EXHIBIT 99.3
[LOGO OF AMERICAN EXPRESS COMPANY]
2006
SECOND 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") Second 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
SECOND QUARTER 2006
HIGHLIGHTS
o Second quarter diluted EPS from continuing operations of $0.78 increased
13% versus $0.69 last year. Total revenues rose 14%. For the trailing 12
months, including discontinued operations, return on equity (ROE) was
30%.
- 2Q '06 Income from continuing operations included:
-- A $144MM ($131MM after-tax) gain related to the completion of
the sale of our card and related operations in Brazil to Banco
Bradesco S.A., as referenced below; and
-- A $62MM ($40MM after-tax) charge related to a higher redemption
rate estimate within the non-U.S. Membership Rewards reserve, as
referenced below.
- 2Q '05 income from continuing operations included:
-- An $87MM tax benefit resulting from an IRS audit of previous years'
tax returns; and
-- A $113MM ($73MM after-tax) benefit from the recovery of
9/11-related insurance claims.
- 2Q '06 and 2Q '05 Income from continuing operations also included
$53MM ($34MM after-tax) and $114MM ($74MM after-tax), respectively,
of reengineering costs related to restructuring efforts in our
business travel, international card and finance areas in both
periods, and within our technology activities in 2Q '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.
-- 2Q '06 results reflected a $27MM loss related to certain
discontinued operations versus $153MM of income last year. 2Q
'06 primarily reflects losses related to the sale of our
international banking operations in Brazil(see discussion below),
and 2Q '05 primarily reflects income related to Ameriprise
Financial, Inc. prior to its spin-off. Both quarters also include
additional costs related to the dispositions of other businesses in
prior quarters.
-- Including discontinued operations, diluted EPS on a net income
basis of $0.76 decreased 6%.
- The Company's reported ROE was 30%, 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 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
June 30, 2006 was 33%. See "Supplemental Information - Pro Forma ROE"
discussion below.
o Compared with the second quarter of 2005:
- Worldwide billed business of $140.5B increased 16% on continued
strong growth within both the proprietary and network businesses. A
comparatively stronger U.S. dollar had minimal impact on the reported
worldwide growth rate;
- Worldwide cards in force of 74.4MM increased 11%, up 7.1MM from last
year and 1.9MM during 2Q '06, as proprietary and network card growth
remained particularly strong;
- Worldwide average spending per proprietary basic card in force
increased 7% versus last year despite the suppressing effect of
substantial card additions over the past few years;
- Worldwide lending balances of $36.3B on an owned basis increased
29%; on a managed basis, worldwide lending balances of $56.5B 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:
- On June 30, 2006, the Company completed the sale of its card and
merchant-related activities and international banking operations in
Brazil to Banco Bradesco S.A. ("Bradesco"), for approximately US
$470MM. Concurrently, the Company signed an independent operator
partnership agreement through which 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 and to act as a merchant acquirer for American Express. This
agreement does not preclude our other network partners, HSBC and
BankBoston, from operating as Network Card Licensees within the
market. The transaction generated a net after-tax gain of $109MM.
$144MM ($131MM after-tax) of the gain, which is related to the card and
merchant-related activities sold, is reported as a contra-expense
within the Company's continuing operations ($119MM within the
International Card & Global Commercial Services ("ICGCS") segment and
$25MM within the Global Network & Merchant Services ("GNMS") segment)
since the Company will continue to maintain its presence in the card
business within Brazil through our Global Network Services ("GNS")
partnerships. A $22MM after-tax loss related to the sale of our
international banking business is reported within discontinued
operations since we have exited these banking activities within
Brazil. Quarterly financial information and business metrics include
the operating impact of the activities sold, while period end
disclosures reflect the sale.
-1-
AMERICAN EXPRESS COMPANY
SECOND QUARTER 2006
HIGHLIGHTS
- Marketing, promotion, rewards and cardmember services costs increased
16% versus 2Q '05, reflecting greater rewards costs and higher
marketing and promotion expenses. The higher rewards costs continued
to reflect volume growth, a higher redemption rate, and strong
cardmember loyalty program participation. Consistent with the 1Q '06
U.S. Membership Rewards model assumption revision, costs also
reflected a $62MM ($40MM after-tax) charge related to a higher
ultimate redemption rate ("URR") assumption within the non-U.S.
Membership Rewards reserve model to reflect program redemption trends
over the past five years. Prior URR calculations utilized redemptions
since the inception of the various programs. Marketing expenses
continued to reflect relatively high levels of spending related to
various business-building initiatives and the Company's ongoing
global "My Life, My Card (SM)" advertising campaign.
- Total provisions for losses and benefits increased 16% versus 2Q '05,
reflecting growth in business volumes and the loan portfolio as well
as a higher level of charge offs outside the U.S., primarily related
to industry-wide credit issues in Taiwan. These increases more than
offset the benefit of lower bankruptcy-related charge offs, improved
collections and strong credit quality in the U.S.
- The Company's reengineering initiatives delivered in excess of $400MM
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 30% of the
benefits delivered in 2Q '06.
- The 1% increase in human resources expense in 2Q '06 reflects the
impact of merit increases and larger benefit costs, partially offset
by lower severance-related expenses versus 2Q '05. 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 65,400 decreased by 200 employees or
less than 1%; compared with last quarter, the employee count
decreased by 1,300 primarily due to the Brazil disposition.
- Rising interest rates continued to negatively impact results as
interest expense rose 45% and banking-related spreads narrowed.
- On May 22nd, the Company's Board of Directors increased the quarterly
dividend by 25%, to $0.15 from $0.12 per share, and authorized the
repurchase of up to 200MM additional common shares as market
conditions allow.
o During the quarter, American Express continued to invest in growth
opportunities through expanded products and services. In our proprietary
business we:
- Introduced the American Express Benefits Plus(SM) Card, a new
healthcare payment product that provides cardmembers with easy and
convenient access to their healthcare flexible spending accounts,
while simultaneously announcing agreements with PayFlex and
WageWorks, leading tax-advantaged spending account administrators, to
offer this product to member corporations and employees;
- Expanded coverage of ExpressPay from American Express, our
contactless payment product, by partnering with Arby's Restaurant
Group, Inc., a leading quick-service restaurant with over 3,500
locations primarily in the United States; and
- Formed a Global Advisory Services unit within the Business Travel
division, providing consulting services and implementation solutions
to help corporate clients optimize their air, car, hotel and meeting
spend.
In our Global Network Services business we:
- Launched, in conjunction with Bank of America, the Bank of America
American Express Rewards card. The card features a clear plastic card
design, patented by American Express, and the richest rewards program
currently available from Bank of America, including double points for
all dining and travel purchases;
- Partnered with USAA Savings Bank to issue USAA American Express cards
accepted on our global merchant network. The card products offer USAA
members a choice of a cash back or points-based rewards program;
- Signed a business transfer agreement with Maybank in Malaysia related
to the sale and licensing of American Express' consumer card,
corporate card and merchant acquiring service business in Malaysia,
which provides a framework for discussion to enter into a final
independent operator partnership agreement. Maybank has been issuing
the Maybank American Express credit card in Malaysia since December
2003;
- Announced a partnership with Banca Intesa Beograd to exclusively
issue American Express Green and Gold Cards in Serbia accepted on our
global merchant network; and
- Partnered with VUB Bank to issue American Express Gold and Blue from
American Express(R) cards as well as acquire merchants in Slovakia.
-2-
AMERICAN EXPRESS COMPANY
SECOND QUARTER 2006 OVERVIEW
CONSOLIDATED
(Preliminary)
STATEMENTS OF INCOME
(GAAP basis)
(millions)
Quarters Ended Percentage
June 30, Inc/(Dec)
------------------- -----------
2006 2005
---- ----
Revenues:
Discount revenue $3,292 $2,860 15%
Cardmember lending net finance charge revenue 867 637 36
Net card fees 533 506 5
Travel commissions and fees 483 502 (4)
Other commissions and fees 642 589 9
Securitization income, net 372 296 26
Other investment and interest income, net 274 269 2
Other 415 361 15
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Total 6,878 6,020 14
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Expenses:
Marketing, promotion, rewards and cardmember services 1,671 1,445 16
Human resources 1,276 1,268 1
Provisions for losses and benefits:
Charge card 192 234 (18)
Cardmember lending 406 275 48
Investment certificates and other 132 123 7
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Total 730 632 16
Professional services 658 544 21
Occupancy and equipment 365 356 3
Interest 336 232 45
Communications 113 113 -
Other 287 309 (7)
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Total 5,436 4,899 11
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Pretax income from continuing operations 1,442 1,121 29
Income tax provision 470 261 80
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Income from continuing operations 972 860 13
(Loss)/Income from discontinued operations, net of tax (27) 153 #
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Net income $ 945 $1,013 (7)
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EPS-Basic
Income from continuing operations $0.80 $0.70 14
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(Loss)/Income from discontinued operations (0.02) $0.12 #
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Net Income $0.78 $0.82 (5)
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EPS-Diluted
Income from continuing operations $0.78 $0.69 13
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(Loss)/Income from discontinued operations ($0.02) $0.12 #
======= ======
Net Income $0.76 $0.81 (6)
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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.
- - 2Q '06 Income from continuing operations included:
- A $144MM ($131MM after-tax) gain related to the completion of
the sale of our card and merchant-related operations in
Brazil; and
- A $62MM ($40MM after-tax) charge related to a higher redemption
rate estimate within the non-U.S. Membership Rewards reserve.
- - 2Q '05 Income from continuing operations included:
- An $87MM tax benefit resulting from an IRS audit of previous
years' tax returns; and
- A $113MM ($73MM after-tax) benefit from the recovery of
9/11-related insurance claims.
- - 2Q '06 and 2Q '05 Income from continuing operations included $53MM
($34MM after-tax) and $114MM ($74MM after-tax), respectively, of
reengineering costs related to restructuring efforts in our business
travel, international card and finance areas in both periods, and
within our technology activities in 2Q '05.
-3-
AMERICAN EXPRESS COMPANY
SECOND QUARTER 2006 OVERVIEW
CONSOLIDATED
o Net Income including discontinued operations decreased 7% to $945MM.
- The 2Q '06 loss from discontinued operations was $27MM after-tax versus
income of $153MM after-tax last year.
o SHARE REPURCHASES: During 2Q '06, 23MM shares were repurchased versus
18MM shares in 1Q '06 and 10MM shares in 2Q '05. We repurchased a higher
level of shares during 2Q '06 versus 2Q '05 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,
571MM shares have been acquired under cumulative Board authorizations to
repurchase up to 770MM shares, including purchases made under agreements
with third parties.
Millions of Shares
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- AVERAGE SHARES: 2Q '06 1Q '06 2Q '05
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Basic 1,217 1,232 1,231
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Diluted 1,242 1,258 1,254
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- ACTUAL SHARE ACTIVITY:
Shares outstanding - beginning of period 1,233 1,241 1,245
Repurchase of common shares (23) (18) (10)
Employee benefit plans, compensation and other 6 10 5
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Shares outstanding - end of period 1,216 1,233 1,240
===== ===== =====
o CAPITAL RETURNED TO SHAREHOLDERS: Including share repurchases and
dividends, during 2Q '06 and the six months to date, we returned 118% and
105% of capital generated to shareholders, respectively. On a cumulative
basis, since 1994, we have returned 68% of capital generated.
o CONSOLIDATED REVENUES: Consolidated revenues increased 14%, reflecting
increases versus last year of 17% within U.S. Card Services ("USCS"), 9%
within ICGCS and 14% within GNMS. Revenues increased due to higher
discount revenues, increased cardmember lending net finance charge
revenue, higher securitization income, net, greater other revenues,
increased net card fees, greater other investment and interest income and
higher other commissions and fees, partially offset by lower travel
commissions and fees. Translation of foreign currency had a minimal
impact on the revenue growth rate.
o CONSOLIDATED EXPENSES: Consolidated expenses increased 11%, reflecting
increases versus last year of 13% within USCS, a 7% increase in ICGCS,
and a 6% increase within GNMS. Expense growth reflected increased
marketing, promotion, rewards and cardmember services costs, higher
professional services expenses, greater interest costs, higher provisions
for losses and benefits, larger occupancy and equipment costs and greater
human resource expenses, partially offset by lower other expenses.
Translation of foreign currency had a minimal impact on the expense
growth rate.
o PRE-TAX MARGIN: Was 21.0% in 2Q '06 compared with 20.9% in 1Q '06 and 18.6%
in 2Q '05.
O EFFECTIVE TAX RATE: Was 33% in 2Q '06 versus 34% in 1Q '06 and 23% in 2Q
'05. The lower tax rate in 2Q '05 reflected the $87MM benefit related to
an IRS audit of previous years' tax returns. The 2Q '06 rate reflects the
relatively low effective rate on the Brazil gain, which was offset by
higher tax expense due to uncertainty regarding the Company's ability to
obtain tax benefits for certain expenses attributable to foreign
subsidiaries.
-4-
AMERICAN EXPRESS COMPANY
SECOND QUARTER 2006 OVERVIEW
CONSOLIDATED
o DISCOUNT REVENUE: A 16% increase in billed business, partially offset by
a lower average discount rate, yielded a 15% increase in discount
revenue.
- The average discount rate* was 2.57% in 2Q '06 versus 2.58% in
1Q '06 and 2.59% in 2Q '05.
--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
June 30, Inc/(Dec)
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2006 2005
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Card billed business* (billions):
United States $102.5 $88.5 16%
Outside the United States 38.0 32.3 18
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Total $140.5 $120.8 16
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Cards in force (millions):
United States 45.4 41.0 11
Outside the United States 29.0 26.3 10
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Total 74.4 67.3 11
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Basic cards in force (millions):
United States 34.8 31.1 12
Outside the United States 24.1 21.8 11
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Total 58.9 52.9 11
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Average basic cardmember spending**
United States $3,134 $2,947 6
Outside the United States $2,137 $1,974 8
Total $2,821 $2,640 7
* For additional information about billed business and discount rate
calculations, please refer to the Second 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 15% increase in USCS, a 16% increase in ICGCS,
and a 31% increase in GNS partner volume. Worldwide average spend per
proprietary basic card grew by 7% and total cards in force grew by
11%.
-- U.S. billed business was up 16% reflecting growth of 14% within
our consumer card business, an 18% increase in small business
spending and a 15% improvement in Corporate Services volumes.
- Spending per proprietary basic card in force increased 6%.
- U.S. non-T&E-related volume categories (which represented
approximately 65% of 2Q '06 U.S. billed business) grew 16%, while
T&E volumes rose 13%.
- U.S. airline-related volume, which represented approximately 11%
of total U.S. volumes during the quarter, increased 17% due to
a 4% increase in transaction volume and a 13% higher average
airline charge.
-- Adjusting for the impact of foreign exchange translation:
- Worldwide billed business and spending per proprietary basic
card in force increased 16% and 7%, respectively.
- Total billed business outside the U.S. rose 17%, reflecting solid
double-digit proprietary growth in all regions.
- Within our proprietary business, billed business outside the
U.S. reflected 15% growth in consumer and small business
spending, as well as 17% growth in Corporate Services volumes.
- Spending per proprietary basic card in force outside the U.S.
rose 8%.
- Worldwide airline volumes, which represented approximately
13% of total volumes during the quarter, increased 17% on 5%
growth in transaction volume, and an 11% increase in the
average airline charge.
CARDS IN FORCE: Rose 11% worldwide due to an increase of 8% in USCS,
1% in ICGCS and 42% 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. In addition,
the segment growth rates reflect the transfer of 1.3MM cards in
Brazil from ICGCS to GNS upon completion of the sale on 6/30/06.
- 1.4MM 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 36% on 28%
growth in average worldwide lending balances on an owned basis and a
higher portfolio yield.
- Annualized net finance charge revenue as a percentage of average loans
in the worldwide owned portfolio was 9.9% in 2Q '06 versus 9.1% in
1Q '06 and 9.3% in 2Q '05. The increase versus last year reflects a
lower proportion of the U.S. portfolio on promotional rates and
increased finance charge rates, which were partially offset by rising
funding costs. The increase versus last quarter reflects the 1Q '06
reduction in net finance charge revenue due to the impact of higher
than anticipated cardmember completion of consumer debt repayment
programs.
-5-
AMERICAN EXPRESS COMPANY
SECOND QUARTER 2006 OVERVIEW
CONSOLIDATED
o NET CARD FEES: Grew 5% due to higher cards in force which were partially
offset by a lower average fee. The average annual fee per proprietary
card in force was $34 in 2Q '06 and 1Q '06, versus $35 in 2Q '05.
o TRAVEL COMMISSIONS AND FEES: Declined 4% reflecting lower average
transaction fees, due in part to the ongoing transition to online
booking. Travel sales increased 5% despite a lower level of transactions.
o OTHER COMMISSIONS AND FEES: Increased 9% on higher card-related assessment
and conversion revenues.
o SECURITIZATION INCOME, NET: Increased 26% as 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 2Q '06 and 2Q '05, net securitization gains, including the
credit components, reflected a decrease in pretax income of $14MM
($9MM after-tax) and a gain of $1MM before and after-tax,
respectively. The 2Q '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 $20.1B in 2Q '06, compared with $20.0B in 2Q '05.
o OTHER INVESTMENT AND INTEREST INCOME, NET: Increased 2% due to higher
interest rates on a greater level of short-term investments.
o OTHER REVENUES: Increased 15% primarily due to fees associated with
transition services agreements with Ameriprise Financial, Inc.
o MARKETING, PROMOTION, REWARDS AND CARDMEMBER SERVICES EXPENSES: Increased
16%, reflecting the greater rewards costs and higher marketing and
promotion expenses previously discussed.
o HUMAN RESOURCES EXPENSE: Increased 1% due to merit increases and larger
benefit costs, partially offset by lower severance-related expenses this
year.
o PROVISIONS FOR LOSSES AND BENEFITS: Increased 16% as the lending and
investment certificate and other provisions growth of 48% and 7%,
respectively, was partially offset by an 18% decline in the charge card
provision. The increase in the lending provision was driven by a higher
level of charge offs outside the U.S., primarily in Taiwan, and increased
loan volumes globally, partially offset by the favorable impact of lower
bankruptcy-related charge offs and strong credit quality in the U.S. The
investment certificate and other provision rose due to higher interest
rates on larger investment certificate balances. The charge provision
decline of 18% reflects the lower loss rate and improved results from
collection activities.
- 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 increased versus last quarter, but declined from
last year. Past due rates rose versus last year, but were flat
compared with last quarter.
6/06 3/06 6/05
----------- ----------------- ---------------
Net loss ratio as a % of charge volume 0.24% 0.19% 0.25%
90 days past due as a % of receivables 1.8% 1.8% 1.7%
6/06 3/06 6/05
----------- ----------------- ---------------
Total Receivables (billions) $34.7 $ 33.2 $ 31.5
Reserves (millions) $ 948 $978 $848
% of receivables 2.7% 2.9% 2.7%
% of 90 day past due accounts 150% 163% 160%
-6-
AMERICAN EXPRESS COMPANY
SECOND QUARTER 2006 OVERVIEW
CONSOLIDATED
- - WORLDWIDE LENDING:**
-- The write-off rate declined versus last year, but increased
versus last quarter. Past due levels rose versus last year and
last quarter.
6/06 3/06 6/05
----------------- ---------------- -----------------
Net write-off rate 3.8% 3.3% 4.1%
30 days past due as a % of loans 2.7% 2.6% 2.4%
6/06 3/06 6/05
----------------- ---------------- -----------------
Total Loans (billions) $36.3 $32.7 $28.1
Reserves (millions) $1,086 $1,053 $888
% of total loans 3.0% 3.2% 3.2%
% of 30 days past due accounts 113% 123% 133%
* 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 Second 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 21% reflecting increased costs
related to higher business and service-related volumes and increased costs.
o OCCUPANCY AND EQUIPMENT EXPENSE: Rose 3% due to costs associated with
higher business and service-related volumes.
o INTEREST EXPENSE: Rose 45% due to a higher effective cost of funds and
greater receivable balances.
o COMMUNICATIONS EXPENSE: Remained flat versus last year.
o OTHER EXPENSE: Decreased 7% due primarily to the inclusion of the $144MM
pre-tax gain related to the sale of our operations in Brazil, partially
offset by the 9/11-related insurance settlement in 2Q '05 and increased
business volumes.
CORPORATE & OTHER
o Net expense was $69MM in 2Q '06 compared with net expense of $49MM in 1Q
'06 and net income of $3MM in 2Q '05. 2Q '05 included the $54MM tax
benefit previously discussed and $112MM ($73MM after-tax) of the benefit
due to the recovery of 9/11-related insurance claims. In addition, the
comparison versus 2Q '05 reflects efforts to eliminate overhead that was
supportive of Ameriprise Financial.
-7-
AMERICAN EXPRESS COMPANY
SECOND 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
June 30, 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: $3.6B Trailing 12-months income from continuing operations: $3.5B
Average total shareholders' equity: $12.0B Average month-end shareholders' equity for the period from
September 30, 2005 through June 30, 2006: $10.5B
ROE: 30% Pro forma ROE: 33%
***
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
SECOND 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 higher marketing, promotion, rewards and
cardmember services expense and other operating expenses. Accordingly, the
incremental expenses, as well as the impact of the net lending securitization
activity, are eliminated in 2Q '05. During 2Q '06, net securitization activity
generated a net decrease in income, due to more maturities than issuances, the
result of which was an increase of $9MM and $5MM, 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 net decrease in income.
CONDENSED STATEMENTS OF INCOME
MANAGED BASIS RECONCILIATION
- ------------------------------------------------------------------------------------------------------------------------------------
(Preliminary, millions)
Tax
Securitization Equivalent
GAAP Basis Effect Effect Managed Basis
- --------------------------------------------------------------- ---------------- --------------- --------------------------
% %
Inc/ Inc/
Quarters Ended June 30, 2006 2005 (Dec) 2006 2005 2006 2005 2006 2005 (Dec)
- --------------------------------------------------------------- ---------------- --------------- --------------------------
Revenues:
Discount revenue, net card
fees and other $2,514 $2,233 13% $44 $51 $54 $57 $2,612 $2,341 12%
Cardmember Lending:
Finance charge revenue 814 587 39 726 618 1,540 1,205 28
Interest expense 215 140 54 257 164 472 304 55
- --------------------------------------------------------------- ---------------- --------------------------
Net finance charge revenue 599 447 34 469 454 1,068 901 19
- --------------------------------------------------------------- ---------------- --------------------------
Securitization income, net 372 296 26 (372) (296) - - -
- --------------------------------------------------------------- ---------------- --------------- --------------------------
Total 3,485 2,976 17 141 209 54 57 3,680 3,242 14
- --------------------------------------------------------------- ---------------- --------------- --------------------------
Expenses:
Marketing, promotion, rewards
and cardmember services 1,106 974 14 9 (1) 1,115 973 15
Provision for losses 351 367 (4) 127 210 478 577 (17)
Human resources and other
operating expenses 1,108 938 18 5 - 1,113 938 19
- --------------------------------------------------------------- ---------------- --------------------------
Total 2,565 2,279 13 $141 $209 2,706 2,488 9
- --------------------------------------------------------------- ---------------- --------------------------
Pretax segment income 920 697 32 54 57 974 754 29
Income tax provision 304 220 38 $54 $57 $358 $277 29
- --------------------------------------------------------------- ---------------- --------------- --------------------------
Segment income $616 $477 29
- ---------------------------------------------------------------
-9-
AMERICAN EXPRESS COMPANY
SECOND QUARTER 2006 OVERVIEW
U.S. CARD SERVICES
STATISTICAL INFORMATION
Quarters Ended Percentage
June 30, Inc/(Dec)
--------------------------------- -------------
2006 2005
------------- -------------
Card billed business (billions) $83.9 $72.8 15%
Total cards in force (millions) 39.1 36.1 8
Basic cards in force (millions) 28.9 26.5 9
Average basic cardmember spending* $2,925 $2,769 6
Segment Capital (billions) $4.7 $4.5 4
Return on Segment Capital** 41.8% 39.2% -
* 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 15% increase in USCS billed business reflected a
6% increase in spending per proprietary basic card and 8% growth in
cards in force.
-- Within the U.S. consumer business, billed business grew 14%;
small business volumes rose 18%.
- - CARDS IN FORCE: Increased by 3.0MM, or 8%, versus last year on continued
strong card acquisition activity and retention levels.
MANAGED P&L DISCUSSION
o NET INCOME: Increased 29% as revenues increased 14% and expenses increased 9%.
- PRE-TAX MARGIN: Was 26.5% in 2Q '06 versus 25.2% in 1Q '06 and 23.3%
in 2Q '05.
- EFFECTIVE TAX RATE: Was 37% in 2Q '06 compared to 36% in 1Q '06 and
37% in 2Q '05.
o DISCOUNT REVENUE, NET CARD FEES AND OTHER REVENUES: Increased 12%, largely
due to higher billed business volumes.
o NET FINANCE CHARGE REVENUE: Increased 19% on 15% growth in average lending
balances and a higher net portfolio yield.
- Annualized net finance charge revenue as a percentage of average loans was
9.2% in 2Q '06 versus 8.7% in 1Q '06 and 8.9% in 2Q '05.
o MARKETING, PROMOTION, REWARDS AND CARDMEMBER SERVICES EXPENSES: Rose 15%
due to higher volume-related rewards costs and increased marketing and
promotion costs due to the continuation of business-building activities.
-10-
AMERICAN EXPRESS COMPANY
SECOND QUARTER 2006 OVERVIEW
U.S. CARD SERVICES
o PROVISION FOR LOSSES: Declined 17% reflecting a lower level of
bankruptcy-related charge offs, improved collections, and continued
strong credit quality. These benefits were partially offset by the impact
of strong volume and loan growth.
- CHARGE CARD: *
-- The loss ratio declined from last year, but increased from last
quarter. Past due levels increased versus last year, but were
flat versus last quarter.
6/06 3/06 6/05
-------------- --------------- ------------
Total Receivables (billions) $18.5 $17.2 $16.8
Net loss ratio as a % of charge volume 0.28% 0.20% 0.29%
90 days past due as a % of total 2.3% 2.3% 2.0%
- CARDMEMBER LENDING: **
-- The write-off rate declined versus last year, but rose versus
last quarter, reflecting the effect of last year's bankruptcy
legislation. The past due rate was flat versus last quarter, but
rose versus last year.
6/06 3/06 6/05
---------- ------------ -----------
Total Loans (billions) $47.8 $45.1 $41.6
Net write-off rate 2.9% 2.6% 4.0%
30 days past due as a % of loans 2.4% 2.4% 2.2%
* 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 Second 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 19% due to higher
interest expense, greater professional services expenses related to
credit and collection activities, higher technology development costs and
increased human resources costs.
-11-
AMERICAN EXPRESS COMPANY
SECOND QUARTER 2006 OVERVIEW
INTERNATIONAL CARD & GLOBAL COMMERCIAL SERVICES
CONDENSED STATEMENTS OF INCOME
(GAAP Basis)
(Preliminary)
Quarters Ended Percentage
June 30, Inc/(Dec)
---------------------------------- ------------------
(millions) 2006 2005
---- ----
Revenues:
Discount revenue, net card fees and other $2,241 $2,083 8%
Cardmember Lending:
Finance charge revenue 308 251 23
Interest expense 108 86 26
------ ------
Net finance charge revenue 200 165 21
------ ------
Total 2,441 2,248 9
------ ------
Expenses:
Marketing, promotion, rewards and cardmember services 410 328 25
Provision for losses and benefits 364 239 52
Human resources and other operating expenses 1,373 1,437 (4)
------ ------
Total 2,147 2,004 7
------ ------
Pretax segment income 294 244 20
Income tax provision 69 19 #
------ ------
Segment income $225 $225 -
===== ======
# Denotes variance greater than 100%.
STATISTICAL INFORMATION
Quarters Ended Percentage
June 30, Inc/(Dec)
------------------ -------- ----------- --------------
2006 2005
---- ----
Card billed business (billions) $49.2 $42.5 16%
Total cards in force (millions) 22.2 22.0 1
Basic cards in force (millions) 17.8 17.5 2
Average basic cardmember spending* $2,654 $2,449 8
Segment Capital (billions) $4.3 $3.9 10
Return on Segment Capital** 22.6% 21.8% -
* 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 an 8%
increase in spending per proprietary basic card and 7% growth in
cards in force before the transfer of cards in
Brazil noted below.
-- Adjusting for the impacts of foreign exchange translation,
billed business and spending per proprietary basic card in force
increased 15% and 8%, respectively.
-- All of AXP's major geographic regions experienced double-digit
growth.
- International consumer and small business spending rose 15%;
global corporate spending rose 16%.
- - CARDS IN FORCE: Rose 1% versus last year. Total cards in force rose
0.3MM during the quarter excluding the impact of the 1.3MM
proprietary cards in Brazil transferred to GNS
upon completion of the sale on June 30, 2006.
P&L DISCUSSION
o NET INCOME: Was flat versus last year as revenues rose 9%, expenses
increased by 7% and the effective tax rate was substantially higher.
- - 2Q '06 included:
-- A $119MM ($109MM after-tax) gain related to the completion of the sale of
our card operations in Brazil; and
-- A $62MM ($40MM after-tax) charge related to the higher redemption rate
estimate within the non-U.S. Membership Rewards reserve.
- - PRE-TAX MARGIN: Was 12.0% in 2Q '06, versus 13.5% in 1Q '06 and 10.9% in
2Q '05.
-12-
AMERICAN EXPRESS COMPANY
SECOND QUARTER 2006 OVERVIEW
INTERNATIONAL CARD & GLOBAL COMMERCIAL SERVICES
- - EFFECTIVE TAX RATE: Was 23% in 2Q '06 compared to 32% in 1Q '06 and
8% in 2Q '05. The 2Q '06 tax rate reflects the relatively low
effective rate on the Brazil gain, which was
offset by higher tax expense due to uncertainty regarding the
Company's ability to obtain tax benefits for certain expenses
attributable to foreign subsidiaries. The 1Q '06 rate reflects a
relatively high effective tax rate related to the gain on the sale of
our stake in Egyptian American Bank, in addition to a relatively low
effective tax rate benefit on credit losses in
Taiwan. The 2Q '05 tax rate reflects a $33MM tax
benefit resulting from the IRS audit of previous years' returns.
o DISCOUNT REVENUE, NET CARD FEES AND OTHER REVENUES: The increase of 8%
versus 2Q '05 was driven primarily by the higher level of card spending
and increased card-related fees, partially offset by a decline in travel
commissions and fees.
o NET FINANCE CHARGE REVENUE: Increased 21% due to 24% growth in average
lending balances.
o MARKETING, PROMOTION, REWARDS AND CARDMEMBER SERVICES EXPENSES: Increased
25%, reflecting the $62MM charge related to the higher redemption rate
estimate within the non-U.S. Membership Rewards reserve and greater
volume-related rewards costs. Marketing and promotion costs were
consistent with last year.
o PROVISION FOR LOSSES AND BENEFITS: Increased 52% due to a higher level of
charge offs, primarily related to industry-wide credit issues in
Taiwan, higher interest rates on investment
certificate balances and strong volume and loan growth.
- CHARGE CARD: *
-- The loss ratio decreased versus last year, but increased versus
last quarter, while past due amounts were consistent with last
year and last quarter.
6/06 3/06 6/05
------------ ----------- -----------
Total Receivables (billions) $15.8 $15.6 $14.7
Net loss ratio as a % of charge volume 0.18% 0.17% 0.20%
90 days past due as a % of total 1.3% 1.3% 1.3%
- CARDMEMBER LENDING:*
-- Past due rates and write-off rates rose versus last year and last
quarter.
6/06 3/06 6/05
--------------- ---------- -----------
Cardmember Loans (billions) $8.7 $8.4 $7.2
30 days past due as a % of loans 3.2% 3.2% 2.7%
Net write-off rate 6.4% 5.5% 4.8%
*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 4% as higher
interest and professional services expenses were more than offset by the
$119MM Brazil gain and lower reengineering-related
costs.
-13-
AMERICAN EXPRESS COMPANY
SECOND QUARTER 2006 OVERVIEW
GLOBAL NETWORK & MERCHANT SERVICES
CONDENSED STATEMENTS OF INCOME
(GAAP Basis)
(Preliminary)
Quarters Ended Percentage
June 30, Inc/(Dec)
---------------------------- -----------
(millions) 2006 2005
---- ----
Revenues:
Discount revenue, fees and other $789 $691 14%
---- ----
Expenses:
Marketing and promotion 140 131 7
Provision for losses 14 17 (18)
Human resources and other operating expenses 320 298 7
---- ----
Total 474 446 6
---- ----
Pretax segment income 315 245 29
Income tax provision 115 90 28
---- ----
Segment income $200 $155 29
==== ====
STATISTICAL INFORMATION
Quarters Ended Percentage
June 30, Inc/(Dec)
------------------------------ -------------
2006 2005
---- ----
Global Card Billed Business*(billions) $140.5 $120.8 16%
Segment Capital (millions) $1,271 $1,102 15
Return on Segment Capital** 53.8% 54.0% -
Global Network Services:***
Card billed business (billions) $7.6 $5.8 31
Total cards in force (millions) 13.1 9.2 42
*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.
*** 2Q '06 Card billed business and total cards in force reflect
the transfer to the ICGCS segment, in 1Q '06, of corporate card
accounts in certain emerging markets that had been managed
within GNS. 2Q '06 cards in force also reflects the transfer of
1.3MM proprietary cards in Brazil from ICGCS
to GNS.
P&L DISCUSSION
o NET INCOME: Increased 29% on 14% revenue growth and a 6% increase in
expenses.
- 2Q '06 included a $25MM ($22MM after-tax) gain related to the sale of
our merchant-related operations in Brazil, partially offset by an
adjustment in amortization relating to an overseas joint venture.
- PRE-TAX MARGIN: Was 39.9% in 2Q '06 versus 37.2% in 1Q '06 and 35.5% in
2Q '05.
- EFFECTIVE TAX RATE: Was 37% in 2Q '06 versus 37% in 1Q '06 and 2Q '05.
o DISCOUNT REVENUE, FEES AND OTHER REVENUE: Increased 14% 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 increased 7%, reflecting increased
merchant-related marketing activities and flat brand-related advertising
costs.
o HUMAN RESOURCES AND OTHER OPERATING EXPENSES: Increased 7% reflecting
higher business volumes, greater salary and benefit costs, and an
adjustment in amortization of an intangible asset relating to an overseas
joint venture, partially offset by the Brazil gain and
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 EARNINGS SUPPLEMENT 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 SIGNIFICANT 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-