EXHIBIT 99.3
[AMERICAN EXPRESS(R) LOGO]
2006
First Quarter
Earnings Supplement
The enclosed summary should be read in conjunction with the text and statistical
tables included in American Express Company's (the "Company" or "AXP") First
Quarter Earnings Release.
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This presentation contains certain forward-looking statements that are subject
to risks and uncertainties and speak only as of the date on which they are made.
Important factors that could cause actual results to differ materially from
these forward-looking statements, including the Company's financial and other
goals, are set forth on pages 55-56 in the Company's 2005 Annual Report to
Shareholders and in its 2005 Annual Report on Form 10-K, and other reports, on
file with the Securities and Exchange Commission.
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AMERICAN EXPRESS COMPANY
FIRST QUARTER 2006
HIGHLIGHTS
o First quarter diluted EPS from continuing operations of $0.70 increased
19% versus $0.59 last year. Total revenues rose 12%. For the trailing 12
months, including discontinued operations, return on equity (ROE) was 27%.
- 1Q '06 Income from continuing operations included:
-- A $112MM ($73MM after-tax) charge related to a higher
redemption rate estimate within the U.S. Membership Rewards
reserve, as referenced below;
-- A $72MM ($47MM after-tax) net reduction in finance charge
revenues and securitization income related to higher than
anticipated cardmember completion of consumer debt repayment
programs and certain associated payment waivers;
-- A $63MM ($53MM after-tax) higher provision for credit losses
in Taiwan due primarily to the impact of industry-wide credit
issues within the market;
-- An estimated favorable impact of $150MM ($98MM after-tax) due
to lower early credit write-offs, primarily related to last
year's bankruptcy legislation in the U.S., and lower than
expected costs related to Hurricane Katrina; and
-- An $88MM ($40MM after-tax) gain related to the completion of
the sale of our stake in Egyptian American Bank ("EAB"), as
referenced below.
- 1Q '06 and 1Q '05 Income from continuing operations included $25MM
($16MM after-tax) and $21MM ($14MM after-tax), respectively, of
reengineering costs related to restructuring efforts in our business
travel and international card areas in both periods, and within our
Travelers Cheque business in 1Q '06, and finance and technology
areas in 1Q '05.
- On September 30, 2005, the Company completed the distribution of all
of the outstanding shares of Ameriprise Financial, Inc. (formerly
American Express Financial Advisors) to its shareholders. This
non-cash distribution was tax-free to the Company's shareholders. In
addition, during the third quarter of 2005, the Company sold its Tax
and Business Services ("TBS") business. The operating results and
assets and liabilities related to businesses spun-off and sold have
been included in discontinued operations in the consolidated
financial statements.
-- 1Q '06 results reflected a $3MM loss related to discontinued
operations versus $201MM of income last year, reflecting
additional costs related to the dispositions of TBS and other
businesses.
-- Including discontinued operations, diluted EPS on a net income
basis of $0.69 decreased 8%.
- The Company's reported ROE was 27%, up from 23% a year ago. This
ratio is determined on a trailing 12-month basis using net income
and total average shareholders' equity (including discontinued
operations). Pro forma ROE, which is determined using trailing four
quarters income from continuing operations (which excludes
discontinued operations) over average month-end shareholders' equity
for the period from September 30, 2005 through March 31, 2006 was
32%. See "Supplemental Information - Pro Forma ROE" discussion
below.
o Compared with the first quarter of 2005:
- Worldwide billed business of $127.2B increased 16% on continued
strong growth within both the proprietary and network businesses. A
comparatively stronger U.S. dollar reduced the reported worldwide
growth rate by 1%;
- Worldwide cards in force of 72.5MM increased 10%, up 6.4MM from last
year and 1.5MM during 1Q '06, as proprietary and network card growth
remained particularly strong;
- Worldwide average spending per proprietary basic card in force
increased 8% versus last year despite the suppressing effect of
substantial card additions over the past few years and the
translation effect of a stronger dollar;
- Worldwide lending balances of $32.7B on an owned basis increased
26%; on a managed basis, worldwide lending balances of $53.5B were
up 16%; and
- Underlying card credit quality continued to be well-controlled and
reserve coverage ratios remained strong.
o Additional items of note included:
- Marketing, promotion, rewards and cardmember services costs
increased 15% versus 1Q '05, reflecting greater rewards costs and
modestly higher marketing and promotion expenses. The higher rewards
costs continued to reflect volume growth, a higher redemption rate,
and strong cardmember loyalty program participation. Rewards costs
also reflected the $112MM ($73MM after-tax) charge related to a
higher ultimate redemption rate ("URR") assumption within the U.S.
Membership Rewards reserve model to reflect program redemption
trends over the past five years. Prior URR calculations utilized
redemptions since the program inception in 1991. Marketing expenses
continued to reflect relatively high levels of spending related to
various other business-building initiatives and the Company's
ongoing global "My Life, My Card (SM)" advertising campaign,
although these brand-related advertising costs were lower than last
year, when the campaign was in its early stages.
- On February 22, 2006, American Express Bank completed the sale of
its 41% stake in the Egyptian American Bank to Credit Agricole and
El Mansour & El Maghraby Investment and Development Co. The
transaction generated proceeds to American Express of $207MM and an
$88MM ($40MM after-tax) gain, which is reported within other
expenses on the Consolidated income statement.
1
AMERICAN EXPRESS COMPANY
FIRST QUARTER 2006
HIGHLIGHTS
- On March 20, 2006, the Company announced an agreement to sell its
card and related operations in Brazil to Banco Bradesco S.A.
("Bradesco"), for approximately US$490 million when the transaction
closes. Bradesco will have the exclusive right for a minimum of 10
years to issue in Brazil the classic Green, Gold and Platinum cards
which carry the American Express Centurion logo. Concurrently, the
Company signed an independent operator partnership agreement which
will continue to allow American Express cards to be accepted on its
merchant network within Brazil. This agreement does not preclude our
other network partners, HSBC and BankBoston, from operating as
Network Card Licensees within the market. This transaction is
expected to close by the end of 2Q '06.
- The Company's reengineering initiatives delivered in excess of
$375MM of additional benefits this quarter, including significant
carry-over benefits from certain initiatives begun in prior periods.
Revenue-related reengineering activities are driving a significant
portion of the total benefits, representing more than 25% of the
benefits delivered in 1Q '06.
- The 4% increase in human resources expense in 1Q '06 reflects the
impact of a higher employee level, merit increases and larger
benefit costs, partially offset by lower management incentive
expenses. The Company elected to adopt SFAS 123R, effective July 1,
2005. The impact of adoption was immaterial since the Company has
been expensing share based awards granted after January 1, 2003
under the provisions of SFAS 123.
-- Compared with last year, the total employee count within
continuing operations of 66,700 increased by 1,100 employees
or 2%; compared with last quarter, the employee count also
increased by 1,100.
o During the quarter, American Express continued to invest in growth
opportunities through expanded products and services.
In our proprietary business we:
- Announced a strategic bank partnership between OPEN from American
Express(SM) and Sovereign Bank, where Sovereign Bank will offer
American Express(R) Business Cards to small business customers in
the Northeast region;
- Added McDonald's, USA as the latest merchant to accept ExpressPay
from American Express, our contactless payment option, at its more
than 12,000 restaurants nationwide;
- Launched American Express RED in the UK, an innovative card product
through which American Express will make a monetary donation to the
Global Fund, to fight AIDS, Tuberculosis and Malaria based on
cardmember spend;
- Expanded our existing corporate card relationship with Qantas
Airways to include co-branded consumer credit cards, offering
consumers accelerated frequent flyer points in the Qantas program;
and
- Launched the first electronic solution for negotiating corporate
meeting venues through an online auction process, exclusively
developed for American Express Business Travel.
In our Global Network Services business we:
- Partnered with GE Consumer Finance to issue cards accepted on our
global merchant network, with the first product launched in
partnership with Dillard's, Inc. one of the nation's largest
retailers;
- Began issuing the first American Express credit card denominated in
U.S. dollars in the Cambodian market as part of our partnership with
Cambodia Mekong Bank Public Limited; and
- Extended our partnership with PBZ Card d.o.o. Zagreb, the only
issuer of American Express cards in Croatia, to issue the Green,
Gold and Platinum line of cards in Bosnia and Herzegovina.
2
AMERICAN EXPRESS COMPANY
FIRST QUARTER 2006 OVERVIEW
CONSOLIDATED
(Preliminary)
Statements of Income
(GAAP basis)
Quarters Ended Percentage
(millions) March 31, Inc/(Dec)
----------------- ----------
2006 2005
-------- -------
Revenues:
Discount revenue $ 2,969 $ 2,639 13%
Cardmember lending net finance charge revenue 729 592 23
Net card fees 520 498 4
Travel commissions and fees 418 422 (1)
Other commissions and fees 639 558 15
Securitization income, net 386 316 22
Other investment and interest income, net 275 261 5
Other 396 354 12
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Total 6,332 5,640 12
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Expenses:
Marketing, promotion, rewards and cardmember services 1,522 1,323 15
Human Resources 1,240 1,187 4
Provisions for losses and benefits:
Charge card 209 215 (3)
Cardmember lending 321 295 9
Investment certificates and other 138 79 75
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Total 668 589 13
Professional services 561 487 15
Occupancy and equipment 346 336 3
Interest 279 201 39
Communications 113 117 (3)
Other 278 312 (11)
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Total 5,007 4,552 10
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Pretax income from continuing operations 1,325 1,088 22
Income tax provision 449 343 31
-------- -------
Income from continuing operations 876 745 18
(Loss)/Income from discontinued operations, net of tax (3) 201 #
-------- -------
Net income $ 873 $ 946 (8)
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EPS-Basic
Income from continuing operations $ 0.71 $ 0.60 18
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(Loss)/Income from discontinued operations - $ 0.16 #
======== =======
Net Income $ 0.71 $ 0.76 (7)
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EPS-Diluted
Income from continuing operations $ 0.70 $ 0.59 19
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(Loss)/Income from discontinued operations ($ 0.01) $ 0.16 #
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Net Income $ 0.69 $ 0.75 (8)
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# Denotes variance greater than 100%.
Note: Amounts herein reflect certain reclassifications as noted in the
Company's Form 8-K, filed with the SEC, dated April 5, 2006.
o 1Q '06 Income from continuing operations included:
-- A $112MM ($73MM after-tax) charge related to a higher redemption
rate estimate within the U.S. Membership Rewards reserve;
-- A $72MM ($47MM after-tax) net reduction in finance charge revenues
and securitization income related to higher than anticipated
cardmember completion of consumer debt repayment programs and
certain associated payment waivers;
-- A $63MM ($53MM after-tax) higher provision for credit losses in
Taiwan due primarily to the impact of industry-wide credit issues
within the market;
-- An estimated favorable impact of $150MM ($98MM after-tax) from lower
early credit write-offs, primarily related to last year's bankruptcy
legislation in the U.S., and lower than expected costs related to
Hurricane Katrina; and
-- An $88MM ($40MM after-tax) gain related to the completion of the
sale of our stake in EAB.
o 1Q '06 and 1Q '05 Income from continuing operations included $25MM ($16MM
after-tax) and $21MM ($14MM after-tax), respectively, of reengineering
costs related to restructuring efforts in our business travel and
international card areas in both periods, and within our Travelers Cheque
business in 1Q '06 and finance and technology areas in 1Q '05.
3
AMERICAN EXPRESS COMPANY
FIRST QUARTER 2006 OVERVIEW
CONSOLIDATED
o Net Income including discontinued operations decreased 8% to $873MM.
- The 1Q '06 loss from discontinued operations was $3MM after-tax
versus income of $201MM after-tax last year.
o SHARE REPURCHASES: During 1Q '06, 18MM shares were repurchased versus 4MM
shares in 4Q '05 and 12MM shares in 1Q '05. We repurchased a higher level
of shares during 1Q '06 after activity was reduced last year due to the
impact of the September 30, 2005 spin-off of Ameriprise. Since the
inception of repurchase programs in December 1994, 548MM shares have been
acquired under cumulative Board authorizations to repurchase up to 570MM
shares, including purchases made under agreements with third parties.
Millions of Shares
------------------------
- AVERAGE SHARES: 1Q '06 4Q '05 1Q '05
------ ------ ------
Basic 1,232 1,232 1,239
====== ====== ======
Diluted 1,258 1,258 1,264
====== ====== ======
- ACTUAL SHARE ACTIVITY:
Shares outstanding - beginning of period 1,241 1,239 1,249
Repurchase of common shares (18) (4) (12)
Employee benefit plans, compensation and
other 10 6 8
------ ------ ------
Shares outstanding - end of period 1,233 1,241 1,245
====== ====== ======
o CAPITAL RETURNED TO SHAREHOLDERS: Including share repurchases and
dividends, during 1Q '06, we returned 93% of capital generated to
shareholders. On a cumulative basis, since 1994, we have returned 66% of
capital generated.
o CONSOLIDATED REVENUES: Consolidated revenues increased 12%, reflecting
increases versus last year of 15% within U.S. Card Services ("USCS"), 7%
within International Card & Global Commercial Services ("ICGCS") and 11%
within Global Network & Merchant Services ("GNMS"). Revenues increased due
to higher discount revenues, increased cardmember lending net finance
charge revenue, higher other commissions and fees, increased
securitization income, net, greater other revenues, increased net card
fees, and greater other investment and interest income, partially offset
by lower travel commissions and fees. Translation of foreign currency
reduced the 12% revenue growth rate by 1%.
o CONSOLIDATED EXPENSES: Consolidated expenses increased 10%, reflecting
increases versus last year of 15% within USCS, a 5% increase in ICGCS, and
a 5% decrease within GNMS. Expense growth reflected increased marketing,
promotion, rewards and cardmember services costs, higher provision for
losses and benefits, higher professional services expenses, higher human
resources expenses, greater interest costs and larger occupancy and
equipment costs, partially offset by lower other expenses and
communication costs. Translation of foreign currency reduced the 10%
expense growth rate by 1%.
o PRE-TAX MARGIN: Was 20.9% in 1Q '06 compared with 15.0% in 4Q '05 and
19.3% in 1Q '05.
o EFFECTIVE TAX RATE: Was 34% in 1Q '06, as compared to 22% in 4Q '05 and
32% in 1Q '05. The 1Q '06 rate reflects a relatively high effective tax
rate related to the gain on the sale of our stake in EAB, resulting from
foreign exchange translation impacts, in addition to a relatively low
effective tax rate benefit on the credit losses in Taiwan. The lower tax
rate in 4Q '05 reflected a $60MM benefit related to finalization of state
tax returns.
4
AMERICAN EXPRESS COMPANY
FIRST QUARTER 2006 OVERVIEW
CONSOLIDATED
o DISCOUNT REVENUE: A 16% increase in billed business, partially offset by a
lower average discount rate, yielded a 13% increase in discount revenue.
- The average discount rate* was 2.58% in 1Q '06 versus 2.55% in 4Q
'05 and 2.61% in 1Q '05. The decrease versus last year continues to
reflect selective repricing initiatives and ongoing changes in the
mix of spending between various merchant segments. The increase
versus 4Q '05 reflects the seasonally higher retail spend levels
during the fourth quarter and costs associated with investments in
strategic merchant partnerships last quarter.
-- We believe the AXP merchant value proposition is strong.
However, as indicated in prior quarters, selective repricing
initiatives, continued changes in the mix of business and
volume-related pricing discounts will likely continue to
result in some erosion of the average discount rate over time.
Quarters Ended Percentage
March 31, Inc/(Dec)
--------------------- ----------
2006 2005
-------- --------
Card billed business* (billions):
United States $ 92.9 $ 79.6 17%
Outside the United States 34.3 29.7 15
-------- --------
Total $ 127.2 $ 109.3 16
======== ========
Cards in force (millions):
United States 44.0 40.3 9
Outside the United States 28.5 25.8 10
-------- --------
Total 72.5 66.1 10
======== ========
Basic cards in force (millions):
United States 33.7 30.6 10
Outside the United States 23.6 21.3 11
-------- --------
Total 57.3 51.9 10
======== ========
Average basic cardmember spending**
United States $ 2,909 $ 2,685 8
Outside the United States $ 1,967 $ 1,826 8
Total $ 2,612 $ 2,412 8
* For additional information about billed business and discount rate
calculations, please refer to the First Quarter 2006 Earnings
Release, American Express Company Selected Statistical Information
pages.
** Proprietary card activity only.
- WORLDWIDE BILLED BUSINESS: The 16% increase in worldwide billed
business reflected a 16% increase in USCS and ICGCS, and a 25%
increase in Global Network Services ("GNS") partner volume.
Worldwide average spend per proprietary basic card grew by 8% and
total cards in force grew by 10%.
-- U.S. billed business was up 17% reflecting growth of 15%
within our consumer card business, a 19% increase in small
business spending and a 17% improvement in Corporate Services
volumes.
- Spending per proprietary basic card in force increased
8%.
- U.S. non-T&E-related volume categories (which
represented approximately 65% of 1Q '06 U.S. billed
business) grew 17%, while T&E volumes rose 14%.
- U.S. airline-related volume, which represented
approximately 14% of total U.S. volumes during the
quarter, increased 17% due to a 6% increase in
transaction volume and an 11% higher average airline
charge.
-- Excluding the impact of foreign exchange translation:
- Worldwide billed business and spending per proprietary
basic card in force increased 17% and 9%, respectively.
- Total billed business outside the U.S. rose 19%,
reflecting double-digit proprietary growth in all
regions, with the largest increases in Canada and
Europe.
- Within our proprietary business, billed business outside
the U.S. reflected 16% growth in consumer and small
business spending, as well as 24% growth in Corporate
Services volumes.
- Spending per proprietary basic card in force outside the
U.S. rose 11%.
- Worldwide airline volumes, which represented
approximately 13% of total volumes during the quarter,
increased 21% on 10% growth in transaction volume, and a
10% increase in the average airline charge.
- CARDS IN FORCE: Rose 10% worldwide due to an increase of 8% in USCS,
7% in ICGCS and 24% in GNS. Continued robust card acquisitions
within both the proprietary and GNS activities, as well as continued
solid average customer retention levels, drove this change.
- 1.0MM and 500K cards were added during the quarter in
the U.S. and the non-U.S. businesses, respectively.
O CARDMEMBER LENDING NET FINANCE CHARGE REVENUE: Increased 23% on 23% growth
in average worldwide lending balances on an owned basis and a relatively
flat portfolio yield.
- Annualized net finance charge revenue as a percentage of average
loans in the worldwide owned portfolio was 9.1% in 1Q '06 versus
9.0% in 4Q '05 and 1Q '05. The slight increase versus last year
reflects a lower proportion of the U.S. portfolio on introductory
rates and increased finance charge rates, which were partially
offset by the reduction in finance charge revenues related to
cardmember completion of consumer debt repayment programs, in
addition to rising funding costs.
5
AMERICAN EXPRESS COMPANY
FIRST QUARTER 2006 OVERVIEW
CONSOLIDATED
o NET CARD FEES: Grew 4% due to higher cards in force which were partially
offset by a lower average fee. In 1Q '06 the average annual fee per
proprietary card in force was $34, versus $35 in 4Q '05 and 1Q '05.
o TRAVEL COMMISSIONS AND FEES: Declined 1% reflecting lower average
transaction fees, due in part to the ongoing transition to online booking.
Travel sales increased 6%.
o OTHER COMMISSIONS AND FEES: Increased 15% on higher card-related
assessment and conversion revenues.
o SECURITIZATION INCOME, NET: Increased 22% as a greater average balance of
securitized loans, a higher portfolio yield and a decrease in portfolio
write-offs were partially offset by greater interest expense due to a
higher coupon rate paid to certificate holders. Securitization income, net
represents the non-credit provision components of the net gains and
charges from securitization activities within the USCS segment, the
amortization and related impairment charges, if any, of the related
interest-only strip, excess spread related to securitized loans, net
finance charge revenue on retained interests in securitized loans, and
servicing income, net of related discounts or fees.
- During 1Q '06 and 1Q '05, net securitization gains, including the
credit components, reflected a decrease in pretax income of $22MM
($14MM after-tax) and a gain of $6MM ($4MM after-tax), respectively.
The 1Q '06 decrease in pretax income was due to the impact of
maturities which was larger than the impact of new issuances. The
average balance of Cardmember lending securitizations was $21.3B in
1Q '06, compared with $20.1B in 1Q '05.
o OTHER INVESTMENT AND INTEREST INCOME, NET: Increased 5% largely due to
higher interest rates on a greater level of short-term investments.
o OTHER REVENUES: Increased 12% primarily due to fees associated with
transition services agreements with Ameriprise Financial, Inc.
o MARKETING, PROMOTION, REWARDS AND CARDMEMBER SERVICES EXPENSES: Increased
15%, reflecting the greater rewards costs and modestly higher marketing
and promotion expenses previously discussed.
o HUMAN RESOURCES EXPENSE: Increased 4% due to higher headcount, merit
increases and larger benefit costs, partially offset by lower management
incentive expenses.
o PROVISIONS FOR LOSSES AND BENEFITS: Increased 13% as the lending and
investment certificate and other provisions growth of 9% and 75%,
respectively, was slightly offset by a 3% decline in the charge card
provision. The increase in the lending provision was driven by the impact
of industry-wide credit issues in Taiwan and higher volumes, partially
offset by the favorable impact of lower early credit write-offs, primarily
related to the 4Q '05 U.S. bankruptcy legislation and lower than expected
costs related to Hurricane Katrina. The investment certificate and other
provision rose due to higher interest rates on larger investment
certificate balances.
- Overall credit quality continued to perform well. Reserve coverage
ratios, which are in excess of 100% of past due balances, remained
strong.
- WORLDWIDE CHARGE CARD:*
-- The loss ratio decreased versus last quarter and last year.
Past due rates improved versus last year, but increased versus
last quarter, consistent with seasonal patterns.
3/06 12/05 3/05
----- ----- -----
Net loss ratio as a % of charge volume 0.19% 0.29% 0.23%
90 days past due as a % of receivables 1.8% 1.6% 1.9%
3/06 12/05 3/05
----- ----- -----
Total Receivables (billions) $33.2 $34.2 $30.0
Reserves (millions) $ 978 $ 942 $ 831
% of receivables 2.9% 2.8% 2.8%
% of 90 day past due accounts 163% 177% 147%
6
AMERICAN EXPRESS COMPANY
FIRST QUARTER 2006 OVERVIEW
CONSOLIDATED
- WORLDWIDE LENDING:**
-- The write-off rate declined versus last year and last quarter.
Past due levels declined versus last year, but increased
versus last quarter, consistent with seasonal patterns.
3/06 12/05 3/05
----- ----- -----
Net write-off rate 3.3% 4.2% 4.1%
30 days past due as a % of loans 2.6% 2.5% 2.7%
3/06 12/05 3/05
----- ----- -----
Total Loans (billions) $ 32.7 $33.1 $25.9
Reserves (millions) $1,053 $ 996 $ 918
% of total loans 3.2% 3.0% 3.6%
% of 30 days past due accounts 123% 122% 134%
* There are no off-balance sheet Charge Card securitizations.
Therefore, "Owned Basis" and "Managed Basis" credit quality
statistics for the Charge Card portfolio are the same.
** All lending statistics are presented here on a GAAP or "Owned
Basis". "Managed Basis" credit quality statistics are available in
the First Quarter 2006 Earnings Release on the Consolidated Selected
Statistical Information pages. Credit trends are generally
consistent under both reporting methods.
O PROFESSIONAL SERVICES EXPENSE: Rose 15% reflecting increased technology
costs related to higher business and service-related volumes.
o OCCUPANCY AND EQUIPMENT EXPENSE: Rose 3% primarily due to expenses related
to the consolidation of certain New York facilities.
o INTEREST EXPENSE: Rose 39% due to a higher effective cost of funds and
higher receivable balances.
o COMMUNICATIONS EXPENSE: Decreased 3% versus last year due to
reengineering-related saves partially offset by increased volumes.
o OTHER EXPENSE: Decreased 11% due primarily to the inclusion of the $88MM
gain related to the completion of the sale of our stake in EAB, partially
offset by increased business volumes.
CORPORATE & OTHER
o Net expense of $49MM in 1Q '06 compared with net expense of $62MM in 4Q
'05 and $40MM in 1Q '05. 4Q '05 reflects a $14MM tax benefit, $11MM ($7MM
after-tax) of expense due to the consolidation of New York facilities, an
additional $10MM ($7MM after-tax) of reengineering costs related primarily
to initiatives within our technology function, and $8MM after-tax of
spin-off related expenses.
7
AMERICAN EXPRESS COMPANY
FIRST QUARTER 2006 OVERVIEW
CONSOLIDATED
SUPPLEMENTAL INFORMATION - PRO FORMA ROE
The Company's consolidated return on equity (ROE) is calculated on a trailing
12-month basis using reported net income over average total shareholders' equity
(including discontinued operations). The Company also reports pro forma ROE,
which is determined on a trailing 12-month basis using income from continuing
operations (which excludes discontinued operations) over average month-end
shareholders' equity for the period from September 30, 2005 through March 31,
2006. Management believes pro forma ROE is an important measure because it
reflects performance of the Company's continuing businesses by excluding the
impact of Ameriprise Financial, Inc. and American Express Tax and Business
Services, Inc., which were disposed of as of September 30, 2005.
ROE Pro Forma ROE
--- -------------
Trailing 12-months net income: $3.7B Trailing 12-months income from continuing operations: $3.4B
Average total shareholders' equity: $13.4B Average month-end shareholders' equity for the period
from September 30, 2005 through March 31, 2006: $10.4B
ROE: 27% Pro forma ROE: 32%
***
MANAGED BASIS
USCS segment results are presented on a managed basis and ICGCS, GNMS and
Corporate & Other segment results are presented on a GAAP basis.
For USCS, managed basis means the presentation assumes there have been no
securitization transactions, i.e. all securitized cardmember loans and related
income effects are reflected as if they were in the Company's balance sheet and
income statements, respectively. 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 lending business can only be derived by evaluating the performance of
both securitized and non-securitized cardmember loans. Asset securitization is
just one of several ways for the Company to fund cardmember loans. Use of a
managed basis presentation, including non-securitized and securitized cardmember
loans, presents a more accurate picture of the key dynamics of the cardmember
lending business, avoiding distortions due to the mix of funding sources at any
particular point in time. The Company does not currently securitize
international loans.
Irrespective of the funding mix, it is important for management and investors to
see metrics, such as changes in delinquencies and write-off rates, for the
entire cardmember lending 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 managed basis presentation for USCS also reflects an increase to interest
income recorded to enable management to evaluate tax-exempt investments on a
basis consistent with taxable investment securities. On a GAAP basis, interest
income associated with tax-exempt investments is recorded based on amounts
earned. Accordingly, information presented on a managed basis assumes that
tax-exempt securities earned income at rates as if the securities produced
taxable income with a corresponding increase in the provision for income taxes.
8
AMERICAN EXPRESS COMPANY
FIRST QUARTER 2006 OVERVIEW
U.S. CARD SERVICES
The following table compares and reconciles the GAAP basis USCS income
statements to the managed basis information, where different.
Management views any net gains from securitizations as discretionary benefits to
be used for card acquisition expenses, which are reflected in both marketing,
promotion, rewards and cardmember services and other operating expenses.
Consequently, the managed basis presentation assumes the impact of this net
activity to be offset by lower marketing, promotion, rewards and cardmember
services expenses and other operating expenses. Accordingly, the incremental
expenses, as well as the impact of the net lending securitization activity, are
eliminated in 1Q '05. During 1Q '06, net securitization activity generated a
loss, due to more maturities than issuances, the result of which was an increase
of $13MM and $9MM, respectively, in the Managed Basis marketing, promotion,
rewards and cardmember services expenses and human resources and other operating
expenses, reflecting the assumption that spending on a GAAP Basis was lower due
to the loss.
CONDENSED STATEMENTS OF INCOME
MANAGED BASIS RECONCILIATION
(Preliminary, millions)
Securitization Tax Equivalent
GAAP Basis Effect Effect Managed Basis
- ------------------------------------------------------------ ----------------- ----------------- -------------------------
% %
Inc/ Inc/
Quarters Ended March 31, 2006 2005 (Dec) 2006 2005 2006 2005 2006 2005 (Dec)
- ------------------------------------------------------------ ----------------- ----------------- -------------------------
Revenues:
Discount revenue, net card fees
and other $ 2,314 $ 2,059 12% $ 48 $ 53 $ 55 $ 57 $ 2,417 2,169 11%
Cardmember Lending:
Finance charge revenue 674 522 29 733 609 1,407 1,131 24
Interest expense 194 120 62 247 140 441 260 70
- ------------------------------------------------------------ ----------------- -------------------------
Net finance charge revenue 480 402 19 486 469 966 871 11
- ------------------------------------------------------------ ----------------- -------------------------
Securitization income, net 386 316 22 (386) (316) - - -
- ------------------------------------------------------------ ----------------- ----------------- -------------------------
Total 3,180 2,777 15 148 206 55 57 3,383 3,040 11
- ------------------------------------------------------------ ----------------- ----------------- -------------------------
Expenses:
Marketing, promotion, rewards
and cardmember services 1,034 837 24 13 (4) 1,047 833 26
Provision for losses 307 342 (10) 126 212 433 554 (22)
Human resources and other
operating expenses 1,043 895 17 9 (2) 1,052 893 18
- ------------------------------------------------------------ ----------------- -------------------------
Total 2,384 2,074 15 $ 148 $ 206 2,532 2,280 11
- ------------------------------------------------------------ ----------------- -------------------------
Pretax segment income 796 703 13 55 57 851 760 12
Income tax provision 250 221 13 $ 55 $ 57 $ 305 $ 278 10
- ------------------------------------------------------------ ----------------- -------------------------
Segment income $ 546 $ 482 13
- ------------------------------------------------------------
9
AMERICAN EXPRESS COMPANY
FIRST QUARTER 2006 OVERVIEW
U.S. CARD SERVICES
STATISTICAL INFORMATION
Quarters Ended Percentage
March 31, Inc/(Dec)
------------------ ----------
2006 2005
------- -------
Card billed business (billions) $ 75.3 $ 65.0 16%
Total cards in force (millions) 38.3 35.5 8
Basic cards in force (millions) 28.4 26.1 9
Average basic cardmember spending* $2,690 $2,506 7
Segment Capital (billions) $ 5.0 $ 4.4 14
Return on Segment Capital** 39.4% 39.4% -
* Proprietary cards only.
** Computed on a trailing 12-month basis using segment income
and equity capital allocated to segments based upon
specific business operational needs, risk measures and
regulatory capital requirements.
- BILLED BUSINESS: The 16% increase in USCS billed business reflected
a 7% increase in spending per proprietary basic card and 8% growth
in cards in force.
-- Within the U.S. consumer business, billed business grew 15%;
small business volumes rose 19%.
- CARDS IN FORCE: Increased by 2.8MM, or 8%, versus last year on
continued strong card acquisition activity.
MANAGED P&L DISCUSSION
o NET INCOME: Increased 13% as revenues and expenses both increased 11%. 1Q
'06 included:
- A $106MM ($69MM after-tax) charge related to a higher redemption
rate estimate within the U.S. Membership Rewards reserve;
- A $72MM ($47MM after-tax) net reduction in finance charge revenues
related to higher than anticipated cardmember completion of consumer
debt repayment programs and certain associated payment waivers;
- A $9MM ($6MM after-tax) charge related to reengineering activities
within our Travelers Cheque business; and
- An estimated favorable impact of $140MM ($91MM after-tax) from lower
early credit write-offs, primarily related to last year's bankruptcy
legislation, and lower than expected costs related to Hurricane
Katrina.
- PRE-TAX MARGIN: Was 25.2% in 1Q '06 versus 16.9% in 4Q '05 and 25.0%
in 1Q '05.
- EFFECTIVE TAX RATE: Was 36% in 1Q '06 compared to 30% in 4Q '05 and
37% in 1Q '05. The lower 4Q '05 tax rate reflects a $29MM tax
benefit primarily related to the finalization of state tax returns.
o DISCOUNT REVENUE, NET CARD FEES AND OTHER REVENUES: Increased 11%, largely
due to increases in billed business volumes.
o NET FINANCE CHARGE REVENUE: Increased 11% on 15% growth in average lending
balances.
- Annualized net finance charge revenue as a percentage of average
loans was 8.7% in 1Q '06 versus 9.1% in 4Q '05 and 8.9% in 1Q '05.
The decrease versus last year and last quarter reflects the impact
of the reduction in finance charge revenues related to higher than
anticipated cardmember completion of consumer debt repayment
programs.
o MARKETING, PROMOTION, REWARDS AND CARDMEMBER SERVICES EXPENSES: Rose 26%
due to the higher Membership Rewards redemption rate estimate discussed
above, higher volume-related rewards costs, and increased marketing and
promotion costs due to the continuation of business-building activities.
10
AMERICAN EXPRESS COMPANY
FIRST QUARTER 2006 OVERVIEW
U.S. CARD SERVICES
o PROVISION FOR LOSSES: Declined 22% reflecting the favorable impact of
lower early credit write-offs, primarily related to last year's
bankruptcy legislation, and lower than expected costs related to Hurricane
Katrina, partially offset by higher volumes.
- CHARGE CARD: *
-- The loss ratio declined from last year and last quarter. Past
due levels were flat versus last year and increased versus
last quarter, consistent with seasonal patterns.
3/06 12/05 3/05
----- ----- -----
Total Receivables (billions) $17.2 $19.2 $15.7
Net loss ratio as a % of charge volume 0.20% 0.38% 0.25%
90 days past due as a % of total 2.3% 1.8% 2.3%
- CARDMEMBER LENDING: **
-- The write-off rate declined significantly versus last year and
last quarter due to a lower level of write-offs following the
effect of last year's bankruptcy legislation. The past due
rate rose versus last quarter, but was lower than last year.
3/06 12/05 3/05
----- ----- -----
Total Loans (billions) $45.1 $46.0 $39.2
Net write-off rate 2.6% 4.6% 4.1%
30 days past due as a % of loans 2.4% 2.3% 2.5%
* There are no off-balance sheet Charge Card securitizations.
Therefore, "Owned Basis" and "Managed Basis" credit quality
statistics for the Charge Card portfolio are the same.
** As previously described, this information is presented on a "Managed
Basis". "Owned Basis" credit quality statistics are available in the
First Quarter 2006 Earnings Release on the U.S. Card Services
Selected Statistical Information pages. Credit trends are generally
consistent under both reporting methods.
o HUMAN RESOURCES AND OTHER OPERATING EXPENSES: Increased 18% due to greater
interest expense and higher human resources costs. In addition, operating
expenses rose, reflecting volume related costs.
11
AMERICAN EXPRESS COMPANY
FIRST QUARTER 2006 OVERVIEW
INTERNATIONAL CARD & GLOBAL COMMERCIAL SERVICES
(Preliminary)
CONDENSED STATEMENTS OF INCOME
(GAAP Basis)
Quarters Ended Percentage
(millions) March 31, Inc/(Dec)
---------------- ----------
2006 2005
------ ------
Revenues:
Discount revenue, net card fees and other $2,109 $1,982 6%
Cardmember Lending:
Finance charge revenue 293 247 19
Interest expense 99 83 19
------ ------
Net finance charge revenue 194 164 18
------ ------
Total 2,303 2,146 7
------ ------
Expenses:
Marketing, promotion, rewards and cardmember services 343 310 11
Provision for losses and benefits 349 228 53
Human resources and other operating expenses 1,300 1,366 (5)
------ ------
Total 1,992 1,904 5
------ ------
Pretax segment income 311 242 29
Income tax provision 98 50 96
------ ------
Net income $ 213 $ 192 11
====== ======
STATISTICAL INFORMATION
Quarters Ended Percentage
March 31, Inc/(Dec)
-------------- ----------
2006 2005
------ ------
Card billed business (billions) $ 45.2 $ 39.1 16%
Total cards in force (millions) 23.2 21.7 7
Basic cards in force (millions) 18.4 17.2 7
Average basic cardmember spending* $2,494 $2,275 10
Segment Capital (billions) $ 4.3 $ 3.8 13
Return on Segment Capital** 23.2% 21.3% -
* Proprietary cards only.
** Computed on a trailing 12-month basis using segment income and
equity capital allocated to segments based upon specific business
operational needs, risk measures and regulatory capital
requirements.
- BILLED BUSINESS: The 16% increase in billed business reflects a 10%
increase in spending per proprietary basic card and 7% growth in
cards in force.
-- Excluding the impact of foreign exchange translation, billed
business and spending per proprietary basic card in force
increased 18% and 12%, respectively.
- All of AXP's major geographic regions experienced double-digit
growth.
- International consumer and small business spending rose 16%;
global corporate spending rose 19%.
- CARDS IN FORCE: Rose 7% versus last year. Total cards in force rose
500K during the quarter.
P&L DISCUSSION
o NET INCOME: Increased 11% as revenues rose 7% and expenses increased by
5%. 1Q '06 included:
- A $63MM ($53MM after-tax) higher provision for credit losses in
Taiwan due primarily to the impact of industry-wide credit issues
within the market;
- $19MM ($12MM after-tax) of reengineering costs, related principally
to initiatives in our corporate travel and international card
businesses. 1Q '05 reflected $12MM ($8MM after-tax) of costs related
to reengineering activities within business travel and the decision
to sell certain banking operations;
- A $6MM ($4MM after-tax) charge related to a higher redemption rate
estimate within the U.S. Membership Rewards reserve; and
- An $88MM ($40MM after-tax) gain related to the completion of the
sale of our stake in EAB.
- PRE-TAX MARGIN: Was 13.5% in 1Q '06, versus 12.6% in 4Q '05 and
11.3% in 1Q '05.
- EFFECTIVE TAX RATE: Was 32% in 1Q '06, compared to 20% in 4Q '05 and
21% in 1Q '05. The 1Q '06 tax rate reflects a relatively high
effective tax rate related to the gain on the sale of our stake in
EAB, resulting from foreign exchange translation impacts, in
addition to a relatively low effective tax rate benefit on the
credit losses in Taiwan.
12
AMERICAN EXPRESS COMPANY
FIRST QUARTER 2006 OVERVIEW
INTERNATIONAL CARD & GLOBAL COMMERCIAL SERVICES
o DISCOUNT REVENUE, NET CARD FEES AND OTHER REVENUES: The increase of 6%
versus 1Q '05 was driven primarily by the higher level of card spending,
as well as modest growth in international banking revenues, partially
offset by a decline in travel commissions and fees.
o NET FINANCE CHARGE REVENUE: Increased 18% due to 17% growth in average
lending balances.
o MARKETING, PROMOTION, REWARDS AND CARDMEMBER SERVICES EXPENSES: Increased
11%, reflecting greater rewards costs and higher marketing and promotion
expenses.
o PROVISION FOR LOSSES AND BENEFITS: Increased 53% due to the industry-wide
credit issues in Taiwan and higher interest rates on larger investment
certificate balances.
- CHARGE CARD: *
-- The loss ratio decreased versus last year and last quarter,
while past due amounts declined from last year, but were
consistent with last quarter.
3/06 12/05 3/05
----- ----- -----
Total Receivables (billions) $15.6 $14.5 $14.4
Net loss ratio as a % of charge volume 0.17% 0.18% 0.22%
90 days past due as a % of total 1.3% 1.3% 1.4%
- CARDMEMBER LENDING:*
-- Past due rates rose versus last year and last quarter;
write-off rates increased from last year and last quarter.
3/06 12/05 3/05
----- ----- -----
Cardmember Loans (billions) $ 8.4 $ 8.3 $7.1
30 days past due as a % of loans 3.2% 2.8% 2.8%
Net write-off rate 5.5% 4.4% 4.3%
* There are no off-balance sheet Charge Card and currently
no off-balance sheet international lending
securitizations. Therefore, "Owned Basis" and "Managed
Basis" credit quality statistics for the Charge Card and
lending portfolio are the same.
o HUMAN RESOURCES AND OTHER OPERATING EXPENSES: Decreased by 5% as higher
interest expenses, human resources and other operating expenses were more
than offset by the $88MM EAB gain.
13
AMERICAN EXPRESS COMPANY
FIRST QUARTER 2006 OVERVIEW
GLOBAL NETWORK & MERCHANT SERVICES
Condensed Statements of Income
(GAAP Basis)
(Preliminary) Quarters Ended Percentage
March 31, Inc/(Dec)
---------------- ----------
(millions) 2006 2005
------ ------
Revenues:
Discount revenue, fees and other $ 705 $ 638 11%
------ ------
Expenses:
Marketing and promotion 135 165 (18)
Provision for losses 10 17 (41)
Human resources and other operating
expenses 298 285 5
------ ------
Total 443 467 (5)
------ ------
Pretax segment income 262 171 53
Income tax provision 96 60 60
------ ------
Segment income $ 166 $ 111 50
====== ======
STATISTICAL INFORMATION
Quarters Ended Percentage
March 31, Inc/(Dec)
---------------- ----------
2006 2005
------ ------
Global Card Billed Business*(billions) $127.2 $109.3 16%
Segment Capital (billions) $ 1.3 $ 1.1 24
Return on Segment Capital** 51.7% 53.6% -
Global Network Services:***
Card billed business (billions) $ 6.6 $ 5.3 25
Total cards in force (millions) 11.0 8.9 24
* Includes activities related to proprietary cards, cards
issued under GNS partnership agreements, cash advances on
proprietary cards and certain insurance fees charged on
proprietary cards.
** Computed on a trailing 12-month basis using segment income
and equity capital allocated to segments based upon specific
business operational needs, risk measures and regulatory
capital requirements.
*** 1Q '06 billed business and cards in force reflect the
transfer to the ICGCS segment, in the quarter, of corporate
card accounts in certain emerging markets that had been
managed within GNS.
P&L DISCUSSION
o NET INCOME: Increased 50% on 11% revenue growth and a 5% decrease in
expenses, due primarily to an 18% decline in marketing and promotion
expenses.
- PRE-TAX MARGIN: Was 37.2% in 1Q '06 versus 34.8% in 4Q '05 and 26.8%
in 1Q '05.
- EFFECTIVE TAX RATE: Was 37% in 1Q '06 versus 34% in 4Q '05 and 35%
in 1Q '05.
o DISCOUNT REVENUE, FEES AND OTHER REVENUE: Increased 11% reflecting growth
in network-related discount revenues generated from the 16% increase in
global card billed business, partially offset by the impact of the decline
in the overall discount rate.
o MARKETING AND PROMOTION: Expenses decreased 18%, reflecting lower
marketing and promotion costs due to a reduction in spending on
brand-related activities.
o HUMAN RESOURCES AND OTHER OPERATING EXPENSES: Increased 5% reflecting
higher business volumes and greater salary and benefit costs, partially
offset by a larger interest expense credit related to internal transfer
pricing which recognizes the merchant services' accounts payable-related
funding benefit.
14
INFORMATION RELATED TO FORWARD LOOKING STATEMENTS
THIS RELEASE INCLUDES FORWARD-LOOKING STATEMENTS, WHICH ARE SUBJECT TO
RISKS AND UNCERTAINTIES. 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. 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 GENERATE SUFFICIENT NET INCOME TO
ACHIEVE A RETURN ON EQUITY ON A GAAP BASIS OF 28 PERCENT TO 30 PERCENT; THE
COMPANY'S ABILITY TO GROW ITS BUSINESS AND MEET OR EXCEED ITS RETURN ON
SHAREHOLDERS' EQUITY TARGET BY REINVESTING APPROXIMATELY 35 PERCENT OF
ANNUALLY-GENERATED CAPITAL, AND RETURNING APPROXIMATELY 65 PERCENT OF SUCH
CAPITAL TO SHAREHOLDERS, OVER TIME, WHICH WILL DEPEND ON THE COMPANY'S ABILITY
TO MANAGE ITS CAPITAL NEEDS AND THE EFFECT OF BUSINESS MIX, ACQUISITIONS AND
RATING AGENCY REQUIREMENTS; 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 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,
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 COMPANY'S ABILITY TO INTRODUCE NEW PRODUCTS, REWARD PROGRAM
ENHANCEMENTS AND SERVICE ENHANCEMENTS ON A TIMELY BASIS DURING 2006; 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 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 CONTINUATION OF
FAVORABLE TRENDS, INCLUDING INCREASED TRAVEL AND ENTERTAINMENT SPENDING, AND THE
OVERALL LEVEL OF CONSUMER CONFIDENCE; THE COSTS AND INTEGRATION OF ACQUISITIONS;
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; THE COMPANY'S ABILITY TO REINVEST THE BENEFITS ARISING
FROM SUCH REENGINEERING ACTIONS IN ITS BUSINESSES; 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; THE COMPANY'S ABILITY TO MANAGE
CREDIT RISK RELATED TO CONSUMER DEBT, BUSINESS LOANS, MERCHANT BANKRUPTCIES AND
OTHER CREDIT TRENDS AND THE RATE OF BANKRUPTCIES, WHICH CAN AFFECT SPENDING ON
CARD PRODUCTS, DEBT PAYMENTS BY INDIVIDUAL AND CORPORATE CUSTOMERS AND
BUSINESSES THAT ACCEPT THE COMPANY'S CARD PRODUCTS AND RETURNS ON THE COMPANY'S
INVESTMENT PORTFOLIOS; BANKRUPTCIES, RESTRUCTURINGS 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; RISKS ASSOCIATED WITH THE COMPANY'S AGREEMENTS WITH
DELTA AIR LINES TO PREPAY $300 MILLION FOR THE FUTURE PURCHASES OF DELTA
SKYMILES REWARDS POINTS; FLUCTUATIONS IN FOREIGN CURRENCY EXCHANGE RATES;
FLUCTUATIONS IN INTEREST RATES, WHICH IMPACT THE COMPANY'S BORROWING COSTS AND
RETURN ON LENDING PRODUCTS; 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, INCLUDING THE VALUATION OF THE
INTEREST-ONLY STRIP RELATING TO THE COMPANY'S LENDING SECURITIZATIONS; THE
POTENTIAL NEGATIVE EFFECT ON THE COMPANY'S BUSINESSES AND INFRASTRUCTURE,
INCLUDING INFORMATION TECHNOLOGY, OF TERRORIST ATTACKS, DISASTERS 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; 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, 2005, AND
ITS OTHER REPORTS FILED WITH THE SEC.
15