EXHIBIT 99.3
[LOGO OF AMERICAN EXPRESS COMPANY]
2006
Third 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") Third 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
THIRD QUARTER 2006
HIGHLIGHTS
o Third quarter diluted EPS from continuing operations of $0.78 increased
13% versus $0.69 last year. Net revenues rose 12%. For the trailing 12
months, return on equity (ROE) was 34%.
- 3Q '06 Income from continuing operations included a $33MM ($24MM
after-tax) gain on the sales of card-related operations in Malaysia
and Indonesia as referenced below;
- 3Q '05 income from continuing operations included:
-- A $105MM tax benefit from the resolution of a prior year tax item
related to the sale of AMEX Life in 1995; and
-- A $49MM ($32MM after-tax) provision to reflect the estimated costs
related to Hurricane Katrina. $38MM of this provision was
related to our U.S. consumer and small business activities, $9MM
was associated with our Corporate Services activities, and $2MM was
merchant-related.
- 3Q '06 and 3Q '05 Income from continuing operations also included
$12MM ($8MM after-tax) and $86MM ($56MM after-tax), respectively, of
reengineering costs related to restructuring efforts in our business
travel area in both periods, and within our finance, international
operations and technology activities in 3Q '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.
-- 3Q '06 results reflected $11MM of income from discontinued
operations versus $165MM of income last year. 3Q '06 primarily
reflects a tax benefit while 3Q '05 primarily reflects income
related to Ameriprise Financial, Inc. prior to its spin-off.
-- Including discontinued operations, diluted EPS on a net income
basis of $0.79 decreased 4%.
o Compared with the third quarter of 2005:
- Worldwide billed business of $140.3B increased 15% on continued
strong growth within both the proprietary and network businesses. A
comparatively weaker U.S. dollar resulted in a 1% benefit in the
reported worldwide growth rate;
- Worldwide cards in force of 76.5MM increased 11%, up 7.5MM from last
year and 2.1MM during 3Q '06, as proprietary and network card growth
remained particularly strong;
- Worldwide average spending per proprietary basic card in force
increased 6% versus last year despite the suppressing effect of
substantial card additions over the past few years;
- Worldwide lending balances of $38.3B on an owned basis increased 28%;
on a managed basis, worldwide lending balances of $58.5B 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:
- During the quarter, the Company completed the sale of its
card-related operations in Malaysia to Maybank and its card-related
operations in Indonesia to Bank Danamon and signed independent
operator agreements with these banks. In both Malaysia and Indonesia,
Maybank and Bank Danamon, respectively, will be the sole issuer and
manager of the American Express charge card and merchant acquiring
businesses under the independent operator agreements. These agreements
allow Maybank and Bank Danamon to issue American Express cards to
individual and corporate clients. The sales generated a $33MM
($24MM after-tax) gain which is reported as a contra-expense in the
Company's Other Expense line within its continuing operations. The
gain is fully allocated to the International Card & Global Commercial
Services ("ICGCS") segment. In addition, as a result of the sale and
the signing of the independent operator agreements, approximately 200K
cards in force, and the associated billed business of approximately
$100MM, was transferred to the Global Network & Merchant Services
("GNMS") segment during the quarter.
- Marketing, promotion, rewards and cardmember services costs increased
7% versus 3Q '05, reflecting greater rewards costs, partially offset
by moderately lower marketing and promotion expenses. The higher
rewards costs continued to reflect volume growth, a higher redemption
rate, and strong cardmember loyalty program participation. Marketing
expenses continued to reflect relatively high levels of spending
related to various business-building initiatives but lower costs
related to the Company's ongoing global "My Life, My Card (SM)"
advertising campaign.
- Total provisions for losses and benefits increased 8% versus 3Q '05,
reflecting growth in business volumes and the loan portfolio as well
as higher volume and interest-rate related costs within the
investment certificates business. These increases more than offset
the benefit of lower bankruptcy-related charge offs, Katrina-related
reserves last year, improved collections and strong credit quality in
the U.S.
-1-
AMERICAN EXPRESS COMPANY
THIRD QUARTER 2006
HIGHLIGHTS
- The Company's reengineering initiatives delivered in excess of $600MM
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 3Q '06.
- The 1% increase in human resources expense in 3Q '06 reflects the
impact of merit increases and larger benefit and management incentive
costs, partially offset by a reduced level of employees and lower
severance-related expenses versus 3Q '05.
-- Compared with last year, the total employee count of 64,200
decreased by 1,200 employees or 2%; compared with last quarter,
the employee count increased 200 or less than 1%.
- Rising interest rates continued to negatively impact results as
interest expense rose 36% and international banking-related spreads
narrowed.
o During the quarter, American Express continued to invest in growth
opportunities through expanded products and services.
In our proprietary business we:
- Launched the Bonus Points Mall, which enables Membership Rewards
enrollees to earn double points for virtually every dollar spent at
more than 100 top brand name online retailers across 23 retail
categories, such as apparel, books, electronics, home and sports.
- Introduced, in conjunction with JetBlue Airways, the JetBlue Business
Card from American Express, which offers small business owners an
automatic OPEN Savings(R) discount of 5% on JetBlue flights plus one
Award Dollar on virtually every purchase and double Awards Dollars on
select small business purchases, including JetBlue travel, gasoline,
office supplies, wireless phone charges and car rentals.
- Announced, in conjunction with JetBlue Airways, a new enhancement for
JetBlue's TrueBlue(R) members who use the JetBlue Card from American
Express. Cardmembers can automatically extend the life of their
TrueBlue points by 12 months each time they purchase as little as
$200 on their JetBlue Card or by using the JetBlue Card to purchase
JetBlue travel before current points expire.
- Announced a significant expansion of our OPEN Savings program with
the launch of airline partners Delta Airlines and JetBlue Airways.
OPEN Savings gives small business owners automatic savings virtually
every time they use their American Express Business Card to make
purchases at any OPEN Savings partners. Small business owners using
any American Express Business Card receive an automatic 3% discount
on the total cost of Delta and JetBlue flights. In addition,
Cardmembers who purchase flights on these airlines, using their
respective Delta SkyMiles, SkyPoints Delta Business Card or JetBlue
Business Card, will receive an additional 2% discount off of the
total cost of the flights.
- Began to pilot Card acceptance for condominium down-payments. The
Moinan Group, one of the country's largest, privately held real
estate firms with a broad portfolio of office, residential, retail
and hotel properties throughout the U.S. and abroad, was the first
merchant to roll out the new program. In 2003, the Moinan Group began
accepting the Card for rent payments across its luxury rental
portfolio.
- Announced, in conjunction with Guaranty Bank, a co-branded American
Express Preferred Rewards Gold Card, to be offered to Guaranty Bank
customers at more than 150 Guaranty locations throughout Texas
and California.
- Kicked-off "Membership Changes Everything (SM)," a five week series
of free activities in the New York City area for Cardmembers
who carry American Express-issued Cards. The activities, which
included free, special access to some of the best music, sports,
theater, film and dining that New York has to offer, were
designed to celebrate and illustrate the benefits and services that
accompany Card membership.
- Announced the addition of three travel agencies to the American
Express Travel U.S. Representative Network: Fugazy International
Travel of Boca Raton, Florida; Hewins Travel of Portland, Maine; and
Passageways Travel of Traverse City, Michigan. The three travel
agencies join the network of top agencies in more than 2,200 locations
worldwide, providing a wide range of travel and financial services to
travelers and American Express Cardmembers.
In our Global Network Services business we:
Launched, in conjunction with Virgin Atlantic and MBNA Europe Bank,
the Virgin Atlantic American Express(R) Credit Card, which includes
the benefit of earning up to 4 miles, within Virgin Atlantic's
award-winning loyalty program, Flying Club, for every 1 GBP spent on
the Card.
Launched, in conjunction with the Industrial and Commercial Bank of
China (ICBC) and PetroChina Company Limited, the ICBC China Petrol
American Express Card. This is the first American Express branded,
co-brand card launched in China. The Cards, both standard and gold
versions, offer attractive automobile-related benefits and are dual
currency cards, denominated in both the Renminbi and the US dollar.
-2-
AMERICAN EXPRESS COMPANY
THIRD QUARTER 2006
HIGHLIGHTS
- Announced, in conjunction with Banco Bradesco, a new partnership with
the Paulista Medical Association (APM) to offer exclusively the
Business APM American Express Card to its 30,000 members, consisting
of small businesses and independent professionals, in the Brazilian
market.
- Launched a co-brand card in partnership with Samsung Card and Korean
Air, representing AXP's first airline co-brand card in the market.
- Launched, in conjunction with Nedbank and South African Airways
(SAA), the SAA Voyager Credit Card, offering a spectrum of added
benefits to SAA passengers and Voyager frequent flyer program
members, including accelerated ways of earning frequent flyer miles.
-3-
AMERICAN EXPRESS COMPANY
THIRD QUARTER 2006 OVERVIEW
CONSOLIDATED
(Preliminary)
Statements of Income
(GAAP basis)
(millions)
Quarters Ended Percentage
September 30, Inc/(Dec)
-------------------------- ---------------
2006 2005
---- ----
Net Revenues:
Discount revenue $3,259 $2,894 13%
Cardmember lending finance charge revenue, net of interest 912 648 41
Net card fees 462 511 (10)
Travel commissions and fees 427 421 1
Other commissions and fees 620 598 4
Securitization income, net 384 353 9
Other investment and interest income, net of interest 264 246 7
Other 431 357 21
----- -----
Total 6,759 6,028 12
----- -----
Expenses:
Marketing, promotion, rewards and cardmember services 1,589 1,492 7
Human resources 1,213 1,197 1
Provisions for losses and benefits:
Charge card 257 299 (14)
Cardmember lending 412 364 13
Investment certificates and other 129 76 70
----- -----
Total 798 739 8
Professional services 684 563 21
Occupancy and equipment 375 346 8
Interest 324 238 36
Communications 107 112 (4)
Other 331 261 27
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Total 5,421 4,948 10
----- -----
Pretax income from continuing operations 1,338 1,080 24
Income tax provision 382 215 78
----- -----
Income from continuing operations 956 865 11
Income from discontinued operations, net of tax 11 165 (93)
----- -----
Net income $967 $1,030 (6)
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EPS-Basic
Income from continuing operations $0.79 $0.70 13
===== =====
Income from discontinued operations $0.01 $0.14 (93)
===== =====
Net Income $0.80 $0.84 (5)
===== =====
EPS-Diluted
Income from continuing operations $0.78 $0.69 13
===== =====
Income from discontinued operations $0.01 $0.13 (92)
===== =====
Net Income $0.79 $0.82 (4)
===== =====
Note: Amounts herein reflect certain reclassifications as noted in the
Company's Form 8-K, filed with the SEC, dated April 5, 2006.
- 3Q '06 Income from continuing operations included a $33MM ($24MM
after-tax) gain on the sales of card-related operations in Malaysia and
Indonesia.
- 3Q '05 income from continuing operations included:
-- A $105MM tax benefit from the resolution of a prior year tax item
related to the sale of AMEX Life in 1995; and
-- A $49MM ($32MM after-tax) provision to reflect the estimated costs
related to Hurricane Katrina.
- 3Q '06 and 3Q '05 Income from continuing operations also included
$12MM ($8MM after-tax) and $86MM ($56MM after-tax), respectively, of
reengineering costs related to restructuring efforts in our business
travel area in both periods and within our finance, international
operations, and technology activities in 3Q '05.
-4-
AMERICAN EXPRESS COMPANY
THIRD QUARTER 2006 OVERVIEW
CONSOLIDATED
o Net Income including discontinued operations decreased 6% to $967MM.
- The 3Q '06 income from discontinued operations was $11MM after-tax
versus $165MM after-tax last year.
o SHARE REPURCHASES: During 3Q '06, 16MM shares were repurchased versus
23MM shares in 2Q '06 and 8MM shares in 3Q '05. We repurchased a higher
level of shares during 3Q '06 versus 3Q '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,
587MM 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
--------------------------------------------
- AVERAGE SHARES: 3Q '06 2Q '06 3Q '05
------ ------ ------
Basic 1,202 1,217 1,229
===== ===== =====
Diluted 1,227 1,242 1,254
===== ===== =====
- ACTUAL SHARE ACTIVITY:
Shares outstanding - beginning of period 1,216 1,233 1,240
Repurchase of common shares (16) (23) (8)
Employee benefit plans, compensation and other 4 6 7
----- ----- -----
Shares outstanding - end of period 1,204 1,216 1,239
===== ===== =====
o CAPITAL RETURNED TO SHAREHOLDERS: Including share repurchases and
dividends, during 3Q '06 and the nine months to date, we returned 81% and
97%, respectively, of capital generated to shareholders. On a cumulative
basis, since 1994, we have returned 68% of capital generated.
o CONSOLIDATED NET REVENUES: Consolidated net revenues increased 12%,
reflecting increases versus last year of 16% within U.S. Card Services
("USCS"), 3% within ICGCS and 15% within GNMS. Net revenues increased due
to higher discount revenues, increased cardmember lending finance charge
revenue, net of interest, greater other revenues, increased
securitization income, net, higher other investment and interest income,
net of interest, higher other commissions and fees and greater travel
commissions and fees, partially offset by lower net card fees.
Translation of foreign currency had a minimal impact on the net revenue
growth rate. A reclassification of certain card acquisition-related
costs, as described within the net card fees discussion on page 7,
suppressed consolidated net revenue growth by approximately 1%.
o CONSOLIDATED EXPENSES: Consolidated expenses increased 10%, reflecting
increases versus last year of 13% within USCS, 6% in ICGCS, and 1% within
GNMS. Expense growth reflected higher professional services expenses,
greater marketing, promotion, rewards and cardmember services costs,
increased interest expense, greater other operating expense, higher
provisions for losses and benefits, increased occupancy and equipment
costs and greater human resources expenses, partially offset by lower
communication expenses. Translation of foreign currency had a minimal
impact on the expense growth rate.
o PRE-TAX MARGIN: Was 19.8% in 3Q '06 compared with 21.1% in 2Q '06 and 17.9%
in 3Q '05.
o EFFECTIVE TAX RATE: Was 29% in 3Q '06 versus 33% in 2Q '06 and 20% in 3Q
'05. The lower tax rate in 3Q '05 reflected the $105MM benefit related to
the resolution of a prior year tax item. The 3Q '06 rate reflects the
favorable impacts of a net interest receivable from the IRS, finalization
of the 2005 U.S. Federal tax return and an adjustment of 2006 estimated
state taxes.
-5-
AMERICAN EXPRESS COMPANY
THIRD QUARTER 2006 OVERVIEW
CONSOLIDATED
o DISCOUNT REVENUE: A 15% increase in billed business, partially offset by
a lower average discount rate, yielded a 13% increase in discount
revenue.
- The average discount rate* was 2.57% in 3Q '06 and in 2Q '06
versus 2.58% in 3Q '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
September 30, Inc/(Dec)
------------------------------ -------------
2006 2005
------ ------
Card billed business* (billions):
United States $101.7 $89.6 14%
Outside the United States 38.6 32.1 20
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Total $140.3 $121.7 15
====== ======
Cards in force (millions):
United States 46.8 42.0 11
Outside the United States 29.7 27.0 10
------ ------
Total 76.5 69.0 11
====== ======
Basic cards in force (millions):
United States 36.0 31.9 13
Outside the United States 25.2 22.4 13
------ ------
Total 61.2 54.3 13
====== ======
Average basic cardmember spending**
United States $3,040 $2,927 4
Outside the United States $2,142 $1,924 11
Total $2,770 $2,610 6
* For additional information about billed business and discount rate
calculations, please refer to the Third Quarter 2006 Earnings
Release, American Express Company Selected Statistical Information
pages.
** Proprietary card activity only.
- - WORLDWIDE BILLED BUSINESS: The 15% increase in worldwide billed
business reflected a 12% increase in USCS, a 14% increase in ICGCS,
and a 62% increase in GNS partner volume. Worldwide average spend per
proprietary basic card grew by 6% and total cards in force grew by
11%.
-- U.S. billed business was up 14% reflecting growth of 11% within
our consumer card business, a 15% increase in small business
spending and a 14% improvement in Corporate Services volumes.
- Spending per proprietary basic card in force increased 4%.
- U.S. non-T&E-related volume categories (which represented
approximately 68% of 3Q '06 U.S. billed business) grew 15%,
while T&E volumes rose 11%.
- U.S. airline-related volume, which represented approximately 10%
of total U.S. volumes during the quarter, increased 11% due to a
2% increase in transactions and a 9% higher average airline
charge.
-- Adjusting for the impact of foreign exchange translation:
- Worldwide billed business and spending per proprietary basic card
in force increased 14% and 5%, respectively.
- Total billed business outside the U.S. rose 17%, reflecting
solid double-digit proprietary growth in all regions except for
Latin America. Excluding the impact of the sale in Brazil, Latin
America also exhibited double-digit proprietary growth.
- Within our proprietary business, billed business outside the
U.S. reflected 9% growth in consumer and small business spending,
as well as 14% growth in Corporate Services volumes.
- Spending per proprietary basic card in force outside the U.S.
rose 8%.
- Worldwide airline volumes, which represented approximately
12% of total volumes during the quarter, increased 11% on 2%
growth in transactions and a 9% increase in the average
airline charge.
- - CARDS IN FORCE: Rose 11% worldwide due to an increase of 8% in USCS,
a flat card level in ICGCS and a 46% increase in GNS. Continued
robust card acquisitions within both the proprietary and GNS
activities, as well as continued solid average customer retention
levels, drove these results. In addition, the sale of our card
activities in Brazil last quarter, and Malaysia and Indonesia this
quarter, resulted in the transfer of 1.5MM cards from ICGCS to GNMS,
suppressing ICGCS', and increasing GNMS', respective growth rates.
- 1.4MM and 700K cards were added during the quarter in the U.S. and
the non-U.S. businesses, respectively.
-6-
AMERICAN EXPRESS COMPANY
THIRD QUARTER 2006 OVERVIEW
CONSOLIDATED
o CARDMEMBER LENDING FINANCE CHARGE REVENUE, NET OF INTEREST: Increased 41%
on 33% 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 9.6% in 3Q '06 and 2Q '06
versus 9.2% in 3Q '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.
- Cardmember lending finance charge revenue is net of related interest of
$327MM and $224MM in 3Q '06 and 3Q '05, respectively.
o NET CARD FEES: Declined 10%, as the benefit of card growth was offset by
a slightly lower average card fee and the reclassification of certain
card acquisition-related costs, beginning prospectively July 1, 2006,
from other operating expense to a reduction in net card fees. This
reclassification had no effect on net income and is not included in the
average fee per card calculation. The average annual fee per card in
force was $34 in 3Q '06 and 2Q '06, versus $35 in 3Q '05.
o TRAVEL COMMISSIONS AND FEES: Increased 1% reflecting a 6% increase in
travel sales, a moderately reduced level of transactions and lower average
transaction fees, due in part to the ongoing transition to online booking.
o OTHER COMMISSIONS AND FEES: Increased 4% on higher card-related assessment
and conversion revenues.
o SECURITIZATION INCOME, NET: Increased 9% 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, and a
lower average securitization balance. Securitization income, net represents
the non-credit provision components of the gains from securitization
activities within the USCS segment, 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.
- COMPONENTS OF SECURITIZATION INCOME, NET:
Quarters Ended Percentage
September 30, Inc/(Dec)
------------------------ -------------
2006 2005
---- ----
(millions)
Excess spread* $279 $227 23%
Servicing fees 100 108 (7)
Gains on sales from securitizations** 5 18 (72)
---- ----
Total securitization income $384 $353 9
==== ====
* Excess spread is the net positive cash flow from interest and fee
collections allocated to the investor's interests after deducting the
interest paid on investor certificates, credit losses, contractual
servicing fees and other expenses.
** Excludes $13MM and $15MM in 2006 and $66MM and $64MM in 2005 of
impact from cardmember loan sales and maturities, respectively,
reflected in credit provision.
- During 3Q '06 and 3Q '05, net securitization gains, including the
credit provision impacts from new issuances and maturities, reflected
an increase in pretax income of $3MM ($2MM after-tax) and $20MM
($13MM after-tax), respectively. The average balance of Cardmember
lending securitizations was $20.0B in 3Q '06, compared with $21.3B in
3Q '05.
o OTHER INVESTMENT AND INTEREST INCOME, NET OF INTEREST: Increased 7% due
to higher interest rates on a greater level of short-term investments.
- Other investment and interest income is net of related interest of $110MM
and $83MM in 3Q '06 and 3Q '05, respectively.
o OTHER REVENUES: Increased 21% primarily due to fees associated with
transition services agreements with Ameriprise Financial, Inc. as well as
higher network partner-related fees.
o MARKETING, PROMOTION, REWARDS AND CARDMEMBER SERVICES EXPENSES: Increased
7%, reflecting the greater rewards costs and moderately lower marketing
and promotion expenses previously discussed.
o HUMAN RESOURCES EXPENSE: Increased 1% due to merit increases and larger
benefit and management incentive costs, partially offset by lower
severance costs and a lower level of employees.
o PROVISIONS FOR LOSSES AND BENEFITS: Increased 8% as the lending and
investment certificate and other provisions growth of 13% and 70%,
respectively, was partially offset by a 14% decline in the charge card
provision. The increase in the lending provision was driven by 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 14% reflects the lower loss rate, Katrina-related reserves last
year and improved results from collection activities.
-7-
AMERICAN EXPRESS COMPANY
THIRD QUARTER 2006 OVERVIEW
CONSOLIDATED
Overall credit quality continued to perform well. Reserve coverage ratios
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 remained flat versus last
quarter.
9/06 6/06 9/05
---------- -------- --------
Net loss ratio as a % of charge volume 0.26% 0.24% 0.27%
90 days past due as a % of receivables 1.8% 1.8% 1.7%
9/06 6/06 9/05
---------- -------- --------
Total Receivables (billions) $35.0 $34.7 $31.9
Reserves (millions) $947 $948 $909
% of receivables 2.7% 2.7% 2.9%
% of 90 day past due accounts 149% 150% 173%
- - WORLDWIDE LENDING:**
-- The write-off rate declined versus last year, but remained flat versus last
quarter. Past due levels rose versus last year and last quarter.
9/06 6/06 9/05
---------- -------- --------
Net write-off rate 3.8% 3.8% 4.0%
30 days past due as a % of loans 2.8% 2.7% 2.5%
9/06 6/06 9/05
---------- -------- --------
Total Loans (billions) $38.3 $36.3 $29.9
Reserves (millions) $1,126 $1,086 $952
% of total loans 2.9% 3.0% 3.2%
% of 30 days past due accounts 106% 113% 128%
* There are no off-balance sheet Charge Card securitizations.
Therefore, all credit quality statistics for the Charge Card
portfolio are on an "Owned Basis".
** All lending statistics are presented here on a GAAP or "Owned
Basis". "Managed Basis" credit quality statistics are available
in the Third 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 higher technology
service fees, greater business and service-related volumes, and increased
credit and collection costs.
o OCCUPANCY AND EQUIPMENT EXPENSE: Rose 8% due to costs associated with higher
business and service-related volumes.
o INTEREST EXPENSE: Rose 36% due to a higher effective cost of funds and
greater receivable balances.
o COMMUNICATIONS EXPENSE: Declined 4%.
o OTHER EXPENSE: Increased 27% versus a relatively low expense level last year,
partially due to increased volume and technology related costs, which offset
the reclassification of certain card acquisition-related costs, described in
net card fees above, and the gain on the sales of operations in Malaysia and
Indonesia.
-8-
AMERICAN EXPRESS COMPANY
THIRD QUARTER 2006 OVERVIEW
CONSOLIDATED
Supplemental Information - Tangible Common Equity and Total Adjusted Assets
During the third quarter of 2006, the Company issued $750MM of 6.80%
Subordinated Debentures due 2036 ("Subordinated Debentures"), which are
automatically extendable until 2066 unless certain events occur prior to that
date. In connection with the Subordinated Debentures, the Company has
undertaken to disclose on a quarterly basis the amount of its "tangible common
equity" and "total adjusted assets". The Company's consolidated tangible
common equity amount as of the end of any fiscal quarter means the total
shareholders' equity, excluding preferred stock, of the Company as reflected
on its consolidated balance sheet prepared in accordance with GAAP as of such
fiscal quarter end minus (i) intangible assets and goodwill and (ii) deferred
acquisition costs, as determined in accordance with GAAP and reflected in such
consolidated balance sheet. The Company calculates total adjusted assets as of
the end of any fiscal quarter as the sum of (i) total consolidated assets as
reflected on the Company's balance sheet minus (ii) non-securitized Cardmember
lending receivables (without deduction for reserves), which are set forth on
the Company's balance sheet, plus (iii) managed (i.e., securitized and
non-securitized) worldwide Cardmember lending receivables as reported by the
Company for such fiscal quarter. As of September 30, 2006, the Company's
tangible common equity was $9B and its total adjusted assets were $141B. As of
September 30, 2006, the consolidated assets, as reflected on the Company's
balance sheet, were $121B.
CORPORATE & OTHER
Net expense was $52MM in 3Q '06 compared with net expense of $69MM in 2Q '06
and net income of $32MM in 3Q '05. 3Q '05 included the $105MM tax benefit
previously discussed, $51MM ($33MM after-tax) of reengineering costs and $3MM
after-tax of Ameriprise spin-off related expenses.
-9-
AMERICAN EXPRESS COMPANY
THIRD QUARTER 2006 OVERVIEW
U.S. CARD SERVICES
Condensed Statements of Income
(GAAP Basis)
(Preliminary)
Quarters Ended Percentage
(millions) September 30, Inc/(Dec)
----------------------- -----------
2006 2005
---- ----
Net Revenues:
Discount revenue, net card fees and other $2,482 $2,233 11%
Cardmember Lending:
Finance charge revenue 928 614 51
Interest expense 260 156 67
------ ------
Net finance charge revenue 668 458 46
Securitization income, net 384 353 9
------ ------
Total 3,534 3,044 16
------ ------
Expenses:
Marketing, promotion, rewards and cardmember
services 1,127 1,003 12
Provision for losses 446 458 (3)
Human resources and other operating expenses 1,142 950 20
------ ------
Total 2,715 2,411 13
------ ------
Pretax segment income 819 633 29
Income tax provision 239 190 26
------ ------
Segment income $ 580 $ 443 31
====== ======
Quarters Ended Percentage
Statistical Information September 30, Inc/(Dec)
- ----------------------- --------------------------------- ------------------
2006 2005
---- ----
Card billed business (billions) $83.4 $74.2 12%
Total cards in force (millions) 39.9 36.9 8
Basic cards in force (millions) 29.5 27.2 8
Average basic cardmember spending* $2,852 $2,765 3
Segment capital (billions) $4.9 $4.9 -
-
Return on segment capital** 44.0% 39.7%
*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 12% increase in USCS billed business reflected a
3% increase in spending per proprietary basic card and 8% growth in
cards in force.
-- Within the U.S. consumer business, billed business grew 11%; small
business volumes rose 15%.
- - CARDS IN FORCE: Increased by 3.0MM, or 8%, versus last year on continued
strong card acquisition activity and retention levels.
P&L DISCUSSION:
o NET INCOME: Increased 31% as net revenues increased 16% and expenses
increased 13%.
- PRE-TAX MARGIN: Was 23.2% in 3Q '06 versus 26.4% in 2Q '06 and 20.8%
in 3Q '05.
- EFFECTIVE TAX RATE: Was 29% in 3Q '06 compared to 33% in 2Q '06 and
30% in 3Q '05. The lower tax rate in 3Q'06 reflects the favorable
impacts of a net interest receivable from the IRS, finalization of
the 2005 U.S. Federal tax return and an adjustment of 2006 estimated
state taxes.
-10-
AMERICAN EXPRESS COMPANY
THIRD QUARTER 2006 OVERVIEW
U.S. CARD SERVICES
o DISCOUNT REVENUE, NET CARD FEES AND OTHER REVENUES: Increased 11%, largely
due to higher billed business volumes.
o NET FINANCE CHARGE REVENUE: Increased 46% on 37% 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 3Q '06 versus 9.1% in 2Q '06 and 8.7% in 3Q '05.
o SECURITIZATION INCOME, NET: Increased 9% 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, and a lower average securitization balance.
o MARKETING, PROMOTION, REWARDS AND CARDMEMBER SERVICES EXPENSES: Rose 12%
due to higher volume-related rewards costs and increased marketing and
promotion costs due to the continuation of business-building activities.
o PROVISION FOR LOSSES: Declined 3% reflecting a lower level of
bankruptcy-related charge offs, Katrina-related reserves last year,
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 rate increased from both last year and last quarter.
The past due rate increased versus last year, but remained flat
versus last quarter.
9/06 6/06 9/05
-------------- --------------- ------------
Total Receivables (billions) $18.2 $18.5 $16.8
Net loss ratio as a % of charge volume 0.33% 0.28% 0.30%
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 increased versus last quarter and
last year.
9/06 6/06 9/05
---------- ------------ -----------
Total Loans (billions) $29.3 $27.6 $22.4
Net write-off rate 3.1% 2.9% 3.6%
30 days past due as a % of loans 2.7% 2.5% 2.4%
* There are no off-balance sheet Charge Card securitizations.
Therefore, all credit quality statistics for the Charge Card
portfolio are on an "Owned Basis".
** Owned basis. See page 13 for "Managed Basis" Cardmember lending
information.
o HUMAN RESOURCES AND OTHER OPERATING EXPENSES: Increased 20% due to higher
interest expense, greater professional services expenses related to
credit and collection activities and higher technology service fees,
increased human resources expenses and generally higher volume-related
costs.
-11-
AMERICAN EXPRESS COMPANY
THIRD QUARTER 2006 OVERVIEW
U.S. CARD SERVICES
MANAGED BASIS
For U.S. Card Services, the managed basis presentation 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.
The managed basis presentation also assumes that there have been no off
balance sheet securitization transactions, i.e., all securitized cardmember
loans and related income effects are reflected as if they were in the
Company's balance sheets and income statements, respectively. For the managed
basis presentation, revenue and expenses related to securitized cardmember
loans are reflected in net card fees and other, net finance charge revenue, and
credit provision. On a managed basis, there is no securitization income, net,
as the managed basis presentation assumes no securitization transactions have
occurred.
The Company presents U.S. Card Services 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. Management also believes
that use of a managed basis presentation presents a more accurate picture of
the key dynamics of the cardmember lending business. Irrespective of the on
and off balance sheet funding mix, it is important for management and
investors to see metrics 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 Company does not currently securitize
international loans.
On a GAAP basis, revenue and expenses from securitized cardmember loans are
reflected in the Company's income statements in securitization income, net,
fees and commissions, and credit provision for cardmember lending. At the time
of a securitization transaction, the securitized cardmember loans are removed
from the Company's balance sheet, and the resulting gain on sale is reflected
in securitization income, net, as well as an impact to credit provision
(credit reserves are no longer recorded for the cardmember loans once sold).
Over the life of a securitization transaction, the Company recognizes
servicing fees and other net revenues (referred to as "excess spread") related
to the interests sold to investors (i.e. the investors' interests). These
amounts are reflected in securitization income, net and fees and commissions.
The Company also recognizes net finance charge revenue over the life of the
securitization transaction related to the interest it retains (i.e. the
seller's interest). At the maturity of a securitization transaction,
cardmember loans on the balance sheet increase, and the impact of the
incremental required loss reserves is recorded in credit provision.
In aggregate, over the life of a securitization transaction, the pre-tax
income impact to the Company is the same whether or not the Company had
securitized cardmember loans or funded these loans through other financing
activities (assuming the same financing costs). The income statement
classifications, however, of specific items will differ.
The following information reconciles the GAAP basis presentation for certain
USCS income statement line items to the managed basis presentation, where
different:
Quarters Ended Percentage
September 30, Inc/(Dec)
-------------------------- ---------------
(millions) 2006 2005
---- ----
o DISCOUNT REVENUE, NET CARD FEES AND OTHER:
- Reported for the period (GAAP) $2,482 $2,233 11%
- Securitization adjustments 51 53
- Tax adjustments 55 56
------ ------
- Managed discount revenue, net card
fees and other $2,588 $2,342 11
====== ======
o NET FINANCE CHARGE REVENUE:
- Reported for the period (GAAP) $ 668 $458 46
- Securitization adjustments 475 512
------ ------
- Managed finance charge revenue $1,143 $ 970 18
====== ======
o SECURITIZATION INCOME, NET:
- Reported for the period (GAAP) $ 384 $353 9
- Securitization adjustments (384) (353)
------ ------
- Managed securitization income, net $ - $ - -
====== ======
o PROVISION FOR LOSSES:
- Reported for the period (GAAP) $ 446 $ 458 (3)
- Securitization adjustments 144 215
------ ------
- Managed provision for losses $ 590 $ 673 (12)
====== ======
-12-
AMERICAN EXPRESS COMPANY
THIRD QUARTER 2006 OVERVIEW
U.S. CARD SERVICES
MANAGED P&L DISCUSSION
o DISCOUNT REVENUE, NET CARD FEES AND OTHER REVENUES: Increased 11%, largely
due to higher billed business volumes.
o NET FINANCE CHARGE REVENUE: Increased 18% 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
9.3% in 3Q '06 versus 9.2% in 2Q '06 and 3Q '05.
o PROVISION FOR LOSSES: Declined 12% reflecting a lower level of
bankruptcy-related charge offs, Katrina-related reserves last year,
improved collections, and continued strong credit quality. These benefits
were partially offset by the impact of strong volume and loan growth.
- 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 increased versus last quarter and
last year.
9/06 6/06 9/05
---------- ------------ -----------
Total Loans (billions) $49.5 $47.8 $43.0
Net write-off rate 3.0% 2.9% 3.8%
30 days past due as a % of loans 2.6% 2.4% 2.4%
* Managed basis. There are no off-balance sheet Charge Card securitizations.
Therefore, all credit quality statistics for the Charge Card portfolio are
on an "Owned Basis" as presented on page 11.
-13-
AMERICAN EXPRESS COMPANY
THIRD QUARTER 2006 OVERVIEW
INTERNATIONAL CARD & GLOBAL COMMERCIAL SERVICES
Condensed Statements of Income
(GAAP Basis)
(Preliminary)
Quarters Ended Percentage
September 30, Inc/(Dec)
------------------------------- -----------------
(millions) 2006 2005
---- ----
Net Revenues:
Discount revenue, net card fees and other $2,086 $2,041 2%
Cardmember Lending:
Finance charge revenue 310 259 20
Interest expense 109 88 24
------ ------
Net finance charge revenue 201 171 18
------ ------
Total 2,287 2,212 3
------ ------
Expenses:
Marketing, promotion, rewards and cardmember services 330 310 6
Provision for losses and benefits 329 270 22
Human resources and other operating expenses 1,347 1,315 2
------ ------
Total 2,006 1,895 6
------ ------
Pretax segment income 281 317 (11)
Income tax provision 65 68 (4)
------ ------
Segment income $216 $249 (13)
====== ======
STATISTICAL INFORMATION Quarters Ended Percentage
September 30, Inc/(Dec)
----------------------------------- -----------------
2006 2005
---- ----
Card billed business (billions) $47.5 $41.8 14%
Total cards in force (millions) 22.1 22.2 -
Basic cards in force (millions) 17.7 17.6 1
Average basic cardmember spending* $2,642 $2,384 11
Segment capital (billions) $4.4 $3.8 16
Return on segment capital** 21.2% 22.3% -
*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 14% increase in billed business reflects an 11%
increase in spending per proprietary basic card and 7% growth in
cards in force excluding the transfer of cards in Brazil, Malaysia and
Indonesia discussed below.
-- Excluding the impact of the Brazil, Malaysia and Indonesia sales,
billed business grew approximately 17% and all of AXP's major
geographic regions experienced double digit growth.
-- Adjusting for the impacts of foreign exchange translation,
billed business and spending per proprietary basic card in force
increased 12% and 9%, respectively.
- International consumer and small business spending rose 9%;
global corporate spending rose 14%.
- CARDS IN FORCE: Was flat versus last year. Excluding the impact of
the 1.3MM proprietary cards in Brazil and 0.2MM proprietary cards in
Indonesia and Malaysia transferred to GNS in 2Q '06 and 3Q '06,
respectively, cards in force rose 7%.
P&L DISCUSSION
o NET INCOME: Decreased 13% versus last year as revenues rose 3% and expenses
increased by 6%.
- 3Q '06 included the $33MM ($24MM after-tax) gain on the sale of
card-related operations in Malaysia and Indonesia and $10MM ($7MM
after-tax) of reengineering costs primarily within the Corporate
Travel business.
- 3Q '05 included $30MM ($19MM after-tax) of reengineering costs,
related principally to ongoing restructuring activities in the
Corporate Travel business, international operations and American
Express Bank.
-14-
AMERICAN EXPRESS COMPANY
THIRD QUARTER 2006 OVERVIEW
INTERNATIONAL CARD & GLOBAL COMMERCIAL SERVICES
- PRE-TAX MARGIN: Was 12.3% in 3Q '06, versus 12.0% in 2Q '06 and 14.3% in
3Q '05.
- EFFECTIVE TAX RATE: Was 23% in 3Q '06 and in 2Q '06 compared to 21% in
3Q '05.
o DISCOUNT REVENUE, NET CARD FEES AND OTHER REVENUES: The increase of 2%
versus 3Q '05 reflects the higher level of card spending, which was
offset by a decrease in net card fees due to the reclassification of
certain card acquisition-related costs referenced previously. Growth was
also suppressed by relatively flat travel commissions and fees and
international banking revenues, increased incentives for corporate clients
associated with growth in corporate volumes, and the impact of the sales
of card-related operations in Brazil, Malaysia and Indonesia.
o NET FINANCE CHARGE REVENUE: Increased 18% as 22% growth in average lending
balances was partially offset by a lower net yield.
- Annualized net finance charge revenue as a percent of average loans was
8.9% in 3Q '06 versus 9.1% in 2Q '06 and 9.3% in 3Q '05.
o MARKETING, PROMOTION, REWARDS AND CARDMEMBER SERVICES EXPENSES: Increased
6%, reflecting greater volume-related rewards costs, partially offset by
a moderate reduction in marketing and promotion costs.
o PROVISION FOR LOSSES AND BENEFITS: Increased 22% principally due to
higher interest rates on investment certificate balances and strong
volume and loan growth.
- CHARGE CARD: *
-- The loss ratio decreased versus last year, but remained flat
compared with last quarter, while past due amounts increased
versus last year and remained flat versus last quarter.
9/06 6/06 9/05
------------ ----------- -----------
Total Receivables (billions) $16.4 $15.8 $15.2
Net loss ratio as a % of charge volume 0.18% 0.18% 0.24%
90 days past due as a % of total 1.3% 1.3% 1.2%
- - CARDMEMBER LENDING:*
-- Past due and write-off rates rose versus last year, but decreased
versus last quarter.
9/06 6/06 9/05
------------ ----------- -----------
Cardmember Loans (billions) $9.0 $8.7 $7.5
Net write-off rate 5.9% 6.4% 5.0%
30 days past due as a % of loans 3.1% 3.2% 2.8%
*There are no off-balance sheet Charge Card and currently
no off-balance sheet international lending securitizations.
Therefore, all credit quality statistics for the Charge Card and
international lending portfolio are on an "Owned Basis".
o HUMAN RESOURCES AND OTHER OPERATING EXPENSES: Increased 2% as higher
interest, human resources, and professional services expenses were offset
by the previously discussed reclassification of certain card
acquisition-related costs and the $33MM gain associated with the sales of
card operations in Malaysia and
Indonesia.
-15-
AMERICAN EXPRESS COMPANY
THIRD QUARTER 2006 OVERVIEW
GLOBAL NETWORK & MERCHANT SERVICES
Condensed Statements of Income
(GAAP Basis)
(Preliminary)
Quarters Ended Percentage
September 30, Inc/(Dec)
---------------------------- --------------
(millions) 2006 2005
---- ----
NET REVENUES:
Discount revenue, fees and other $798 $693 15%
---- ----
Expenses:
Marketing and promotion 118 167 (29)
Provision for losses 19 19 -
Human resources and other operating expenses 347 293 18
---- ----
Total 484 479 1
---- ----
Pretax segment income 314 214 47
Income tax provision 102 73 40
---- ----
Segment income $212 $141 50
==== ====
STATISTICAL INFORMATION Quarters Ended Percentage
September 30, Inc/(Dec)
----------------------------- -------------
2006 2005
---- ----
Global card billed business*(billions) $140.3 $121.7 15%
Segment capital (millions) $1,262 $1,227 3
Return on segment capital** 57.9% 49.4% -
Global Network Services:***
Card billed business (billions) $9.7 $6.0 62
Total cards in force (millions) 14.5 9.9 46
* Includes activities related to proprietary cards (including cash advances),
cards issued under network partnerships, 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.
*** 3Q'06 Card billed business and total cards in force include $1.2B of
billed business associated with the transfer of 1.3MM proprietary cards in
Brazil in 2Q '06 and 0.2MM proprietary cards in Malaysia and Indonesia
during 3Q '06, from ICGCS to GNS.
P&L DISCUSSION
o NET INCOME: Increased 50% on 15% revenue growth and a 1% increase in
expenses.
- PRE-TAX MARGIN: Was 39.3% in 3Q '06 versus 39.9% in 2Q '06 and 30.9% in
3Q '05.
- EFFECTIVE TAX RATE: Was 32% in 3Q '06 versus 37% in 2Q '06 and 34% in
3Q '05.
o DISCOUNT REVENUE, FEES AND OTHER REVENUE: Increased 15% reflecting growth
in network-related discount revenues generated from the 15% increase in
global card billed business, as well as higher network partner-related
fees.
o MARKETING AND PROMOTION EXPENSES: Decreased 29%, reflecting a reduction
in brand-related advertising costs versus last year when the "My Life, My
Card (SM)" campaign was in a particularly active phase.
o HUMAN RESOURCES AND OTHER OPERATING EXPENSES: Increased 18% reflecting
higher business volumes, and greater salary, benefit and management
incentive costs, partially offset by a larger interest expense credit
related to internal transfer pricing which recognizes the merchant
services' accounts payable-related funding benefit.
-16-
INFORMATION RELATED TO FORWARD LOOKING STATEMENTS
THIS DOCUMENT 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; FLUCTUATIONS IN INTEREST RATES, WHICH
IMPACT THE COMPANY'S BORROWING COSTS AND RETURN ON LENDING PRODUCTS; 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; 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.
-17-