American Express 2010 Annual Report Download - page 43

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