AEFA has two primary exposures to the general level of equity markets: asset management fees and customer crediting rates based upon the returns on equity markets. AEFA earns fees from the management of equity securities in variable annuities, variable insurance, proprietary mutual funds and other managed assets. The amount of fees is generally based on the value of the portfolios, and thus is subject to fluctuation with the general level of equity market values. To reduce the sensitivity of AEFA’s fee revenues to the general performance of equity markets, AEFA has from time to time entered into various combinations of financial instruments that mitigate the negative effect on fees that would result from a decline in the equity markets. In addition, AEFA writes and purchases index options to manage the margin related to certain investment certificate and annuity products that pay interest based upon the relative change in a major stock market index betwen the beginning and end of the product’s term. At December 31, 2002, equity-based derivatives with a net notional amount of $208 million were outstanding to hedge equity market exposures. The negative effect on AEFA’s pretax earnings of a 10 percent decline in equity markets would be approximately $57 million and $81 million based on assets under management, certificate and annuity business in-force, and index options as of December 31, 2002 and 2001, respectively. AEFA’s owned investment securities are, for the most part, held by its life insurance and investment certificate subsidiaries, which primarily invest in long-term and intermediate-term fixed income securities to provide their clients with a competitive rate of return on their investments while controlling risk. Investment in fixed income securities is designed to provide AEFA with a targeted margin between the interest rate earned on investments and the interest rate credited to clients’ accounts. AEFA does not trade in securities to generate short-term profits for its own account. AEFA’s life insurance and investment certificate subsidiaries’ investment committees regularly review models projecting various interest rate scenarios and risk/return measures and their effect on the profitability of the company. The committees’ objectives are to structure their investment security portfolios based upon the type and behavior of the products in the liability portfolios to achieve targeted levels of profitability within defined risk parameters and to meet contractual obligations. Part of the com- mittees’ strategies include the use of derivatives, such as interest rate caps, swaps and floors, for risk management purposes. I 49 AXP I FINANCIAL REVIEW AMERICAN EXPRESS BANK Results of Operations STATEMENTS OF OPERATIONS Years Ended December 31,(Millions) 2002 2001 2000 Net revenues: Interest income $ 606 $ 698 $ 735 Interest expense 246 396 484 Net interest income 360 302 251 Commissions and fees 215 203 214 Foreign exchange income and other revenues 170 144 126 Total net revenues 745 649 591 Expenses: Human resources 236 247 257 Other operating expenses 244 255 273 Provision for losses: Ongoing 147 65 28 Restructuring related — 26 — Total provision for losses 147 91 28 Restructuring charges (3) 70 — Total expenses 624 663 558 Pretax income (loss) 121 (14) 33 Income tax provision (benefit) 41 (1) 4 Net income (loss) $8 0 $ (13) $ 29