated to the appropriate governing bodies. The operational risk framework also includes the entity risk self-assessment. This is a risk workshop where senior leaders identify the key operational risks that the business unit or support group faces and determines the Company s preparedness to respond should these risks occur. Top risks are tracked to ensure that the appropriate monitoring or mitigation is in place. Managing enterprise risk is an important priority for the Company and the program continues to evolve. 49

143 2009 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY 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 international), 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. 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. U.S. CARD SERVICES SELECTED INCOME STATEMENT DATA GAAP BASIS PRESENTATION Years Ended December 31, (Millions) Revenues Discount revenue, net card fees and other $ 9,125 $ 10,357 $ 10,243 Securitization income, net 400 1,070 1,507 Interest income 3,221 4,736 5,125 Interest expense 855 2,166 2,653 Net interest income 2,366 2,570 2,472 Total revenues net of interest expense 11,891 13,997 14,222 Provisions for losses 3,769 4,389 2,998 Total revenues net of interest expense after provision for losses 8,122 9,608 11,224 Expenses Marketing, promotion, rewards and cardmember services 4,266 4,837 5,140 Salaries and employee benefits and other operating expenses 3,532 3,630 3,354 Total 7,798 8,467 8,494 Pretax segment income 324 1,141 2,730 Income tax provision Segment income $ 249 $ 852 $ 1,823 50

144 SELECTED STATISTICAL INFORMATION (a) 2009 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY As of or for the Years Ended December 31, (Billions, except percentages and where indicated) Card billed business $ $ $ Total cards-in-force (millions) Basic cards-in-force (millions) Average basic cardmember spending (dollars) $ 10,957 $ 11,594 $ 12,011 U.S. Consumer Travel: Travel sales (millions) $ 2,561 $ 3,113 $ 2,975 Travel commissions and fees/sales 8.4% 8.2% 8.0% Total segment assets $ 57.9 $ 77.8 $ 82.3 Segment capital (millions) (b) $ 6,510 $ 4,788 $ 4,454 Return on average segment capital (c) 4.5% 18.0% 40.2% Return on average tangible segment capital (c) 4.8% 19.0% 41.8% Cardmember receivables: Total receivables $ 17.8 $ 17.8 $ days past due as a % of total 1.8% 3.7% N/A Average receivables $ 16.1 $ 19.2 $ 19.7 Net write-off rate (d) 3.8% 3.6% N/A Cardmember loans owned basis (e) : Total loans $ 23.5 $ 32.7 $ days past due loans as a % of total 3.7% 4.7% 2.8% Average loans $ 25.9 $ 36.7 $ 37.1 Net write-off rate 9.1% 5.8% 3.1% Net interest income divided by average loans (f)(h) 9.1% 7.0% 6.7% Net interest yield on cardmember loans (f) 9.0% 8.5% 8.9% Cardmember loans managed basis (g) : Total loans $ 52.6 $ 62.4 $ days past due loans as a % of total 3.7% 4.7% 2.8% Average loans $ 54.9 $ 64.0 $ 58.2 Net write-off rate 8.7% 5.5% 3.1% Net interest yield on cardmember loans (f)(g) 9.9% 9.1% 9.1% (a) See Glossary of Selected Terminology for the definitions of certain key terms and related information. (b) Segment capital at the end of each respective period represents capital allocated to a segment based upon specific business operational needs, risk measures, and regulatory capital requirements. (c) Return on average segment capital is calculated by dividing (i) segment income ($249 million, $852 million and $1.8 billion for 2009, 2008 and 2007, respectively) by (ii) average segment capital ($5.6 billion, $4.7 billion and $4.5 billion for 2009, 2008 and 2007, respectively). Return on average tangible segment capital is computed in the same manner as return on average segment capital except the computation of average tangible segment capital excludes average goodwill and other intangibles of $432 million, $243 million and $170 million at December 31, 2009, 2008 and 2007, respectively. The Company believes the return on average tangible segment capital is a useful measure of the profitability of its business. (d) In the fourth quarter of 2008, the Company revised the time period in which past due cardmember receivables in USCS are written off to 180 days past due, consistent with applicable bank regulatory guidance. Previously, receivables were written off when 360 days past billing. The net write-offs for 2008 include approximately $341 million resulting from this write-off methodology change, which is not reflected in the table above. If the $341 million had been included in USCS write-offs, the net write-off rate would have been 5.4 percent for (e) Owned, a GAAP basis measurement, reflects only cardmember loans included on the Company s Consolidated Balance Sheets. (f) See below for calculations of net interest yield on cardmember loans and the ratio of net interest income divided by average loans presented on an owned basis. The Company believes net interest yield on cardmember loans (on both an owned and managed basis) is useful to investors because it provides a measure of profitability of the Company s cardmember loans portfolio. (g) Includes on-balance sheet cardmember loans and off-balance sheet securitized cardmember loans. The difference between the owned basis (GAAP) information and managed basis information is attributable to the effects of securitization activities. Refer to the information set forth under USCS Selected Financial Information for further discussion of the managed basis presentation. (h) This calculation includes elements of total interest income and total interest expense that are not attributable to the cardmember loan portfolio, and thus is not representative of net interest yield on cardmember loans. The calculation includes interest income and interest expense attributable to investment securities and other interest-bearing deposits as well as to cardmember loans, and interest expense attributable to other activities, including cardmember receivables. CALCULATION OF NET INTEREST YIELD ON CARDMEMBER LOANS (a) Years Ended December 31, (Millions, except percentages and where indicated) Owned Basis: Net interest income $ 2,366 $ 2,570 Average loans (billions) $ 25.9 $ 36.7 Adjusted net interest income $ 2,326 $ 3,127 Adjusted average loans (billions) $ 26.0 $ 36.8 Net interest income divided by average loans 9.1% 7.0% Net interest yield on cardmember loans 9.0% 8.5% (a) See Glossary of Selected Terminology for the definitions of certain key terms and related information.

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146 2009 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 2009 GAAP BASIS The following discussion of USCS segment results of operations is presented on a GAAP basis. USCS reported segment income of $249 million for 2009, a $603 million or 71 percent decrease from $852 million in 2008, which decreased $971million or 53 percent from Total Revenues Net of Interest Expense In 2009, USCS total revenues net of interest expense decreased $2.1 billion or 15 percent to $11.9 billion due to lower securitization income, net, decreased interest income and lower discount revenue, net card fees and other, partially offset by lower interest expense. Discount revenue, net card fees and other of $9.1 billion in 2009 decreased $1.2 billion or 12 percent from 2008, due to lower billed business volumes, reduced other commissions and fees, decreased net card fees, lower other revenues and reduced travel commissions and fees. The decrease in billed business reflected a 10 percent decrease in basic cards-in-force and a 5 percent decline in average basic cardmember spending. In 2009 within USCS, small business and consumer billed business volumes declined 13 percent and 10 percent, respectively. Interest income of $3.2 billion in 2009 was $1.5 billion or 32 percent lower than in 2008, primarily due to lower portfolio yields and a decrease in average owned lending balances. Interest expense of $855 million in 2009 decreased $1.3 billion or 61 percent as compared to a year ago, primarily due to lower market interest rate-driven cost of funds and reduced average owned cardmember loans and receivable balances. Total revenues net of interest expense of $14.0 billion in 2008 were $225 million or 2 percent lower than 2007 as a result of lower securitization income, net, decreased other commissions and fees and lower interest income, partially offset by slightly higher discount revenue, net card fees and other, as well as lower interest expense. Provisions for Losses Provisions for losses decreased $620 million or 14 percent to $3.8 billion for 2009 compared to 2008, due to lower loan balances and improving credit indicators during the second half of The lending net write-off rate increased in the first half of the year and then began to improve in the third and fourth quarter. Past due rates rose early in the year but then showed improvement through the remainder of the year commencing in the second quarter. The write-off and past due rates reflect in part targeted efforts to manage credit performance such as reducing high loan balances, as well as the impact of customer assistance programs, including the re-aging of cardmember accounts meeting certain criteria. Provisions for losses increased $1.4 billion or 46 percent to $4.4 billion for 2008 compared to 2007 due to higher write-off and delinquency rates in the lending and charge portfolios reflecting the challenging U.S. credit environment. Expenses During 2009, USCS expenses decreased $669 million or 8 percent to $7.8 billion, due to lower marketing, promotion, rewards and cardmember services expenses and lower salaries and employee benefits and total operating expenses. Expenses in 2009, 2008, and 2007, included $12 million, $30 million, and $13 million, respectively, of charges related to reengineering activities primarily related to the Company s reengineering initiatives in 2009 and 2008 as previously discussed and reengineering activities within consumer and small business services in Expenses in 2008 of $8.5 billion were $27 million or less than 1 percent lower than in 2007, due to lower marketing, promotion, rewards and cardmember services expenses, partially offset by greater salaries and employee benefits and other operating expenses, net. Marketing, promotion, rewards and cardmember services expenses decreased $571 million or 12 percent in 2009 to $4.3 billion, due to lower rewards costs, reduced marketing and promotion expenses and the Delta-related charge to the Membership Reward balance sheet reserve in the fourth quarter of Marketing, promotion, rewards and cardmember services expenses decreased $303 million or 6 percent in 2008 to $4.8 billion, due to the Membership Rewards related charge in 2007 noted above, the incremental business-building expenses in 2007 compared to lower marketing and promotion expenses in 2008, partially offset by the Delta-related charge in 2008 to increase the Membership Rewards liability and higher volume-related rewards costs. Salaries and employee benefits and other operating expenses of $3.5 billion in 2009 decreased $98 million or 3 percent from 2008, reflecting the benefits from reengineering activities, lower net charges associated with these reengineering programs, the favorable impact in 2008 related to fair value hedge ineffectiveness and the costs related to the Delta contract extension in the fourth quarter of Salaries and employee benefits and other operating expenses of $3.6 billion in 2008 increased $276 million or 8 percent from The increase was due to higher software, operations, technology and credit and collection costs, the pension-related gain in 2007 and costs related to the Company s reengineering initiatives in Income Taxes The effective tax rate was 23 percent for 2009 compared to 25 percent and 33 percent for 2008 and 2007, respectively. The rates for each of these years reflect tax benefits related to the resolution of certain prior years tax items. DIFFERENCES BETWEEN GAAP AND MANAGED BASIS PRESENTATION Due to changes in GAAP governing the accounting for transfers of financial assets effective January 1, 2010 that will result in the consolidation of the Lending Trust, the presentation of financial and statistical information on a 52

147 2009 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY GAAP and managed basis as described below will no longer be applicable beginning in For USCS, the managed basis presentation assumes that there have been no off-balance sheet securitization transactions, i.e., all securitized cardmember loans and related income effects are reflected as if they were in the Company s balance sheets and income statements, respectively. For the managed basis presentation, revenue and expenses related to securitized cardmember loans are reflected in other commissions and fees (included in discount revenue, net card fees and other in the USCS Selected Financial Information), interest income, interest expense, and provisions for losses. On a managed basis, there is no securitization income, net as the managed basis presentation assumes no securitization transactions have occurred. The Company presents USCS information on a managed basis because that is the way the Company s management views and manages the business. Management believes that a full picture of trends in the Company s cardmember loans business can only be derived by evaluating the performance of both securitized and non-securitized cardmember loans. Management also believes that use of a managed basis presentation presents a more accurate picture of the key dynamics of the cardmember loans business. Irrespective of the on- and off-balance sheet funding mix, it is important for management and investors to see metrics for the entire cardmember loans portfolio because they are more representative of the economics of the aggregate cardmember relationships and ongoing business performance and trends over time. It is also important for investors to see the overall growth of cardmember loans and related revenue in order to evaluate market share. These metrics are significant in evaluating the Company s performance and can only be properly assessed when all non-securitized and securitized cardmember loans are viewed together on a managed basis. The Company does not currently securitize international loans. On a GAAP basis, revenue and expenses from securitized cardmember loans are reflected in the Company s income statements in securitization income, net, fees and commissions, and provisions for losses for cardmember loans. At the time of a securitization transaction, the securitized cardmember loans are removed from the Company s balance sheet, and the resulting gain on sale is reflected in securitization income, net as well as an impact to provisions for losses (credit reserves are no longer recorded for the cardmember loans once sold). Over the life of a securitization transaction, the Company recognizes servicing fees and other net revenues (referred to as excess spread ) related to the interests sold to investors (i.e., the investors interests). These amounts, in addition to changes in the fair value of interest-only strips, are reflected in securitization income, net and fees and commissions. The Company also recognizes total interest income over the life of the securitization transaction related to the interest it retains (i.e., the seller s interest). At the maturity of a securitization transaction, cardmember loans on the balance sheet increase, and the impact of the incremental required loss reserves is recorded in provisions for losses. As presented, in aggregate over the life of a securitization transaction, the pretax income impact to the Company is the same whether or not the Company had securitized cardmember loans or funded these loans through other financing activities (assuming the same financing costs). The income statement classifications, however, of specific items will differ. U.S. CARD SERVICES SELECTED FINANCIAL INFORMATION MANAGED BASIS PRESENTATION Years Ended December 31, (Millions) Discount revenue, net card fees and other: Reported for the period (GAAP) $ 9,125 $ 10,357 $ 10,243 Securitization adjustments (a) Managed discount revenue, net card fees and other $ 9,456 $ 10,757 $ 10,553 Interest income: Reported for the period (GAAP) $ 3,221 $ 4,736 $ 5,125 Securitization adjustments (a) 3,097 3,512 3,130 Managed interest income $ 6,318 $ 8,248 $ 8,255 Securitization income, net: Reported for the period (GAAP) $ 400 $ 1,070 $ 1,507 Securitization adjustments (a) (400) (1,070) (1,507) Managed securitization income, net $ $ $ Interest expense: Reported for the period (GAAP) $ 855 $ 2,166 $ 2,653 Securitization adjustments (a) ,136 Managed interest expense $ 1,099 $ 2,996 $ 3,789 Provisions for losses: Reported for the period (GAAP) $ 3,769 $ 4,389 $ 2,998 Securitization adjustments (a) 2,573 2, Managed provisions for losses $ 6,342 $ 6,391 $ 3,869 (a) Refer to discussion of Differences Between GAAP and Managed Basis Presentation above. 53

148 2009 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY CALCULATION OF NET INTEREST YIELD ON CARDMEMBER LOANS (a)(b) Years Ended December 31, (Millions, except percentages and where indicated) Managed Basis (b) Net interest income (c) $ 5,219 $ 5,252 Average loans (billions) $ 54.9 $ 64.0 Adjusted net interest income $ 5,435 $ 5,809 Adjusted average loans (billions) $ 55.0 $ 64.1 Net interest yield on cardmember loans 9.9% 9.1% (a) See Glossary of Selected Terminology for the definitions of certain key terms and related information. (b) Refer to Calculation of Net Interest Yield on Cardmember Loans Owned Basis on page 33 for calculation of the ratio of net interest income divided by average loans presented on an owned basis. (c) Includes the GAAP to managed basis securitization adjustments to interest income and interest expense as set forth under USCS Selected Financial Information managed basis presentation. RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 2009 MANAGED BASIS The following discussion of USCS is on a managed basis. Discount revenue, net card fees and other in 2009 decreased $1.3 billion or 12 percent to $9.5 billion, due to lower billed business volumes, reduced other commissions and fees, decreased net card fees, lower other revenues and reduced travel commissions and fees. Discount revenue, net card fees and other in 2008 increased $204 million or 2 percent to $10.8 billion, largely due to higher net card fees, greater other revenues, higher travel commissions and fees, and increased discount revenues, which were partially offset by lower other commissions and fees. Interest income in 2009 of $6.3 billion decreased by $1.9 billion or 23 percent, due to a decline in the average managed lending balance and a lower portfolio yield, offset by the benefits of certain repricing initiatives during Interest income in 2008 of $8.2 billion remained flat as lower market interest rate-driven yields more than offset the 10 percent growth in average managed lending balances. Interest expense in 2009 decreased $1.9 billion or 63 percent to $1.1 billion, due to a lower market interest rate-driven cost of funds and lower average managed cardmember loans and receivable balances, as well as the movement of liquidity-related interest expense to the Corporate & Other segment. In 2008, interest expense decreased $793 million or 21 percent to $3.0 billion due to a lower market interest rate-driven cost of funds, which more than offset higher average managed receivable balances. Provisions for losses decreased 1 percent in 2009, driven by a lower average loan and receivable balance and improved charge card credit performance, partially offset by a higher lending write-off level versus Provisions for losses increased $2.5 billion or 65 percent to $6.4 billion in 2008, reflecting the impact of higher write-off and delinquency rates and higher average managed loan balances, partially offset by the credit-related charge in INTERNATIONAL CARD SERVICES SELECTED INCOME STATEMENT DATA Years Ended December 31, (Millions) Revenues Discount revenue, net card fees and other $ 3,404 $ 3,758 $ 3,499 Interest income 1,588 1,984 1,741 Interest expense Net interest income 1,079 1, Total revenues net of interest expense 4,483 4,781 4,331 Provisions for losses 1,211 1, Total revenues net of interest expense after provision for losses 3,272 3,751 3,519 Expenses Marketing, promotion, rewards and cardmember services 1,221 1,453 1,566 Salaries and employee benefits and other operating expenses 1,821 2,145 1,836 Total 3,042 3,598 3,402 Pretax segment income Income tax benefit (73) (198) (174) Segment income $ 303 $ 351 $

149 SELECTED STATISTICAL INFORMATION (a) 2009 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY As of or for the Years Ended December 31, (Billions, except percentages and where indicated) Card billed business $ 94.9 $ $ 98.0 Total cards-in-force (millions) Basic cards-in-force (millions) Average basic cardmember spending (dollars) $ 8,758 $ 9,292 $ 8,772 International Consumer Travel: Travel sales (millions) $ 985 $ 1,267 $ 1,113 Travel commissions and fees/sales 8.6% 8.1% 8.6% Total segment assets $ 20.4 $ 20.4 $ 21.4 Segment capital (millions) (b) $ 2,164 $ 1,997 $ 2,062 Return on average segment capital (c) 14.3% 16.7% 15.3% Return on average tangible segment capital (c) 19.3% 22.5% 21.4% Cardmember receivables: Total receivables $ 5.9 $ 5.6 $ days past billing as a % of total (d) 2.1% 3.1% 1.8% Net loss ratio as a % of charge volume 0.36% 0.24% 0.26% Cardmember loans: Total loans $ 9.2 $ 9.5 $ days past due loans as a % of total 3.3% 3.6% 2.8% Average loans $ 8.9 $ 10.9 $ 10.0 Net write-off rate 6.8% 4.8% 4.9% Net interest income divided by average loans (e)(f) 12.1% 9.4% 8.3% Net interest yield on cardmember loans (e) 11.9% 9.8% 8.9% (a) See Glossary of Selected Terminology for the definitions of certain key terms and related information. (b) Segment capital at the end of each respective period represents capital allocated to a segment based upon specific business operational needs, risk measures, and regulatory capital requirements. (c) Return on average segment capital is calculated by dividing (i) segment income ($303 million, $351 million, and $291 million for 2009, 2008, and 2007, respectively) by (ii) average segment capital ($2.1 billion, $2.1 billion, and $1.9 billion for 2009, 2008, and 2007, respectively). Return on average tangible segment capital is computed in the same manner as return on average segment capital except the computation of average tangible segment capital excludes average goodwill and other intangibles of $551 million, $544 million, and $539 million as of December 31, 2009, 2008, and 2007, respectively. The Company believes the return on average tangible segment capital is a useful measure of the profitability of its business. (d) A cardmember account is considered 90 days past billing if payment has not been received within 90 days of the cardmember s billing statement date. In addition, if the Company initiates collection procedures on an account prior to the account becoming 90 days past billing, the associated cardmember receivable balance is considered as 90 days past billing. A cardmember account becomes past due if payment is not received within 30 days after the billing statement date. (e) See below for calculation of net interest yield on cardmember loans and the ratio of net interest income divided by average loans. 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 loans portfolio. (f) This calculation includes elements of total interest income and total interest expense that are not attributable to the cardmember loan portfolio, and thus is not representative of net interest yield on cardmember loans. The calculation includes interest income and interest expense attributable to investment securities and other interest-bearing deposits as well as to cardmember loans, and interest expense attributable to other activities, including cardmember receivables. CALCULATION OF NET INTEREST YIELD ON CARDMEMBER LOANS (a) Years Ended December 31, (Millions, except percentage and where indicated) Net interest income $ 1,079 $ 1,023 Average loans (billions) $ 8.9 $ 10.9 Adjusted net interest income $ 1,065 $ 1,072 Adjusted average loans (billions) $ 8.9 $ 10.9 Net interest income divided by average loans 12.1% 9.4% Net interest yield on cardmember loans 11.9% 9.8% (a) See Glossary of Selected Terminology for the definitions of certain key terms and related information. RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 2009 ICS reported segment income of $303 million for 2009, a $48 million or 14 percent decrease from $351 million in 2008, which increased $60 million or 21 percent from A significant portion of ICS segment income in 2009 and 2008 is attributable to the Company s internal tax allocation process. See further discussion in the Income Tax section below. Total Revenues Net of Interest Expense In 2009, ICS total revenues net of interest expense decreased $298 million or 6 percent to $4.5 billion compared to 2008 due to lower discount revenue, net card fees and other and decreased interest income, partially offset by lower interest expense. Discount revenue, net card fees, and other revenues decreased $354 million or 9 percent to $3.4 billion in 2009 compared to 2008, driven primarily by the lower level of card spending, decreased other commissions and fees, lower other revenues and reduced travel commissions and fees, partially offset by an increase in net card fees. The 11 percent decrease 55

150 2009 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY in billed business in 2009 reflected a 6 percent decrease in average spending per proprietary basic cards-in-force and an 8 percent decrease in basic cards-in-force. Assuming no changes in foreign currency exchange rates from 2008 to 2009, billed business decreased 4 percent and average spending per proprietary basic cards-in-force increased 1 percent in Volume comparisons within the major geographic regions ranged from a low-single-digit increase in Latin America to mid-single-digit decreases in Asia Pacific, Europe and Canada 3. Interest income declined $396 million or 20 percent to $1.6 billion in 2009 compared to 2008, primarily due to an 18 percent reduction in average cardmember loans and lower interest on bank and other deposits, partially offset by a higher cardmember loan portfolio yield. Interest expense of $509 million in 2009 declined $452 million or 47 percent, as compared to 2008, due to lower average loan and receivable balances, as well as a decreased cost of funds. Total revenues net of interest expense of $4.8 billion in 2008 were $450 million or 10 percent higher than 2007 due to higher discount revenue, net card fees and other and increased interest income, partially offset by higher interest expense. Provisions for Losses Provisions for losses increased $181 million or 18 percent to $1.2 billion in 2009 compared to 2008, primarily reflecting a higher lending reserve level. Provisions for losses increased $218 million or 27 percent to $1.0 billion in 2008 compared to 2007, primarily due to increased reserve levels due to the challenging economic environment and loan and business volume growth. Expenses During 2009, ICS expenses decreased $556 million or 15 percent to $3.0 billion compared to 2008, due to lower marketing, promotion, rewards and cardmember services and decreased salaries and employee benefits and other operating expenses. Expenses in 2009, 2008, and 2007, included $4 million, $83 million, and $16 million, respectively, of reengineering costs primarily related to the Company s reengineering initiatives in 2009 and 2008 as previously 3 Refer to footnote 2 on page 34 under Consolidated Results of Operations for the Three Years Ended December 31, 2009 relating to changes in foreign exchange rates. discussed and reengineering in the international payments business for Expenses in 2008 of $3.6 billion were $196 million or 6 percent higher than 2007, due to increased salaries and employee benefits and other operating expenses, partially offset by lower marketing, promotion, rewards and cardmember services costs. Marketing, promotion, rewards and cardmember services expenses decreased $232 million or 16 percent to $1.2 billion in 2009 compared to 2008, reflecting reduced marketing and promotion expenses through the first nine months of 2009 and lower reward costs. Marketing, promotion, rewards and cardmember services expenses decreased $113 million or 7 percent to $1.5 billion in 2008 compared to 2007, due to the Membership Rewards related charge and the incremental business-building costs in 2007 noted above, which more than offset higher marketing and promotion expenses, and volume-related rewards costs in Salaries and employee benefits and other operating expenses decreased $324 million or 15 percent to $1.8 billion in 2009 compared to 2008, primarily due to benefits from the Company s reengineering activities and lower net charges during 2009 related to reengineering initiatives. Salaries and employee benefits and other operating expenses increased $309 million or 17 percent to $2.1 billion in 2008 compared to 2007, primarily due to higher salaries and employee benefits expense and increased other operating expenses, which reflected the costs related to the Company s reengineering initiatives in 2008, as well as greater professional services expense. Income Taxes The effective tax rate was negative 32 percent in 2009 versus negative 129 percent in 2008 and negative 149 percent in ICS includes a tax benefit of $73 million and $198 million in 2009 and 2008, respectively, since the Company s internal tax allocation process provides this segment with the consolidated benefit related to its ongoing funding activities outside the United States. The tax benefit is likely to continue, because Congress is expected to extend the law that provides the basis for the benefit. 56

151 GLOBAL COMMERCIAL SERVICES SELECTED INCOME STATEMENT DATA 2009 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY Years Ended December 31, (Millions) Revenues Discount revenue, net card fees and other $ 4,157 $ 5,081 $ 4,697 Interest income Interest expense Net interest income (111) (385) (428) Total revenues net of interest expense 4,046 4,696 4,269 Provisions for losses Total revenues net of interest expense after provisions for losses 3,869 4,465 4,106 Expenses Marketing, promotion, rewards and cardmember services Salaries and employee benefits and other operating expenses 2,969 3,395 2,975 Total 3,301 3,772 3,362 Pretax segment income Income tax provision Segment income $ 390 $ 505 $ 536 SELECTED STATISTICAL INFORMATION (a) As of or for the Years Ended December 31, (Billions, except percentages and where indicated) Card billed business $ $ $ Total cards-in-force (millions) Basic cards-in-force (millions) Average basic cardmember spending (dollars) $ 15,544 $ 18,527 $ 18,017 Global Corporate Travel: Travel sales $ 14.6 $ 21.0 $ 20.5 Travel commissions and fees/sales 8.8% 7.8% 7.7% Total segment assets $ 22.9 $ 25.1 $ 21.1 Segment capital (millions) (b) $ 3,445 $ 3,550 $ 2,239 Return on average segment capital (c) 11.3% 15.8% 25.3% Return on average tangible segment capital (c) 25.9% 34.3% 43.3% Cardmember receivables: Total receivables $ 9.8 $ 9.4 $ days past billing as a % of total (d) 1.4% 2.7% 2.1% Net loss ratio as a % of charge volume 0.19% 0.13% 0.10% (a) See Glossary of Selected Terminology for the definitions of certain key terms and related information. (b) Segment capital at the end of each respective period represents capital allocated to a segment based upon specific business operational needs, risk measures, and regulatory capital requirements. (c) Return on average segment capital is calculated by dividing (i) segment income ($390 million, $505 million and $536 million for 2009, 2008 and 2007, respectively) by (ii) average segment capital ($3.4 billion, $3.2 billion and $2.1 billion for 2009, 2008 and 2007, respectively). Return on average tangible segment capital is computed in the same manner as return on average segment capital except the computation of average tangible segment capital excludes average goodwill and other intangibles of $1.9 billion, $1.7 billion and $881 million at December 31, 2009, 2008 and 2007, respectively. The Company believes the return on average tangible segment capital is a useful measure of the profitability of its business. (d) A cardmember account is considered 90 days past billing if payment has not been received within 90 days of the cardmember s billing statement date. In addition, if the Company initiates collection procedures on an account prior to the account becoming 90 days past billing, the associated cardmember receivable balance is considered as 90 days past billing. A cardmember account becomes past due if payment is not received within 30 days after the billing statement date. 57

152 2009 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 2009 GCS reported segment income of $390 million for 2009, a $115 million or 23 percent decrease from $505 million in 2008, which decreased $31 million or 6 percent from Total Revenues Net of Interest Expense In 2009, GCS total revenues net of interest expense decreased $650 million or 14 percent to $4.0 billion due to decreased discount revenue, net card fees, and other revenues and lower interest income, partially offset by lower interest expense. Discount revenue, net card fees, and other revenues decreased $924 million or 18 percent to $4.2 billion in 2009 primarily driven by lower travel commissions and fees, the reduced level of card spending, decreased other revenues and reduced other commissions and fees. The 14 percent decrease in billed business in 2009 reflected a 16 percent decrease in average spending per proprietary basic card. Assuming no changes in foreign currency exchange rates from 2008 to 2009, billed business and average spending per proprietary basic card decreased 11 percent and 13 percent, respectively, in 2009 with volume decreases within the United States of 11 percent compared to results within the Company s other major geographic regions ranging from the mid-teen-digit declines in Europe and Asia Pacific, a low-teen-digit decrease in Canada, and a mid-single-digit increase in Latin America 4. Interest income decreased $107 million or 64 percent to $61 million in 2009 compared to 2008, driven by lower rates within deposit-related income. Interest expense decreased $381 million or 69 percent to $172 million in 2009 compared to 2008 due to a lower cost of funds and average receivable balance, partially offset by the cost of funding the CPS acquisition. Total revenues net of interest expense of $4.7 billion in 2008 were $427 million or 10 percent higher than 2007 due to increased discount revenue, net card fees, and other revenue and lower interest expense. Provisions for Losses Provisions for losses decreased $54 million or 23 percent to $177 million in 2009 compared to 2008, reflecting improved credit trends as 2009 progressed. Provisions for losses increased $68 million or 42 percent to $231 million in 2008 compared to 2007, reflecting higher loss and past due rates due to the challenging economic environment. 4 Refer to footnote 2 on page 34 under Consolidated Results of Operations for the Three Years Ended December 31, 2009 relating to changes in foreign exchange rates. Expenses During 2009 GCS expenses decreased $471 million or 12 percent to $3.3 billion, reflecting a reduction of $426 million in salaries and employee benefits and other operating expenses as described below, as well as lower rewards costs, lower net charges associated with reengineering initiatives in 2009, and the Delta-related increase in the Membership Rewards balance sheet reserve in the fourth quarter of Expenses in 2009, 2008 and 2007, included $101 million, $138 million, and $25 million, respectively, of reengineering costs, primarily reflecting the Company s reengineering initiatives in 2009 and 2008 as previously discussed and reengineering costs, primarily in business travel in Expenses in 2008 of $3.8 billion were $410 million or 12 percent higher than 2007, primarily due to greater salaries and employee benefits and other operating expenses. Marketing, promotion, rewards and cardmember services expenses decreased $45 million or 12 percent to $332 million in 2009 compared to 2008, primarily reflecting lower rewards costs in 2009 and the Delta-related increase in the Membership Rewards balance sheet reserve in the fourth quarter of Marketing, promotion, rewards and cardmember services expenses decreased $10 million or 3 percent to $377 million in 2008 compared to 2007, primarily due to the Membership Rewards related charge in 2007, offset by higher volume-related rewards costs and the Delta-related charge in 2008 to increase the Membership Rewards liability. Salaries and employee benefits and other operating expenses decreased $426 million or 13 percent to $3.0 billion in 2009 compared to 2008, reflecting the benefits from the Company s reengineering initiatives, partially offset by lower net charges associated with these programs during Salaries and employee benefits and other operating expenses increased $420 million or 14 percent to $3.4 billion in 2008 compared to 2007, due to higher other operating expenses and greater salaries and employee benefits expense, which reflected the impacts of the CPS acquisition, as well as the costs related to the Company s reengineering initiatives in 2008 and the pension-related gain in Income Taxes The effective tax rate was 31 percent in 2009 versus 27 percent in 2008 and 28 percent in

153 GLOBAL NETWORK & MERCHANT SERVICES SELECTED INCOME STATEMENT DATA 2009 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY Years Ended December 31, (Millions) Revenues Discount revenue, fees and other $ 3,625 $ 3,875 $ 3,549 Interest income Interest expense (85) (222) (312) Net interest income Total revenues net of interest expense 3,716 4,102 3,864 Provisions for losses Total revenues net of interest expense after provisions for losses 3,581 3,975 3,761 Expenses Marketing and promotion Salaries and employee benefits and other operating expenses 1,679 1,932 1,606 Total 2,200 2,485 2,201 Pretax segment income 1,381 1,490 1,560 Income tax provision Segment income $ 898 $ 995 $ 1,022 SELECTED STATISTICAL INFORMATION (a) As of or for the Years Ended December 31, (Billions, except percentages and where indicated) Global Card billed business (b) $ $ $ Global Network & Merchant Services: Total segment assets $ 7.3 $ 7.0 $ 6.5 Segment capital (millions) (c) $ 1,764 $ 1,451 $ 1,170 Return on average segment capital (d) 52.9% 75.4% 90.7% Return on average tangible segment capital (d) 54.1% 77.4% 93.4% Global Network Services: Card billed business $ 71.8 $ 67.4 $ 52.9 Total cards-in-force (millions) (a) See Glossary of Selected Terminology for the definitions of certain key terms and related information. (b) Global Card billed business includes activities (including cash advances) related to proprietary cards, cards issued under network partnership agreements, and certain insurance fees charged on proprietary cards. (c) Segment capital at the end of each respective period represents capital allocated to a segment based upon specific business operational needs, risk measures, and regulatory capital requirements. (d) Return on average segment capital is calculated by dividing (i) segment income ($898 million, $995 million and $1.0 billion for 2009, 2008 and 2007, respectively) by (ii) average segment capital ($1.7 billion, $1.3 billion and $1.1 billion for 2009, 2008 and 2007, respectively). Return on average tangible segment capital is computed in the same manner as return on average segment capital except the computation of average tangible segment capital excludes average goodwill and other intangibles of $36 million, $35 million and $33 million as of December 31, 2009, 2008 and 2007, respectively. The Company believes the return on average tangible segment capital is a useful measure of the profitability of its business. RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 2009 GNMS reported segment income of $898 million in 2009, a $97 million or 10 percent decrease from $995 million in 2008, which decreased $27 million or 3 percent from Total Revenues Net of Interest Expense GNMS total revenues net of interest expense decreased $386 million or 9 percent to $3.7 billion in 2009 compared to 2008, due to decreased discount revenue, net card fees and other and decreased interest expense credit. Discount revenue, fees and other revenues decreased $250 million or 6 percent to $3.6 billion in 2009 compared to 2008, reflecting a decline in merchant-related revenues, due to the 9 percent decrease in global card billed business, partially offset by higher GNS-related revenues. Interest expense credit decreased $137 million or 62 percent to $85 million in 2009 compared to 2008, due to a lower rate-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 $4.1 billion in 2008 were $238 million or 6 percent higher compared to 2007 due to increased discount revenue, fees and other revenues offset by lower interest expense credit. Provisions for Losses Provisions for losses increased $8 million or 6 percent to $135 million in 2009 compared to 2008, primarily driven by the higher provisions in GNS. Provisions for losses in 2008 increased $24 million or 23 percent to $127 million compared to 2007, primarily reflecting merchant-related provisions. Expenses During 2009, GNMS expenses decreased $285 million or 11 percent to $2.2 billion compared to Expenses in 2009, 2008 and 2007, included $22 million, $31 million and $6 million of reengineering costs, respectively, primarily related 59

154 2009 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY to the Company s reengineering initiatives in 2009 and 2008 as previously discussed. Expenses in 2008 of $2.5 billion were $284 million or 13 percent higher than 2007, due to increased salaries and employee benefits and other operating expenses, partially offset by a decrease in marketing and promotion expenses. Marketing and promotion expenses decreased $32 million or 6 percent to $521 million in 2009 compared to 2008, reflecting lower brand and merchant-related marketing costs during the first nine months of Marketing and promotion expenses decreased 7 percent in 2008 to $553 million compared to 2007, reflecting lower brand and other marketing and promotion expenses as compared to incremental business-building costs in Salaries and employee benefits and other operating expenses decreased $253 million or 13 percent to $1.7 billion in 2009 compared to 2008, primarily reflecting the benefits from the Company s reengineering initiatives. Salaries and employee benefits and other operating expenses increased $326 million or 20 percent to $1.9 billion in 2008 compared to 2007, primarily due to increased merchant-related reserve due to the challenging economic environment, 2007 gains related to the sale of the Company s merchant-related operations in Russia, greater salaries and employee benefits expense, which reflected the expansion of the merchant sales force and the costs related to the Company s reengineering initiatives in 2008 and higher volume-related expenses. Income Taxes The effective tax rate was 35 percent in 2009, 33 percent in 2008 and 34 percent in CORPORATE & OTHER Corporate & Other had net income of $297 million, $168 million and $454 million in 2009, 2008 and 2007, respectively. Net income in 2009 reflected the $372 million and $172 million after-tax income related to the MasterCard and Visa litigation settlements, respectively, and $135 million of after-tax income related to the ICBC sale. In the third quarter of 2009, the Company recorded a $180 million ($113 million after-tax) benefit associated with the Company s accounting for a net investment in consolidated foreign subsidiaries. $135 million ($85 million after-tax) of this benefit represents the correction of an error related to the accounting for cumulative translation adjustments in prior periods. The error resulted in a $60 million ($38 million after-tax) income overstatement in the second quarter of 2009, a $135 million ($85 million after-tax) income understatement in the fourth quarter of 2008 and minimal amounts for all other periods affected dating back to the third quarter of 2007, when the incorrect accounting originated. Also included in the $180 million is a non-recurring $45 million ($28 million after-tax) related benefit which was recorded in the third quarter of 2009 as a result of changes in the fair value of certain foreign exchange forward contracts that are economic hedges to foreign currency exposures of net investments in consolidated foreign subsidiaries. Reengineering costs of $35 million after-tax, $108 million after-tax and $4 million after-tax, for 2009, 2008 and 2007, respectively, primarily related to the Company s reengineering initiatives previously discussed. Net income in 2008 reflected the $186 million and $172 million after-tax income related to the MasterCard and Visa litigation settlements, respectively, offset by a $19 million after-tax charge primarily relating to the ongoing AEB operations retained by the Company in the first quarter of Net income in 2007 reflected the $700 million after-tax gain resulting from the initial $1.13 billion due March 31, 2008, from Visa as part of the litigation settlement. This was partially offset by a $46 million after-tax litigation related charge, and a $31 million after-tax charge for the contribution to the American Express Charitable Fund. EXPOSURE TO AIRLINE INDUSTRY The Company has multiple co-brand relationships and rewards partners, of which airlines are one of the most important and valuable. The Company s largest airline co-brand is Delta Air Lines (Delta) and this relationship includes exclusive co-brand credit card partnerships and other arrangements, including Membership Rewards, merchant acceptance and travel. American Express Delta SkyMiles Credit Card co-brand portfolio accounts for approximately 5 percent of the Company s worldwide billed business and less than 15 percent of worldwide cardmember lending receivables. Refer to Note 8 to the Consolidated Financial Statements for further discussion of prepaid miles acquired from Delta. Over the last couple of years, there were a significant number of airline bankruptcies and liquidations, driven in part by volatile fuel costs and weakening economies around the world. Historically, the Company has not experienced significant revenue declines when a particular airline scales back or ceases operations due to a bankruptcy or other financial challenges because volumes generated by that airline are typically shifted to other participants in the industry that accept the Company s card products. The Company s exposure to business and credit risk in the airline industry is primarily through business arrangements where the Company has remitted payment to the airline for a cardmember purchase of tickets that have not yet been used or flown. The Company mitigates this risk by delaying payment to the airlines with deteriorating financial situations, thereby increasing cash withheld to protect the Company in the event the airline is liquidated. To date, the Company has not experienced significant losses from airlines that have ceased operations. 60

155 OTHER REPORTING MATTERS 2009 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY 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 an owned or managed basis, as applicable, excluding the impact of deferred card fees, net of deferred direct acquisition costs of cardmember loans on an owned or managed basis, as applicable. Adjusted net interest income Represents net interest income allocated to the Company s cardmember loans portfolio on an owned or managed basis, as applicable, which excludes the impact of card fees on loans and balance transfer fees attributable to the Company s cardmember loans portfolio on an owned or managed basis, as applicable. Asset securitizations Asset securitization involves the transfer and sale of receivables or loans to a special purpose entity created for the securitization activity, typically a trust. The trust, in turn, issues securities, commonly referred to as asset-backed securities that are secured by the transferred receivables or loans. The trust uses the proceeds from the sale of such securities to pay the purchase price for the underlying receivables or loans. Average discount rate This calculation is designed to approximate merchant pricing. It represents the percentage of billed business (both proprietary and GNS) retained by the Company from merchants it acquires, prior to payments to third parties unrelated to merchant acceptance. Basic cards-in-force Proprietary basic consumer cards-in-force includes basic cards issued to the primary account owner and does not include additional supplemental cards issued on that account. Proprietary basic small business and corporate cards-in-force include basic and supplemental cards issued to employee cardmembers. Non-proprietary basic cards-in-force includes all cards that are issued and outstanding under network partnership agreements. Billed business Represents the dollar amount of charges on all American Express cards; also referred to as spend or charge volume. Proprietary billed business includes charges made on the Company s proprietary cards-in-force, cash advances on proprietary cards and certain insurance fees charged on proprietary cards. Non-proprietary billed business represents the charges through the Company s global network on cards issued by the Company s network partners. Billed business is reflected in the United States or outside the United States based on where the cardmember is domiciled. Capital asset pricing model Generates an appropriate discount rate using internal and external inputs to value future cash flows based on the time value of money and the price for bearing uncertainty inherent in an investment. Capital ratios Represents the minimum standards established by the regulatory agencies as a measure to determine whether the regulated entity has sufficient capital to absorb on and off-balance sheet losses beyond current loss accrual estimates. Card acquisition Primarily represents the issuance of new cards to either new or existing cardmembers through marketing and promotion efforts. Cardmember The individual holder of an issued American Express branded charge or credit card. Cardmember loans Represents the outstanding amount due from cardmembers for charges made on their American Express credit cards, as well as any interest charges and card-related fees. Cardmember loans also include balances with extended payment terms on certain charge card products and are net of unearned revenue. Cardmember receivables Represents the outstanding amount due from cardmembers for charges made on their American Express charge cards as well as any card-related fees. Charge cards Represents cards that carry no pre-set spending limits and are primarily designed as a method of payment and not as a means of financing purchases. Cardmembers generally must pay the full amount billed each month. No finance charges are assessed on charge cards. Credit cards Represents cards that have a range of revolving payment terms, grace periods, and rate and fee structures. Discount revenue Represents revenue earned from fees charged to merchants with whom the Company has entered into a card acceptance agreement for processing cardmember transactions. The discount fee generally is deducted from the Company s payment reimbursing the merchant for cardmember purchases. Such amounts are reduced by contra- revenue such as payments to third-party card issuing partners, cash-back reward costs and corporate incentive payments. Interest expense Interest expense includes interest incurred primarily to fund cardmember loans, charge card product receivables, general corporate purposes, and liquidity needs, and is recognized as incurred. Interest expense is divided principally into three categories (i) deposits, which primarily relates to interest expense on deposits taken from customers and institutions, (ii) short-term borrowings, which primarily relates to interest expense on commercial paper, federal funds purchased, bank overdrafts and other short-term borrowings, and (iii) long-term debt, which primarily relates to interest expense on the Company s long-term debt. Interest income Interest and fees on loans includes interest on loans which is assessed using the average daily balance method for loans owned. These amounts are recognized based upon the principal amount outstanding in accordance with the terms of the applicable account agreement until the outstanding balance is paid or written-off. Loan fees are deferred and recognized in interest income 61

156 2009 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY on a straight-line basis over the 12-month card membership period, net of deferred direct card acquisition costs and a reserve for projected membership cancellation. Interest and dividends on investment securities primarily relates to the Company s performing fixed-income securities. Interest income is accrued as earned using the effective interest method, which adjusts the yield for security premiums and discounts, fees and other payments, so that the related investment security recognizes a constant rate of return on the outstanding balance throughout its term. These amounts are recognized until these securities are in default or when it is likely that future interest payments will not be made as scheduled. Interest income on deposits with banks and other is recognized as earned, and primarily relates to the placement of cash in excess of near-term funding requirements in interest-bearing time deposits, overnight sweep accounts, and other interest bearing demand and call accounts. Interest-only strip Interest-only strips are generated from USCS securitization activity and are a form of retained interest held by the Company in the securitization. This financial instrument represents the present value of estimated future positive excess spread expected to be generated by the securitized assets over the estimated life of those assets. Excess spread is the net cash flow from interest and fee collections allocated to the third-party investors interests in the securitization after deducting the interest paid on the investor certificates, credit losses, contractual servicing fees, and other expenses. Merchant acquisition Represents the signing of merchants to accept American Express-branded cards. Net card fees Represents the charge card membership fees earned during the period. These fees are recognized as revenue over the covered card membership period (typically one year), net of provision for projected refunds for cancellation of card membership. Net interest yield on cardmember loans Represents the net spread earned on cardmember loans. Net interest yield on cardmember loans (both on an owned and managed basis) 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 (both on an owned and managed basis) includes interest that is deemed uncollectible. For the owned and managed basis presentation, reserves and net write-offs related to uncollectible interest are recorded through provisions for losses cardmember loans; therefore, such reserves and net write-offs are not included in the net interest yield calculation. Net loss ratio Represents the ratio of charge card write-offs consisting of principal (resulting from authorized and unauthorized transactions) and fee components, less recoveries, on cardmember receivables expressed as a percentage of gross amounts billed to cardmembers. Net write-off rate Represents the amount of cardmember loans or USCS cardmember receivables written off consisting of principal (resulting from authorized transactions), less recoveries, as a percentage of the average loan balance or USCS average receivables during the period. Return on average equity Calculated by dividing one year period net income by one year average total shareholders equity. Return on average tangible common equity Computed in the same manner as ROE except the computation of average tangible common shareholders equity excludes average goodwill and other intangibles. Return on average segment capital Calculated by dividing one year period segment income by one year average segment capital. Return on average tangible segment capital Computed in the same manner as return on average segment capital except the computation of average tangible segment capital excludes average goodwill and other intangibles. 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. Securitization income, net 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. 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 capital ratio 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, and minority interests in consolidated subsidiaries, adjusted for certain other comprehensive income items, ineligible goodwill and intangible assets. 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. Tier 1 leverage ratio Tier 1 leverage ratio is calculated by dividing Tier 1 capital (as defined above) by the Company s average total consolidated assets for the most recent quarter. 62

157 2009 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY Total cards-in-force Represents the number of cards that are issued and outstanding. Total consumer cards-in-force includes basic cards issued to the primary account owner and any supplemental cards, which represent additional cards issued on that account. Total small business and corporate cards-in-force include basic cards issued to employee cardmembers. Proprietary cards-in-force represent card products where the Company owns the cardmember relationship, including card issuance, billing and credit management and strategic plans such as marketing, promotion, and development of card products and offerings. Proprietary cards-in-force include co-brand and affinity cards. For non-proprietary cards-in-force (except for certain independent operator network partnership agreements), the Company maintains the responsibility to acquire and service merchants that accept the Company s cards and the cardmember relationship is owned by the Company s network partners that issue the cards (who also provide the Company data on the number of cards they issue). Total risk-based capital ratio Total risk-based capital ratio is calculated as the sum of Tier 1 capital (as defined above) and Tier 2 capital divided by risk-weighted assets. The Company calculates Tier 2 capital as 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. Travel sales Represents the total dollar amount of travel transaction volume for airline, hotel, car rental, and other travel arrangements made for consumers and corporate clients. The Company earns revenue on these transactions by charging a transaction or management fee. FORWARD-LOOKING STATEMENTS This report includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which are subject to risks and uncertainties. The forward-looking statements, which address the Company s expected business and financial performance, among other matters, contain words such as believe, expect, 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: the Company s ability to exceed for 2010 its on-average, over-time earnings per share growth target of 12 percent to 15 percent per annum, which will depend on, among other things, the factors described below, including the level of consumer and business spending, credit trends, expense management, currency and interest rate fluctuations and general economic conditions, such as unemployment and GDP growth; the Company s ability to manage credit risk related to consumer debt, business loans, merchants and other credit trends, which will depend in part on (i) the economic environment, including, among other things, the housing market, the rates of bankruptcies and unemployment, which can affect spending on card products, debt payments by individual and corporate customers and businesses that accept the Company s card products, (ii) the effectiveness of the Company s credit models and (iii) the impact of recently enacted statutes and proposed legislative initiatives affecting the credit card business, including, without limitation, The Credit Card Accountability Responsibility and Disclosure Act of 2009 (the CARD Act ); the impact of the Company s efforts to deal with delinquent cardmembers in the current challenging economic environment, which may affect payment patterns of cardmembers and the perception of the Company s services, products and brands; the Company s near-term write-off rates, including those for the first and second quarters of 2010, 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; consumer and business spending on the Company s credit and charge card products and Travelers Cheques and other prepaid products and growth in card lending balances, which depend in part on the economic environment, and the ability to issue new and enhanced card and prepaid products, services and rewards programs, and increase revenues from such products, attract new cardmembers, reduce cardmember attrition, capture a greater share of existing cardmembers spending, and sustain premium discount rates on its card products in light of regulatory and market pressures, increase merchant coverage, retain cardmembers after low introductory lending rates have expired, and expand the Global Network Services business; the write-off and delinquency rates in the medium- to long-term of cardmembers added by the Company during the past few years, which could impact their profitability to the Company; the Company s ability to effectively implement changes in the pricing of certain of its products and services; fluctuations in interest rates (including fluctuations in benchmarks, such as LIBOR and other benchmark rates that may give rise to basis risk, and credit spreads), which impact the Company s borrowing costs, return on lending products and the value of the Company s investments; the Company s net interest yield on cardmember loans trending downward over time closer to historical levels, which will be impacted by the affects of the CARD Act and changes in consumer behavior that affect loan balances; the actual amount to be spent by the Company on marketing, promotion, rewards and cardmember services based on management s assessment of competitive opportunities and other factors affecting its judgment and during 2010, the extent of provision benefit, if any, from 63

158 2009 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY lower than expected write-offs; the ability to control and manage operating, infrastructure, advertising and promotion expenses as business expands or changes, including the ability to accurately estimate the provision for the cost of the Membership Rewards program; fluctuations in foreign currency exchange rates; the Company s ability to grow its business and generate excess capital and earnings in a manner and at levels that will allow the Company to return a portion of capital to shareholders, which will depend on the Company s ability to manage its capital needs, and the effect of business mix, acquisitions and rating agency and regulatory requirements, including those arising from the Company s status as a bank holding company; the ability of the Company to meet its objectives with respect to the growth of its brokered retail CD program, brokerage sweep account program and the direct deposit initiative, which will depend in part on customer demand, the perception of the Company s brand and regulatory capital requirements; the success of the Global Network Services business in partnering with banks in the United States, which will depend in part on the extent to which such business further enhances the Company s brand; allows the Company to leverage its significant processing scale, expands merchant coverage of the network, provides Global Network Services bank partners in the United States the benefits of greater cardmember loyalty and higher spend per customer, and merchant benefits such as greater transaction volume and additional higher spending customers; the ability of the Global Network Services business to meet the performance requirements called for by the Company s settlements with MasterCard and Visa; trends in travel and entertainment spending and the overall level of consumer confidence; the uncertainties associated with business acquisitions, including, among others, the failure to realize anticipated business retention, growth and cost savings, as well as the ability to effectively integrate the acquired business into the Company s existing operations; the success, timeliness and financial impact (including costs, cost savings, and other benefits, including increased revenues), and beneficial effect on the Company s operating expense to revenue ratio, both in the short-term and over time, of reengineering initiatives being implemented or considered by the Company, including cost management, structural and strategic measures such as vendor, process, facilities and operations consolidation, outsourcing (including, among others, technologies operations), relocating certain functions to lower-cost overseas locations, moving internal and external functions to the internet to save costs, and planned staff reductions relating to certain of such reengineering actions, including, the ability of the Company to generate an annualized level of greater than $500 million of gross expense savings by 2012 from reengineering actions in its Global Services unit; the Company s ability to reinvest the benefits arising from such reengineering actions in its businesses; bankruptcies, restructurings, consolidations or similar events affecting the airline or any other industry representing a significant portion of the Company s billed business, including any potential negative effect on particular card products and services and billed business generally that could result from the actual or perceived weakness of key business partners in such industries; the triggering of obligations to make payments to certain co-brand partners, merchants, vendors and customers under contractual arrangements with such parties under certain circumstances; a downturn in the Company s businesses and/or negative changes in the Company s and its subsidiaries credit ratings, which could result in contingent payments under contracts, decreased liquidity and higher borrowing costs; the ability of the Company to satisfy its liquidity needs and execute on its funding plans, which will depend on, among other things, the Company s future business growth, its credit ratings, market capacity and demand for securities offered by the Company, performance by the Company s counterparties under its bank credit facilities and other lending facilities, regulatory changes, including changes to the policies, rules and regulations of the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of San Francisco, the Company s ability to securitize and sell receivables and the performance of receivables previously sold in securitization transactions; accuracy of estimates for the fair value of the assets in the Company s investment portfolio and, in particular, those investments that are not readily marketable; the ability of the Company s charge card and lending trusts to maintain excess spreads at levels sufficient to avoid material set-asides or early amortization of the Company s charge card and lending securitizations, which will depend on various factors such as income derived from the relevant portfolios and their respective credit performances; the increase in excess spread resulting from the designation of discount option receivables with respect to the American Express Credit Account Master Trust, which will depend in part on the monthly principal payment rate posted to accounts in, and the credit performance of, the securitized lending portfolio; the Company s ability to invest in technology advances across all areas of its business to stay on the leading edge of technologies applicable to the payments industry; the Company s ability to attract and retain executive management and other key employees; the Company s ability to protect its intellectual property rights (IP) and avoid infringing the IP of other parties; the potential negative effect on the Company s businesses and infrastructure, including information technology, of terrorist attacks, natural disasters, intrusion into our infrastructure by hackers or other catastrophic events in the future; political or economic instability in certain regions or countries, which could affect lending and other commercial activities, among other businesses, or restrictions on convertibility of certain currencies; changes in laws or government regulations; the administration s proposal to impose a Financial Crisis Responsibility Fee at the rate of 64

159 2009 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY approximately 15 basis points on certain liabilities of banks, bank holding companies and other financial institutions with consolidated assets of at least $50 billion; the potential failure of the U.S. Congress to extend 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; the potential impact of the CARD Act and regulations adopted by federal bank regulators relating to certain credit and charge card practices, including, among others, the imposition by card issuers of interest rate increases on outstanding balances and the allocation of payments in respect of outstanding balances with different interest rates, which could have an adverse impact on the Company s net income; accounting changes, including the implementation of changes to the accounting for off-balance sheet activities or other potential regulatory interpretations in this area, which, effective January 1, 2010, requires the Company to consolidate the assets and liabilities of the lending securitization trust, thereby requiring the Company to reestablish loss reserves, which has in turn resulted in a reduction to the Company s regulatory capital ratios and will also result in a change with respect to the presentation of its financial statements beginning in the first quarter of 2010, and which also could result in lower credit ratings on securities issued by the Company s off-balance sheet securitization trusts as a result of the uncertainty with respect to the ability of rating agencies to continue to rely on the FDIC s safe harbor rule regarding the isolation of securitized assets in the event of a sponsoring bank s receivership or conservatorship, which in turn could adversely impact the Company s ability to utilize securitizations as a component of its funding strategy; outcomes and costs associated with litigation and compliance and regulatory matters; and competitive pressures in all of the Company s major businesses. A further description of these and other risks and uncertainties can be found in the Company s Annual Report on Form 10-K for the year ended December 31, 2009, and the Company s other reports filed with the SEC. 65

160 MANAGEMENT S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING MANAGEMENT S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AMERICAN EXPRESS COMPANY 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, 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, 2009, 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,

161 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AMERICAN EXPRESS COMPANY 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, 2009 and 2008, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2009, 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, 2009, 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. 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. New York, New York February 25,

162 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY CONSOLIDATED FINANCIAL STATEMENTS PAGE Consolidated Statements of Income For the Years Ended December 31, 2009, 2008 and Consolidated Balance Sheets December 31, 2009 and Consolidated Statements of Cash Flows For the Years Ended December 31, 2009, 2008 and Consolidated Statements of Shareholders Equity For the Years Ended December 31, 2009, 2008 and NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 Summary of Significant Accounting Policies 73 Note 2 Acquisitions and Discontinued Operations 76 Note 3 Fair Values 77 Note 4 Accounts Receivable 80 Note 5 Loans 82 Note 6 Investment Securities 84 Note 7 Asset Securitizations 87 Note 8 Other Assets 91 Note 9 Customer Deposits 93 Note 10 Debt 94 Note 11 Other Liabilities 97 Note 12 Derivatives and Hedging Activities 98 Note 13 Guarantees 102 Note 14 Common and Preferred Shares and Warrants 103 Note 15 Changes in Accumulated Other Comprehensive (Loss) Income 104 Note 16 Restructuring Charges 106 Note 17 Income Taxes 108 Note 18 Earnings Per Common Share 110 Note 19 Details of Certain Consolidated Statements of Income Lines 110 Includes further details of: > Other Commissions and Fees > Other Revenues > Marketing, Promotions, Rewards and Cardmember Services > Other, Net Expenses Note 20 Stock Plans 111 Note 21 Retirement Plans 113 Note 22 Significant Credit Concentrations 118 Note 23 Regulatory Matters and Capital Adequacy 119 Note 24 Commitments and Contingencies 121 Note 25 Reportable Operating Segments and Geographic Operations 122 Note 26 Parent Company 125 Note 27 Quarterly Financial Data (Unaudited)

163 CONSOLIDATED STATEMENTS OF INCOME AMERICAN EXPRESS COMPANY Years Ended December 31 (Millions, except per share amounts) Revenues Non-interest revenues Discount revenue $ 13,389 $ 15,025 $ 14,596 Net card fees 2,151 2,150 1,919 Travel commissions and fees 1,594 2,010 1,926 Other commissions and fees 1,778 2,307 2,417 Securitization income, net 400 1,070 1,507 Other 2,087 2,157 1,751 Total non-interest revenues 21,399 24,719 24,116 Interest income Interest and fees on loans 4,468 6,159 6,351 Interest and dividends on investment securities Deposits with banks and other Total interest income 5,331 7,201 7,424 Interest expense Deposits Short-term borrowings Long-term debt and other 1,745 2,618 2,684 Total interest expense 2,207 3,555 3,981 Net interest income 3,124 3,646 3,443 Total revenues net of interest expense 24,523 28,365 27,559 Provisions for losses Charge card 857 1,363 1,140 Cardmember loans 4,266 4,231 2,761 Other Total provisions for losses 5,313 5,798 4,103 Total revenues net of interest expense after provisions for losses 19,210 22,567 23,456 Expenses Marketing, promotion, rewards and cardmember services 6,467 7,361 7,817 Salaries and employee benefits 5,080 6,090 5,438 Professional services 2,408 2,413 2,280 Other, net 2,414 3,122 2,227 Total 16,369 18,986 17,762 Pretax income from continuing operations 2,841 3,581 5,694 Income tax provision ,568 Income from continuing operations 2,137 2,871 4,126 Loss from discontinued operations, net of tax (7) (172) (114) Net income $ 2,130 $ 2,699 $ 4,012 Earnings per Common Share Basic: (Note 18) Income from continuing operations attributable to common shareholders (a) $ 1.55 $ 2.47 $ 3.49 Loss from discontinued operations (0.01) (0.14) (0.09) Net income attributable to common shareholders (a) $ 1.54 $ 2.33 $ 3.40 Earnings per Common Share Diluted: (Note 18) Income from continuing operations attributable to common shareholders (a) $ 1.54 $ 2.47 $ 3.44 Loss from discontinued operations (0.15) (0.10) Net income attributable to common shareholders (a) $ 1.54 $ 2.32 $ 3.34 Average common shares outstanding for earnings per common share: Basic 1,168 1,154 1,173 Diluted 1,171 1,156 1,193 (a) Represents income from continuing operations or net income, as applicable, less (i) accelerated preferred dividend accretion of $212 million for the year ended December 31, 2009 due to the repurchase of $3.39 billion of preferred shares issued as part of the Capital Purchase Program (CPP), (ii) preferred share dividends and related accretion of $94 million for the year ended December 31, 2009, and (iii) earnings allocated to participating share awards and other items of $22 million, $15 million and $26 million for the years ended December 31, 2009, 2008 and 2007, respectively. See Notes to Consolidated Financial Statements. 69

164 CONSOLIDATED BALANCE SHEETS AMERICAN EXPRESS COMPANY December 31 (Millions, except share data) Assets Cash and cash equivalents Cash and cash due from banks $ 881 $ 1,574 Interest-bearing deposits in other banks (including securities purchased under resale agreements: 2009, $212; 2008, $141) 10,597 6,554 Short-term investment securities 4,064 12,419 Total 15,542 20,547 Accounts receivable Cardmember receivables, less reserves: 2009, $546; 2008, $810 33,197 32,178 Other receivables, less reserves: 2009, $109; 2008, $118 5,007 4,393 Loans Cardmember loans, less reserves: 2009, $3,268; 2008, $2,570 29,504 39,641 Other, less reserves: 2009, $27; 2008, $ ,018 Investment securities 24,337 12,526 Premises and equipment at cost, less accumulated depreciation: 2009, $4,130; 2008, $3,743 2,782 2,948 Other assets 13,213 12,607 Assets of discontinued operations 216 Total assets $ 124,088 $ 126,074 Liabilities and Shareholders Equity Liabilities Customer deposits $ 26,289 $ 15,486 Travelers Cheques outstanding 5,975 6,433 Accounts payable 8,926 8,428 Short-term borrowings 2,344 8,993 Long-term debt 52,338 60,041 Other liabilities 13,810 14,592 Liabilities of discontinued operations 260 Total liabilities 109, ,233 Commitments and contingencies (see Note 24) Shareholders Equity Common shares, $.20 par value, authorized 3.6 billion shares; issued and outstanding 1,192 million shares in 2009 and 1,160 million shares in Additional paid-in capital 11,144 10,496 Retained earnings 3,737 2,719 Accumulated other comprehensive (loss) income Net unrealized securities gains (losses), net of tax: 2009, $(291); 2008, $ (699) Net unrealized derivatives losses, net of tax: 2009, $15; 2008, $44 (28) (80) Foreign currency translation adjustments, net of tax: 2009, $31; 2008, $64 (722) (368) Net unrealized pension and other postretirement benefit costs, net of tax: 2009, $244; 2008, $216 (469) (459) Total accumulated other comprehensive loss (712) (1,606) Total shareholders equity 14,406 11,841 Total liabilities and shareholders equity $ 124,088 $ 126,074 See Notes to Consolidated Financial Statements. 70

165 CONSOLIDATED STATEMENTS OF CASH FLOWS AMERICAN EXPRESS COMPANY Years Ended December 31 (Millions) Cash Flows from Operating Activities Net income $ 2,130 $ 2,699 $ 4,012 Loss from discontinued operations, net of tax Income from continuing operations 2,137 2,871 4,126 Adjustments to reconcile income from continuing operations to net cash provided by operating activities Provisions for losses 5,313 5,798 4,103 Depreciation and amortization 1, Deferred taxes, acquisition costs and other (1,429) 442 (851) Stock-based compensation Changes in operating assets and liabilities, net of effects of acquisitions and dispositions: Other receivables (730) 101 (927) Other assets 526 (2,256) (226) Accounts payable and other liabilities (23) 885 1,013 Travelers Cheques outstanding (449) (770) (22) Net cash (used in) provided by operating activities attributable to discontinued operations (233) 129 (129) Net cash provided by operating activities 6,384 8,141 8,011 Cash Flows from Investing Activities Sale of investments 2,930 4,657 3,034 Maturity and redemption of investments 2,900 9,620 6,154 Purchase of investments (13,719) (14,724) (9,592) Net decrease (increase) in cardmember loans/receivables 6,154 5,940 (20,377) Proceeds from cardmember loan securitizations 2,244 9,619 7,825 Maturities of cardmember loan securitizations (4,800) (4,670) (3,500) Purchase of premises and equipment (772) (977) (938) Sale of premises and equipment Acquisitions, net of cash acquired (4,589) (124) Net (increase) decrease in restricted cash (1,935) Net cash provided by investing activities attributable to discontinued operations 196 2, Net cash (used in) provided by investing activities (6,752) 7,561 (16,621) Cash Flows from Financing Activities Net change in interest-bearing deposits 11, ,361 Net (decrease) increase in short-term borrowings (6,574) (8,693) 2,682 Issuance of long-term debt 6,697 19,213 20,833 Principal payments on long-term debt (15,197) (13,787) (9,214) Issuance of American Express Series A preferred shares and warrants 3,389 Issuance of American Express common shares Repurchase of American Express Series A preferred shares (3,389) Repurchase of American Express stock warrants (340) Repurchase of American Express common shares (218) (3,572) Dividends paid (924) (836) (712) Net cash provided by (used in) financing activities attributable to discontinued operations 40 (6,653) 1,236 Net cash (used in) provided by financing activities (4,647) (10,440) 15,466 Effect of exchange rate changes on cash Net (decrease) increase in cash and cash equivalents (5,008) 5,282 7,022 Cash and cash equivalents at beginning of year includes cash of discontinued operations: 2009, $3; 2008, $6,390; 2007, $4,445 20,550 15,268 8,246 Cash and cash equivalents at end of year includes cash of discontinued operations: 2009, $0; 2008, $3; 2007, $6,390 $ 15,542 $ 20,550 $ 15,268 See Notes to Consolidated Financial Statements. 71

166 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AMERICAN EXPRESS COMPANY Additional Paid-in Capital Accumulated Other Comprehensive (Loss) Income Three Years Ended December 31, 2009 (Millions, except per share amounts) Total Preferred Shares Common Shares Retained Earnings Balances as of December 31, 2006 $ 10,511 $ $ 240 $ 9,638 $ (520) $ 1,153 Comprehensive income Net income 4,012 4,012 Change in net unrealized securities gains (80) (80) Change in net unrealized derivatives (losses) gains (98) (98) Foreign currency translation adjustments (33) (33) Net unrealized pension and other postretirement benefit gains Total comprehensive income 4,090 Repurchase of common shares (3,572) (12) (494) (3,066) Other changes, primarily employee plans ,020 (157) Effect of change in accounting principle (127) (127) Cash dividends declared Common, $0.63 per share (740) (740) Balances as of December 31, , ,164 (442) 1,075 Comprehensive income Net income 2,699 2,699 Change in net unrealized securities gains (711) (711) Change in net unrealized derivatives (losses) gains (9) (9) Foreign currency translation adjustments (113) (113) Net unrealized pension and other postretirement benefit losses (334) (334) Total comprehensive income 1,532 Repurchase of common shares (218) (1) (42) (175) Other changes, primarily employee plans (44) Cash dividends declared Common, $0.72 per share (836) (836) Balances as of December 31, , ,496 (1,606) 2,719 Comprehensive income Net income 2,130 2,130 Change in net unrealized securities gains (losses) 1,206 1,206 Change in net unrealized derivatives losses Foreign currency translation adjustments, including hedge gain/loss (354) (354) 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, Preferred share accretion 232 (232) Repurchase of preferred shares (3,389) (3,389) Repurchase of warrants (340) (232) (108) Issuance of common shares Other changes, primarily employee plans Cash dividends declared Preferred shares (74) (74) Common, $0.72 per share (855) (855) Balances as of December 31, 2009 $ 14,406 $ $ 237 $ 11,144 $ (712) $ 3,737 See Notes to Consolidated Financial Statements. 72

167 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES THE COMPANY 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 various products and services are sold globally to diverse customer groups, including consumers, small businesses, middle-market companies, and large corporations. These products and services are sold through various channels, including direct mail, on-line applications, targeted direct and third-party sales forces and direct response advertising. PRINCIPLES OF CONSOLIDATION The Consolidated Financial Statements of the Company are prepared in conformity with U.S. generally accepted accounting principles (GAAP). All significant intercompany transactions are eliminated. The Company has performed an evaluation of subsequent events through February 25, 2010, which is the date the financial statements were issued. The Company consolidates all voting interest entities in which the Company holds a controlling financial interest through which the Company is able to exercise control over those entities operating and financial decisions. Entities in which the Company s voting interest does not provide the Company with control, but allows the Company to exert significant influence over their financial and operating decisions are accounted for under the equity method. All other investments in equity securities, to the extent that they are not considered marketable securities, are accounted for under the cost method. Investments with variable interest entities (VIEs) are limited. The Company consolidates any VIEs for which it is considered to be the primary beneficiary. The determination of whether an entity is a VIE is based on the amount and characteristics of the entity s equity. An enterprise is required to consolidate a VIE when it has a variable interest for which it is deemed to be the primary beneficiary, that is, it will absorb a majority of the VIE s expected losses or receive a majority of the VIE s expected residual returns. Certain reclassifications of prior period amounts have been made to conform to the current presentation. These reclassifications did not have an impact on the Company s results of operations. FOREIGN CURRENCY Assets and liabilities denominated in foreign currencies are translated into U.S. dollars based upon exchange rates prevailing at the end of each year. The resulting translation adjustments, along with any related qualifying hedge and tax effects, are included in accumulated other comprehensive (loss) income, a component of shareholders equity. Translation adjustments, including qualifying hedge and tax effects, are reclassified to earnings upon the sale or substantial liquidation of investments in foreign operations. Revenues and expenses are translated at the average month-end exchange rates during the year. Gains and losses related to transactions in a currency other than the functional currency, including operations outside the U.S. where the functional currency is the U.S. dollar, are reported net, in the Company s Consolidated Statements of Income, in other non-interest revenue, interest income, interest expense, or other, net expense, depending on the nature of the activity. Net foreign currency transaction gains amounted to approximately $205 million, $15 million and $27 million in 2009, 2008 and 2007, respectively. Refer to Note 19 for further discussion of certain items that impacted these gains in AMOUNTS BASED ON ESTIMATES AND ASSUMPTIONS Accounting estimates are an integral part of the Consolidated Financial Statements. These estimates are based, in part, on management s assumptions concerning future events. Among the more significant assumptions are those that relate to reserves for cardmember losses relating to loans and charge card receivables, reserves for Membership Rewards cost, fair value measurements, goodwill and income taxes. These accounting estimates reflect the best judgment of management, but actual results could differ. TOTAL REVENUES NET OF INTEREST EXPENSE Discount Revenue Discount revenue represents fees charged to merchants with which the Company, or its franchise partners, has entered into card acceptance agreements for facilitating transactions between the merchants and the Company s cardmembers. The discount generally is deducted from the payment to the merchant and recorded as discount revenue at the time the charge is captured. Net Card Fees Card fees are deferred and recognized 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 cancellations. Charge card fees are recognized in net card fees in the Consolidated Statements of Income and the unamortized net card fee balance is reported in other liabilities on the Consolidated Balance Sheets (refer to Note 11). Loan product fees are considered an enhancement to the 73

168 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY yield on the product, and are recognized in interest and fees on loans in the Consolidated Statements of Income. The unamortized net card fee balance for lending products is reported net in cardmember loans on the Consolidated Balance Sheets (refer to Note 5). Travel Commissions and Fees The Company earns travel commissions and fees by charging clients transaction or management fees for selling and arranging travel and travel management services. Client transaction fee revenue is recognized at the time the client books the travel arrangements. Travel management services revenue is recognized over the contractual term of the agreement. The Company s travel suppliers (for example, airlines, hotels, car rental companies) pay commissions and fees on tickets issued, sales and other services based on contractual agreements. Commissions and fees from travel suppliers are generally recognized at the time a ticket is purchased or over the term of the contract. Commissions and fees that are based on actual usage that is unknown at time of purchase (for example, hotel and car rentals) are recognized when cash is received. Other Commissions and Fees Other commissions and fees include foreign currency conversion fees, delinquency fees, service fees and other card related assessments, which are recognized primarily in the period in which they are charged to the cardmember. Also included are fees related to the Company s Membership Rewards program, which are deferred and recognized over the period covered by the fee. The unamortized Membership Rewards fee balance is included in other liabilities on the Consolidated Balance Sheets (refer to Note 11). Contra-revenue The Company regularly makes payments through contractual arrangements with merchants, Commercial Card clients and certain other customers, collectively the customers. Payments to customers are generally classified as contra-revenue unless a specifically identifiable benefit (e.g. goods or services) is received by the Company in consideration for that payment and the fair value of such benefit is determinable and measurable. If no such benefit is identified, then the entire payment is classified as contra-revenue, and included within total non-interest revenues in the Consolidated Statements of Income in the line item where the related transaction revenues are recorded (e.g. discount revenue, travel commissions and fees, and other commissions and fees). If such a benefit is identified, then the payment is classified as expense up to the estimated fair value of the benefit. Interest Income Interest on loans owned is assessed using the average daily balance method. Interest is recognized based upon the loan principal amount outstanding in accordance with the terms of the applicable account agreement until the outstanding balance is paid or written-off. Interest and dividends on investment securities primarily relates to 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 a constant rate of return is recognized on the investment security s outstanding balance. Amounts are recognized until such time as a security is in default or when it is likely that future interest payments will not be made as scheduled. Interest on deposits with banks and other is recognized as earned, and primarily relates to the placement of cash in excess of near-term funding requirements in interest-bearing time deposits, overnight sweep accounts, and other interest bearing demand and call accounts. Interest 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 financing. BALANCE SHEET Cash and Cash Equivalents Cash and cash equivalents include cash and amounts due from banks, interest-bearing bank balances, including securities purchased under resale agreements and other highly liquid investments with original maturities of 90 days or less. Premises and Equipment Premises and equipment, including leasehold improvements, are carried at cost less accumulated depreciation. Costs incurred during construction are capitalized and are depreciated once an asset is placed in service. Depreciation is generally computed using the straight-line method over the estimated useful lives of assets, which range from 3 to 8 years for equipment. Premises are depreciated based upon their estimated useful life at the acquisition date, which generally ranges from 40 to 60 years. Leasehold improvements are depreciated using the straight-line method over the lesser of the remaining term of the leased facility or the economic life of the improvement, which ranges from 5 to 10 years. The Company maintains operating leases worldwide for facilities and equipment. Rent 74

169 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY expense for facility leases is recognized ratably over the lease term, and is calculated to include adjustments for rent concessions, rent escalations and leasehold improvement allowances. The Company accounts for lease restoration obligations in accordance with applicable GAAP, which requires recognition of the fair value of restoration liabilities when incurred, and amortization of capitalized restoration costs over the lease term. Software development costs The Company capitalizes certain costs associated with the acquisition or development of internal-use software. Once the software is ready for its intended use, these costs are amortized on a straight-line basis over the software s estimated useful life, generally 5 years. SIGNIFICANT ACCOUNTING POLICIES The following table identifies the Company s other significant accounting policies, the Note and page where a detailed description of each policy can be found. Significant Accounting Policy Note Number Note Title Page Fair Value Measurements Note 3 Fair Values of Financial Instruments Page 77 Accounts Receivable Note 4 Accounts Receivable Page 80 Loans Note 5 Loans Page 82 Investment Securities Note 6 Investment Securities Page 84 Securitization Income, Net; and Asset Securitization Note 7 Asset Securitizations Page 87 Goodwill and Other Intangible Assets Note 8 Other Assets Page 91 Membership Rewards Note 11 Other Liabilities Page 97 Derivative Financial Instruments and Hedging Activities Note 12 Derivative and Hedging Activities Page 98 Income Taxes Note 17 Income Taxes Page 108 Other Non-Interest Revenues Note 19 Details of Certain Consolidated Statements of Income Page 110 Other, Net Expense Note 19 Details of Certain Consolidated Statements of Income Page 110 Stock-based Compensation Note 20 Stock Plans Page 111 Bank Holding Company Note 23 Regulatory Matters and Capital Adequacy Page 119 Reportable Operating Segments Note 25 Reportable Operating Segments and Geographic Operations Page

170 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY RECENTLY ISSUED ACCOUNTING STANDARDS The Financial Accounting Standards Board (FASB) recently issued the following accounting standards, which are effective beginning January 1, Accounting Standards Update (ASU) No , Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets: An amendment for accounting for transfers of financial assets will eliminate the concept of a qualifying special purpose entity (QSPE), therefore requiring these entities to be evaluated under the accounting guidance for consolidation of VIEs. Other changes include additional considerations when determining if sale accounting is appropriate, as well as enhanced disclosure requirements. The new standard is to be applied prospectively to transactions completed after the effective date. ASU No , Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities: An amendment for accounting by enterprises involved with VIEs eliminates the scope exception for QSPEs and requires an entity to reconsider its previous consolidation conclusions reached under the VIE consolidation model, including (i) whether an entity is a VIE, (ii) whether the enterprise is the VIE s primary beneficiary, and (iii) the required financial statement disclosures. The new standard can be applied as of the effective date, with a cumulative-effect adjustment to retained earnings recognized on that date, or retrospectively, with a cumulative-effect adjustment to retained earnings recognized as of the beginning of the first year adjusted. The Company has determined that it will be required to consolidate the American Express Credit Account Master Trust (the Lending Trust) as a result of implementing these standards. This will result in approximately $29.0 billion of additional cardmember loans being recognized on the balance sheet of the Company effective January 1, 2010, along with $25.0 billion of long-term debt. This will also result in the reduction of the Company s investment securities by $3.6 billion and other assets by $0.7 billion. The $29.0 billion of cardmember loans will require associated loan loss reserves of approximately $2.5 billion, which will be charged directly against retained earnings. The adjustments described above will reduce shareholders equity by approximately $1.8 billion on an after-tax basis. Refer to Note 7 for further discussion of the Lending Trust. NOTE 2 ACQUISITIONS AND DISCONTINUED OPERATIONS ACQUISITIONS Revolution Money On January 15, 2010, the Company purchased Revolution Money, a provider of secure person-to-person payment services through an internet based platform, for approximately $300 million. The majority of the consideration paid is expected to be recorded as goodwill, with the remainder to be allocated to finite-lived intangible assets and other miscellaneous assets and liabilities. Corporate Payment Services On March 28, 2008, the Company purchased Corporate Payment Services (CPS), General Electric Company s commercial card and corporate purchasing business unit. The Company acquired $2.2 billion in assets and assumed $63 million in liabilities. The total cash consideration of $2.3 billion paid by the Company consisted of the contractual purchase price of approximately $1.1 billion plus the repayment of CPS $1.2 billion in outstanding debt as of the acquisition date. DISCONTINUED OPERATIONS On September 18, 2007, the Company entered into an agreement to sell its international banking subsidiary, American Express Bank Ltd. (AEB) to Standard Chartered PLC (Standard Chartered) and to sell American Express International Deposit Company (AEIDC) through a put/call agreement to Standard Chartered 18 months after the close of the AEB sale. The sale of AEB was completed on February 29, In the third quarter of 2008, AEIDC qualified to be reported as a discontinued operation. The sale of AEIDC was completed on September 10, For all periods presented, all of the operating results, assets and liabilities, and cash flows of AEB (except for certain components of AEB that were not sold) and AEIDC have been removed from the Corporate & Other segment and are presented separately in discontinued operations in the Company s Consolidated Financial Statements. The Notes to the Consolidated Financial Statements have been adjusted to exclude discontinued operations unless otherwise noted. 76

171 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY NOTE 3 FAIR VALUES As permitted under GAAP, the Company adopted new fair value measurement and disclosure requirements in two phases. The first phase, effective for the Company January 1, 2008, establishes requirements for fair value measurements of financial assets and liabilities, and other recurring fair value measurements reported or disclosed at fair value. The second phase, effective for the Company January 1, 2009, establishes requirements for all other assets and liabilities recognized or disclosed at fair value on a nonrecurring basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date, and is based on the Company s principal or most advantageous market for the specific asset or liability. GAAP established a three-level hierarchy of inputs to valuation techniques used to measure fair value, defined as follows: Level 1 inputs that are quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2 inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability, including: - Quoted prices for similar assets or liabilities in active markets - Quoted prices for identical or similar assets or liabilities in markets that are not active - Inputs other than quoted prices that are observable for the asset or liability - Inputs that are derived principally from or corroborated by observable market data by correlation or other means Level 3 inputs that are unobservable and reflect the Company s own assumptions about the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances (e.g. internally derived assumptions surrounding the timing and amount of expected cash flows). As summarized in the table below, the Company has financial assets and liabilities that are measured at fair value on a recurring basis. For the year ended December 31, 2009, the Company did not have any significant assets or liabilities that were measured at fair value on a nonrecurring basis in periods subsequent to initial recognition. The following table provides a summary of the estimated fair values for the Company s financial assets and financial liabilities measured at fair value on a recurring basis by GAAP s valuation hierarchy (as described above), as of December 31: (Millions) Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Assets Investment securities (a) $ 20,738 $ 530 $ 20,208 $ $ 11,782 $ $ 11,782 $ Retained subordinated securities 3,599 3, Interest-only strip Derivatives (b) ,782 1,782 Total assets (c) $ 25,190 $ 530 $ 21,041 $ 3,619 $ 14,340 $ $ 13,564 $ 776 Liabilities Derivatives (b) $ 283 $ $ 283 $ $ 483 $ $ 483 $ Total liabilities $ 283 $ $ 283 $ $ 483 $ $ 483 $ (a) Excludes retained subordinated securities and interest-only strip. (b) GAAP permits the netting of derivative assets and derivative liabilities when a legally enforceable master netting agreement exists between the Company and its derivative counterparty. As of December 31, 2009 and 2008, $33 million and $39 million, respectively, of derivative assets and liabilities have been offset and presented net on the Consolidated Balance Sheets. (c) The Company s defined benefit pension plan (the Plan) assets are included in the determination of the Plan s net funded status, which is reported in other liabilities in the Consolidated Balance Sheets. The Plan assets are also measured at fair value on an annual basis, applying inputs in the fair value hierarchy as described above. Refer to Note 21 for further details. 77

172 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY The table below presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the years ended December 31, 2009 and 2008, including realized and unrealized gains (losses) included in earnings and accumulated other comprehensive (loss) income: (Millions) Investments- Retained Subordinated Securities Other Assets- Interest-Only Strip Investments- Retained Subordinated Securities Other Assets- Interest-Only Strip Beginning fair value, January 1 $ 744 $ 32 $ 78 $ 223 Increases in securitized loans (a) 1,760 1,250 Unrealized and realized gains (losses) 1,095(b) (12)(c) (584)(b) (191)(c) Ending fair value, December 31 $ 3,599 $ 20 $ 744 $ 32 (a) Represents cost basis of securitized loans. (b) Included in accumulated other comprehensive (loss) income. (c) Included in securitization income, net. VALUATION TECHNIQUES USED IN MEASURING FAIR VALUE GAAP requires disclosure of the estimated fair value of all financial instruments. A financial instrument is defined as cash, evidence of an ownership in an entity, or a contract between two entities to deliver cash or another financial instrument or to exchange other financial instruments. The disclosure requirements for the fair value of financial instruments exclude leases, equity method investments, affiliate investments, pension and benefit obligations, insurance contracts and all non-financial instruments. For the financial assets and liabilities measured at fair value on a recurring basis, summarized in the valuation hierarchy table above, the Company applies the following valuation techniques to measure fair value: Investment Securities (Excluding Retained Subordinated Securities and the Interest-only Strip) When available, quoted market prices in active markets are used to determine fair value. Such investment securities are classified within Level 1 of the fair value hierarchy. When quoted prices in an active market are not available, the fair values for the Company s investment securities are obtained primarily from pricing services engaged by the Company, and the Company receives one price for each security. The fair values provided by the pricing services are estimated by using pricing models, where the inputs to those models are based on observable market inputs. The inputs to the valuation techniques applied by the pricing services vary depending on the type of security being priced but are typically benchmark yields, benchmark security prices, credit spreads, prepayment speeds, reported trades and broker-dealer quotes, all with reasonable levels of transparency. The pricing services did not apply any adjustments to the pricing models used. In addition, the Company did not apply any adjustments to prices received from the pricing services. The Company classifies the prices obtained from the pricing services within Level 2 of the fair value hierarchy because the underlying inputs are directly observable from active markets or recent trades of similar securities in inactive markets. However, the pricing models used 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. The Company has reaffirmed its understanding of the valuation techniques used by its pricing services. In addition, the Company corroborates the prices provided by its pricing services to test their reasonableness by comparing their prices to valuations from different pricing sources as well as comparing prices to the sale prices received from sold securities. Refer to Note 6 for additional fair value information. Retained Subordinated Securities The Company determines the fair value of its retained subordinated securities using discounted cash flow models. The discount rate used is based on an interest rate curve that is observable in the marketplace plus an unobservable credit spread commensurate with the risk of these securities and similar financial instruments. The Company classifies such securities in Level 3 of the fair value hierarchy because the applicable credit spreads are not observable due to the illiquidity in the market with respect to these securities and similar financial instruments. Refer to Note 7 for additional fair value information. 78

173 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY Interest-only Strip The fair value of the interest-only strip is the present value of estimated future positive excess spread expected to be generated by the securitized loans over the estimated remaining life of those loans. Management utilizes certain estimates and assumptions to determine the fair value of the interest-only strip asset, including estimates for finance charge yield, credit losses, London Interbank Offered Rate (LIBOR) (which determines future certificate interest costs), monthly payment rate and discount rate. On a quarterly basis, the Company compares the assumptions it uses in calculating the fair value of its interest-only strip to observable market data when available, and to historical trends. The interest-only strip is classified within Level 3 of the fair value hierarchy due to the significance of the unobservable inputs used in valuing this asset. Refer to Note 7 for additional fair value information. Derivative Financial Instruments The fair value of the Company s derivative financial instruments, which could be assets or liabilities on the Consolidated Balance Sheets, is estimated by using either a third-party valuation service that uses proprietary pricing models, or by using internal pricing models, neither of which contain a high level of subjectivity as the valuation techniques used do not require significant judgment and inputs to those models are readily observable from actively quoted markets. In each case, the valuation models used are consistently applied and reflect the contractual terms of the derivatives, including the period of maturity, and market-based parameters such as interest rates, foreign exchange rates, equity indices or prices, and volatility. Credit valuation adjustments are necessary when the market parameters (for example, a benchmark curve) used to value derivatives are not indicative of the credit quality of the Company or its counterparties. The Company considers the counterparty credit risk by applying an observable forecasted default rate to the current exposure. Refer to Note 12 for additional fair value information. The following table discloses the estimated fair values for the Company s financial assets and financial liabilities not carried at fair value as of December 31: (Rounded to nearest billion) Carrying Value Fair Value Carrying Value Fair Value Financial Assets: Assets for which carrying values equal or approximate fair value $ 57 $ 57 $ 58 $ 58 Loans $ 30 $ 30 $ 41 $ 41 Financial Liabilities: Liabilities for which carrying values equal or approximate fair value $ 33 $ 33 $ 37 $ 37 Certificates of deposit $ 15 $ 16 $ 8 $ 7 Long-term debt $ 52 $ 54 $ 60 $ 56 The fair values of these financial instruments are estimates based upon market conditions and perceived risks as of December 31, 2009 and 2008, and require management judgment. These figures may not be indicative of their future fair values. The fair value of the Company cannot be estimated by aggregating the amounts presented. The following methods were used to determine estimated fair values: FINANCIAL ASSETS FOR WHICH CARRYING VALUES EQUAL OR APPROXIMATE FAIR VALUE Financial assets for which carrying values equal or approximate fair value include cash and cash equivalents, cardmember receivables, accrued interest and certain other assets. For these assets, the carrying values approximate fair value because they are short-term in duration or variable rate in nature. 79

174 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY FINANCIAL ASSETS CARRIED AT OTHER THAN FAIR VALUE Loans Loans are recorded at historical cost, less reserves, on the Consolidated Balance Sheets. In estimating the fair value for the Company s loans, the principal market is assumed to be the securitization market, and the Company uses the hypothetical securitization price to determine the fair value of the portfolio. The securitization price is estimated from the assumed proceeds of the hypothetical securitization in the current market, adjusted for securitization uncertainties such as market conditions and liquidity. FINANCIAL LIABILITIES FOR WHICH CARRYING VALUES EQUAL OR APPROXIMATE FAIR VALUE Financial liabilities for which carrying values equal or approximate fair value include accrued interest, customer deposits (excluding certificates of deposit, which are described further below), Travelers Cheques outstanding, short-term borrowings and certain other liabilities for which the carrying values approximate fair value because they are short-term in duration, variable rate in nature, or have no defined maturity. FINANCIAL LIABILITIES CARRIED AT OTHER THAN FAIR VALUE Certificates of Deposit Certificates of deposit (CDs) are recorded at their historical issuance cost on the Consolidated Balance Sheets. Fair value is estimated using a discounted cash flow methodology based on the Company s current borrowing rates for similar types of CDs. Long-term Debt Long-term debt is recorded at historical issuance cost on the Consolidated Balance Sheets. Fair value is estimated using either quoted market prices or discounted cash flows based on the Company s current borrowing rates for similar types of borrowing. NOTE 4 ACCOUNTS RECEIVABLE CARDMEMBER RECEIVABLES Cardmember receivables represent amounts due from charge card customers. These receivables are recorded at the time a cardmember enters into a point-of-sale transaction with a merchant. Cardmember receivable balances are presented on the Consolidated Balance Sheets net of reserves for losses, discussed below, and includes principal and any related accrued fees. RESERVES FOR LOSSES CARDMEMBER RECEIVABLES Reserves for losses relating to cardmember receivables represent management s best estimate of the losses inherent in the Company s outstanding portfolio of receivables. Management s evaluation process requires certain estimates and judgments. Reserves for these losses are primarily based upon models that analyze portfolio performance and reflect management s judgment regarding overall reserve adequacy. The analytic models take into account several factors, including average losses and recoveries over an appropriate historical period. Management considers whether to adjust the analytic models for specific factors such as increased risk in certain portfolios, impact of risk management initiatives on portfolio performance and concentration of credit risk based on factors such as tenure, industry or geographic regions. In addition, management adjusts the reserves for losses for other external environmental factors such as leading economic and market indicators, and the legal and regulatory environment. Generally, due to the short-term nature of cardmember receivables, the impact of the other external environmental factors on the inherent losses within the cardmember receivable portfolio is not significant. As part of this evaluation process, management also considers various reserve coverage metrics, such as reserves as a percentage of past-due amounts, reserves as a percentage of cardmember receivables and net write-off coverage. Cardmember receivables balances are written off when management deems amounts to be uncollectible and is generally determined by the number of days past due. Cardmember receivables within the U.S. Card Services (USCS) segment are generally written off when 180 days past due and cardmember receivables within the International Card Services (ICS) and Global Commercial Services (GCS) segments are generally written off when 360 days past billing. Receivables in bankruptcy or owed by deceased individuals are written off upon notification. Recoveries are recognized on a cash basis. Prior to the fourth quarter of 2008, cardmember receivables in the USCS segment were written off when 360 days past billing. During 2008, consistent with applicable bank regulatory guidance, the Company modified its write-off methodology to write off cardmember receivables in the USCS segment when 180 days past due. Net cardmember 80

175 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY receivables write-offs in 2008 included approximately $341 million resulting from this change in write-off methodology. The impact of this change to the provision for charge card losses was not material. Accounts receivable as of December 31 consisted of: (Millions) U.S. Card Services $ 17,750 $ 17,822 International Card Services 5,944 5,582 Global Commercial Services 9,844 9,397 Global Network & Merchant Services (a) Cardmember receivables gross (b) 33,743 32,988 Less: Cardmember reserve for losses Cardmember receivables, net $ 33,197 $ 32,178 Other receivables, net (c) $ 5,007 $ 4,393 (a) Includes receivables primarily related to the Company s business partners and International Currency Card portfolios. (b) Includes approximately $10.4 billion and $9.9 billion of cardmember receivables outside the United States as of December 31, 2009 and 2008, respectively. (c) Other receivables primarily represent amounts due from the Company s travel customers, third party issuing partners, accrued interest on investments, receivables acquired in connection with the purchase of CPS, Company cash held in an off-balance sheet securitization trust for daily settlement requirements and other receivables due to the Company in the ordinary course of business. The following table presents changes in the cardmember receivables reserve for losses for years ended December 31: (Millions) Balance, January 1 $ 810 $ 1,149 $ 981 Additions: Cardmember receivables provision (a) 857 1,363 1,140 Deductions: Cardmember receivables net write-offs (a) (1,131) (1,552) (907) Cardmember receivables other (b) 10 (150) (65) Balance, December 31 $ 546 $ 810 $ 1,149 (a) For cardmember receivables, represents provision for losses and write-offs consisting of principal (resulting from authorized and unauthorized transactions) and fee components, less recoveries of $349 million, $187 million and $203 million for 2009, 2008 and 2007, respectively. (b) For December 31, 2008, these amounts primarily include adjustments related to the reclassification of waived fee reserves to a contra-cardmember receivable. This amount, for all periods, includes foreign currency translation adjustments. Refer to Note 5 for discussion on pledged cardmember receivables as of December 31, 2009 and Also refer to Note 5 for impaired cardmember receivables as of December 31, 2009 and

176 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY NOTE 5 LOANS CARDMEMBER LOANS Cardmember loans represent amounts due from lending product customers. These loans are recorded at the time a cardmember enters into a point-of-sale transaction with a merchant or when a charge card customer enters into an extended payment arrangement. Cardmember loans are presented on the Consolidated Balance Sheets net of reserves for cardmember losses, unamortized net card fees and include accrued interest receivable and fees as of the balance sheet date. The Company s policy is to generally cease accruing for interest receivable on a cardmember loan at the time when the account is written off. RESERVES FOR LOSSES CARDMEMBER LOANS Reserves for losses relating to cardmember loans represent management s best estimate of the losses inherent in the Company s outstanding portfolio of loans. Management s evaluation process requires certain estimates and judgments. Reserves for these losses are primarily based upon models that analyze portfolio performance and reflect management s judgment regarding overall reserve adequacy. The analytic models take into account several factors, including average losses and recoveries over an appropriate historical period. Management considers whether to adjust the analytic models for specific factors such as increased risk in certain portfolios, impact of risk management initiatives on portfolio performance and concentration of credit risk based on factors such as tenure, industry or geographic regions. In addition, management adjusts the reserves for losses for other external environmental factors including leading economic and market indicators such as the unemployment rate, GDP, home price indices, non-farm payrolls, personal consumption expenditures index, consumer confidence index, purchasing manager s index, bankruptcy filings and the legal and regulatory environment. As part of this evaluation process, management also considers various reserve coverage metrics, such as reserves as a percentage of past-due amounts, reserves as a percentage of cardmember loans and net write-off coverage. Cardmember loan balances are written off when management deems amounts to be uncollectible and is generally determined by the number of days past due (at 180 days past due). Cardmember loans in bankruptcy or owed by deceased individuals are written off upon notification. Recoveries are recognized on a cash basis. Loans as of December 31 consisted of: (Millions) U.S. Card Services $ 23,507 $ 32,684 International Card Services 9,241 9,499 Global Commercial Services Cardmember loans (a) 32,772 42,211 Less: Cardmember loans reserve for losses 3,268 2,570 Cardmember loans, net $ 29,504 $ 39,641 Other loans, net (b) $ 506 $ 1,018 (a) Cardmember loan balance is net of unamortized net card fees of $114 million and $115 million as of December 31, 2009 and 2008, respectively. (b) Other loans primarily represent small business installment loans, a store card portfolio whose billed business is not processed on the Company s network and small business loans associated with the CPS acquisition. Other loans at December 31, 2008, included a loan to an affiliate in discontinued operations. The following table presents changes in the cardmember loans reserve for losses for years ended December 31: (Millions) Balance, January 1 $ 2,570 $ 1,831 $ 1,171 Additions: Cardmember loans provisions (a) 4,209 4,106 2,615 Cardmember loans other (b) Total provision 4,266 4,231 2,761 Deductions: Cardmember loans net write-offs principal (c) (2,949) (2,643) (1,636) Cardmember loans net write-offs interest and fees (c) (448) (580) (354) Cardmember loans other (d) (171) (269) (111) Balance, December 31 $ 3,268 $ 2,570 $ 1,831 (a) Represents loss provisions for cardmember loans consisting of principal (resulting from authorized transactions), interest and fee reserves components. (b) Primarily represents adjustments to cardmember loans resulting from unauthorized transactions. For December 31, 2008 and 2007, this amount also includes waived fees. (c) Cardmember loans net write-offs principal for 2009, 2008 and 2007 include recoveries of $327 million, $301 million and $295 million, respectively. Recoveries of interest and fees were de minimis. (d) For December 31, 2009, the amount for cardmember loans primarily includes $160 million of reserves that were removed in connection with securitizations during the period. The offset is in the allocated cost of the associated retained subordinated 82

177 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY securities. For December 31, 2008, these amounts include reclassification of waived fee reserves to contra-cardmember loans. This amount, for all periods, includes foreign currency translation adjustments. PLEDGED LOANS AND RECEIVABLES Certain cardmember loans and receivables totaling approximately $16.3 billion are pledged by the Company to its securitization Trusts (refer to Note 7). Upon adoption of new GAAP governing transfers of financial assets as of January 1, 2010, and the resulting consolidation of the Lending Trust (refer to Note 1), approximately $29.0 billion of additional cardmember loans will be recognized on the balance sheet of the Company. While the $29.0 billion of additional cardmember loans were sold by the Company s bank subsidiaries to the Lending Trust, such loans are deemed to be pledged by the Company to the Company s Lending Trust. IMPAIRED LOANS AND RECEIVABLES Individually impaired loans and receivables are defined by GAAP as larger balance or smaller balance homogeneous restructured loans and receivables for which it is probable that the lender will be unable to collect all amounts due according to the original contractual terms of the loan and receivable agreement. The Company may modify cardmember loans and receivables and such modifications may include reducing the interest rate/delinquency fees on the loans and receivables and/or placing the cardmember on a fixed payment plan not exceeding 60 months. If the cardmember does not comply with the modified terms, then the loan or receivable agreement reverts back to its original terms. Impaired loans and receivables include long-term modification programs or Troubled Debt Restructurings (TDR), wherein the terms of a loan or receivable have been modified for cardmembers that are experiencing financial difficulties and a long-term concession (more than 12 months) has been granted to the borrower. TDRs totaled $114 million and $71 million of cardmember loans and receivables outstanding as of December 31, 2009 and 2008, respectively. Reserves for losses for TDRs is determined by the difference between cash flows expected to be received from the cardmember discounted at the original contractual interest rates and the carrying value of the cardmember balance. The Company s policy is generally to accrue interest through the date of charge-off (i.e. 180 days past due). Loans amounting to $299 million and $927 million at December 31, 2009 and 2008, respectively, were past due 90 days or more and still accruing interest. These amounts include $46 million and $69 million of cardmember loans that are also included in the Short Term Modification Programs discussed above. In addition, as of December 31, 2009 and 2008, loans of $494 million and $14 million, respectively, were not accruing interest. These amounts primarily include certain cardmember loans placed with outside collection agencies. OTHER LOANS AND RECEIVABLES WITH SHORT-TERM MODIFICATIONS In addition to the TDRs discussed above, the Company has instituted other modification programs that include short-term (12 months or less) interest rate and fee reductions to cardmembers experiencing financial difficulty ( Short Term Modification Programs ). As of December 31, 2009 and 2008, approximately $701 million and $497 million, respectively, in cardmember loans and receivables have been modified under these Short Term Modification Programs. These amounts include $46 million and $69 million, respectively, of cardmember loans that are also included in loans past due 90 days or more still accruing interest discussed above. The short-term modifications to these cardmember loans and receivables had no incremental impact on the Company s reserve for losses. 83

178 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY NOTE 6 INVESTMENT SECURITIES Investment securities include debt and equity securities and are classified as available-for-sale. The Company s investment securities, principally debt securities, are carried at fair value on the Consolidated Balance Sheets with unrealized gains (losses) recorded in accumulated other comprehensive (loss) income, net of income tax provisions (benefits). Realized gains and losses are recognized in results of operations upon disposition of the securities using the specific identification method on a trade date basis. Refer to Note 3 for a description of the Company s methodology for determining the fair value of its investment securities. The following is a summary of investment securities as of December 31: (Millions) Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value State and municipal obligations $ 6,457 $ 51 $ (258) $ 6,250 $ 6,628 $ 37 $ (1,034) $ 5,631 U.S. Government treasury obligations 5, ,566 1, ,981 U.S. Government agency obligations 6, (1) 6,745 3, ,185 Mortgage-backed securities (a) (2) Retained subordinated securities (b) 3, (1) 3,599 1,328 (584) 744 Equity securities (c) Corporate debt securities (d) 1, (12) 1, (13) 218 Foreign government bonds and obligations (4) 81 Other (e) Total $23,542 $ 1,069 $ (274) $ 24,337 $13,684 $ 477 $ (1,635) $ 12,526 (a) Represents mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. (b) Consists of investments in retained subordinated securities from the Company s cardmember loan securitization program. (c) Represents the Company s investment in Industrial and Commercial Bank of China (ICBC). (d) The December 31, 2009 balance includes $1.1 billion (cost basis) of corporate debt obligations issued under the Temporary Liquidity Guarantee Program (TLGP) that are guaranteed by the Federal Deposit Insurance Corporation (FDIC). (e) Other is primarily comprised of investments in various mutual funds. OTHER-THAN-TEMPORARY IMPAIRMENT Realized losses are recognized when management determines that a decline in value is other-than-temporary. Such determination requires judgment regarding the amount and timing of recovery. The Company reviews and evaluates its investments at least quarterly and more often, as market conditions may require, to identify investments that have indications of other-than-temporary impairments. The determination of other-than-temporary impairment is a subjective process, requiring the use of judgments and assumptions. It is reasonably possible that a change in estimate will occur in the near term relating to other-than- temporary impairment. Accordingly, the Company considers several factors when evaluating debt securities for an other-than-temporary impairment including the determination of the extent to which the decline in fair value of the security is due to increased default risk for the specific issuer or market interest rate risk. With respect to increased default risk, the Company assesses the collectibility of principal and interest payments by monitoring issuers credit ratings, related changes to those ratings, specific credit events associated with the individual issuers as well as the credit ratings of a financial guarantor, where applicable, and the extent to which amortized cost exceeds fair value and the duration and size of that difference. With respect to market interest rate risk, including benchmark interest rates and credit spreads, the Company assesses whether it has the intent to sell the securities, and whether it is more likely than not that the Company will not be required to sell the securities before recovery of any unrealized losses. 84

179 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY The following table provides information about the Company s investment securities with gross unrealized losses and the length of time that individual securities have been in a continuous unrealized loss position as of December 31: (Millions) Less than 12 months 12 months or more Less than 12 months 12 months or more Description of Securities Estimated Fair Value Gross Unrealized Losses Estimated Fair Value Gross Unrealized Losses Estimated Fair Value Gross Unrealized Losses Estimated Fair Value Gross Unrealized Losses State and municipal obligations $ 837 $ (25) $ 2,074 $ (233) $ 2,515 $ (326) $ 2,037 $ (708) U.S. Government agency obligations 249 (1) Mortgage-backed securities 120 (2) 4 Retained subordinated securities 75 (1) 744 (584) Corporate debt securities 102 (1) 38 (11) 35 (1) 99 (12) Foreign government bonds and obligations 27 (4) Total $ 1,308 $ (29) $ 2,191 $ (245) $ 3,321 $ (915) $ 2,136 $ (720) The following table summarizes the unrealized losses of temporary impairments by ratio of fair value to amortized cost as of December 31: (Dollars in millions) Less than 12 months 12 months or more Total Ratio of Fair Value to Amortized Cost Number of Securities Estimated Fair Value Gross Unrealized Losses Number of Securities Estimated Fair Value Gross Unrealized Losses Number of Securities Estimated Fair Value Gross Unrealized Losses 2009: 90% 100% 155 $ 1,289 $ (25) 235 $ 1,414 $ (87) 390 $ 2,703 $ (112) Less than 90% 2 19 (4) (158) (162) Total as of December 31, $ 1,308 $ (29) 318 $ 2,191 $ (245) 475 $ 3,499 $ (274) 2008: 90% 100% 327 $ 1,289 $ (73) 37 $ 111 $ (7) 364 $ 1,400 $ (80) Less than 90% 321 2,032 (842) 310 2,025 (713) 631 4,057 (1,555) Total as of December 31, $ 3,321 $ (915) 347 $ 2,136 $ (720) 995 $ 5,457 $ (1,635) 85

180 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY The gross unrealized losses on state and municipal securities and all other debt securities are attributable to a number of reasons such as issuer specific credit spreads and changes in market interest rates. In assessing default risk on these securities, excluding the Company s retained subordinated securities, the Company has qualitatively considered the key factors identified above and determined that it expects to collect all of the contractual cash flows due on the securities. In assessing default risk on the retained subordinated securities, the Company has analyzed the projected cash flows of the American Express Credit Account Master Trust (the Lending Trust) and expects to collect all of the contractual cash flows due on the securities. Overall, for the investment securities in gross unrealized loss positions identified above (a) the Company does not intend to sell the securities, (b) it is more likely than not that the Company will not be required to sell the securities before recovery of the unrealized losses, and (c) the Company expects that the contractual principal and interest will be received on the securities. SUPPLEMENTAL INFORMATION Gross realized gains and losses on sales of investment securities, included in other non-interest revenues, are as follows: (Millions) Gains $ 226(a) $ 20 $ 14 Losses (1) (8) (5) Total $ 225 $ 12 $ 9 (a) Primarily represents the gain from the sale of 50 percent of the Company s investment in ICBC. Contractual maturities of investment securities, excluding equity securities and other securities (primarily mutual funds with no stated maturity), as of December 31, 2009, are as follows: (Millions) Cost Estimated Fair Value Due in: Due within 1 year $ 10,285 $ 10,333 Due after 1 year but within 5 years 6,439 6,919 Due after 5 years but within 10 years Due after 10 years 5,974 5,756 Total $ 23,402 $ 23,767 The Company s individual investments in the unrated classes of its retained subordinated securities contain multiple maturity dates over periods ranging from 2010 through Accordingly, in the table above, the Company has classified such investments based on the weighted-average maturity. In addition, the expected payments on state and municipal obligations and mortgage-backed securities may not coincide with their contractual maturities because borrowers have the right to call or prepay certain obligations. 86

181 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY NOTE 7 ASSET SECURITIZATIONS The Company periodically securitizes cardmember receivables and loans arising from its card business through the transfer of those assets to a trust. The trust then issues securities to third-party investors, collateralized by the transferred assets. Securitization transactions are accounted for as either sales or secured borrowings, based on the structure of the transaction and the current GAAP requirements. Refer to Note 1 for a description of the changes in GAAP governing the accounting for transfers of financial assets, which will result in all securitization transactions being accounted for as secured borrowings by the Company effective January 1, Based on GAAP in effect at December 31, 2009, in order for a securitization of financial assets to be accounted for as a sale, the transferor must surrender control over those financial assets to the extent that the transferor receives consideration other than beneficial interests in the transferred assets. Cardmember loans are transferred to the American Express Credit Account Master Trust, the Lending Trust, which meets the criteria of a qualifying special purpose entity (QSPE), and such transactions qualify as accounting sales through year-end, Accordingly, when loans were sold through securitizations, the Company removed the loans from its Consolidated Balance Sheets and recognized a gain or loss on sale and retained interests in the securitizations. Cardmember receivables are transferred to the American Express Issuance Trust, the Charge Trust, which is not a QSPE. Securitizations of cardmember receivables are accounted for as secured borrowings. OFF-BALANCE SHEET SECURITIZATIONS Servicing Portfolio In consideration for the transfer of the current cardmember loans, as well as the future cash flows related to the cardmember account, the Company, through its subsidiaries, receives an undivided, pro rata interest in the trust referred to as seller s interest, which is equal to the balance of all cardmember loans ($36.2 billion and $40.5 billion as of December 31, 2009 and 2008, respectively) transferred to the Lending Trust plus the associated accrued interest receivable ($918 million and $1.1 billion at December 31, 2009 and 2008, respectively) less the investors portion of those assets (securitized cardmember loans). Seller s interest is reported as cardmember loans on the Company s Consolidated Balance Sheets. Any accrued interest related to the investors portion of securitized cardmember loans is reported as other assets on the Company s Consolidated Balance Sheets. The Company retains servicing responsibilities for the transferred cardmember loans through its subsidiary, American Express Travel Related Services Company, Inc. (TRS), and earns a related fee. No servicing asset or liability is recognized at the time of a securitization because the Company receives adequate compensation relative to current market servicing fees. The following table illustrates the activity in the Lending Trust (including the securitized cardmember loans and seller s interest) for the years ended December 31: (Millions) Lending Trust assets, January 1 $ 41,579 $ 36,194 Account additions, net 2,956 10,187 Cardmember activity, net (7,457) (4,802) Lending Trust assets, December 31 $ 37,078 $ 41,579 Securitized cardmember loans, January 1 $ 28,955 $ 22,670 Impact of issuances, external 2,250 9,640 Impact of issuances, retained 2,013 1,315 Impact of maturities (4,892) (4,670) Securitized cardmember loans, December 31 $ 28,326 $ 28,955 Seller s interest, January 1 $ 12,624 $ 13,524 Impact of issuances (4,263) (10,955) Impact of maturities 4,892 4,670 Account additions, net 2,956 10,187 Cardmember activity, net (7,457) (4,802) Seller s interest, December 31 $ 8,752 $ 12,624 The Company announced in the second quarter of 2009 that certain actions affecting outstanding series of securities issued by the Lending Trust were completed in order to adjust the credit enhancement structure of substantially all of the outstanding series of securities previously issued by the Lending Trust. These actions were to address the concerns of rating agencies and the decline in the trust excess spread due to the performance of the underlying credit card receivables in the Lending Trust. The actions, which are permitted by the transaction documents governing the Lending Trust, consisted of the following: 1. Issuance of two new series of investor certificates (collectively, the Series D Certificates ) equaling approximately $1.5 billion in aggregate. The Series D Certificates were acquired by the Company in exchange for a portion of the sellers interest in the Lending Trust. The D Certificates, which were issued at a market interest rate, are subordinated to all other investor certificates and therefore provide additional credit enhancement to all outstanding series. These certificates have various maturities, including a final maturity of

182 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY 2. Designation of a percentage of new principal receivables arising from accounts in the Lending Trust as Discount Option Receivables (as defined in the Lending Trust documentation). As permitted under the terms of the transaction documents governing the Lending Trust, collections on Discount Option Receivables may be applied as finance charge collections, which increased the yield on the assets in the Lending Trust by approximately basis points beginning with the July 2009 monthly reporting period. The designation of Discount Option Receivables is scheduled to continue through The actions described above did not have a material impact on the Company s results of operations. Securitization Income The following table summarizes the activity related to securitized loans reported in securitization income, net for the years ended December 31: (Millions) Excess spread, net (a) $ (155) $ 544 $ 1,025 Servicing fees (Losses) Gains on sales from securitizations (b) (7) (17) 57 Securitization income, net $ 400 $ 1,070 $ 1,507 (a) Excess spread, net is the net cash flow from interest and fee collections allocated to the investors interests after deducting the interest paid on investor certificates, credit losses, contractual servicing fees, other expenses, and the changes in the fair value of the interest-only strip. This amount excludes issuer rate fee collections, which are a portion of monthly discount revenue that is earned and collected by the Company on new transactions by cardmembers that have their loans sold into the Lending Trust. These cash flows are available to pay monthly Lending Trust expenses. The issuer rate is reported in discount revenue in the Company s Consolidated Statements of Income. In periods when the excess spread, net in the Lending Trust becomes negative, and the issuer rate fee collections are utilized to pay Lending Trust expenses, the Company recognizes an expense in securitization income, net in the Company s Consolidated Statements of Income. (b) Excludes $201 million and $(393) million of credit provision impact from cardmember loan sales and maturities for 2009, $446 million and $(177) million of credit provision impact from cardmember loan sales and maturities for 2008, as well as $144 million and $(84) million of credit provision impact from cardmember loan sales and maturities for At the time of a cardmember loan securitization, the Company records a gain (loss) on sale, which is calculated as the difference between the proceeds from the sale and the book basis of the cardmember loans sold. The book basis is determined by allocating the carrying amount of the sold cardmember loans, net of applicable credit reserves, between the cardmember loans sold and the interests retained based on their relative fair values. Such fair values are based on market prices at the date of transfer for the sold cardmember loans and on the estimated present value of future cash flows for retained interests. Gains (losses) on sale from securitizations are reported in securitization income, net in the Company s Consolidated Statements of Income. The income component resulting from the release of credit reserves upon sale of cardmember loans is reported as a reduction of provision for losses from cardmember loans. The removal of credit reserves in connection with retained subordinated securities is offset in the allocated cost of the associated retained subordinated securities. Retained Interests in Securitized Assets and Fair Value Measurement The Company retains subordinated interests in the securitized cardmember loans. These interests include one or more A-rated, BBB-rated and unrated investments in tranches of the securitization (subordinated securities) and an interest-only strip. The following table presents retained interests for the years ended December 31: (Millions) Subordinated securities (a) $ 3,599 $ 744 Interest-only strip (b) Total retained interests $ 3,619 $ 776 (a) The subordinated securities are accounted for at fair value as available-for-sale investment securities and are reported in investments on the Company s Consolidated Balance Sheets with unrealized gains (losses) recorded in accumulated other comprehensive (loss) income. (b) The interest-only strip is accounted for at fair value and is reported in other assets on the Company s Consolidated Balance Sheets with changes in fair value recorded in securitization income, net in the Company s Consolidated Statements of Income. Refer to Note 3 for a description of the Company s methodology for determining the fair value of retained subordinated interests and interest-only strips and related fair value disclosures. 88

183 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY Changes in the estimates and assumptions used may have a significant impact on the Company s valuation of the retained interests. The key economic assumptions used in measuring the interest-only strip asset at the time of issuance as well as at December 31, 2009, and the sensitivity of the fair value to immediate 10 percent and 20 percent adverse changes in these assumptions are as follows (rates are per annum): Interest-Only Strip At time of issuance As of December 31, 2009 Impact on fair value of 10% (Millions, except rates per annum) Assumptions adverse change(a) Finance charge yield 13.2%-13.5% 13.5%-15.6% 12.4%-13.4% $ (77.8)(b) Expected credit losses 9.8%-10.9% 4.3%-5.8% 7.6%-8.7% $ (50.7)(b) LIBOR 0.3%-0.9% 2.7%-4.6% 0.2%-0.6% $ (1.7) Monthly payment rate 23.0%-23.1% 23.8%-24.7% 25.5% $ (0.1) Discount rate 14.3%-17.2% 11.0%-12.0% 12.4% $ (a) The impact on fair value of a 20 percent adverse change is approximately two times the impact of a 10 percent adverse change identified above. (b) The fair value of the interest-only strip is $20 million as of December 31, Therefore, a 10 percent adverse change in the assumption would result in the fair value of the interest-only strip written down to zero. The key assumptions and the sensitivity of the current year s fair value of the retained subordinated securities to immediate 10 percent and 20 percent adverse changes in these key assumptions are as follows: Retained Subordinated Securities Impact on fair value of 10% adverse change Impact on fair value of 20% adverse change (Millions, except rates per annum) Assumptions Discount rate 2.5%-20.7% $ (57.2) $ (112.0) LIBOR 1.0%-3.9 % $ 1.5 $ 3.0 This sensitivity analysis does not represent management s expectations of adverse changes in these assumptions but is provided as a hypothetical scenario to assess the sensitivity of the fair value of the retained subordinated interests to changes in key inputs. Management cannot extrapolate changes in fair value based on a 10 percent or 20 percent change in all key assumptions simultaneously in part because the relationship of the change in one assumption on the fair value of the retained interest is calculated independently from any change in another assumption. Changes in one factor may cause changes in another, which could magnify or offset the sensitivities. Other Disclosures The table below summarizes cash flows received from the Lending Trust for the years ended December 31: (Millions) Proceeds from new securitizations during the period (a) $ 2,244 $ 9,619 Proceeds from collections reinvested in revolving cardmember securitizations $ 81,654 $ 78,164 Servicing fees received $ 562 $ 543 Excess spread received, including issuer rate collections and discounting $ 2,520 $ 2,363 (a) Net of issuance expenses. The following table presents quantitative information about delinquencies, net credit losses, and components of securitized cardmember loans as of December 31: (Billions) Total Amount of Cardmember Loans Amount of Loans 30 Days or More Past Due Net Credit Write-offs During the Year 2009 Cardmember loans managed (a) $ 61.1 $ 2.2 $ 6.2 Less: Cardmember loans securitized Cardmember loans on-balance sheet $ 32.8 $ 1.2 $ Cardmember loans managed $ 71.2 $ 3.3 $ 4.9 Less: Cardmember loans securitized Cardmember loans on-balance sheet $ 42.2 $ 1.9 $ 3.2 (a) Excludes subordinated accrued interest receivable classified in other assets of $719 million and $807 million as of December 31, 2009 and 2008, respectively. Refer to Note 8.

184 ON-BALANCE SHEET SECURITIZATIONS The Company s securitizations of cardmember receivables are accounted for as secured borrowings. The Charge Trust is 89

185 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY considered a variable interest entity and is consolidated by American Express Receivables Financing Corporation V, LLC, its primary beneficiary, which is in turn consolidated by the Company. The cardmember receivables securitized through this entity are not accounted for as sold and continue to be reported as owned assets on the Company s Consolidated Balance Sheets. The related securities issued to third-party investors are reported as long-term debt on the Company s Consolidated Balance Sheets. The following table summarizes the total assets and liabilities held by the Charge Trust as of December 31: (Billions) Assets $ 8.3 $ 7.8 Liabilities $ 5.0 $ 5.0 These receivables are available only for payment of the debt or other obligations issued or arising in the securitization transactions. For these assets, the carrying values approximate fair value because these are short-term in duration. The long-term debt is payable only out of collections on the underlying securitized assets. The fair value of these liabilities was $5.0 billion and $4.4 billion as of December 31, 2009 and 2008, respectively. LENDING TRUST AND CHARGE TRUST TRIGGERS Under the respective terms of the Lending Trust and the Charge Trust agreements, the occurrence of certain events could result in payment of trust expenses, establishment of reserve funds, or in a worst-case scenario, early amortization of investor certificates. The following table below presents key metrics reported by each trust as of December 31, 2009: Lending Trust Charge Trust Excess spread rate, net: (a) (b) 3-month average Trigger event Trust trigger for reserve account funding < 5.00% < 4.00% Trust trigger for early amortization 0% 0% 3-month average Actual rate Floating rate series 14.75% 30.77% Fixed rate series 10.36% 27.51% Reserve account funding (millions): Required amount (c) Floating rate series $0 $0 Fixed rate series $0 $0 Seller s interest percentage: Required rate 7% 15% Actual rate 25% 36% Paydown rate 3-month average: Required rate N/A 60% Actual rate N/A 94.4% (a) The excess spread rate, net including issuer rate collections in the Lending Trust is the sum of the net cash flows of the (i) excess spread, net and (ii) issuer rate, as a percentage of the outstanding investors certificates. Excess spread, net is the net cash flows from interest and fee collections allocated to the investors interests after deducting the interest paid on investors certificates, credit losses, contractual servicing fees and other expenses. The deductions may be a greater amount than the collections, resulting in negative spread losses. Excess spread, net is reported by the Company in securitization income, net in the Consolidated Statements of Income. See above for the disclosure of excess spread, net. (b) The excess spread rate, net in the Charge Trust is the net cash flows from the discounted portion of principal collections allocated to the investors interests after deducting the interest paid on investors notes, credit losses, contractual servicing fees and other expenses, as a percentage of the outstanding investors notes. (c) If the three-month average excess spread rate, net including issuer rate collections falls below the trigger level of 5 percent or 4 percent for the Lending Trust and Charge Trust, respectively, the affected Trust is required to fund a cash account in increasing amounts ($3 million to $1.7 billion for the Lending Trust and $11 million to $170 million for the Charge Trust) depending on the severity by which the excess spread rate, net falls below the trigger level. In the event of an early amortization of the Lending Trust, the investor certificates would be required to be repaid over an approximate four month period, based on the estimated average life of the securitized loans. Although the repayment of the investor certificates is non-recourse to the Company, the Company would need an alternate source of funding for the lending receivables assets. In the event of an early amortization of the Charge Trust, the underlying investor notes issued by the Charge Trust are required to be repaid over an approximate one month period, based on the estimated average life of the securitized receivable. 90

186 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY NOTE 8 OTHER ASSETS The following is a summary of other assets as of December 31: (Millions) Deferred tax assets, net (a) $ 2,979 $ 3,470 Goodwill 2,328 2,301 Restricted cash (b) 2, Prepaid expenses (c) 2,114 1,712 Derivative assets (a) 800 1,743 Subordinated accrued interest receivable Other intangible assets, at amortized cost Other 1,364 1,619 Total $ 13,213 $ 12,607 (a) Refer to Notes 17 and 12 for a discussion of deferred tax assets, net, and derivative assets, respectively, as of December 31, 2009 and (b) Includes restricted cash of $1.8 billion as of December 31, 2009, which is held for certain asset-backed securitization maturities that will occur in the first quarter of (c) Includes prepaid miles and reward points acquired from airline and other partners of approximately $1.3 billion and $950 million, respectively, as of December 31, 2009 and Of these amounts, approximately $889 million and $900 million as of December 31, 2009 and 2008, respectively, represented miles purchased from Delta that are generally subject to certain restrictions and will be expensed as used in the future. GOODWILL Goodwill represents the excess of acquisition cost of an acquired company over the fair value of assets acquired and liabilities assumed. The Company assigns goodwill to its reporting units for the purpose of impairment testing. A reporting unit is defined as an operating segment, or a business one level below an operating segment for which complete, discrete financial information is available that management regularly reviews. The Company evaluates goodwill for impairment annually as of June 30 and between annual tests if events occur or circumstances change that more likely than not reduce the fair value of reporting units below their carrying amounts. 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 the carrying amount, including goodwill. If the fair value of a reporting unit is less than its carrying amount, the second step of the impairment test is required to measure the amount of any impairment loss. Goodwill was not impaired as of December 31, 2009 and Goodwill impairment testing involves management judgment, requiring an assessment of whether the carrying value of the reporting unit can be supported by the fair value of the individual reporting unit using widely accepted valuation techniques, such as the market approach (earnings multiples or transaction multiples) or income approach (discounted cash flow methods). The fair values of the reporting units were determined using a combination of valuation techniques consistent with the income approach and the market approach. When preparing discounted cash flow models under the income approach, the Company uses internal forecasts to estimate future cash flows expected to be generated by the reporting units. Actual results may differ from forecasted results. The Company uses the expected cost of equity financing, estimated using a capital asset pricing model, to discount future cash flows for each reporting unit. The Company believes the discount rates used appropriately reflect the risks and uncertainties in the financial markets generally and specifically in the Company s internally developed forecasts. Further, to assess the reasonableness of the valuations derived from the discounted cash flow models, the Company also analyzes market based multiples for similar industries of the reporting unit, where available. The changes in the carrying amount of goodwill reported in the Company s reportable operating segments were as follows. During 2009 and 2008, there were no accumulated goodwill impairment losses. (Millions) USCS ICS GCS GNMS Corporate & Other Total Balance as of January 1, 2008 $ 175 $ 519 $ 771 $ 27 $ 16 $ 1,508 Acquisitions (a) Dispositions (1) (1) Other, including foreign currency translation (10) (25) 1 (34) Balance as of December 31, 2008 $ 175 $ 509 $ 1,573 $ 28 $ 16 $ 2,301 Other, including foreign currency translation Balance as of December 31, 2009 $ 175 $ 512 $ 1,597 $ 28 $ 16 $ 2,328 (a) Includes approximately $818 million related to the acquisition of General Electric Company s commercial card and corporate purchasing business. 91

187 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY OTHER INTANGIBLE ASSETS Intangible assets are amortized over their estimated useful lives of 1 to 22 years. The Company reviews intangible assets for impairment quarterly and whenever events and circumstances indicate that their carrying amounts may not be recoverable. In addition, on an annual basis, the Company performs an impairment evaluation of all intangible assets by assessing the recoverability of the asset values based on the cash flows generated by the relevant assets or asset groups. An impairment is recognized if the carrying amount is not recoverable and exceeds the asset s fair value. The components of other intangible assets were as follows: (Millions) Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount Customer relationships (a) $ 873 $ (240) $ 633 $ 744 $ (135) $ 609 Other 145 (61) (52) 108 Total $ 1,018 $ (301) $ 717 $ 904 $ (187) $ 717 (a) Includes approximately $265 million related to a customer intangible payment made in connection with the renegotiated contract with Delta Air Lines. Amortization expense for the years ended December 31, 2009, 2008 and 2007 was $140 million, $83 million and $47 million, respectively. Intangible assets acquired in 2009 and 2008 are being amortized, on average, over 5 years and 8 years, respectively. Estimated amortization expense for other intangible assets over the next five years is as follows: (Millions) Estimated amortization expense $ 141 $ 125 $ 115 $ 105 $ 81 OTHER The Company has $168 million and $141 million in affordable housing partnership interests as of December 31, 2009 and 2008, respectively, included in other assets in the table above. The Company is a limited partner and typically has a less than 50 percent interest in the affordable housing partnerships. These partnership interests are accounted for in accordance with GAAP governing equity method investments and joint ventures. 92

188 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY NOTE 9 CUSTOMER DEPOSITS As of December 31, customer deposits were categorized as interest-bearing or non-interest-bearing deposits as follows: (Millions) U.S.: Interest-bearing $ 25,579 $ 14,377 Non-interest-bearing Non-U.S.: Interest-bearing 680 1,072 Non-interest-bearing Total customer deposits $ 26,289 $ 15,486 The customer deposits are aggregated by deposit type offered by the Company as of December 31 as follows: (Millions) U.S. retail deposits: Cash sweep and savings accounts $ 10,498 $ 7,247 Certificates of deposit 15,081 6,258 Institutional and other deposits 710 1,981 Total customer deposits $ 26,289 $ 15,486 The scheduled maturities of all certificates of deposit as of December 31, 2009 are as follows: (Millions) U.S. Non-U.S. Total 2010 $ 4,854 $ 394 $ 5, , , ,146 2, ,715 1, After 5 years Total $ 15,081 $ 395 $ 15,476 As of December 31, certificates of deposit in denominations of $100,000 or more were as follows: (Millions) U.S. $ 196 $ 894 Non-U.S. 153 Total $ 196 $ 1,047 93

189 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY NOTE 10 DEBT SHORT-TERM BORROWINGS The Company s short-term borrowings outstanding, defined as borrowings with original maturities of less than one year, were as follows as of December 31: (Millions, except percentages) Outstanding Balance Year-End Stated Rate on Debt(a) Year-End Effective Interest Rate with Swaps(a)(b) Outstanding Balance Year-End Stated Rate on Debt(a) Year-End Effective Interest Rate with Swaps(a)(b) Commercial paper (c) $ % $ 7, % Federal funds purchased % Other short-term borrowings (d) 1, % 0.85% 1, % 1.88% Total $ 2, % $ 8, % (a) For floating rate debt issuances, the stated and effective interest rates are based on the floating rates in effect as of December 31, 2009 and 2008, respectively. These rates may not be indicative of future interest rates. (b) Effective interest rates are only presented if swaps are in place to hedge the underlying debt. (c) December 31, 2008 balance includes $4.5 billion of commercial paper purchased by the Federal Reserve Bank s Special Purpose Vehicle (SPV) through the Commercial Paper Funding Facility (CPFF). As of December 31, 2009, no commercial paper purchased by the SPV was outstanding. (d) Includes interest-bearing overdrafts with banks of $277 million and $382 million as of December 31, 2009 and 2008, respectively. In addition, balances include interest bearing amounts due to merchants in accordance with merchant service agreements, as well as other short-term borrowings. 94

190 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY LONG-TERM DEBT The Company s long-term debt outstanding, defined as debt with original maturities of one year or greater, as of December 31 was as follows: (Millions, except percentages) Year-End Effective Interest Maturity Dates Outstanding Balance(a) Rate with Swaps(b)(c) Outstanding Balance(a) Year-End Stated Rate on Debt(b) Year-End Stated Rate on Debt(b) Year-End Effective Interest Rate with Swaps(b)(c) American Express Company (Parent Company only) Fixed Rate Senior Notes $ 9, % 6.01% $ 7, % 5.53% Floating Rate Senior Notes % Subordinated Debentures (d) % % American Express Travel Related Services Company, Inc. Fixed Rate Senior Notes % 1, % Floating Rate Senior Notes % 5.63% % 5.63% American Express Credit Corporation Fixed Rate Senior Notes , % 3.26% 9, % 3.64% Floating Rate Senior Notes , % 7, % 2.85% Borrowings under Bank Credit Facilities , % 4.52% 2, % 4.88% American Express Centurion Bank Fixed Rate Senior Notes , % 2.86% 3, % 2.59% Floating Rate Senior Notes , % 6, % 1.44% American Express Bank, FSB Fixed Rate Senior Notes , % 2.70% 7, % 2.82% Floating Rate Senior Notes , % 1.22% 8, % 1.98% American Express Receivables Financing Corporation V LLC Fixed Rate Senior Notes , % 1, % Floating Rate Senior Notes , % 3, % Floating Rate Subordinated Notes % % Other Fixed Rate Instruments (e) % % Total $ 52, % $ 60, % (a) The outstanding balances reflect the impact of fair value hedge accounting whereby certain fixed rate notes have been swapped to floating rate through the use of interest rate swaps and are marked to market, as are the associated swaps, which are reported as derivative assets or liabilities. In 2009 and 2008, the impact on long-term debt due to fair value hedge accounting was $0.6 billion and $1.0 billion, respectively. Refer to Note 12 for more details on the Company s treatment of fair value hedges. (b) For floating rate debt issuances, the stated and effective interest rates are based on the floating rates in effect as of December 31, 2009 and 2008, respectively. These rates may not be indicative of future interest rates. (c) Effective interest rates are only presented when swaps are in place to hedge the underlying debt. (d) The maturity date will automatically be extended to September 1, 2066, except in the case of either (i) a prior redemption or (ii) a default. See further discussion below. (e) Includes $87 million and $89 million as of December 31, 2009 and 2008, respectively, related to a sale-leaseback transaction completed in

191 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY As of December 31, 2009, the Parent Company had $750 million principal outstanding of Subordinated Debentures that accrue interest at an annual rate of 6.80 percent until September 1, 2016, and at an annual rate of three-month LIBOR plus 2.23 percent thereafter. At the Company s option, the Subordinated Debentures are redeemable for cash after September 1, 2016 at 100 percent of the principal amount plus any accrued but unpaid interest. If the Company fails to achieve specified performance measures, it will be required to issue its common shares and apply the net proceeds to make interest payments on the Subordinated Debentures. No dividends on the Company s common or preferred shares could be paid until such interest payments are made. The Company would fail to meet these specific performance measures if (i) the Company s tangible common equity is less than 4 percent of total adjusted assets for the most recent quarter or (ii) if the trailing two quarters consolidated net income is equal to or less than zero and tangible common equity as of the trigger determination date, and as of the end of the quarter end six months prior, has in each case declined by 10 percent or more from the tangible common equity as of the end of the quarter 18 months prior to the trigger determination date. The Company met the specified performance measures in As of December 31, 2009 and 2008, the Company was not in violation of any of its debt covenants. Aggregate annual maturities on long-term debt obligations (based on final maturity dates) were as follows as of December 31, 2009: (Millions) Thereafter Total American Express Company (Parent Company only) $ $ 399 $ $ 998 $ 1,248 $ 7,598 $ 10,243 American Express Travel Related Services Company, Inc. 1,200 1,200 American Express Credit Corporation 3,506 2,032 4,792 5,138 3, ,471 American Express Centurion Bank 2,143 1,212 1,346 4,701 American Express Bank, FSB 1,752 5,170 1,612 1,807 1,298 11,639 American Express Receivables Financing Corporation V LLC 3,410 1,560 4,970 Other Total $ 10,829 $ 8,810 $ 9,176 $ 7,943 $ 4,823 $ 10,757 $ 52,338 As of December 31, 2009 and 2008, the Company maintained total bank lines of credit of $12.2 billion and $11.2 billion, respectively. Of the total credit lines, $9.0 billion and $8.7 billion were unutilized, and for the years ended December 31, 2009 and 2008, respectively, the Company paid $6.8 million and $6.0 million in fees to maintain these lines. $8.2 billion and $7.9 billion of these unutilized amounts supported commercial paper borrowings as of December 31, 2009 and 2008, respectively. The availability of these credit lines is subject to the Company s compliance with certain financial covenants, including the maintenance by the Company of consolidated tangible net worth of at least $4.1 billion, the maintenance by American Express Credit Corporation (Credco) of a 1.25 ratio of combined earnings and fixed charges to fixed charges, and the compliance by American Express Centurion Bank (Centurion Bank) and American Express Bank, FSB (FSB) with applicable regulatory capital adequacy guidelines. As of December 31, 2009, the Company s consolidated tangible net worth was approximately $11.6 billion, Credco s ratio of combined earnings and fixed charges to fixed charges was 1.59 and Centurion Bank and FSB each exceeded their regulatory capital adequacy guidelines. The committed bank credit facilities do not contain material adverse change clauses and the facilities may not be terminated should there be a change in the Company s credit rating. The Company paid total interest primarily related to short- and long-term debt, corresponding interest rate swaps and customer deposits of $2.3 billion, $3.5 billion and $3.7 billion in 2009, 2008 and 2007, respectively. 96

192 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY NOTE 11 OTHER LIABILITIES The following is a summary of other liabilities as of December 31: (Millions) Membership Rewards liabilities $ 4,303 $ 4,643 Employee-related liabilities (a) 1,877 2,026 Rebate accruals (b) 1,309 1,255 Deferred charge card fees, net 1,034 1,041 Other (c) 5,287 5,627 Total $ 13,810 $ 14,592 (a) Employee-related liabilities include employee benefit plan obligations and incentive compensation. (b) Rebate accruals include payments to third-party card issuing partners and cash-back reward costs. (c) Other includes accruals for general operating expenses, advertising and promotion, derivatives, restructuring and reengineering reserves, and minority interest in subsidiaries. Membership Rewards The Membership Rewards program allows enrolled cardmembers to earn points that can be redeemed for a broad range of rewards, including travel, entertainment, retail certificates, and merchandise. The Company establishes balance sheet liabilities which represent the estimated cost of points earned to date that are ultimately expected to be redeemed. These liabilities reflect management s best estimate of future redemption costs. An ultimate redemption rate and weighted average cost per point are key factors used to approximate the Membership Reward liability. Management uses models to estimate ultimate redemption rates based on historical redemption data, card product type, year of program enrollment, enrollment tenure and card spend levels. The weighted-average cost per point is determined using actual redemptions during the previous 12 months, adjusted as appropriate for recent changes in redemption costs. The provision for the cost of Membership Rewards points is included in marketing, promotion, rewards and cardmember services. The Company continually evaluates its reserve methodology and assumptions based on developments in redemption patterns, cost per point redeemed, contract changes, and other factors. DEFERRED CHARGE CARD FEES The carrying amount of deferred charge card and other fees, net of direct acquisition costs and reserves for membership cancellations as of December 31 were as follows: (Millions) Deferred charge card and other fees (a) $ 1,213 $ 1,233 Deferred direct acquisition costs (60) (78) Reserves for membership cancellations (119) (114) Deferred charge card fees and other, net of direct acquisition costs and reserves $ 1,034 $ 1,041 (a) Includes deferred fees for Membership Reward program participants. 97

193 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY NOTE 12 DERIVATIVES AND HEDGING ACTIVITIES The Company uses derivative financial instruments to manage exposure to various market risks. 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 and insurance and travelers cheque businesses, and its investment portfolios; and Foreign exchange risk in its international operations. General principles and the overall framework for managing market risk across the Company are defined in the Market Risk Policy, which is the responsibility of the Asset-Liability Committee (ALCO). Market risk limits and escalation triggers in that policy are approved by the ALCO and by the Enterprise-wide Risk Management Committee (ERMC). Market risk is centrally managed by the Market Risk Committee, which reports into the ALCO and is chaired by the Chief Market Risk Officer of the Company. Market risk management is also guided by policies covering the use of derivative financial instruments, funding and liquidity and investments. Derivative financial instruments derive their value from an underlying variable or multiple variables, including interest rate, foreign exchange, and equity indices or prices. These instruments enable end users to increase, reduce or alter exposure to various market risks and, for that reason, are an integral component of the Company s market risk management. The Company s market exposures are in large part by-products of the delivery of its products and services. Interest rate risk arises through the funding of cardmember receivables and fixed-rate loans with variable-rate borrowings as well as through the risk to net interest margin from changes in the relationship between benchmark rates such as Prime and LIBOR. Interest rate exposure within the Company s charge card and fixed-rate lending products is managed by varying the proportion of total funding provided by short-term and variable-rate debt and deposits compared to fixed-rate debt and deposits. In addition, interest rate swaps are used from time to time to effectively convert fixed-rate debt to variable-rate or to convert variable-rate debt to fixed rate. The Company may change the mix between variable-rate and fixed-rate funding based on changes in business volumes and mix, among other factors. The majority of its cardmember loans, which are linked to a benchmark rate such as Prime that can reprice monthly, are funded with variable-rate funding, the majority of which are linked to LIBOR. Foreign exchange risk is generated by cardmember cross-currency charges, foreign currency balance sheet exposures, translation of foreign subsidiary equity, and foreign currency earnings in international units. 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, options, and cross-currency swap contracts, which can help lock in the value of the Company s exposure to specific currencies. The Company does not engage in derivative financial instruments for trading purposes. Derivative financial instruments may contain counterparty credit risk. The Company manages this risk by considering the current exposure, which is the replacement cost of contracts on the measurement date, as well as estimating the maximum potential value of the contracts over the next 12 months, considering such factors as the volatility of the underlying or reference index. To mitigate derivative credit risk, counterparties are required to be pre-approved and rated as investment grade. Counterparty risk exposures are monitored by the Company s Institutional Risk Management Committee (IRMC). The IRMC formally reviews large institutional exposures to ensure compliance with the Company s ERMC guidelines and procedures and determines the risk mitigation actions, when necessary. Additionally, to mitigate counterparty credit risk the Company may, on occasion, enter into master netting agreements. As of December 31, 2009 and 2008, the counterparty credit risk associated with the Company s derivative financial instruments was not significant. In relation to the Company s credit risk, under the terms of its derivative financial instruments, the Company is not required to either immediately settle any outstanding liability balances, or post collateral upon the occurrence of a specified credit risk-related event. 98

194 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY The Company s derivative financial instruments are carried at fair value on the Consolidated Balance Sheets. The accounting for changes in fair value depends on the instruments intended use and the resulting hedge designation, if any, as discussed below. Refer to Note 3 for a description of the Company s methodology for determining the fair value of its derivative financial instruments. The following table summarizes the total gross fair value, excluding interest accruals, of derivative product assets and liabilities as of December 31: Other assets Fair Value Other liabilities Fair Value (Millions) Derivatives designated as hedging instruments Interest rate contracts Fair value hedges $ 632 $ 1,072 $ 6 $ Cash flow hedges Foreign exchange contracts Net investment hedges Total derivatives designated as hedging instruments $ 765 $ 1,607 $ 180 $ 290 Derivatives not designated as hedging instruments Interest rate contracts $ 11 $ 9 $ 5 $ 20 Foreign exchange contracts (a) Equity-linked contract (b) 3 Total derivatives not designated as hedging instruments Total derivatives (c) $ 833 $ 1,782 $ 283 $ 483 (a) As of December 31, 2009, foreign exchange contracts also include foreign currency derivatives embedded in certain operating agreements. (b) Represents an equity-linked derivative embedded in one of the Company s investment securities. (c) GAAP permits the netting of derivative assets and derivative liabilities when a legally enforceable master netting agreement exists between the Company and its derivative counterparty. As of December 31, 2009 and 2008, $33 million and $39 million, respectively, of derivative assets and liabilities have been offset and presented net on the Consolidated Balance Sheets. DERIVATIVE FINANCIAL INSTRUMENTS THAT QUALIFY FOR HEDGE ACCOUNTING Derivative financial instruments executed for hedge accounting purposes are documented and designated as such when the Company enters into the contracts. In accordance with its risk management policies, the Company structures its hedges with very similar terms to the hedged items. The Company formally assesses, at inception of the hedge accounting relationship and on a quarterly basis, whether derivatives designated as hedges are highly effective in offsetting the fair value or cash flows of hedged items. These assessments usually are made through the application of the regression analysis method. If it is determined that a derivative is not highly effective as a hedge, the Company will discontinue the application of hedge accounting. FAIR VALUE HEDGES A fair value hedge involves a derivative designated to hedge the Company s exposure to future changes in the fair value of an asset or a liability, or an identified portion thereof that is attributable to a particular risk. The Company is exposed to interest rate risk associated with its fixed-rate long-term debt. The Company uses interest rate swaps to convert certain fixed-rate long-term debt to floating-rate at the time of issuance. As of December 31, 2009 and 2008, the Company hedged $15.1 billion and $12.4 billion, respectively, of its fixed-rate debt to floating-rate debt using interest rate swaps. To the extent the fair value hedge is effective, the gain or loss on the hedging instrument offsets the loss or gain on the hedged item attributable to the hedged risk. Any difference between the changes in the fair value of the derivative and the hedged item is referred to as hedge ineffectiveness and is recorded in earnings as a component of other, net expenses. Hedge ineffectiveness may be caused by differences between the debt s interest coupon and the benchmark rate, which is in turn primarily due to credit spreads at inception of the hedging relationship that are not reflected in the valuation of the interest rate swap. Furthermore, hedge ineffectiveness may be caused by changes in the relationship between 3-month LIBOR and 1-month LIBOR rates, as these so-called basis spreads may impact the valuation of the interest rate swap without causing an offsetting impact in the value of the hedged debt. If a fair value hedge is de-designated or no longer considered to be effective, changes in fair value of the 99

195 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY derivative continue to be recorded through earnings but the hedged asset or liability is no longer adjusted for changes in fair value. The existing basis adjustment of the hedged asset or liability is then amortized or accreted as an adjustment to yield over the remaining life of that asset or liability. The following table summarizes the impact on the Consolidated Financial Statements of fair value hedges associated with the Company s fixed-rate long-term debt described above for the years ended December 31: Statement of Income Derivative contract (loss) gain Hedged item gain (loss) (Millions) Amount recognized Amount recognized Ineffective net (losses) gains Derivative relationship Location Location Interest rate contracts Other, net expenses $ (446) $ 967 Other, net expenses $ 437 $ (898) $ (9) $ 69 CASH FLOW HEDGES A cash flow hedge involves a derivative financial instrument designated to hedge the Company s exposure to variable future cash flows attributable to a particular risk of an existing recognized asset or liability, or a forecasted transaction. The Company hedges existing long-term variable-rate debt, the rollover of short-term borrowings and the anticipated forecasted issuance of additional funding through the use of derivative financial instruments, primarily interest rate swaps. These instruments effectively convert floating-rate debt to fixed-rate debt for the duration of the swap. As of December 31, 2009 and 2008, the Company hedged $1.6 billion and $4.7 billion, respectively, of its floating debt using interest rate swaps. For derivatives that qualify as cash flow hedges, the effective portion of the gain or loss on the derivatives are recorded in accumulated other comprehensive (loss) income and reclassified into earnings when the hedged cash flows are recognized in earnings. The amount that is reclassified into earnings is presented in the Consolidated Statements of Income with the hedged instrument or transaction impact, primarily in interest expense. Any ineffective portion of the gain or loss on the derivatives is reported as a component of other, net expenses. If a cash flow hedge is de-designated or terminated prior to maturity, the amount previously recorded in accumulated other comprehensive (loss) income is recognized into earnings over the period that the hedged item impacts earnings. If a hedge relationship is discontinued because it is probable that the forecasted transaction will not occur according to the original strategy, any related amounts previously recorded in accumulated other comprehensive (loss) income are recognized into earnings immediately. In the normal course of business, as the hedged cash flows are recognized into earnings, the Company expects to reclassify $32 million of net pretax losses on derivative instruments from accumulated other comprehensive (loss) income into earnings during the next 12 months. NET INVESTMENT HEDGES A net investment hedge is used to hedge future changes in currency exposure of a net investment in a foreign operation. The Company primarily designates foreign currency derivatives, typically foreign exchange forwards, and on occasion foreign currency denominated debt, as hedges of net investments in certain foreign operations. These instruments reduce exposure to changes in currency exchange rates on the Company s investments in non-u.s. subsidiaries. The effective portion of the gain or loss on net investment hedges are recorded in accumulated other comprehensive (loss) income as part of the cumulative translation adjustment. Any ineffective portion of the gain or loss on net investment hedges is recognized in other, net expenses during the period of change. 100

196 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY The following table summarizes the impact on the Consolidated Financial Statements of cash flow hedges and net investment hedges for the years ended December 31: Location Reclassified from OCI into Income Derivative impact on statement of income (loss) gain Amount Reclassified from OCI into Income Location Reclassified from OCI into Income Derivative ineffectiveness (loss) gain (Millions) Amount Derivative relationship Cash flow hedges (a)(b) : Interest rate contracts Interest expense $ (115) $ (247) Other, net expenses $ $ Net investment hedges (b) : Foreign exchange contracts Other, net expenses $ $ Other, net expenses $ (1) $ 3 (a) As of December 31, 2009 and 2008, there was no impact on the Consolidated Statements of Income due to forecasted transactions no longer probable to occur. (b) The effective portion of the gain or loss on the derivatives is recorded in accumulated other comprehensive (loss) income (OCI) and is presented in Note 15. DERIVATIVES NOT DESIGNATED AS HEDGES The Company has derivative financial instruments that act as economic hedges and are not designated for hedge accounting purposes. Foreign currency transactions and non-u.s. dollar cash flow exposures from time to time may be partially or fully economically hedged through foreign currency contracts, primarily foreign exchange forwards, options, and cross-currency swaps. These hedges generally mature within one year. Foreign currency contracts involve the purchase and sale of a designated currency at an agreed upon rate for settlement on a specified date. The changes in the fair value of the derivatives effectively offset the related foreign exchange gains or losses on the underlying balance sheet exposures. From time to time, the Company may enter into interest rate swaps to specifically manage funding costs related to its proprietary card business. The Company has certain operating agreements whose payments may be linked to a market rate or price, primarily foreign currency rates. The payment components of these agreements may meet the definition of an embedded derivative, which is assessed to determine if it requires separate accounting and reporting. If so, the embedded derivative is accounted for separately and is classified as a foreign exchange contract based on its primary risk exposure. In addition, the Company also holds an investment security containing an embedded equity-linked derivative. For derivative financial instruments that are not designated as hedges, changes in fair value are reported in current period earnings. The following table summarizes the impact on the Consolidated Financial Statements of derivative financial instruments not designated as hedges for the years ended December 31: (Millions) Income Statement classification of gain (loss) on Amount recognized Derivative relationship derivatives not designated as hedges Derivatives not designated as hedges Interest rate contracts Other, net expenses $ 17 $ (33) Foreign exchange contracts (a) Other non-interest revenues (1) Interest and dividends on investment securities 4 13 Interest expense on short-term borrowings 5 (7) Interest expense on long-term debt and other Other, net expenses (5) (38) Equity-linked contract Other non-interest revenues 1 Total $ 56 $ (43) (a) For the period ended December 31, 2009, foreign exchange contracts include embedded foreign currency derivatives. Gains (Losses) on embedded derivatives are included in other, net expenses. 101

197 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY NOTE 13 GUARANTEES The Company provides cardmember protection plans that cover losses associated with purchased products, as well as certain other guarantees in the ordinary course of business which are within the scope of GAAP governing the accounting for guarantees. For the Company, guarantees primarily consist of card and travel protection programs, including: Credit Card Registry cancels and requests replacement of lost or stolen cards, and provides for fraud liability coverage; Return Protection refunds the price of eligible purchases made with the card where the merchant will not accept the return for up to 90 days from the date of purchase; Account Protection provides account protection in the event that a cardmember is unable to make payments on the account due to unforeseen hardship; and, Merchant Protection protects cardmembers primarily against non-delivery of goods and services, usually in the event of bankruptcy or liquidation of a merchant. In the event that a dispute is resolved in the cardmember s favor, the Company will credit the cardmember account for the amount of the purchase and will seek recovery from the merchant. If the Company is unable to collect the amount from the merchant, it will bear the loss for the amount credited to the cardmember. The Company mitigates this risk by withholding settlement from the merchant or obtaining deposits and other guarantees from merchants considered higher risk due to various factors. The amounts being held by the Company are not significant when compared to the maximum potential amount of future payments under this guarantee. In relation to its maximum amount of undiscounted future payments as seen in the table that follows, to date the Company has not experienced any significant losses related to guarantees. The Company s initial recognition of guarantees is at fair value, which has been determined in accordance with GAAP governing fair value measurement. In addition, the Company establishes reserves when an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. The following table provides information related to such guarantees as of December 31: Maximum amount of undiscounted future payments(a) (Billions) Amount of related liability(b) (Millions) Type of Guarantee Card and travel operations (c) $ 66 $ 69 $ 112 $ 99 Other (d) Total $ 67 $ 70 $ 186 $ 192 (a) Represents the notional amounts that could be lost under the guarantees and indemnifications if there were a total default by the guaranteed parties. The Merchant Protection guarantee is calculated using management s best estimate of maximum exposure based on all eligible claims as measured against annual billed business volumes. (b) Included as part of other liabilities on the Company s Consolidated Balance Sheets. (c) Includes Credit Card Registry, Return Protection, Account Protection and Merchant Protection, which the Company offers directly to cardmembers. (d) Other primarily includes guarantees related to the Company s business dispositions, real estate, and tax, as well as contingent consideration obligations, each of which are individually smaller indemnifications. Refer to Note 26 for a discussion of additional guarantees of the Company as of December 31, 2009 and

198 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY NOTE 14 COMMON AND PREFERRED SHARES AND WARRANTS As of December 31, 2009, the Company has 100 million common shares remaining under share repurchase authorizations. Such authorizations do not have an expiration date, and at present, there is no intention to modify or otherwise rescind the current authorizations. Common shares are generally retired by the Company upon repurchase (except for 5.0 million, 0.4 million and 0.5 million shares held as treasury shares at December 31, 2009, 2008 and 2007, respectively); retired common shares and treasury shares are excluded from the shares outstanding in the table below. The Treasury shares, with a cost basis of $235 million, $21 million and $29 million as of December 31, 2009, 2008 and 2007, respectively, are included as a reduction to additional paid-in capital in shareholders equity on the Consolidated Balance Sheets. The following table shows authorized shares and provides a reconciliation of common shares issued and outstanding: (Millions, except where indicated) Common shares authorized (billions) (a) Shares issued and outstanding at beginning of year 1,160 1,158 1,199 Issuances (Repurchases) of common shares 22 (5) (60) Other, primarily stock option exercises and RSAs granted Shares issued and outstanding as of December 31, 1,192 1,160 1,158 (a) Of the common shares authorized but unissued as of December 31, 2009, approximately 124 million shares were reserved for issuance under employee stock and employee benefit plans. The Board of Directors is authorized to permit the Company to issue up to 20 million preferred shares at a par value of $1.66 2/3 without further shareholder approval. On January 9, 2009, under the United States Department of the Treasury (Treasury Department) Capital Purchase Program (CPP), the Company issued to the Treasury Department as consideration for aggregate proceeds of $3.39 billion: (1) 3.39 million shares of Fixed Rate (5 percent) Cumulative Perpetual Preferred Shares Series A (the Preferred Shares), and (2) a ten-year warrant (the Warrant) for the Treasury Department to purchase up to 24 million common shares at an exercise price of $20.95 per share. Upon issuance, $3.16 billion of the proceeds were allocated to the Preferred Shares, and $232 million of the proceeds were allocated to the Warrant based on their relative fair values at the date of issuance. As a pre-condition of the repurchase of the Preferred Shares, the Treasury Department and the Company s Banking Regulator required that the Company raise capital in the public markets. As a result, the Company issued $3.0 billion of non-guaranteed senior debt on May 18, 2009 and approximately 22 million common shares at $25.25 per share in June On June 17, 2009, the Company repurchased the Preferred Shares at their face value of $3.39 billion. Because the $3.39 billion cash paid exceeded the $3.18 billion amortized carrying amount of the Preferred Shares, the $212 million excess represented an in-substance Preferred Share dividend that reduced earnings per share (EPS) attributable to common shareholders by $0.18 for the year ended December 31, Refer to Note 18. On July 29, 2009, the Company repurchased the Warrant for $340 million. The Warrant repurchase resulted in reductions of cash, retained earnings and additional paid-in-capital on the Company s Consolidated Balance Sheet. The Warrant repurchase had no impact on the Consolidated Income Statement and EPS for the year ended December 31, There were no preferred shares or warrants issued and outstanding as of December 31,

199 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY NOTE 15 CHANGES IN ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME Accumulated other comprehensive (loss) income (OCI) is a balance sheet item in the Shareholders Equity section of the Company s Consolidated Balance Sheets. It is comprised of items that have not been recognized in earnings but may be recognized in earnings in the future when certain events occur. Changes in each component of OCI for the three years ended December 31, were as follows: Net Unrealized Gains (Losses) on Investment Securities Net Unrealized Gains (Losses) Foreign Currency Translation Adjustments Net Unrealized Pension and Other Postretirement Benefit Costs Accumulated Other Comprehensive (Loss) Income on (Millions), net of tax(a) Derivatives Balances as of December 31, 2006 $ 92 $ 27 $ (222) $ (417) $ (520) Net unrealized gains (losses) (80) (68) (148) Reclassification for realized (gains) losses into earnings (5) (30) 3 (32) Other losses (b) (47) (47) Foreign currency translation adjustments Net losses related to hedges of investment in foreign operations (380) (380) Pension and other postretirement benefit costs Discontinued operations (c) 52 (3) 4 53 Net change in accumulated other comprehensive (loss) income (80) (98) (33) Balances as of December 31, (71) (255) (128) (442) Net unrealized gains (losses) (718) (170) (888) Reclassification for realized (gains) losses into earnings (8) Foreign currency translation adjustments (1,102) (1,102) Net gains related to hedges of investment in foreign operations Pension and other postretirement benefit costs (329) (329) Discontinued operations (c) (2) 41 Net change in accumulated other comprehensive (loss) income (711) (9) (113) (331) (1,164) 104

200 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY Net Unrealized Gains (Losses) on Investment Securities Net Unrealized Gains (Losses) Foreign Currency Translation Adjustments Net Unrealized Pension and Other Postretirement Benefit Costs Accumulated Other Comprehensive (Loss) Income on (Millions), net of tax(a) Derivatives Balances as of December 31, 2008 (699) (80) (368) (459) (1,606) Net unrealized gains (losses) 1,351 (22) 1,329 Reclassification for realized (gains) losses into earnings (145) 74 (71) Foreign currency translation adjustments (d) Net losses related to hedges of investment in foreign operations (877) (877) Pension and other postretirement benefit costs (10) (10) Net change in accumulated other comprehensive (loss) income 1, (354) (10) 894 Balances as of December 31, 2009 $ 507 $ (28) $ (722) $ (469) $ (712) (a) The following table shows the tax impact for the three years ended December 31, for the changes in each component of accumulated other comprehensive (loss) income: (Millions) Investment securities $ 749 $ (472) $ (84) Derivatives 29 (4) (56) Foreign currency translation adjustments 33 (66) 17 Pension and other postretirement benefit costs (28) (159) 152 Discontinued operations (c) Total tax impact $ 783 $ (685) $ 58 (b) In connection with the Company s adoption of hybrid financial instrument accounting requirements, as of January 1, 2007, the Company recognized a gain of $80 million ($50 million after-tax) related to the fair value of the interest-only strip, which was recorded in other comprehensive (loss) income in previous periods. Changes in the fair value of the interest-only strip subsequent to the adoption of this standard are reflected in securitization income, net. (c) Relates to the change in accumulated other comprehensive (loss) income prior to the dispositions of AEB and AEIDC. (d) Includes a $190 million other comprehensive loss, recorded in the third quarter of 2009, representing the correction of an error related to the accounting in prior periods for cumulative translation adjustments associated with a net investment in foreign subsidiaries. (Refer to Note 19 for further details). 105

201 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY NOTE 16 RESTRUCTURING CHARGES During 2009, the Company recorded $185 million of restructuring charges, net of adjustments of previously accrued amounts due to revisions of prior estimates. The 2009 activity primarily relates to the $199 million of restructuring charges the Company recorded in the second quarter to further reduce its operating costs by downsizing and reorganizing certain operations. These restructuring activities were for the elimination of approximately 4,000 positions or about 6 percent of the Company s total worldwide workforce and occurred across all business units, markets and staff groups. Additional restructuring charges of $38 million taken in the third and fourth quarters of 2009 relate principally to the reorganization of certain senior leadership positions, as well as the exit of a business in the Global Network & Merchant Services (GNMS) segment. The Company also recorded adjustments of $(52) million during 2009 that primarily relate to revisions of prior estimates for higher employee redeployments to other positions within the Company, business changes and modifications to existing initiatives. These modifications do not constitute a significant change in the original restructuring plan from an overall Company perspective. During 2008, the Company recorded restructuring charges of $434 million, net of adjustments of previously accrued amounts due to revisions of prior estimates. While the Company s restructuring activity in the first and third quarters of 2008 primarily related to exiting certain international banking businesses, the Company recorded $410 million of restructuring charges in the fourth quarter of 2008 in order to further reduce the Company s cost structure. This restructuring was for the elimination of approximately 7,000 positions or approximately 10 percent of its total worldwide workforce. These reductions primarily occurred across business units, markets and staff groups focusing on management and other positions that do not interact directly with customers, and related to reorganizing or automating certain internal processes; outsourcing certain operations to third parties; and discontinuing or relocating business activities to other locations. During 2007, the Company recorded restructuring charges of $49 million, net of adjustments of previously accrued amounts due to revisions of prior estimates, primarily related to the reorganizations within the Company s business travel, operations, finance, and technology areas. Restructuring charges related to severance obligations are included in salaries and employee benefits and discontinued operations in the Company s Consolidated Statements of Income, while charges pertaining to other exit costs are included in occupancy and equipment, professional services, other, net expenses and discontinued operations. The following table summarizes the Company s restructuring reserves activity for the years ended December 31, 2009, 2008 and 2007: (Millions) Severance(a) Other(b) Total Liability balance as of December 31, 2006 $ 89 $ 4 $ 93 Restructuring charges, net of $17 in adjustments (c) Payments (61) (6) (67) Other non-cash (2) (4) (6) Liability balance as of December 31, Restructuring charges, net of $10 in adjustments (c)(d) Payments (63) (13) (76) Other non-cash 2 (2) Liability balance as of December 31, Restructuring charges, net of $52 in adjustments (e) Payments (287) (45) (332) Other non-cash (f) 14 (9) 5 Liability balance as of December 31, 2009 (g) $ 253 $ 32 $ 285 (a) Accounted for in accordance with the GAAP governing the accounting for nonretirement postemployment benefits and for costs associated with exit or disposal activities. (b) Other primarily includes facility exit, asset impairment and contract termination costs. (c) Adjustments primarily relate to higher than anticipated redeployments of displaced employees to other positions within the Company. (d) Includes $17 million related to discontinued operations. (e) Adjustments of $52 million were recorded in the Company s reportable operating segments as follows: $6 million in USCS, $28 million in ICS, $(15) million in GCS, $3 million in GNMS, and $30 million in Corporate & Other. These adjustments primarily relate to higher employee redeployments to other positions within the Company, business changes and modifications to existing initiatives. (f) Consists primarily of foreign exchange impacts offset by asset impairments directly related to restructuring activity. 106

202 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY (g) The majority of cash payments related to the remaining restructuring liabilities are expected to be completed in 2010, with the exception of certain smaller amounts related to contractual long-term severance arrangements which are expected to be completed in 2012, and certain lease obligations which will continue until their expiration in The following table summarizes the Company s restructuring charges, net of adjustments, by reportable segment for the year ended December 31, 2009, and the cumulative amounts relating to the restructuring programs that were in progress during 2009 and initiated at various dates between 2006 and Cumulative Restructuring Expense Incurred to Date on 2009 in-progress Restructuring Programs (Millions) Total Restructuring Charges net of adjustments Severance Other Total USCS $ 12 $ 64 $ 6 $ 70 ICS GCS GNMS Corporate & Other (a) Total $ 185 $ 589 $ 97 $ 686(b) (a) The Corporate & Other segment includes certain 2009 and 2008 severance and other charges of $6 million and $133 million, respectively, related to Company-wide support functions which were not allocated to the Company s operating segments, as these were corporate initiatives and are consistent with how such charges were reported internally. (b) As of December 31, 2009, the total expenses to be incurred for previously approved restructuring activities that were in progress are not expected to be materially different than the cumulative expenses incurred to date for these programs. 107

203 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY NOTE 17 INCOME TAXES The components of income tax expense included in the Consolidated Statements of Income were as follows: (Millions) Current income tax expense (benefit): U.S. federal $ 661 $ 735 $ 1,631 U.S. state and local 40 (28) 246 Non-U.S Total current income tax expense 996 1,059 2,285 Deferred income tax (benefit) expense: U.S. federal (231) (150) (496) U.S. state and local 24 (84) (22) Non-U.S. (85) (115) (199) Total deferred income tax benefit (292) (349) (717) Total income tax expense on continuing operations $ 704 $ 710 $ 1,568 Income tax expense (benefit) from discontinued operations $ 4 $ 12 $ (49) A reconciliation of the U.S. federal statutory rate of 35 percent to the Company s actual income tax rate for the years ended December 31 on continuing operations was as follows: Combined tax at U.S. statutory federal income tax rate 35.0% 35.0% 35.0% Increase (Decrease) in taxes resulting from: Tax-exempt income (4.6) (3.9) (2.8) State and local income taxes, net of federal benefit Non-U.S. subsidiaries earnings (6.8) (8.4) (5.0) Tax settlements (a) (1.4) (5.5) (2.2) All other (0.1) 1.0 (0.1) Actual tax rates 24.8% 19.8% 27.5% (a) Relates to the resolution of tax matters in various jurisdictions. The Company records a deferred income tax (benefit) provision when there are differences between assets and liabilities measured for financial reporting and for income tax return purposes. These temporary differences result in taxable or deductible amounts in future years and are measured using the tax rates and laws that will be in effect when such differences are expected to reverse. The significant components of deferred tax assets and liabilities as of December 31 are reflected in the following table: (Millions) Deferred tax assets: Reserves not yet deducted for tax purposes $ 3,495 $ 3,559 Employee compensation and benefits Net unrealized securities losses 458 Other Gross deferred tax assets 4,326 4,943 Valuation allowance (60) (69) Deferred tax assets after valuation allowance 4,266 4,874 Deferred tax liabilities: Intangibles and fixed assets Deferred revenue Asset securitizations Net unrealized securities gains 291 Other Gross deferred tax liabilities 1,287 1,404 Net deferred tax assets $ 2,979 $ 3,470 A valuation allowance is established when management determines that it is more likely than not that all or some portion of the benefit of the deferred tax assets will not be realized. The valuation allowances as of December 31, 2009 and 2008 are associated with non-u.s. operations and relate to all of the Company s net operating losses and other deferred tax assets. Accumulated earnings of certain non-u.s. subsidiaries, which totaled approximately $6.6 billion as of December 31, 2009, are intended to be permanently reinvested outside the United States. The Company does not provide for federal income taxes on foreign earnings intended to be permanently reinvested outside the United States. Accordingly, federal taxes, which would have aggregated approximately $1.8 billion as of December 31, 2009, have not been provided on those earnings. Net income taxes paid by the Company (including amounts related to discontinued operations) during 2009, 2008 and 2007, were approximately $0.4 billion, $2.0 billion and $1.8 billion, respectively. These amounts include estimated tax payments and cash settlements relating to prior tax years. 108

204 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY The Company, its wholly-owned U.S. subsidiaries, and certain non-u.s. subsidiaries file a consolidated federal income tax return. 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. Given these inherent complexities, the Company must make judgments in assessing the likelihood that a tax position will be sustained upon examination by the taxing authorities based on the technical merits of the tax position. A tax position is recognized only when, based on management s judgment regarding the application of income tax laws, it is more likely than not that the tax position will be sustained upon examination. The amount of benefit recognized for financial reporting purposes is based on management s best judgment of the most likely outcome resulting from examination given the facts, circumstances and information available at the reporting date. The Company adjusts the level of unrecognized tax benefits when there is new information available to assess the likelihood of the outcome. The Company is under continuous examination by the Internal Revenue Service (IRS) and tax authorities in other countries and states in which the Company has significant business operations. The tax years under examination and open for examination vary by jurisdiction. In June 2008, the IRS completed its field examination of the Company s federal tax returns for the years 1997 through In July 2009, the IRS completed its field examination of the Company s federal tax returns for the years 2003 and However, all of these years continue to remain open as a consequence of certain issues under appeal. The Company is currently under examination by the IRS for the years 2005 through The following table presents changes in the unrecognized tax benefits: (Millions) Balance, January 1 $ 1,176 $ 1,112 $ 1,143 Increases: Current year tax positions Tax positions related to prior years Effects of foreign currency translations 1 1 Decreases: Tax positions related to prior years (197) (208) (164) Settlements with tax authorities (97) (213) (126) Lapse of statute of limitations (2) (3) (2) Effects of foreign currency translations (2) Balance, December 31 $ 1,081 $ 1,176 $ 1,112 Included in the $1.1 billion, $1.2 billion and $1.1 billion of unrecognized tax benefits at December 31, 2009, 2008 and 2007, respectively, are approximately $480 million, $452 million and $597 million, respectively that, if recognized, would favorably affect the effective tax rate in a future period. These benefits primarily relate to the Company s gross permanent benefits and corresponding foreign tax credits and federal tax effects. The Company believes it is reasonably possible that the unrecognized tax benefits could decrease within the next 12 months by as much as $580 million principally as a result of potential resolutions of prior years tax items with various taxing authorities. The prior years tax items include unrecognized tax benefits relating to the timing of recognition of certain gross income, the deductibility of certain expenses or losses, and the attribution of taxable income to a particular jurisdiction or jurisdictions. Of the $580 million of unrecognized tax benefits, approximately $318 million are temporary differences that, if recognized, would only impact the effective rate due to net interest assessments and state tax rate differentials. With respect to the remaining decrease of $262 million, it is not possible to quantify the impact that the decrease could have on the effective tax rate and net income due to the inherent complexities and the number of tax years open for examination in multiple jurisdictions. Resolution of the prior years items that comprise this remaining amount could have an impact on the effective tax rate and on net income, either favorably (principally as a result of settlements that are less than the liability for unrecognized tax benefits) or unfavorably (if such settlements exceed the liability for unrecognized tax benefits). Interest and penalties relating to unrecognized tax benefits are reported in income tax provision. During the years ended December 31, 2009, 2008 and 2007, the Company recognized approximately $1 million, $60 million and $17 million, respectively, of interest and penalties. The Company has approximately $282 million and $285 million accrued for the payment of interest and penalties as of December 31, 2009 and 2008, respectively. 109

205 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY NOTE 18 EARNINGS PER COMMON SHARE The computations of basic and diluted EPS for the years ended December 31 were as follows: (Millions, except per share amounts) Numerator: Basic and diluted: Income from continuing operations $ 2,137 $ 2,871 $ 4,126 Preferred shares dividends, accretion, and recognition of remaining unaccreted dividends (a) (306) Earnings allocated to participating share awards and other items (22) (15) (26) Loss from discontinued operations, net of tax (7) (172) (114) Net income attributable to common shareholders $ 1,802 $ 2,684 $ 3,986 Denominator: Basic: Weighted-average common stock 1,168 1,154 1,173 Add: Weighted-average stock options and warrants (b) Diluted 1,171 1,156 1,193 Basic EPS (c) : Income from continuing operations attributable to common shareholders $ 1.55 $ 2.47 $ 3.49 Loss from discontinued operations (0.01) (0.14) (0.09) Net income attributable to common shareholders $ 1.54 $ 2.33 $ 3.40 Diluted EPS (c) : Income from continuing operations attributable to common shareholders $ 1.54 $ 2.47 $ 3.44 Loss from discontinued operations (0.15) (0.10) Net income attributable to common shareholders $ 1.54 $ 2.32 $ 3.34 (a) Includes the 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 on June 17, 2009 issued as part of the CPP. Also includes $74 million of preferred dividends paid and $20 million of preferred dividend accretion during (b) For the years ended December 31, 2009, 2008 and 2007, the dilutive effect of unexercised stock options excludes 71 million, 45 million and 8 million options, respectively, from the computation of EPS because inclusion of the options would have been anti-dilutive. (c) Effective January 1, 2009, guidance for determining whether instruments granted in share-based payment transactions are participating securities requires that restricted stock awards be included in the computation of basic and diluted EPS pursuant to the two-class method. Accordingly, the Company has retrospectively adjusted EPS for 2008 and The Subordinated Debentures, discussed in Note 10, would affect the EPS computation only in the unlikely event the Company fails to achieve specified performance measures related to the Company s tangible common equity and consolidated net income. In that circumstance the Company would reflect the additional common shares in the EPS computation. NOTE 19 DETAILS OF CERTAIN CONSOLIDATED STATEMENTS OF INCOME LINES The following is a detail of other commissions and fees for the years ended December 31: (Millions) Foreign currency conversion revenue $ 672 $ 755 $ 718 Delinquency fees Service fees Other Total other commissions and fees $ 1,778 $ 2,307 $ 2,417 The following is a detail of other revenues for the years ended December 31: (Millions) Insurance premium revenue $ 293 $ 326 $ 349 Publishing revenue Gain on investment securities Other 1,345 1,492 1,048 Total other revenues $ 2,087 $ 2,157 $ 1,751 Other revenues includes insurance premiums earned from cardmember travel and other insurance programs, publishing revenues, revenues arising from contracts with Global Network Services (GNS) partners including royalties and signing fees, and other miscellaneous revenue and fees. 110

206 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY The following is a detail of marketing, promotion, rewards and cardmember services for the years ended December 31: (Millions) Marketing and promotion $ 1,914 $ 2,430 $ 2,562 Cardmember rewards 4,036 4,389 4,777 Cardmember services Total marketing, promotion, rewards and cardmember services $ 6,467 $ 7,361 $ 7,817 Marketing and promotion expense includes advertising costs, which are expensed in the year in which the advertising first takes place. Cardmember rewards expense includes the costs of rewards programs (including Membership Rewards, discussed in Note 11). Cardmember services expense includes protection plans and complimentary services provided to cardmembers. The following is a detail of other, net expense for the years ended December 31: (Millions) Occupancy and equipment $ 1,619 $ 1,641 $ 1,436 Communications MasterCard and Visa settlements (852) (571) (1,056) Other (a) 1,233 1,586 1,386 Total other, net expense $ 2,414 $ 3,122 $ 2,227 (a) Includes (i) a $135 million benefit recorded in the third quarter of 2009 representing the correction of an error related to the accounting for cumulative translation adjustments associated with a net investment in foreign subsidiaries (the impact of the incorrect accounting was not material to any of the quarterly or annual periods in which it occurred and resulted in a $60 million overstatement of pretax income in the second quarter of 2009, a $135 million understatement of pretax income in the fourth quarter of 2008 and minimal amounts for all other periods affected dating back to the third quarter of 2007 when the incorrect accounting originated), (ii) a $45 million benefit recorded in the third quarter of 2009 resulting from the change in fair value of certain forward exchange contracts, and (iii) lower travel and entertainment and other expenses due to the Company s reengineering activities. Also includes a $59 million benefit recorded in the second quarter of 2009 representing the correction of an error related to prior periods from the completion of certain account reconciliations. Based on the items described above, the aggregate impact from the correction of errors in accounting for the 12 months ended December 31, 2009 resulted in a $254 million overstatement of pretax income. Other, net expense includes general operating expenses, gains (losses) on sale of assets or businesses not classified as discontinued operations, and litigation and insurance costs or settlements. NOTE 20 STOCK PLANS STOCK OPTION AND AWARD PROGRAMS Under the 2007 Incentive Compensation Plan and previously under the 1998 Incentive Compensation Plan (the Plans), awards may be granted to employees and other key individuals who perform services for the Company and its participating subsidiaries. These awards may be in the form of stock options, restricted stock awards or units (RSAs), portfolio grants (PGs), and similar awards designed to meet the requirements of non-u.s. jurisdictions. For the Company s Plans, there were a total of 37 million, 45 million and 52 million common shares unissued and available for grant as of December 31, 2009, 2008 and 2007, respectively, as authorized by the Company s Board of Directors and shareholders. The Company granted stock option awards to its Chief Executive Officer (CEO) in November 2007 and January 2008 that have performance-based and market-based conditions. These option awards are separately described below and are excluded from the information and tables presented in the following paragraphs. A summary of stock option and RSA activity as of December 31, 2009, and changes during the year are presented below: (Shares in thousands) Stock Options RSAs Weighted Average Exercise Weighted Average Grant Shares Price Shares Price Outstanding at December 31, ,674 $ ,108 $ Granted 9,165 $ ,014 $ Exercised/vested (2,757) $ (2,680) $ Forfeited (2,060) $ (760) $ Expired (8,328) $ Outstanding at December 31, 2009 (a) 79,694 $ ,682 $ Options vested and expected to vest at December 31, ,271 $ Options exercisable at December 31, 2009 (a) 59,778 $ (a) As of December 31, 2009, the exercise prices for stock options outstanding and stock options exercisable ranged from $12.06 to $60.95 and $24.66 to $60.95, respectively. The Company recognizes the cost of employee stock awards granted in exchange for employee services based on the grant-date fair value of the award, net of expected forfeitures. Those costs are recognized ratably over the vesting period. 111

207 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY STOCK OPTIONS Each stock option has an exercise price equal to the market price of the Company s common stock on the date of grant and a contractual term of 10 years from the date of grant. Stock options generally vest 25 percent per year beginning with the first anniversary of the grant date. The weighted-average remaining contractual life and the aggregate intrinsic value (the amount by which the fair value of the Company s stock exceeds the exercise price of the option) of the stock options outstanding, exercisable, and vested and expected to vest as of December 31, 2009 were as follows: Outstanding Exercisable Vested and Expected to Vest Weighted average remaining contractual life (in years) Aggregate intrinsic value ($ millions) $ 399 $ 199 $ 379 The intrinsic value for options exercised during 2009, 2008 and 2007 was $11 million, $79 million and $463 million, respectively (based upon the fair value of the Company s stock price at the date of exercise). Cash received from the exercise of stock options in 2009, 2008 and 2007 was $83 million, $176 million and $852 million, respectively. The tax benefit realized from income tax deductions from stock option exercises, which was recorded in additional paid-in capital, in 2009, 2008 and 2007 was $2 million, $21 million and $158 million, respectively. The fair value of each option is estimated on the date of grant using a Black-Scholes-Merton option-pricing model. The following weighted-average assumptions are used for grants issued in 2009, 2008 and 2007, the majority of which were granted in the beginning of each year: Dividend yield 4.1% 1.5% 1.0% Expected volatility 36% 19% 19% Risk-free interest rate 2.1% 2.8% 4.8% Expected life of stock option (in years) Weighted-average fair value per option $ 4.54 $ 8.24 $ The expected volatility is based on weighted historical and implied volatilities of the Company s common stock price. The expected life of the options is based on historical data. STOCK OPTIONS WITH PERFORMANCE-BASED AND MARKET-BASED CONDITIONS On November 30, 2007 and January 31, 2008, the Company s CEO was granted in the aggregate 2,750,000 of non-qualified stock option awards with performance-based and market-based conditions. The exercise prices per share are $58.98 and $49.13, respectively. Both awards have a contractual term of 10 years and a vesting period of 6 years. Performance-based Conditions Awards for 2,062,500 options have performance-based conditions with an aggregate grant date fair value of approximately $33.8 million using a Black-Scholes-Merton option-pricing model. Compensation expense for these awards will be recognized over the vesting period when it is determined it is probable that the performance metrics will be achieved. No compensation expense for these awards was recorded in 2009, 2008 or Market-based Conditions Awards for 687,500 options have market-based conditions with an aggregate grant date fair value of approximately $10.5 million using a Monte Carlo valuation model. The expected volatility is based on historical returns of the Company s common stock price and the S&P 500 Index. The expected life of the options is based on historical data. Compensation expense for the fair value of these awards is recognized ratably over the vesting period irrespective of the probability of the market metric being achieved. Total compensation expense recorded in 2009, 2008 and 2007 was $2.4 million, $2.4 million and $0.1 million, respectively. RESTRICTED STOCK AWARDS RSAs are valued based on the stock price on the date of grant and vest generally 25 percent per year, beginning with the first anniversary of the grant date. RSA holders receive non-forfeitable dividends or dividend equivalents. The total fair value of shares vested during 2009, 2008 and 2007 was $44 million, $134 million and $203 million, respectively (based upon the Company s stock price at the vesting date). The weighted-average grant date fair value of RSAs granted in 2009, 2008 and 2007, is $18.04, $48.29 and $57.89, respectively. PORTFOLIO GRANTS In 2009, the Company awarded cash-settled PGs to Executive Officers that earn value based on the Company s financial performance and the Company s total shareholder return versus the S&P 500 Index. Awards in 2009 for all other PG recipients earn value based on the Company s performance against financial and corporate objectives. The 2009 awards vest fifty percent each year over two one-year performance periods. All PGs awarded in 2008 and 2007 earn value based on the Company s financial performance and the Company s 112

208 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY total shareholder return versus the S&P 500 Index and cliff vest after a three-year performance period. PG payouts are subject to CBC approval. The PGs are classified as liabilities and, therefore, the fair value is determined at the date of grant and remeasured quarterly as part of compensation expense over the performance period. Cash paid upon vesting of PGs was $43 million, $59 million and $55 million in 2009, 2008 and 2007, respectively. SUMMARY OF STOCK PLAN EXPENSE The components of the Company s stock-based compensation expense (net of cancellations) are as follows: (Millions) Restricted stock awards (a) $ 135 $ 141 $ 135 Stock options (a) Portfolio grants and other Performance/market-based stock options 2 2 Total stock based compensation expense (b) $ 202 $ 237 $ 276 (a) As of December 31, 2009, the total unrecognized compensation cost related to unvested RSAs and options was $260 million and $74 million, respectively. The unrecognized cost for RSAs and options will be recognized ratably over the remaining vesting period. The weighted-average remaining vesting period for RSAs and options is 2.44 years and 2.01 years, respectively. (b) The total income tax benefit recognized in the income statement for stock-based compensation arrangements in 2009, 2008 and 2007 was $71 million, $83 million and $96 million, respectively. NOTE 21 RETIREMENT PLANS The Company sponsors defined benefit pension plans, defined contribution plans, and other postretirement benefit plans for its employees. The following table provides a summary of the total cost related to these plans as of December 31: (Millions) Defined benefit pension plan cost $ 21 $ 13 $ 28 Defined contribution plan cost Other postretirement benefit plan cost Net periodic benefit cost $ 168 $ 251 $ 232 The expenses in the above table are recorded in salaries and employee benefits in the Consolidated Statements of Income. DEFINED BENEFIT PENSION PLANS The Company s significant defined benefit pension plans cover certain employees in the United States and United Kingdom. Most employees outside the United States and United Kingdom are covered by local retirement plans, some of which are funded, while other employees receive payments at the time of retirement or termination under applicable labor laws or agreements. The Company complies with the minimum funding requirements in all countries. The Company sponsors the U.S. American Express Retirement Plan (the Plan) for eligible employees in the United States. The Plan is a noncontributory defined benefit plan and a tax-qualified retirement plan subject to the Employee Retirement Income Security Act of 1974, as amended (ERISA). Effective July 1, 2007, the Plan was closed to new entrants and existing participants no longer accrue future benefits. The Company funds retirement costs through a trust and complies with the applicable minimum funding requirements specified by ERISA, as revised under the Pension Protection Act (PPA), effective October 1, The funded status of the Plan on an ERISA basis as of October 1, 2009 (applicable plan year) is 106 percent. The PPA calculation assumptions are specific to ERISA and differ from the calculation of the net funded status for GAAP purposes (see Net Funded Status as of December 31, 2009 in the table below). The Plan is a cash balance plan and employees accrued benefits are based on notional account balances, which are maintained for each individual. Employees balances are credited daily with interest at a fixed-rate that is updated each January 1 and is based on the average of the daily five-year U.S. Treasury Note yields for the previous October 1 through November 30. The interest rate varies from a minimum of 5 percent to a maximum equal to the lesser of (i) 10 percent or (ii) the applicable interest rate set forth in the Plan. Employees and their beneficiaries have the option to receive annuity payments upon retirement or a lump-sum payout at vested termination, death, disability or retirement. The Company also sponsors an unfunded non-qualified Supplemental Retirement Plan (the SRP) for employees compensated above a certain level to supplement their pension benefits that are limited by the Internal Revenue Code. The SRP was also amended as of July 1, 2007, and its terms generally parallel those of the Plan, except that the definition of compensation and payment options differ. For each plan, the net funded status is defined by GAAP governing retirement benefits as the difference between the fair value of plan assets and the respective plan s projected benefit obligation. The projected benefit obligation represents a liability based on the plan participants service-to-date and their expected future compensation at their projected retirement date. Changes in the funded status are recorded as unamortized gains and losses, which are recognized in other comprehensive income, net of tax, in the periods in which they occur along with prior service cost. 113

209 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY As of December 31, 2009, the net funded status related to the defined benefit pension plans was underfunded by $406 million, as shown in the following table: Net Funded Status (Millions) Net funded status, beginning of year $ (441) $ 113 Increase (Decrease) in fair value of plan assets 296 (900) (Increase) Decrease in projected benefit obligation (261) 346 Net change 35 (554) Net funded status, end of year $ (406) $ (441) The net funded status amounts at December 31, 2009 and 2008 are recognized in the Consolidated Balance Sheets in other liabilities. Plan Assets and Obligations The following tables provide a reconciliation of changes in the fair value of plan assets and projected benefit obligations for all defined benefit pension plans: Reconciliation of Change in Fair Value of Plan Assets (Millions) Fair value of plan assets, beginning of year $ 1,693 $ 2,593 Effect of transition to December 31st measurement date 11 Actual return on plan assets 290 (461) Employer contributions Benefits paid (59) (61) Settlements (81) (88) Foreign currency exchange rate changes 72 (321) Net change 296 (900) Fair value of plan assets, end of year $ 1,989 $ 1,693 Reconciliation of Change in Projected Benefit Obligation (Millions) Projected benefit obligation, beginning of year $ 2,134 $ 2,480 Effect of transition to December 31st measurement date 6 Service cost Interest cost Benefits paid (59) (61) Actuarial loss (gain) 189 (56) Plan amendments (4) Settlements (81) (88) Curtailments (14) (5) Foreign currency exchange rate changes 85 (297) Net change 261 (346) Projected benefit obligation, end of year $ 2,395 $ 2,134 Accumulated Other Comprehensive Loss The following table provides the amounts comprising accumulated other comprehensive loss, which are not yet recognized as components of net periodic pension benefit cost as of December 31: (Millions) Net actuarial loss $ 655 $ 650 Net prior service cost (3) (3) Total, pretax effect Tax impact (219) (215) Total, net of taxes $ 433 $ 432 The estimated portion of the net actuarial loss and net prior service cost that is expected to be recognized as a component of net periodic pension benefit cost in 2010 is $22 million and nil, respectively. The following table lists the amounts recognized in other comprehensive loss in 2009: (Millions) 2009 Net actuarial loss: Reclassified to earnings from equity (a) $ (29) Losses in current year (b) 34 Net actuarial loss, pretax $ 5 (a) Amortization of actuarial losses and recognition of losses related to lump sum settlements.

210 (b) Deferral of actuarial losses and curtailment gains. Benefit Obligations The accumulated benefit obligation in a defined benefit pension plan is the present value of benefits earned to date by plan participants computed based on current compensation levels as contrasted to the projected benefit obligation, which is the present value of benefits earned to date by plan participants based on their expected future compensation at their projected retirement date. The accumulated and projected benefit obligations for all defined benefit pension plans are as follows: (Millions) Accumulated benefit obligation $ 2,327 $ 2,057 Projected benefit obligation $ 2,395 $ 2,134 The accumulated benefit obligation and fair value of plan assets for pension plans with accumulated benefit obligation that exceeds the fair value of plan assets are as follows: (Millions) Accumulated benefit obligation $ 1,369 $ 2,056 Fair value of plan assets $ 1,020 $ 1,

211 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY The projected benefit obligation and fair value of plan assets for pension plans with projected benefit obligation that exceeds the fair value of plan assets are as follows: (Millions) Projected benefit obligation $ 2,395 $ 2,134 Fair value of plan assets $ 1,989 $ 1,693 Net Periodic Pension Benefit Cost The components of the net periodic pension benefit cost for all defined benefit pension plans as of December 31 are as follows: (Millions) Service cost (a) $ 14 $ 23 $ 89 Interest cost (b) Expected return on plan assets (c) (146) (169) (155) Amortization of prior service costs (d) 1 Recognized net actuarial loss (e) Settlements losses (gains) (f) 19 5 (5) Curtailment (gains) losses (g) (3) 1 (63) Net periodic pension benefit cost $ 21 $ 13 $ 28 (a) Current value of benefits earned by employees during the period. (b) Estimated interest incurred on the outstanding projected benefit obligation during the period. (c) Expected return on the market related value of plan assets. (d) Costs that result from plan amendments, which are amortized over the expected future service period of the employees impacted. (e) Amortization of the accumulated losses which exceed 10 percent of the greater of the projected benefit obligation or the market related value of plan assets. (f) Recognition of the actuarial losses resulting from lump sum settlements of the benefit obligation. (g) Gains resulting from a reduction in the benefit obligation due to a decrease in the expected years of future service of current plan participants. Assumptions The weighted-average assumptions used to determine defined benefit pension obligations were: Discount rates 5.3% 5.9% Rates of increase in compensation levels 3.6% 3.9% The weighted-average assumptions used to determine net periodic pension benefit costs were: Discount rates 5.9% 5.8% 5.2% Rates of increase in compensation levels 3.9% 4.2% 4.1% Expected long-term rates of return on assets 6.9% 7.6% 7.8% The Company assumes a long-term rate of return on assets on a weighted-average basis. In developing this assumption, management evaluates historical returns on plan assets as well as benchmark information including projections of asset class returns and long-term inflation. The discount rate assumptions for the Company s significant defined benefit plans are determined using a model consisting of bond portfolios that match the cash flows of the plan s projected benefit payments based on the plan participants service to date and their expected future compensation. Use of the rate produced by this model generates a projected benefit obligation that equals the current market value of a portfolio of high-quality zero-coupon bonds whose maturity dates and amounts match the timing and amount of expected future benefit payments. Asset Allocation and Fair Value The Benefit Plans Investment Committee (BPIC) is appointed by the Compensation and Benefits Committee of the Company s Board of Directors and has the responsibility of reviewing and approving the investment policies related to plan assets for the Company s defined benefit pension plans; evaluating the performance of the investments in accordance with the investment policy; reviewing the investment objectives, risk, characteristics, expenses and historical performance; and selecting and evaluating the investment managers. The BPIC typically meets quarterly to review the performance of the various investment managers and service providers as well as other investment related matters. The Company s significant defined benefit pension plans have investment policies, which prescribe targets for the amount of assets that can be invested in a security class in order to mitigate the detrimental impact of adverse or unexpected results with respect to any individual security class on the overall portfolio. The portfolios are diversified by asset type, risk characteristics and concentration of investments. Effective January 1, 2009, the Company adopted new GAAP fair value disclosure requirements for defined benefit pension plan assets (the new expanded disclosures are not applicable for plan assets at December 31, 2008 when the asset allocation was 48 percent equity securities, 43 percent fixed income securities, and 9 percent other investments). Refer to Note 3 for a discussion related to valuation techniques used to measure fair value, including a description of the three-level fair value hierarchy of inputs.

212 115

213 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY The following table summarizes the target allocation and categorization of all defined benefit pension plan assets measured at fair value on a recurring basis by GAAP s valuation hierarchy as of December 31, Quoted Prices in Active Markets for Identical Significant Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Asset Category (millions, except percentages) Target Allocation 2010 Total Assets (Level 1) U.S. equity securities 15% $ 334 $ 334 $ $ International equity securities (a) 30% U.S. fixed income securities 30% International fixed income securities (a) 15% Balanced funds 5% Cash Other (b) Private equity Real estate Hedge funds 8 8 Total other 5% Total 100% $1,989 $ 975 $ 916 $ 98 (a) A significant portion of international investments are in U.K. companies and U.K. government and agency securities. (b) Measured at reported net asset value in accordance with GAAP adopted in The fair value measurement of all defined benefit pension plan assets using significant unobservable inputs (Level 3) changed during 2009 due to the following: (Millions) Total Private Equity Real Estate Hedge Funds Beginning fair value, January 1, 2009 $187 $64 $60 $63 Actual net losses on plan assets: Held at the end of the year (38) (16) (19) (3) Sold during the year (10) (1) (9) Total net losses (48) (16) (20) (12) Net purchases, sales and settlements (41) 4 (2) (43) Net decrease (89) (12) (22) (55) Ending fair value, December 31, 2009 $ 98 $52 $38 $8 116

214 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY Benefit Payments The Company s defined benefit pension plans expect to make benefit payments to retirees as follows: 2015 (Millions) Expected payments $ 132 $ 147 $ 152 $ 152 $ 171 $ 903 In addition, the Company expects to contribute $64 million to its defined benefit pension plans in DEFINED CONTRIBUTION RETIREMENT PLANS The Company sponsors defined contribution retirement plans, the principal plan being the Retirement Savings Plan (RSP), a 401(k) savings plan with a profit sharing component. The RSP is a tax-qualified retirement plan subject to ERISA and covers most employees in the U. S. Under the terms of the RSP, employees have the option of investing up to 10 percent of their contributions in the American Express Company Stock Fund, which invests primarily in the Company s common stock, through accumulated payroll deductions. Employees are restricted from transferring balances into this fund if the balance has reached 10 percent of the employee s total account balance. The RSP held 13 million shares of American Express Common Stock at both December 31, 2009 and 2008, beneficially for employees. Effective July 1, 2007, the Company matches employee contributions to the plan up to a maximum of 5 percent of total pay. Additional annual conversion contributions of up to 8 percent of total pay are provided into the RSP for eligible employees who were hired before April 1, The Company also sponsors an RSP SRP, which is an unfunded non-qualified plan for employees whose RSP benefits are limited by the Internal Revenue Code and its terms generally parallel those of the RSP, except that the definition of compensation and payment options differ. The total expense for all defined contribution retirement plans globally was $118 million, $211 million and $173 million in 2009, 2008 and 2007, respectively. The decrease in defined contribution expense in 2009 primarily reflects the Company s temporary suspension of the employer match conversion contributions (reinstated prospectively in January 2010). OTHER POSTRETIREMENT BENEFIT PLANS The Company sponsors unfunded other postretirement benefit plans that provide health care and life insurance to certain retired U.S. employees. Accumulated Other Comprehensive Loss The following table provides the amounts comprising accumulated other comprehensive loss which are not yet recognized as components of net periodic benefit cost as of December 31: (Millions) Net actuarial loss $ 60 $ 47 Net prior service cost (2) Total, pretax effect Tax impact (24) (18) Total, net of taxes $ 36 $ 27 The estimated portion of the net actuarial loss above that is expected to be recognized as a component of net periodic benefit cost in 2010 is $2 million. The following table lists the amounts recognized in other comprehensive loss in 2009: (Millions) 2009 Net actuarial loss: Reclassified to earnings from equity $ (2) Losses in current year 15 Net actuarial loss 13 Net prior service cost: Reclassified to earnings from equity 2 Net prior service cost 2 Total, pretax $ 15 Benefit Obligations The projected benefit obligation represents a liability based upon estimated future medical and other benefits to be provided to retirees. The following table provides a reconciliation of the changes in the projected benefit obligation: Reconciliation of Change in Projected Benefit Obligation (Millions) Projected benefit obligation, beginning of year $ 295 $ 312 Effect of transition to December 31st measurement date 1 Service cost 5 6 Interest cost Benefits paid (16) (27) Actuarial loss (gain) 16 (16) Curtailment loss 6 Net change 29 (17) Projected benefit obligation, end of year $ 324 $ 295 The plans are unfunded and the obligations as of December 31, 2009 and 2008 are recognized in the Consolidated Balance Sheets in other liabilities. 117

215 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY Net Periodic Benefit Cost GAAP provides for the delayed recognition of the net actuarial loss and the net prior service credit remaining in accumulated other comprehensive income (loss). The components of the net periodic benefit cost for all other postretirement benefit plans as of December 31 are as follows: (Millions) Service cost $ 5 $ 6 $ 6 Interest cost Amortization of prior service cost (2) (2) (2) Recognized net actuarial loss Curtailment loss 6 Net periodic benefit cost $ 29 $ 27 $ 31 ASSUMPTIONS The weighted-average assumptions used to determine benefit obligations were: Discount rates 5.4% 6.0% Health care cost increase rate: Following year 8.0% 8.5% Decreasing to the year % 5.0% The weighted-average discount rate used to determine net periodic benefit cost was 6.0 percent, 6.1 percent and 5.7 percent in 2009, 2008 and 2007, respectively. The discount rate assumption for the Company s unfunded other postretirement benefit plans is determined by using a model consisting of bond portfolios that match the cash flows of the plan s projected benefit payments. Use of the rate produced by this model generates a projected benefit obligation that equals the current market value of a portfolio of high-quality zero-coupon bonds whose maturity dates and amounts match the timing and amount of expected future benefit payments. A one percentage-point change in assumed health care cost trend rates would have the following effects: One percentagepoint increase One percentagepoint decrease (Millions) Increase (Decrease) on benefits earned and interest cost for U.S. plans $ 1 $ 1 $ (1) $ (1) Increase (Decrease) on postretirement benefit obligation for U.S. plans $ 15 $ 15 $ (14) $ (13) Benefit Payments The Company s other postretirement benefit plans expect to make benefit payments as follows: (Millions) Expected payments $ 24 $ 24 $ 24 $ 25 $ 26 $ 132 In addition, the Company expects to contribute $24 million to its other postretirement benefit plans in NOTE 22 SIGNIFICANT CREDIT CONCENTRATIONS Concentrations of credit risk exist when changes in economic, industry or geographic factors similarly affect groups of counterparties whose aggregate credit exposure is material in relation to American Express total credit exposure. The Company s customers operate in diverse industries, economic sectors and geographic regions. The following table details the Company s maximum credit exposure by category, including the credit exposure associated with derivative financial instruments, as of December 31: (Billions, except percentages) On-balance sheet: Individuals (a) $ 60 $ 68 Financial institutions (b) U.S. Government and agencies (c) All other (d) Total on-balance sheet (e) $ 116 $ 117 Unused lines-of-credit-individuals (f) $ 222 $ 253 (a) Individuals primarily include cardmember loans and receivables. (b) Financial institutions primarily include debt obligations of banks, broker-dealers, insurance companies and savings and loan associations. (c) U.S. Government and agencies represent debt obligations of the U.S. Government and its agencies, states and municipalities, and government sponsored entities.

216 (d) All other primarily includes cardmember receivables from other corporate institutions. (e) Certain distinctions between categories require management judgment. (f) Because charge card products have no preset spending limit, the associated credit limit on cardmember receivables is not quantifiable. Therefore, the quantified unused line-of-credit amounts only include the approximate credit line available on cardmember loans (including both for on-balance sheet loans and loans previously securitized). 118

217 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY As of December 31, 2009, the Company s most significant concentration of credit risk was with individuals, including cardmember receivables and loans. These amounts are generally advanced on an unsecured basis. However, the Company reviews each potential customer s credit application and evaluates the applicant s financial history and ability and willingness to repay. The Company also considers credit performance by customer tenure, industry, and geographic location in managing credit exposure. The following table details the Company s cardmember loans and receivables exposure (including unused lines-of-credit on cardmember loans) in the United States and International, as of December 31: (Billions, except percentages) On-balance sheet: United States $ 47 $ 56 International On-balance sheet (a) $ 67 $ 75 Unused lines-of-credit-individuals: United States $ 181 $ 211 International Total $ 222 $ 253 (a) Represents cardmember loans to individuals as well as receivables from individuals and corporate institutions as discussed in footnotes (a) and (d) from the previous table. EXPOSURE TO AIRLINE INDUSTRY The Company has multiple co-brand relationships and rewards partners, of which airlines are one of the most important and valuable. The Company s largest airline co-brand is Delta Air Lines (Delta) and this relationship includes exclusive co-brand credit card partnerships and other arrangements, including Membership Rewards, merchant acceptance and travel. American Express Delta SkyMiles Credit Card co-brand portfolio accounts for approximately 5 percent of the Company s worldwide billed business and less than 15 percent of worldwide cardmember lending receivables. Refer to Note 8 to the Consolidated Financial Statements for further discussion of prepaid miles acquired from Delta. Over the last couple of years, there were a significant number of airline bankruptcies and liquidations, driven in part by volatile fuel costs and weakening economies around the world. Historically, the Company has not experienced significant revenue declines when a particular airline scales back or ceases operations due to a bankruptcy or other financial challenges because volumes generated by that airline are typically shifted to other participants in the industry that accept the Company s card products. The Company s exposure to business and credit risk in the airline industry is primarily through business arrangements where the Company has remitted payment to the airline for a cardmember purchase of tickets that have not yet been used or flown. The Company mitigates this risk by delaying payment to the airlines with deteriorating financial situations, thereby increasing cash withheld to protect the Company in the event the airline is liquidated. To date, the Company has not experienced significant losses from airlines that have ceased operations. NOTE 23 REGULATORY MATTERS AND CAPITAL ADEQUACY The Company is regulated by the Federal Reserve and is subject to the Federal Reserve s requirements for risk-based capital and leverage ratios. The Company s two U.S. Bank operating subsidiaries, Centurion Bank and FSB (collectively, the Banks ), are subject to similar regulatory capital requirements of the FDIC and the Office of Thrift Supervision (OTS). The Federal Reserve s guidelines for capital adequacy define two categories of risk-based capital: Tier 1 and Tier 2 capital (as defined in the regulations). Under the risk-based capital guidelines of the Federal Reserve, the Company is required to maintain minimum ratios of Tier 1 and Total (Tier 1 plus Tier 2) capital to risk weighted assets, as well as a minimum leverage ratio (Tier 1 capital to average adjusted on-balance sheet assets). Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional, discretionary actions by regulators, that, if undertaken, could have a direct material effect on the Company s and the Banks financial statements. As of December 31, 2009 and 2008, the Company and its Banks were well-capitalized and met all capital requirements to which each was subject. Management is not aware of any events subsequent to December 31, 2009 that would materially, adversely affect the Company s and the Banks 2009 capital ratios, including the impact of the adoption of changes in GAAP governing the accounting for transfers of financial assets effective January 1, 2010, as discussed in Note 1. While the adoption of these new accounting standards is expected to result in a reduction of the Company s capital ratios, such ratios are expected to be above applicable well-capitalized levels. 119

218 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY The following table presents the regulatory capital ratios for the Company and the Banks at December 31, 2009 and 2008: Tier 1 capital Total capital Tier 1 capital ratio Total capital ratio Tier 1 leverage ratio(a) (Millions, except percentages) December 31, 2009 American Express Company $ 11,464 $ 13, % 11.9% 9.7% American Express Centurion Bank (b) $ 4,430 $ 4, % 15.0% 17.1% American Express Bank, FSB (b) $ 4,784 $ 5, % 16.7% 15.1%(a) December 31, 2008 American Express Company $ 10,087 $ 11, % 11.1% 8.5% American Express Centurion Bank $ 3,029 $ 3, % 13.7% 13.2% American Express Bank, FSB $ 3,415 $ 3, % 14.0% 12.2%(a) Well-capitalized ratios (c) 6.0% 10.0% 5.0%(d) Minimum capital ratios (c) 4.0% 8.0% 4.0% (a) FSB leverage ratio represents Tier 1 core capital ratio, calculated similarly to Tier 1 leverage ratio. (b) Since January 2009, FSB has committed to maintain a Total capital ratio of no less than 15 percent. During 2009, enhancements were made to the American Express Credit Account Master Trust used to securitize credit card receivables issued by both the FSB and Centurion Bank. As a result of these enhancements, the Banks began holding capital against their off balance sheet trust assets. The Company infused $1.4 billion and $475 million of additional capital into FSB and Centurion Bank, respectively, during 2009 and in connection with the foregoing increased capital commitment for FSB and the impact of the trust enhancements for both FSB and Centurion Bank. (c) As defined by the regulations issued by the Federal Reserve, Office of the Comptroller of the Currency (OCC), OTS and FDIC. (d) Represents requirements for banking subsidiaries to be considered well capitalized pursuant to regulations issued under the Federal Deposit Insurance Corporation Improvement Act. There is no well capitalized definition for the Tier 1 leverage ratio for a bank holding company. RESTRICTED NET ASSETS OF SUBSIDIARIES Certain of the Company s subsidiaries are subject to restrictions on the transfer of net assets under debt agreements and regulatory requirements. These restrictions have not had any effect on the Company s shareholder dividend policy and management does not anticipate any impact in the future. Procedures exist to transfer net assets between the Company and its subsidiaries, while ensuring compliance with the various contractual and regulatory constraints. At December 31, 2009, the aggregate amount of net assets of subsidiaries that are restricted to be transferred to American Express Parent Company (Parent Company) was approximately $9.5 billion. BANK HOLDING COMPANY DIVIDEND RESTRICTIONS The Company is limited in its ability to pay dividends by its regulators who could prohibit a dividend that would be considered an unsafe or unsound banking practice. It is the policy of the Federal Reserve that bank holding companies should generally pay dividends on common stock only out of net income attributable to common shareholders over the past year, and only if prospective earnings retention is consistent with the organization s current and expected future capital needs, asset quality, and overall financial condition. Moreover, bank holding companies should not maintain dividend levels that undermine a company s ability to be a source of strength to its banking subsidiaries. BANKS DIVIDEND RESTRICTIONS In the years ended December 31, 2008 and 2007, Centurion Bank paid dividends from retained earnings to its parent of $650 million and $700 million, respectively, which were eliminated in the Company s consolidation. No dividends were paid in In the years ended December 31, 2008 and 2007, FSB paid dividends from retained earnings to its parent of $150 million and $150 million, respectively, which were eliminated in the Company s consolidation. No dividends were paid in As of December 31, 2009 and 2008, the Banks could pay, in the aggregate, $1.3 billion and $0.6 billion, respectively, in dividends to their bank holding companies without the prior approval of their respective banking regulators. In determining the dividends, the Banks must also consider its effect on applicable risk-based capital and leverage ratio requirements, as well as policy statements of the federal regulatory agencies. 120

219 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY NOTE 24 COMMITMENTS AND CONTINGENCIES The Company and its subsidiaries are involved in a number of legal and arbitration proceedings, including class actions, concerning matters arising in connection with the conduct of their respective business activities. The Company believes it has meritorious defenses to each of these actions and intends to defend them vigorously. In the course of its business, the Company and its subsidiaries are also subject to governmental examinations, information gathering requests, subpoenas, inquiries, and investigations. The Company believes it is not a party to, nor are any of its properties the subject of, any pending legal, arbitration, regulatory, tax or investigative proceedings that would have a material adverse effect on the Company s consolidated financial condition or liquidity. However, it is possible that the outcome of any such proceedings could have a material impact on results of operations in any particular reporting period as the proceedings are resolved. VISA AND MASTERCARD SETTLEMENTS As previously disclosed the Company reached settlement agreements with Visa and MasterCard. Under the terms of the settlement agreements, the Company will receive aggregate maximum payments of $4.05 billion. The settlement with Visa comprised an initial payment of $1.13 billion ($700 million after-tax) that was recorded as a gain in Having met quarterly performance criteria, the Company recognized $280 million ($172 million after-tax) from Visa in 2009 and 2008, and $600 million ($372 million after-tax) and $300 million ($186 million after-tax) from MasterCard in 2009 and 2008, respectively. The remaining Visa and MasterCard quarterly payments, subject to the Company achieving certain quarterly performance criteria, continue through the fourth and second quarters of 2011, respectively, and are included in other, net expenses within the Corporate & Other segment. The Company also has 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 $6.0 billion as of December 31, The Company leases certain facilities and equipment under noncancelable and cancelable agreements. The total rental expense amounted to $362 million in 2009 including lease termination penalties of $36 million. Rent expense was $337 million and $300 million in 2008 and 2007, respectively. As of December 31, 2009, the minimum aggregate rental commitment under all noncancelable operating leases (net of subleases of $5 million) was: (Millions) 2010 $ Thereafter 1,316 Total $ 2,337 As of December 31, 2009, the Company s future minimum lease payments under capital leases or other similar arrangements is approximately $12 million per annum from 2010 through 2013, $14 million in 2014 and $40 million thereafter. Refer to Note 22 for a discussion of the Company s customer commitments, related to unused lines-of-credit, as of December 31, 2009 and

220 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY NOTE 25 REPORTABLE OPERATING SEGMENTS AND GEOGRAPHIC OPERATIONS REPORTABLE OPERATING SEGMENTS The Company is a leading global payments and travel company that is 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 international), and regulatory environment considerations. Based on these factors, the Company has the following four reportable operating segments: USCS issues a wide range of card products and services to consumers and small businesses in the United States, and provides consumer travel services to cardmembers and other consumers. ICS issues proprietary consumer and small business cards outside the United States. GCS offers global corporate payment and travel-related products and services to large and mid-sized companies. GNMS segment operates a global general-purpose charge and credit card network, which includes both proprietary cards and cards issued under network partnership agreements. It also manages merchant services globally, which includes signing merchants to accept cards as well as processing and settling card transactions for those merchants. This segment also offers merchants point-of-sale products, servicing and settlements and marketing programs. Corporate functions and auxiliary businesses, including the Company s publishing business, the Global Prepaid business, as well as other company operations are included in Corporate & Other. 122

221 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY The following table presents certain selected financial information as of December 31, 2009, 2008 and 2007 and for each of the years then ended. (Millions, except where indicated) USCS ICS GCS GNMS Corporate & Other(a) Consolidated 2009 (b) Non-interest revenues $ 9,525 $ 3,404 $ 4,157 $ 3,625 $ 688 $ 21,399 Interest income 3,221 1, ,331 Interest expense (85) 756 2,207 Total revenues net of interest expense 11,891 4,483 4,046 3, ,523 Total provision 3,769 1, ,313 Pretax income from continuing operations , ,841 Income tax provision (benefit) 75 (73) Income from continuing operations $ 249 $ 303 $ 390 $ 898 $ 297 $ 2,137 Total equity (billions) $ 6.5 $ 2.2 $ 3.4 $ 1.8 $ 0.5 $ Non-interest revenues $ 11,427 $ 3,758 $ 5,081 $ 3,875 $ 578 $ 24,719 Interest income 4,736 1, ,201 Interest expense 2, (222) 97 3,555 Total revenues net of interest expense 13,997 4,781 4,696 4, ,365 Total provision 4,389 1, ,798 Pretax income from continuing operations 1, , ,581 Income tax provision (benefit) 289 (198) (64) 710 Income from continuing operations $ 852 $ 351 $ 505 $ 995 $ 168 $ 2,871 Total equity (billions) $ 4.8 $ 2.0 $ 3.5 $ 1.4 $ 0.1 $ Non-interest revenues $ 11,750 $ 3,499 $ 4,697 $ 3,549 $ 621 $ 24,116 Interest income 5,125 1, ,424 Interest expense 2, (312) 116 3,981 Total revenues net of interest expense 14,222 4,331 4,269 3, ,559 Total provision 2, ,103 Pretax income from continuing operations 2, , ,694 Income tax provision (benefit) 907 (174) ,568 Income from continuing operations $ 1,823 $ 291 $ 536 $ 1,022 $ 454 $ 4,126 Total equity (billions) $ 4.5 $ 2.1 $ 2.2 $ 1.2 $ 1.0 $ 11.0 (a) Corporate & Other includes adjustments and eliminations for intersegment activity. (b) The Company changed the manner by which it assesses the performance of its reportable operating segments to exclude the impact of its excess liquidity funding levels. Accordingly, beginning in 2009, the debt and cash and investment balances associated with the Company s excess liquidity funding and the related net negative interest spread are no longer included within the reportable operating segment results (primarily USCS and GCS segments) and are reported in the Corporate & Other segment. The segment results for the prior years have not been revised for this change. The impact on segment income from continuing operations was an increase to USCS, ICS, and GCS of $101 million, $1 million and $41 million, respectively, and a decrease to Corporate & Other of $143 million for the year ending December 31, The impact on reportable operating segment asset and liability balances for this change was a decrease to USCS and GCS of $19 billion and $7 billion, respectively, and an increase to Corporate & Other of $26 billion as of December 31,

222 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY 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, promotion, rewards and cardmember services expenses are reflected in each segment based on actual expenses incurred, with the exception of brand advertising, which is reflected in the GNMS segment. 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 reflect expenses, such as professional services, occupancy and equipment, and communications, 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 from Corporate & Other to the other segments based on each segment s relative level of pretax income, with the exception of certain fourth quarter 2008 severance and other related charges of $133 million from the Company s fourth quarter restructuring initiatives for staff group support functions. This presentation is consistent with how such charges were reported internally. See further discussion in Note 16 regarding this corporate initiative. 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. GEOGRAPHIC OPERATIONS The following table presents the Company s total revenues net of interest expense and pretax income in different geographic regions: (Millions) United States Europe Asia/Pacific All Other Consolidated 2009 Total revenues net of interest expense $ 16,582 $ 3,151 $ 2,335 $ 2,455 $ 24,523 Pretax income from continuing operations $ 2,034 $ 300 $ 200 $ 307 $ 2, Total revenues net of interest expense $ 19,365 $ 3,755 $ 2,544 $ 2,701 $ 28,365 Pretax income from continuing operations $ 3,110 $ 196 $ 99 $ 176 $ 3, Total revenues net of interest expense $ 19,456 $ 3,515 $ 2,231 $ 2,357 $ 27,559 Pretax income from continuing operations $ 4,984 $ 301 $ 124 $ 285 $ 5,694 The data in the above table is, in part, based upon internal allocations, which necessarily involve management s judgment. 124

223 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY NOTE 26 PARENT COMPANY Parent Company Condensed Statements of Income Years Ended December 31 (Millions) Revenues Non-interest revenues Gain on sale of securities $ 211 $ $ Other Total non-interest revenues Interest income Interest expense (562) (462) (360) Total revenues net of interest expense $ (205) $ (170) $ (89) Expenses Salaries and employee benefits Other Total Pretax loss (477) (418) (381) Income tax benefit (164) (176) (157) Net loss before equity in net income of subsidiaries and affiliates (313) (242) (224) Equity in net income of subsidiaries and affiliates 2,450 3,113 4,350 Income from continuing operations 2,137 2,871 4,126 Loss from discontinued operations, net of tax (7) (172) (114) Net income $ 2,130 $ 2,699 $ 4,012 Parent Company Condensed Balance Sheets As of December 31 (Millions) Assets Cash and cash equivalents $ 5,679 $ 3 Investment securities Equity in net assets of subsidiaries and affiliates of continuing operations 14,677 12,563 Accounts receivable, less reserves 523 1,153 Loan to affiliate in discontinued operations 238 Premises and equipment at cost, less accumulated depreciation: 2009, $34; 2008, $ Due from subsidiaries 4,197 5,928 Other assets Equity in net liabilities of subsidiaries and affiliates of discontinued operations (44) Total assets $ 26,047 $ 21,197 Liabilities and Shareholders Equity Accounts payable and other liabilities $ 1,398 $ 1,424 Long-term debt 10,243 7,932 Total liabilities 11,641 9,356 Shareholders equity Common shares Additional paid-in capital 11,144 10,496 Retained earnings 3,737 2,719 Accumulated other comprehensive loss (712) (1,606) Total shareholders equity 14,406 11,841 Total liabilities and shareholders equity $ 26,047 $ 21,197 SUPPLEMENTAL DISCLOSURE The Parent Company guarantees up to $104 million of indebtedness under lines of credit that subsidiaries have with various banks. As of December 31, 2009, $17 million in lines of credit have been drawn down. 125

224 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY Parent Company Condensed Statements of Cash Flows Years Ended December 31 (Millions) Cash Flows from Operating Activities Net income $ 2,130 $ 2,699 $ 4,012 Adjustments to reconcile net income to cash provided by operating activities: Equity in net (income) loss of subsidiaries and affiliates: Continuing operations (2,450) (3,113) (4,350) Discontinued operations Dividends received from subsidiaries and affiliates 1,103 2,340 3,708 Gain on sale of investments (211) Loan to affiliate in discontinued operations (238) Other operating activities, primarily with subsidiaries 2,911 (1,915) (242) Net cash provided by (used in) operating activities 3,490 (55) 3,242 Cash Flows from Investing Activities Sale/redemption of investments 361 Premises and equipment (20) (14) (10) Investments in subsidiaries and affiliates (58) (550) Net cash provided by (used in) investing activities 341 (72) (560) Cash Flows from Financing Activities Issuance of debt 3,000 3,000 1,500 Issuance of American Express Series A preferred shares and warrants 3,389 Repurchase of American Express Series A preferred shares (3,389) Principal payment of debt (505) (1,995) (750) Issuance of American Express common shares and other Repurchase of American Express common shares (218) (3,572) Repurchase of American Express stock warrants (340) Dividends paid (924) (836) (712) Net cash provided by (used in) financing activities 1, (2,682) Net change in cash and cash equivalents 5,676 Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year $ 5,679 $ 3 $ 3 126

225 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN EXPRESS COMPANY NOTE 27 QUARTERLY FINANCIAL DATA (UNAUDITED) (Millions, except per share amounts) Quarters Ended 12/31 9/30(b) 6/30(b)(c) 3/31 12/31(c) 9/30 6/30(a) 3/31(a) Total revenues net of interest expense $6,489 $6,016 $6,092 $5,926 $6,506 $7,164 $7,455 $7,240 Pretax income from continuing operations , ,461 Income from continuing operations ,044 Income (Loss) from discontinued operations, net of tax 6 (2) (5) (6) (66) (46) (7) (53) Net income (b) Earnings Per Common Share Basic: Continuing operations $ 0.59 $ 0.54 $ 0.09 $ 0.32 $ 0.26 $ 0.74 $ 0.57 $ 0.90 Discontinued operations 0.01 (0.01) (0.05) (0.04) (0.01) (0.05) Net income $ 0.60 $ 0.54 $ 0.09 $ 0.31 $ 0.21 $ 0.70 $ 0.56 $ 0.85 Earnings Per Common Share Diluted: Continuing operations $ 0.59 $ 0.54 $ 0.09 $ 0.32 $ 0.26 $ 0.74 $ 0.56 $ 0.89 Discontinued operations 0.01 (0.01) (0.01) (0.05) (0.04) (0.04) Net income $ 0.60 $ 0.53 $ 0.09 $ 0.31 $ 0.21 $ 0.70 $ 0.56 $ 0.85 Cash dividends declared per common share $ 0.18 $ 0.18 $ 0.18 $ 0.18 $ 0.18 $ 0.18 $ 0.18 $ 0.18 Common share price: High $42.25 $36.50 $28.45 $21.38 $35.80 $42.50 $52.63 $52.32 Low $31.69 $22.00 $13.08 $ 9.71 $16.55 $31.68 $37.61 $39.50 (a) Diluted EPS from discontinued operations was greater than basic EPS from discontinued operations due to the impact of rounded fractional amounts. (b) The results for the quarter ended September 30, 2009 include a $180 million benefit related to (i) the accounting for a net investment in foreign subsidiaries and (ii) the change in the fair value of certain forward exchange contracts. The results of operations for the quarter ended June 30, 2009 include a $59 million benefit related to the completion of certain account reconciliations. Refer to Note 19 for further discussion of these items. (c) The results of operations for the quarters ended June 30, 2009 and December 31, 2008 include restructuring charges in the amount of $199 million and $410 million, respectively. Refer to Note 16 for further discussion of these items. 127

226 CONSOLIDATED FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA AMERICAN EXPRESS COMPANY (Millions, except per share amounts, percentages, and where indicated) Operating Results (a) Total revenues net of interest expense $ 24,523 $ 28,365 27,559 $ 24,826 $ 22,145 Expenses 16,369 18,986 17,762 17,008 15,605 Provisions for losses 5,313 5,798 4,103 2,666 2,561 Income from continuing operations 2,137 2,871 4,126 3,625 3,014 (Loss) Income from discontinued operations (7) (172) (114) Net income 2,130 2,699 4,012 3,707 3,734 Return on average equity (b) 14.6% 22.3% 37.3% 34.7% 25.4% Balance Sheet (a) Cash and cash equivalents $ 15,542 $ 20,547 8,878 $ 3,801 $ 4,272 Accounts receivable, net 38,204 36,571 41,994 38,642 35,293 Loans, net 30,010 40,659 53,339 43,034 33,824 Investment securities 24,337 12,526 13,214 13,207 13,102 Assets of discontinued operations ,278 20,699 19,866 Total assets 124, , , , ,571 Customer deposits 26,289 15,486 15,397 12,011 13,827 Travelers Cheques outstanding 5,975 6,433 7,197 7,215 7,175 Short-term borrowings 2,344 8,993 17,761 15,236 15,711 Long-term debt 52,338 60,041 55,285 42,747 30,781 Liabilities of discontinued operations ,527 20,003 19,077 Shareholders equity 14,406 11,841 11,029 10,511 10,549 Common Share Statistics Earnings per share (c) : Income from continuing operations: Basic $ 1.55 $ 2.47 $ 3.49 $ 2.97 $ 2.42 Diluted $ 1.54 $ 2.47 $ 3.44 $ 2.91 $ 2.38 (Loss) Income from discontinued operations: Basic $ (0.01) $ (0.14) $ (0.09) $ 0.07 $ 0.58 Diluted $ $ (0.15) $ (0.10) $ 0.07 $ 0.57 Net income: Basic $ 1.54 $ 2.33 $ 3.40 $ 3.04 $ 3.00 Diluted $ 1.54 $ 2.32 $ 3.34 $ 2.98 $ 2.95 Cash dividends declared per share $ 0.72 $ 0.72 $ 0.63 $ 0.57 $ 0.48 Book value per share $ $ $ 9.53 $ 8.76 $ 8.50 Market price per share (d) : High $ $ $ $ $ Low $ 9.71 $ $ $ $ Close $ $ $ $ $ Average common shares outstanding for earnings per share: Basic 1,168 1,154 1,173 1,212 1,233 Diluted 1,171 1,156 1,193 1,235 1,253 Shares outstanding at period end 1,192 1,160 1,158 1,199 1,241 Other Statistics Number of employees at period end (thousands): United States Outside United States Total (e) Number of shareholders of record 41,273 43,257 50,216 51,644 55,409 (a) In 2007, the Company entered into an agreement to sell its international banking subsidiary, AEB, and its subsidiary that issues investment certificates to AEB s customers, AEIDC, to Standard Chartered subject to certain regulatory approvals. The results, assets, and liabilities of AEB (except for certain components of the business which were not sold) are presented as discontinued operations. Additionally, the spin-off of Ameriprise and certain dispositions were completed in 2006 and 2005, and the results of these operations are presented as discontinued operations. Refer to Note 2 for additional information on discontinued operations. (b) Return on average equity is calculated by dividing one year period of net income by one year average of total shareholders equity. (c) Effective January 1, 2009, guidance for determining whether instruments granted in share-based payment transactions are participating securities requires that restricted stock awards be included in the computation of basic and diluted earnings per share pursuant to the two-class method. Accordingly, the Company has retrospectively adjusted EPS for all prior periods presented. Refer to Note 18 to the Company s Consolidated Financial Statements. (d) The market price per share beginning with the fourth quarter of 2005 reflects the spin-off of Ameriprise as of September 30, The opening share price on the first trading day after the spin-off was $ (e) Amounts include employees from discontinued operations. 128

227 Exhibit 21 SUBSIDIARIES OF THE REGISTRANT Unless otherwise indicated, all of the voting securities of these subsidiaries are directly or indirectly owned by the registrant. Where the name of the subsidiary is indented, the voting securities of such subsidiary are owned directly by the company under which its name is indented. Name Country Name American Express Company (USA) New York 56th Street AXP Campus LLC (USA) Arizona American Express Austria Bank GmbH Austria American Express Bank LLC Russian Federation American Express Bank Ltd. S.A. Argentina American Express Banking Corp. (USA) New York American Express Travel Related Services Company, Inc. (USA) New York American Express Bank (Mexico) S.A Institucion de Banca Multiple Mexico American Express Bank Services, S.A. de C.V. Mexico American Express Bank FSB United States American Express Receivables Financing Corporation IV LLC (USA) Delaware American Express Business Loan Corporation (USA) Utah American Express Centurion Bank (USA) Utah American Express Receivables Financing Corporation III LLC (USA) Delaware American Express Company (Mexico) S.A. de C.V. Mexico American Express Insurance Services, Agente de Seguros, S.A. de C.V. Mexico American Express Servicios Profesionales, S.A. de C.V. Mexico American Express Credit Corporation (USA) Delaware American Express Capital Australia Australia American Express Credit Mexico, LLC (USA) Delaware Fideicomiso Empresarial American Express No Mexico American Express Euro Funding Limited Partnership United Kingdom American Express Overseas Credit Corporation Limited Jersey AEOCC Management Company Limited Jersey American Express Overseas Credit Corporation N.V. Netherlands Antilles AE Hungary Holdings Limited Liability Company Hungary American Express Canada Credit Corporation Canada American Express Canada Finance Limited Canada American Express Sterling Funding Limited Partnership United Kingdom American Express Funding (Luxembourg) S.a.r.l Luxembourg Credco Receivables Corp. (USA) Delaware 1

228 Name Country Name American Express Dutch Capital, LLC (USA) Delaware American Express Europe Limited (USA) Delaware Sceptre Nominees Limited United Kingdom American Express Global Financial Services, Inc. (USA) Delaware American Express Holdings Netherlands CV Netherlands American Express Insurance Agency of Puerto Rico, Inc. Puerto Rico American Express International (NZ), Inc. (USA) Delaware American Express Limited (USA) Delaware Alpha Card SCRL Belgium Alpha Card Merchant Services SCRL Belgium BCC Corporate NV/SA Belgium American Express (Malaysia) SDN. BHD. Malaysia American Express (Thai) Co. Ltd Thailand American Express Brasil Assessoria Empresarial Ltda. Brazil American Express International (B) SDN.BHD Brunei Darussalam American Express International Holdings, LLC (USA) Delaware American Express Argentina S.A. Argentina American Express Holdings (France) SAS France American Express France SAS France American Express Carte France SA France American Express Change SAS France American Express Paris SAS France American Express Services SA France American Express Voyages SAS France American Express Management France American Express France Finance SNC France South Pacific Credit Card Limited New Zealand Centurion Finance Limited New Zealand American Express International, Inc. (USA) Delaware AE Exposure Management Limited Jersey American Express (India) Private Limited India American Express Asia Network Consulting (Beijing) Limited Company China American Express Australia Limited Australia American Express Company AS Norway American Express Corporate Travel SA Belgium American Express Denmark A/S Denmark American Express Group Services Limited United Kingdom 2

229 Name Country Name American Express Holding AB Sweden American Express Business Travel A/S Denmark American Express Business Travel AB Sweden American Express Business Travel AS Norway Forsakringsaktiebolaget Viator Sweden American Express Holdings Limited United Kingdom American Express Insurance Services Europe Limited United Kingdom American Express Services Europe Limited United Kingdom American Express Hungary Financial Services Closed Company Limited by Shares Hungary American Express Hungary Travel Services Ltd. Hungary American Express International (Taiwan), Inc. Taiwan, Province of China American Express International SA Greece Key Tours SA Greece American Express Japan Co., Ltd Japan American Express Locazioni Finanziarie s.r.l Italy American Express Payment Services Limited United Kingdom American Express Poland S.A. Poland American Express Reisebüro GmbH Austria American Express Services India Limited India American Express spol. s.r.o. Czech Republic American Express Swiss Holdings GmbH Switzerland Swisscard AECS AG Switzerland American Express Travel (Singapore) Pte. Ltd. Singapore American Express Travel Holdings (Hong Kong) Limited Hong Kong CITS American Express Air Services Ltd China CITS American Express Southern Air Services Ltd China CITS American Express Travel Services Ltd China Farrington American Express Travel Services Limited Hong Kong American Express Travel Holdings (M) Company SDN. BHD. Malaysia Mayflower American Express Travel Services SDN. BHD. Malaysia American Express Travel Services Vostok, LLC Russian Federation ZAO American Express International Services Russian Federation American Express Wholesale Currency Services Pty Limited Australia Amex Broker Assicurativo s.r.l. Italy Amex General Insurance Agency, Inc. Taiwan, Province of China 3

230 Name Country Name Amex Life Insurance Marketing, Inc. Taiwan, Province of China Amex Travel Holding (Japan) Ltd. Japan American Express Nippon Travel Agency, Inc. Japan Interactive Transaction Solutions Limited United Kingdom Interactive Transactions Solutions SAS France Sociedad Internacional de Servicios de Panama S.A. Panama TransUnion Limited Hong Kong American Express Service (Thailand) Company Limited Thailand TRS Card International, Inc. (USA) Delaware American Express de Espana, S.A. (Sociedad Unipersonal) Spain American Express E.F.C., S.A. (Sociedad Unipersonal) Spain American Express Foreign Exchange, S.A. (Sociedad Unipersonal) Spain American Express Viajes, S.A. (Sociedad Unipersonal) Spain American Express Barcelo Viajes SL Spain Amex Asesores de Seguros, S.A. (Sociedad Unipersonal) Spain American Express Marketing & Development Corp. (USA) Delaware American Express Prepaid Card Management Corporation (USA) Arizona American Express Publishing Corporation (USA) New York American Express Receivables Financing Corporation II (USA) Delaware American Express Receivables Financing Corporation V LLC (USA) Delaware Amex (Middle East) B.S.C. (c) Bahrain Amex Al Omania LLC Oman Amex Egypt LLC Egypt ASAL (American Express Saudi Arabia Ltd) Bahrain Amex Bank of Canada Canada Amex Canada Inc. Canada Amex Card Services Company (USA) Delaware Asesorías e Inversiones American Express Chile Limitada Chile Amex Inmobiliaria Limitada Chile Bansamex, S.A. Spain Cardmember Financial Services Limited Jersey Cavendish Holdings, Inc. (USA) Delaware Drillamex, Inc. (USA) Delaware FRC West Property. LLC (USA) Arizona 4

231 Name Country Name Harbor Payments, Inc. (USA) Delaware Fiware Holdings, Inc. (USA) Delaware Harbor Payments Corporation (USA) Georgia Southern Africa Travellers Cheque Company (Pty) Ltd South Africa Swiss Bankers Prepaid Services AG Switzerland Travel Impressions, Ltd. (USA) Delaware Travellers Cheque Associates Limited United Kingdom AMEX Assurance Company (USA) Illinois Amexco Insurance Company (USA) Vermont National Express Company, Inc. (USA) New York The Balcor Company Holdings, Inc. (USA) Delaware The Balcor Company (USA) Delaware Rexport, Inc. (USA) Delaware 5

232 Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the Registration Statements (Form S-8 No , No , No , No , No , No , No , No , No , No , No , No , No , No , No , No , No , No , No , No ; and No ; Form S-3 No , No , No , No , No , No , No , No , No , No , No and ) of American Express Company of our report dated February 25, 2010, relating to the consolidated financial statements and the effectiveness of internal control over financial reporting, which appears in the 2009 Annual Report to Shareholders, which is incorporated by reference in this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP New York, New York February 25, 2010

233 EXHIBIT 31.1 CERTIFICATION I, Kenneth I. Chenault, certify that: 1. I have reviewed this annual report on Form 10-K of American Express Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant s internal control over financial reporting that occurred during the registrant s most recent fiscal quarter (the registrant s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant s internal control over financial reporting; and -1-

234 5. The registrant s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant s auditors and the audit committee of the registrant s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant s internal control over financial reporting. Date: February 25, 2010 /s/ Kenneth I. Chenault Kenneth I. Chenault Chief Executive Officer -2-

235 EXHIBIT 31.2 CERTIFICATION I, Daniel T. Henry, certify that: 1. I have reviewed this annual report on Form 10-K of American Express Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant s internal control over financial reporting that occurred during the registrant s most recent fiscal quarter (the registrant s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant s internal control over financial reporting; and -1-

236 5. The registrant s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant s auditors and the audit committee of the registrant s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant s internal control over financial reporting. Date: February 25, 2010 /s/ Daniel T. Henry Daniel T. Henry Chief Financial Officer -2-

237 EXHIBIT 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Annual Report on Form 10-K of American Express Company (the Company ) for the fiscal year ended December 31, 2009, as filed with the Securities and Exchange Commission on the date hereof (the Report ), Kenneth I. Chenault, as Chief Executive Officer of the Company, and Daniel T. Henry, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Kenneth I. Chenault Name: Kenneth I. Chenault Title: Chief Executive Officer Date: February 25, 2010 /s/ Daniel T. Henry Name: Daniel T. Henry Title: Chief Financial Officer Date: February 25, 2010 The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and is not being filed as part of the Form 10-K or as a separate disclosure document for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the Exchange Act ), or otherwise subject to liability under that section. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act except to the extent that this Exhibit 32.1 is expressly and specifically incorporated by reference in any such filing. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

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