AMERICAN EXPRESS BANK, FSB

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1 AMERICAN EXPRESS BANK, FSB Business American Express Bank, FSB ( FSB, or the Bank ) was incorporated under United States law as a federal savings bank in 2000 and received Federal Deposit Insurance Corporation ( FDIC ) insurance in the same year. Its principal office is located at 4315 South 2700 West, Salt Lake City, Utah FSB is a whollyowned subsidiary of American Express Travel Related Services Company, Inc. ( TRS ). FSB commenced its current operations as American Express Bank, FSB in April The information about FSB presented below is qualified in its entirety by reference to and should be read in conjunction with FSB s Quarterly Thrift Financial Reports ( TFRs ) covering the years ended December 31, 2009, 2008 and Note, however, certain amounts in 2008 and 2007 have been reclassified to conform to the 2009 presentation. FSB issues OPEN from American Express ( OPEN ) and American Express co-branded revolving credit cards in the United States. FSB is also the issuer of certain OPEN charge cards. In addition, FSB has outstanding lines of credit in association with certain OPEN and consumer charge cards and offers unsecured loans to cardmembers in connection with its Extended Payment Option programs. The Extended Payment Option offers qualified United States cardmembers the option of extending payment over time for certain charges on the charge card. In addition, FSB launched a direct deposit taking program, Personal Savings from American Express, to supplement its distribution of deposit products through third-party distribution channels. This program makes FDIC-insured certificates of deposit and high-yield savings account products available directly to consumers. In addition to earning cardmember lending finance revenues, FSB also receives revenue from cardmember fees and discount revenue from service establishments. The cardmember account is offered in different versions with a variety of features and terms, including co-branded cards, cards with differing rates, fees, grace periods, and cards with additional features such as rebates.

2 Results of Operations Years Ended December 31, 2009, 2008, and 2007 FSB s results of operations are based on financial information reported in its TFRs filed with the Office of Thrift Supervision ( OTS ). FSB reported a net loss of $(257) million, and net income of $217 million and $876 million for the years ended December 31, 2009, 2008, and 2007, respectively. The year-over-year decrease in net income in 2009 compared to 2008 was primarily due to additional provision reflecting higher loss and past due rates due to the challenging economic environment. In 2009, 2008, and 2007, return on average assets was (0.84) percent, 0.79 percent, and 4.02 percent, respectively. Interest income decreased to $2.5 billion in 2009 compared to $2.9 billion in 2008 primarily due to lower market interest-rate driven yields. In addition, average loan balances decreased to $21.1 billion in 2009 from $23.0 billion in Interest income was flat at $2.9 billion in 2008 compared to $2.9 billion in 2007 as a result of decreased average yields on the portfolio, offset by an increase in average loan balances to $23.0 billion in 2008 from $19.9 billion in Interest expense decreased to $566 million in 2009 compared to $722 million in 2008 primarily due to a lower cost of funds which was offset by increased average deposit balances. Interest expense decreased to $722 million in 2008 compared to $867 million in 2007 as a result of a lower average cost of funds. Provisions for loan losses increased to $2.5 billion in 2009 compared to $2.2 billion in 2008 and $1.1 billion in The year-over-year increase in provisions for loan losses from 2008 to 2009 reflected the impact of higher write-off and delinquency rates offset by lower average loan balances. The year-over-year increase in provisions for loan losses from 2007 to 2008 was primarily due to the impact of higher write-off and delinquency rates and higher average loan balances. At December 31, 2009, 2008, and 2007, FSB s reserves as a percentage of delinquencies were 273 percent, 115 percent, and 112 percent, respectively. Loans are written off when management deems amounts to be uncollectible and is generally determined by the number of days past due. In general, loans in bankruptcy or owed by deceased individuals are written off upon notification, while other accounts are written off when 180 days past due. The net charge-off rates as a percentage of average loans for the years ended December 31, 2009, 2008, and 2007 were 9.25 percent, 7.57 percent, and 3.98 percent, respectively. Non-interest income was $3.8 billion, $4.1 billion, and $3.8 billion and non-interest expense was $3.6 billion, $3.7 billion, and $3.4 billion, in 2009, 2008, and 2007, respectively. Non-interest income decreased from 2008 to 2009 primarily due to lower discount revenue and discount billed business. Non-interest income increased from 2007 to 2008 primarily due to higher discount revenue. Non-interest expense decreased from 2008 to 2009 due to decreased marketing, promotion, rewards and cardmember services. Non-interest expense increased from 2007 to 2008 due to increased marketing, promotion, rewards and cardmember services. Income tax (benefit) provision and effective tax rates for the years ended December 31, 2009, 2008, and 2007 were $(154) million or 37.5 percent, $167 million or 43.5 percent, and $507 million or 36.7 percent, respectively. 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. At December 31, 2009, 2008, and 2007, FSB exceeded the OTS well-capitalized levels for Tier 1 core, total risk-based and Tier 1 risk-based capital. The Tier 1 core capital ratios at December 31, 2009, 2008, and 2007 were percent, percent, and percent, respectively. The total risk-based capital ratios at December 31, 2009, 2008, and 2007 were percent, percent, and percent, respectively. The Tier 1 risk-based capital ratios at December 31, 2009, 2008, and 2007 were percent, percent, and percent, respectively. At December 31, 2009, the OTS well-capitalized levels for Tier 1 core, total risk-based and Tier 1 risk-based capital were 5.00 percent, percent, and 6.00 percent, respectively.

3 Liquidity and Capital Resources FSB funds its lending activities principally through deposits and bank notes. At December 31, 2009, 2008, and 2007, FSB had $12.8 billion, $8.4 billion, and $8.0 billion of deposits outstanding and $11.6 billion, $15.4 billion, and $11.3 billion in bank notes outstanding, respectively. Additionally, in August 2009, the FSB issued $400 million in subordinated debt to its parent. FSB periodically securitizes cardmember loans through the American Express Credit Account Master Trust (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. FSB is required to maintain an undivided interest in the transferred cardmember loans, which is referred to as the seller s interest, and is generally equal to the balance of all cardmember loans transferred to the Lending Trust less the investors portion of those assets. The investors interest is created when the Lending Trust issues a security to a third party. The seller s interest received by FSB in consideration for the transfer of cardmember loans is reflected in FSB s balance sheet as a component of cardmember loans. When the Lending Trust issues a security to a third party, a new investor s interest is created. FSB removes the corresponding cardmember loans from its balance sheet, recognizes a gain on sale and release of credit reserves and records an interest-only, or IO strip. From time to time, FSB may record other retained interests as well. The total investors interest outstanding will change through new issuances and maturities. The seller s interest will change as a result of new trust issuances or maturities as well as new account additions, new charges on securitized accounts and collections. As seller s interest changes each period, the related allowance for loss will change as well. When a security matures, the Lending Trust uses a portion of the collections to repay the security, and as a result the investors interest decreases. Under the terms of the Lending Trust agreement, 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. 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 Bank, the Bank would need an alternate source of funding for the lending receivables assets. As of December 31, 2009, the Trust had met all minimum requirement levels as described above. The Bank 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, of which $571 million related to the Bank. The Series D Certificates were acquired by the Bank in exchange for a portion of the seller s 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 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 2010.

4 The actions described above did not have a material impact on the Bank s results of operations. At December 31, 2009, 2008, and 2007, the total cardmember loans held by the Lending Trust that had been transferred by FSB were $14.7 billion, $15.0 billion, and $11.5 billion, respectively, of which $11.3 billion, $10.5 billion, and $7.4 billion, respectively, had been sold and $3.4 billion, $4.5 billion, and $4.1 billion, respectively, had been classified as seller s interest. FSB also retains a subordinated interest in the securitized cardmember loans, an IO strip. The fair value of the IO Strip at December 31, 2009, 2008, and 2007 was $9 million, $3 million, and $45 million, respectively. The IO strip is recorded in other assets on FSB s balance sheet.

5 SELECTED FINANCIAL INFORMATION OF AMERICAN EXPRESS BANK, FSB The following unaudited financial information of FSB for each of the years ended December 31, 2009, 2008, and 2007 was derived from the TFRs and should be read in conjunction therewith and with the detailed information contained elsewhere herein and incorporated by reference. (in millions) For the Years Ended December 31, Operating Data: Interest income $ 2,467 $ 2,908 $ 2,906 Interest expense Net interest income 1,901 2,186 2,039 Provisions for loan losses 2,481 2,189 1,126 (Loss) Income after provisions for loan losses (580) (3) 913 Non-interest income 3,808 4,098 3,844 Non-interest expense 3,639 3,711 3,374 Net non-interest income Pretax (loss) income (411) 384 1,383 Income tax (benefit) provision (154) Net (loss) income $ (257) $ 217 $ 876 (in millions) As of December 31, Balance Sheet Data: Assets: Cash and cash equivalents $ 2,848 $ 4,239 $ 2,085 Investments 7,650 1,107 1,105 Loans 20,688 24,387 21,871 Reserves (1,813) (1,478) (735) Loans, net 18,875 22,909 21,136 Other assets 2,523 1, Total assets $ 31,896 $ 29,908 $ 25,040 Liabilities and Shareholder s Equity: Deposit liabilities $ 12,831 $ 8,434 $ 8,010 Federal funds purchased ,138 Subordinated Debt Bank notes 11,639 15,402 11,290 Total debt 24,870 23,905 20,438 Other liabilities 2,039 2,252 1,723 Total liabilities 26,909 26,157 22,161 Total shareholder s equity 4,987 3,751 2,879 Total liabilities and shareholder s equity $ 31,896 $ 29,908 $ 25,040

6 SELECTED FINANCIAL INFORMATION OF AMERICAN EXPRESS BANK, FSB (in millions) As of December 31, Key Statistics: Average assets $30,683 $27,623 $21,817 Average shareholder s equity 4,586 3,389 2,622 Average loans 21,058 22,995 19,887 Total Risk-weighted assets (net) 33,755 26,991 22,289 Tier 1 risk-based capital 4,784 3,415 2,569 Total risk based capital 5,623 3,767 2,853 Past-due & non-accrual loans* 664 1, Net charge-offs 1,948 1, As of December 31, Selected Ratios: Return on average assets (1) (0.84%) 0.79% 4.02% Return on average shareholder s equity (2) (5.60%) 6.40% 33.41% Tier 1 core capital ratio 15.09% 12.22% 11.10% Total risk-based capital ratio 16.66% 13.95% 12.80% Tier 1 risk-based capital ratio 14.17% 12.65% 11.53% Net charge-offs / average loans (3) 9.25% 7.57% 3.98% Reserves / past due & non-accrual loans (4) 273% 115% 112% Reserves / period-end-loans (5) 8.76% 6.06% 3.36% Past due & non-accrual loans / period-end loans (6) 3.21% 5.27% 3.00% (1) Return on average assets is calculated by dividing net income by average assets. The OTS defines average assets as each month during the year s average month-to-month divided by total months in the year. (2) Return on average shareholder s equity is calculated by dividing net income by average shareholder s equity. The OTS defines average shareholder s equity as each month during the year s average month-to-month divided by total months in the year. (3) Net charge-offs / average loans is calculated by dividing gross charge-offs less recoveries by full year average loans. (4) Past due and non-accrual loans is based on the TFR definition, i.e., all balances that are 30 days past due and still accruing plus all non-accrual loans. (5) Reserves/period-end-loans is calculated by dividing the allowance for loan losses by total loans. (6) Past due and nonaccrual loans/ period-end loans is calculated by dividing past due and nonaccrual loans by total loans. *NOTE: As of December 31, 2009, Short-term modification programs were not considered non-accruals.

7 CAPITALIZATION OF AMERICAN EXPRESS BANK, FSB The following table sets forth the consolidated capitalization of FSB at December 31, 2009, 2008, and The table should be read in conjunction with FSB s Quarterly TFRs incorporated by reference herein. As of December 31, (in millions) Deposit liabilities: Total $ 12,831 $ 8,434 $ 8,010 Short-, medium- and long-term indebtedness: Federal funds purchased $ - $ 69 $ 1,138 Subordinated Debt Bank notes 11,639 15,402 11,290 Total $ 12,039 $ 15,471 $ 12,428 Shareholder s equity: Capital surplus $ 3,490 $ 2,090 $ 1,290 Undivided profits and capital reserves 1,497 1,661 1,589 Total shareholder s equity $ 4,987 $ 3,751 $ 2,879 Total capitalization $ 29,857 $ 27,656 $ 23,317

AMERICAN EXPRESS BANK, FSB

AMERICAN EXPRESS BANK, FSB Business American Express Bank, FSB ( FSB ) was incorporated under United States law as a federal savings bank in 2000 and received Federal Deposit Insurance Corporation ( FDIC