American Express 2011 Annual Report Download - page 17

AMERICAN EXPRESS COMPANY
2011 FINANCIAL REVIEW
FORWARD-LOOKING STATEMENTS AND NON-GAAP
MEASURES
Certain of the statements in this Annual Report are forward-
looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Refer to the “Forward-Looking
Statements” section below. In addition, certain calculations
included within this Annual Report constitute non-GAAP
financial measures. The Company’s calculations of non-GAAP
financial measures may differ from the calculations of similarly
titled measures by other companies.
BANK HOLDING COMPANY
The Company is a bank holding company under the Bank
Holding Company Act of 1956 and the Federal Reserve Board
(Federal Reserve) is the Company’s primary federal regulator. As
such, the Company is subject to the Federal Reserve’s
regulations, policies and minimum capital standards.
CURRENT ECONOMIC ENVIRONMENT/OUTLOOK
The Company’s results for 2011 continued to reflect strong
spending growth and improved credit performance, as well as a
planned slowdown in the growth of operating expenses in the
fourth quarter of the year. During the year cardmember
spending volumes grew both in the United States and
internationally, and across all of the Company’s businesses,
despite both a challenging economic environment and
comparisons to relatively strong performance in the prior year.
While the positive impacts of strong billings growth and
modestly higher cardmember borrowing levels were partially
offset by lower loan yields, the strong billings growth, improved
credit trends and certain tax benefits not expected to recur
provided the Company with the opportunity to invest in the
business and also generate strong earnings. The Company
continues to focus its investments on both driving near-term
metrics and building capabilities that will benefit the medium- to
long-term success of the Company.
The Company’s improving credit trends contributed to a
reduction in loan write-offs and in overall loss reserve levels over
the course of 2011 when compared to 2010. Reserve coverage
ratios remain at appropriate levels after taking into consideration
a net reduction of approximately $1.8 billion in loss reserve
levels in 2011. Going forward, the Company expects the benefits
to its results from reserve releases to diminish as credit metrics
are at historically low levels.
Despite the Company’s continued momentum, competition
remains extremely intense across all of its businesses. In
addition, the global economic environment remains uncertain.
The current instability in Europe in particular, and concerns
about sovereign defaults and the creditworthiness and liquidity
of the European banking systems could adversely affect global
economic conditions, including potentially negatively affecting
consumer and corporate confidence and spending, disrupting
the debt and equity markets and impacting foreign exchange
rates. European billed business accounted for approximately 12
percent of the Company’s total billed business for the year ended
December 31, 2011. The Company also received the last
settlement payments from MasterCard and Visa in 2011 and
faces more difficult year-over-year comparisons in light of strong
2010 and 2011 volume and credit performance. Due to these
factors, the Company is continuing to implement its plan to slow
the growth of operating expenses over the next few years.
ACQUISITIONS
On March 1, 2011, the Company completed the acquisition of a
controlling interest in Loyalty Partner in furtherance of its
strategy to accelerate growth internationally and to grow
fee-based revenue. Loyalty Partner is a leading marketing services
company best known for the loyalty programs it operates in
Germany, Poland and India. Loyalty Partner also provides
market analysis, operating platforms and consulting services that
help merchants grow their businesses. Total consideration was
$616 million ($585 million plus $31 million in cash acquired).
The Company has an option to acquire the remaining interest
over a three-year period beginning at the end of 2013 at a price
based on business performance, which had an estimated fair
value of $150 million at the acquisition date. The final purchase
price allocation, which is not expected to be significantly
different from the estimate at the date of acquisition, will be
completed in the first quarter of 2012. Refer to Note 2 to the
Consolidated Financial Statements for further information.
The Company also made selected organic and strategic
investments over the course of 2011 as part of its plans to expand
digital payment products and capabilities for customers.
FINANCIAL SUMMARY
A summary of the Company’s recent financial performance
follows:
Years Ended December 31,
(Millions, except per share
amounts and ratio data) 2011 2010
Percent
Increase
(Decrease)
Total revenues net of interest expense $ 29,962 $ 27,582 9 %
Provisions for losses $ 1,112 $ 2,207 (50)%
Expenses $ 21,894 $ 19,411 13 %
Income from continuing operations $ 4,899 $ 4,057 21 %
Net income $ 4,935 $ 4,057 22 %
Earnings per common share from
continuing operations – diluted(a) $4.09$ 3.35 22 %
Earnings per common share – diluted(a) $4.12$ 3.35 23 %
Return on average equity(b) 27.7% 27.5%
Return on average tangible common
equity(c) 35.8% 35.1%
(a) Earnings per common share from continuing operations — diluted and
Earnings per common share — diluted were both reduced by the impact of
earnings allocated to participating share awards and other items of $58 million
and $51 million for the years ended December 31, 2011 and 2010, respectively.
(b) ROE is calculated by dividing (i) one-year period net income ($4.9 billion and
$4.1 billion for 2011 and 2010, respectively), by (ii) one-year average total
shareholders’ equity ($17.8 billion and $14.8 billion for 2011 and 2010,
respectively).
(c) Returnonaveragetangiblecommonequity is computed in the same manner as
ROE except the computation of average tangible common equity, a non-GAAP
measure, excludes from average total shareholders’ equity average goodwill and
other intangibles of $4.2 billion and $3.3 billion as of December 31, 2011 and
2010, respectively. The Company believes return on average tangible common
equity is a useful measure of profitability of its business.
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