EX-99.3 4 exhibit99_3jan.txt EARNINGS SUPPLEMENT EXHIBIT 99.3 [LOGO OF AMERICAN EXPRESS COMPANY] 2005 FOURTH QUARTER/FULL YEAR 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") Fourth Quarter/Full Year 2005 Earnings Release. --------------------------------------------------------------------------- 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 71-73 in the Company's 2004 Annual Report to Shareholders and in its 2004 Annual Report on Form 10-K, and other reports, on file with the Securities and Exchange Commission. --------------------------------------------------------------------------- AMERICAN EXPRESS COMPANY FOURTH QUARTER 2005 HIGHLIGHTS o Fourth quarter diluted EPS from continuing operations of $0.60 increased 13% versus $0.53 last year. Total revenues rose 9%. For the trailing 12 months, including discontinued operations, ROE was 25%. - 4Q `05 Income from continuing operations included: -- A $60MM tax benefit primarily related to the finalization of state tax returns; -- A $123MM ($80MM after-tax) increase in the GAAP provision for losses, or a $192MM ($125MM after-tax) increase in the provision on a managed basis, within the U.S. Card Services ("USCS") segment, reflecting substantially higher write-offs related to increased bankruptcy filings resulting from the October 17, 2005 change in bankruptcy legislation, and higher volumes; -- $65MM ($42MM after-tax) of reengineering costs, in our business travel and technology functions. $54MM of these costs were recorded within the International Card & Global Commercial Services ("ICGCS") segment, $10MM were related to the Corporate & Other segment, and $1MM was related to the Global Network & Merchant Services ("GNMS") segment. - 4Q '04 Income from continuing operations included: -- A $117MM ($76MM after-tax) net gain in connection with the sale on December 1, 2004 of the equipment leasing product line managed within the Company's small business financing unit; and -- $99MM ($64MM after-tax) in reengineering charges related to restructuring efforts in our business travel, finance and technology, and international operations areas. - 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 or sold have been included in discontinued operations in the consolidated financial statements. -- 4Q '05 results reflected a $6MM loss related to discontinued operations versus $227MM of income last year. Including discontinued operations, diluted EPS on a net income basis of $0.59 decreased 17%. - The company's reported return on equity (ROE) was 25%, up from 22% a year ago. This ratio is determined on a trailing 12-month basis using net income and total average shareholders' equity (including discontinued operations). Pro forma ROE, which is determined using trailing four quarters income from continuing operations (which excludes discontinued operations and the cumulative effect of accounting changes) over average month-end shareholders' equity for the quarter ending December 31, 2005 was 31%. See "Supplemental Information - Pro Forma ROE" discussion below. o Compared with the fourth quarter of 2004: - Worldwide billed business increased 15% on continued strong growth within both the proprietary and network businesses. A comparatively stronger U.S. dollar reduced the reported worldwide growth rate by 1%. - Worldwide cards in force of 71.0MM increased 9%, up 5.6MM from last year and 2.0MM during 4Q `05, 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 year and the translation effect of a stronger dollar; - Worldwide lending balances of $33.1B on an owned basis increased 23%; on a managed basis, worldwide lending balances of $54.3B were up 15%; and - Underlying card credit quality, excluding the bankruptcy legislation effect, continued to be well-controlled and reserve coverage ratios remained strong. o Additional items of note included: - Marketing, promotion, rewards and cardmember services costs increased 11% versus 4Q '04, reflecting greater rewards costs and higher marketing and promotion expenses. Marketing expenses rose due to continuing costs related to the Company's ongoing global "My Life, My Card (SM)" advertising campaign, and various business building initiatives, including the expansion of our product portfolio. Rewards costs increased, reflecting volume growth, a higher redemption rate, and strong cardmember loyalty program participation. The total expense was at a historically high level, increasing $161MM vs. 4Q '04 and $89MM vs. 3Q '05. However, the 11% growth rate vs. 4Q '04 was lower than the 16% growth previously forecasted. The approximately $70MM shortfall versus our expectation reflected a number of items. Examples include: -- Certain expenses originally forecast to be within the marketing and promotion category that were subsequently recorded in other lines within the income statement; -- Certain partnership-related initiatives originally anticipated for the quarter that are now scheduled for 2006; and -- The impact of a comparatively stronger dollar on the translation of spending in other currencies. Overall business building expenses for the quarter also included an increase in technology development expenditures, which rose 24%, or approximately $30MM, from 4Q '04. These investments were directed toward activities that support our new product and servicing capabilities. The strong metric performance during the quarter underlines the continued effectiveness of the Company's overall business building expenditures. -1- AMERICAN EXPRESS COMPANY FOURTH QUARTER 2005 HIGHLIGHTS - The Company's reengineering initiatives delivered in excess of $1B of additional benefits this year, including significant carry-over benefits from certain initiatives begun in prior periods. Revenue-related reengineering activities are driving a significant portion of the total benefits, representing more than 25% of the benefits delivered in 4Q '05 and during the full year. - As previously disclosed, the Company decided to expense stock options beginning in 1Q '03 and use restricted stock awards in place of stock options for middle management. As a result, the 4Q `05 4% decrease in human resources expense includes the impact of incremental annual option grant expense, increased levels of restricted stock awards and other related compensation changes. The impact of these changes and higher management incentive costs, merit increases and larger benefit costs were more than offset by lower severance costs and reengineering benefits. In addition, 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 65,600 decreased by 700 employees or 1%; compared with last quarter, the employee count increased by 300. o During the quarter, American Express continued to invest in growth opportunities through expanded products and services. In our proprietary business, we: - Launched One from American Express(SM), a card product enabling cardmembers to save with every purchase with a percentage of spending contributed to a high-yield savings account, as well as the option to contribute extra funds from checking, savings or brokerage accounts at any time; - Announced an agreement with WellChoice, Inc., the parent company of Empire Blue Cross Blue Shield, to offer a healthcare payment solution including a consumer-directed health plan, a Health Savings Account (HSA) from American Express Bank, FSB, and a new card product providing access to HSA funds, the American Express HealthPay Plus(SM) Card; - Launched Clear from American Express(SM), a new credit card with no fees, automatic rewards and the ability to pay over time as well as benefits and services to help consumers better manage their finances; - Announced a partnership with The Knot, Inc. to launch two co-branded credit cards specifically targeted to engaged couples and newlyweds; - Invited select, high-spending cardmembers in Singapore to obtain an American Express Centurion Card, as part of its inaugural launch in this market; and - Expanded the participants in the OPEN Savings Program(SM) to include such partners as Courtyard by Marriott(R), FedEx Kinko's Office and Print Centers, and Hyatt Hotels & Resorts(R). In our Global Network Services business, we: - Launched five new card products in the U.S. as part of our partnership with Citigroup, Inc., including the Citi(R)/Platinum, Citi(R) Dividend, Citi(R)/ AAdvantage(R), Citi PremierPass(R) and the Citi(R) Diamond Preferred Rewards American Express(R) Cards; - Announced a partnership with Bank of America to issue and market jointly branded American Express Cards in the U.S., while also affirming the continuation of our existing partnership with MBNA after the completion of its acquisition by Bank of America; - Announced a partnership with HSBC - North America Holdings, Inc. to offer American Express branded cards in the United States; - Launched the first American Express Cards in Russia, denominated in both rubles and U.S. dollars, as part of our partnership with Russian Standard Bank; - Partnered with Nuevo Banco Comercial to issue American Express cards in Uruguay, as well as acquire and service merchants on our network; and - Partnered with BANCPOST to launch and exclusively offer the first American Express credit cards in Romania. In other activities, we: - Entered into an exclusive marketing agreement with Solver, a Microsoft Certified Partner, to license and sell American Express' investment optimization resource allocation methodology and software platform to Fortune 1000 companies. -2- AMERICAN EXPRESS COMPANY FOURTH QUARTER 2005 OVERVIEW CONSOLIDATED
(Preliminary) Statements of Income (GAAP basis) (millions) Quarters Ended Percentage December 31 Inc/(Dec) ----------------------- ---------------- 2005 2004 ---- ---- Revenues: Discount revenue $3,172 $2,817 13% Cardmember lending net finance charge revenue 703 560 25 Net card fees 518 491 5 Travel commissions and fees 435 484 (10) Other commissions and fees 640 616 4 Securitization income, net 295 325 (9) Other investment and interest income 279 261 7 Other 395 349 13 ------ ------ Total 6,437 5,903 9 ------ ------ Expenses: Human Resources 1,177 1,232 (4) Marketing, promotion, rewards and cardmember services 1,581 1,420 11 Provisions for losses and benefits: Charge Card 290 240 21 Cardmember lending 415 296 40 Investment Certificates and Other 108 71 52 ------ ------ Total 813 607 34 Professional services 714 647 10 Occupancy and equipment 390 379 3 Interest 249 222 12 Communications 115 120 (5) Other 439 356 24 ------ ------ Total 5,478 4,983 10 ------ ------ Pretax income from continuing operations 959 920 4 Income tax provision 208 251 (17) ------ ------ Income from continuing operations 751 669 12 Income/(Loss) from discontinued operations, net of tax (6) 227 # ------ ------ Net income $745 $896 (17) ====== ====== EPS-Basic Income from continuing operations $0.61 $0.54 13 ====== ====== Income/(Loss) from discontinued operations $(0.01) $0.18 # ====== ====== Net Income $0.60 $0.72 (17) ====== ====== EPS-Diluted Income from continuing operations $0.60 $0.53 13 ====== ====== Income/(Loss) from discontinued operations $(0.01) $0.18 # ====== ====== Net Income $0.59 $0.71 (17) ====== ======
# Denotes variance greater than 100%. o Income from continuing operations increased 12% to $751MM. - 4Q `05 Income from continuing operations included: -- A $60MM tax benefit primarily related to the finalization of state tax returns; -- A $123MM ($80MM after-tax) increase in the GAAP provision for losses, or a $192MM ($125MM after-tax) increase in the provision on a managed basis, within the USCS segment reflecting substantially higher write-offs related to increased bankruptcy filings resulting from the October 17, 2005 change in bankruptcy legislation, and higher volumes; and -- $65MM ($42MM after-tax) of reengineering costs in our business travel and technology functions. $54MM of these costs were recorded within the ICGCS segment, $10MM were related to the Corporate & Other segment, and $1MM was related to the GNMS segment. - 4Q '04 Income from continuing operations included: -- A $117MM ($76MM after-tax) net gain in connection with the sale on December 1, 2004 of the equipment leasing product line managed within the Company's small business financing unit; and -- $99MM ($64MM after-tax) in reengineering charges related to restructuring efforts in our business travel, finance and technology, and international operations areas. -3- AMERICAN EXPRESS COMPANY FOURTH QUARTER 2005 OVERVIEW CONSOLIDATED o Net Income including discontinued operations decreased 17% to $745MM. - 4Q '05 loss from discontinued operations was $6MM after-tax versus income of $227MM last year. o SHARE REPURCHASES: During 4Q '05, 4MM shares were repurchased versus 8MM shares in 3Q '05 and 15MM shares in 4Q `04. Repurchases during the quarter and full year reflect a more measured approach towards repurchase activity in light of the capital implications of the spin-off of Ameriprise. Since the inception of repurchase programs in December 1994, 530MM shares have been acquired under cumulative Board authorizations to repurchase up to 570MM shares, including purchases made under agreements with third parties.
Millions of Shares ------------------------------------- - AVERAGE SHARES: 4Q `05 3Q `05 4Q `04 ------ ------ ------ Basic 1,232 1,229 1,242 ====== ====== ====== Diluted 1,258 1,254 1,270 ====== ====== ====== - ACTUAL SHARE ACTIVITY: Shares outstanding - beginning of period 1,239 1,255 1,240 Repurchase of common shares (4) (8) (15) Employee benefit plans, compensation and other 6 7 9 ------ ------ ------ Shares outstanding - end of period 1,241 1,239 1,249 ====== ====== ======
o CONSOLIDATED REVENUES: Consolidated revenues increased 9% reflecting increases versus last year of 13% within USCS, 3% within ICGCS and 6% within GNMS. Revenues increased due to higher discount revenues, increased Cardmember lending net finance charge revenue, greater other revenues, increased net card fees, higher other commissions and fees, and greater other investment and interest income, partially offset by lower travel commissions and fees and a decline in securitization income, net. Translation of foreign currency reduced the 9% revenue growth rate by 1%. o CONSOLIDATED EXPENSES: Consolidated expenses increased 10%, reflecting increases versus last year of 14% within USCS and 2% within GNMS, respectively, and expenses within ICGCS that were unchanged versus last year. Expense growth reflected higher provision for losses and benefits, increased marketing, promotion, rewards and cardmember services costs, greater other expenses, higher professional services expenses, greater interest costs and larger occupancy and equipment costs, partially offset by lower human resources expenses and a decline in communication costs. Translation of foreign currency reduced the 10% expense growth rate by 1%. o PRE-TAX MARGIN: Was 14.9% in 4Q '05 compared with 17.8% in 3Q '05 and 15.6% in 4Q '04. o EFFECTIVE TAX RATE: Was 22% in 4Q '05, as compared to 20% in 3Q '05 and 27% in 4Q '04. The 4Q '05 tax rate reflects the $60MM benefit primarily related to the finalization of state tax returns previously discussed. The lower than normal tax rates in 3Q '05 and 4Q `04 reflect benefits of $105MM and $12MM, respectively, from the resolution of previous years' tax audits and return items. -4- AMERICAN EXPRESS COMPANY FOURTH QUARTER 2005 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 2.54% in 4Q `05 versus 2.57% in 3Q `05 and 2.58% in 4Q `04. The decrease versus last year and last quarter continues to reflect, in part, ongoing changes in the mix of spending between various merchant segments in addition to seasonally higher fourth quarter retail spend levels. The decrease also reflects costs associated with investments in strategic merchant partnerships. -- We believe the AXP value proposition is strong. However, as indicated in prior quarters, continued changes in the mix of business, volume-related pricing discounts and selective repricing initiatives will likely continue to result in some erosion of the average discount rate over time.
Quarters Ended Percentage December 31, Inc/(Dec) -------------------------- ------------ 2005 2004 ---- ---- Card billed business* (billions): United States $93 $84 15% Outside the United States 39 32 13 ------ ------ Total $132 $116 15 ====== ====== Cards in force (millions): United States 43.0 39.9 8 Outside the United States 28.0 25.5 10 ------ ------ Total 71.0 65.4 9 ====== ====== Basic cards in force (millions): United States 32.8 30.3 8 Outside the United States 23.2 21.0 10 ------ ------ Total 56.0 51.3 9 ====== ====== Average basic cardmember spending** United States $3,094 $2,860 8 Outside the United States $2,092 $2,003 4 Total $2,778 $2,589 7
* For additional information about billed business and discount rate calculations, please refer to the Fourth Quarter/Full Year 2005 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 16% increase in USCS, a 10% increase in ICGCS and a 34% increase in Global Network Services ("GNS") partner volume. Worldwide average spend per proprietary basic card grew by 7% and total cards in force grew by 9%. -- U.S. billed business was up 15% reflecting growth of 15% within our consumer card business, an 18% increase in small business spending and a 13% improvement in Corporate Services volumes. - Spending per proprietary basic card in force increased 8%. - U.S. non-T&E-related volume categories (which represented approximately 71% of 4Q `05 U.S. billed business) grew 17%, while T&E volumes rose 12%. - U.S. airline-related volume, which represented approximately 10% of total U.S. volumes during the quarter, rose 12% due to 8% transaction volume growth and an approximately 3% higher average airline charge. -- Excluding the impact of foreign exchange translation: - Worldwide-billed business and spending per proprietary basic card in force increased 16% and 9%, respectively. - Total billed business outside the U.S. rose 13% reflecting double-digit proprietary growth in all regions, with the largest increases in Canada and Latin America. - Within our proprietary business, billed business outside the U.S. reflected 14% growth in consumer and small business spending, as well as in Corporate Services volumes. - Spending per proprietary basic card in force outside the U.S. rose 9%. - Worldwide airline volumes, which represented approximately 11% of total volumes during the quarter, increased 15% on 10% growth in transaction volume, and a 4% increase in the average airline charge. - CARDS IN FORCE: Rose 9% worldwide due to an increase of 7% in USCS, 5% in ICGCS and 23% in GNS. Continued robust card acquisitions within both the proprietary and GNS activities, as well as strong average customer retention levels, drove this change. - 1MM cards were added during the quarter in both the U.S. and the non-U.S. businesses, respectively. GNS growth was achieved despite the addition of a substantial number of cards last year through the MBNA partnership. -5- AMERICAN EXPRESS COMPANY FOURTH QUARTER 2005 OVERVIEW CONSOLIDATED o CARDMEMBER LENDING NET FINANCE CHARGE REVENUE: Increased 25% on 19% 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 9.0% in 4Q `05 versus 9.2% in 3Q '05 and 8.6% in 4Q `04. The increase versus last year reflects a lower proportion of the U.S. portfolio on introductory rates and increased finance charge rates, partially offset by rising funding costs. o NET CARD FEES: Grew 5% primarily due to higher cards in force. In 4Q '05, 3Q '05 and 4Q '04 the average annual fee per proprietary card in force was $35. o TRAVEL COMMISSIONS AND FEES: Declined 10% due to a 3% decline in travel sales and lower transaction fees, due in part to the ongoing transition to online booking. o OTHER COMMISSIONS AND FEES: Increased 4% on higher card-related assessments. o SECURITIZATION INCOME, NET: Decreased 9% as a greater average balance of securitized loans and a higher portfolio yield were more than offset by an increase in portfolio write-offs, reflecting the 4Q'05 bankruptcy legislation effect. 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 4Q '05, results reflected net securitization gains, including the credit components, of $11MM ($7MM after-tax). During 4Q '04, there was no incremental securitization activity. The average balance of Cardmember lending securitizations was $21.0B in 4Q '05, compared with $20.3B in 4Q '04. o OTHER INVESTMENT AND INTEREST INCOME: Increased 7% largely due to higher interest rates on a greater level of short-term investments. o OTHER REVENUES: Increased 13% primarily due to fees associated with transition services agreements with Ameriprise Financial, Inc. o HUMAN RESOURCES EXPENSE: Declined 4% due to $52MM of lower severance costs and the realization of reengineering benefits, partially offset by higher management incentives, including additional incremental stock-based compensation expenses, merit increases and larger benefit costs. o MARKETING, PROMOTION, REWARDS AND CARDMEMBER SERVICES EXPENSES: Increased 11%, reflecting greater rewards costs and higher marketing and promotion expenses. The increase in marketing and promotion expenses is due to the Company's ongoing global brand advertising campaign and our continued focus on business-building initiatives. The growth in rewards costs is attributable to volume growth, a higher redemption rate and strong cardmember loyalty program participation. o PROVISIONS FOR LOSSES AND BENEFITS: Increased 34% as the charge card and lending provisions rose 21% and 40%, respectively, and other provisions increased by 52%. The charge and lending growth reflects higher provision rates reflecting the impact of the new bankruptcy legislation and strong volume increases within both activities. The other provision rose due to higher interest rates on larger investment certificate balances. - Credit Quality: -- Overall credit quality continued to perform well, excluding the bankruptcy reform legislation impact which increased write-offs substantially. -- 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 and last year. Past due rates improved versus last year and last quarter.
12/05 9/05 12/04 ----------- ----------- ----------- Net loss ratio as a % of charge volume 0.29% 0.27% 0.25% 90 days past due as a % of receivables 1.6% 1.7% 1.8% 12/05 9/05 12/04 ----------- ----------- ------------ Total Receivables (billions) $34.2 $31.9 $31.1 Reserves (millions) $942 $909 $806 % of receivables 2.8% 2.9% 2.6% % of 90 day past due accounts 177% 173% 146%
-6- AMERICAN EXPRESS COMPANY FOURTH QUARTER 2005 OVERVIEW CONSOLIDATED - WORLDWIDE LENDING:** -- The write-off rate rose versus last year and last quarter. Past due levels were flat with last quarter, but up from last year.
12/05 9/05 12/04 ----------- ----------- ----------- Net write-off rate 4.2% 4.0% 3.9% 30 days past due as a % of loans 2.5% 2.5% 2.4% 12/05 9/05 12/04 ----------- ----------- ----------- Total Loans (billions) $33.1 $29.9 $26.9 Reserves (millions) $996 $952 $972 % of total loans 3.0% 3.2% 3.6% % of 30 days past due accounts 122% 128% 151%
* 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 Fourth Quarter/Full Year 2005 Earnings Release on the Consolidated Selected Statistical Information pages. Credit trends are generally consistent under both reporting methods. o PROFESSIONAL SERVICES EXPENSE: Rose 10% reflecting increased technology costs related to higher business and service-related volumes. o OCCUPANCY AND EQUIPMENT EXPENSE: Rose 3% due in part to the amortization of software costs and partially offset by savings from the consolidation of certain facilities. o INTEREST EXPENSE: Rose 12% due to higher receivable balances and a higher effective cost of funds. o COMMUNICATIONS EXPENSE: Decreased 5% versus last year due to reengineering-related saves partially offset by increased volumes. o OTHER OPERATING EXPENSE: Increased 24% due to the 4Q '04 $117MM net gain on the sale of the equipment leasing product line within the small business financing unit. -7- AMERICAN EXPRESS COMPANY FOURTH QUARTER 2005 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 shareholder's equity (including discontinued operations). The Company also reports pro forma ROE, which is determined using trailing four quarters income from continuing operations (which excludes discontinued operations and the cumulative effect of accounting changes) over average month-end shareholders' equity for the quarter ended December 31, 2005. Management believes pro forma ROE is an important measure because it reflects performance of the Company's continuing businesses by excluding the impact of Ameriprise Financial, Inc. and American Express Tax and Business Services, Inc., which were disposed of as of September 30, 2005.
ROE Pro Forma ROE ------------------------------------------ ------------------------------------------------- Trailing 12-months net income: $3.7B Trailing four quarters income from continuing operations: $3.2B Average total shareholders' equity: $14.7B Total average 4Q '05 shareholders' equity: $10.2B ROE: 25% Pro forma ROE: 31%
*** MANAGED BASIS USCS and ICGCS segment results are presented on a managed basis and 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 metrics 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 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 for ICGCS reflects a foreign exchange services reclassification of revenue earned related to the sale and purchase of foreign currencies as part of the foreign exchange business. On a GAAP basis, these revenues are included with other foreign exchange items that are reflected in other operating expenses. Accordingly, information presented on a managed basis assumes that the amounts earned are included in other revenue with a corresponding increase in other operating expenses. -8- AMERICAN EXPRESS COMPANY FOURTH QUARTER 2005 OVERVIEW CORPORATE & OTHER o Net expense of $60MM in 4Q '05 compared with net income of $24MM in 3Q '05 and a net expense of $12MM in 4Q '04. - 4Q '05 reflects a $14MM tax benefit, $11MM ($7MM after-tax) of expense due to the consolidation of New York facilities, $10MM ($7MM after-tax) of reengineering costs related primarily to initiatives within our technology function, and $8MM after-tax of spin-off related expenses. - 3Q '05 reflects the $105MM tax benefit from the resolution of a prior year tax item related to the sale of AMEX Life in 1995, $51MM ($33MM after-tax) of reengineering costs and $3MM after-tax of spin-off related expenses. - 4Q '04 reflects the $117MM ($76MM after-tax) net gain related to the sale of the equipment leasing product line, offset by corporate investment spending on compliance and technology projects. -9- AMERICAN EXPRESS COMPANY FOURTH QUARTER 2005 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 was offset by higher marketing, promotion, rewards and cardmember services expenses of $6MM in 4Q '05, and other operating expenses of $5MM in 4Q '05. Accordingly, the incremental expenses, as well as the impact of the net lending securitization activity, are eliminated.
Condensed Statements of Income Managed Basis Reconciliation (Preliminary, millions) Tax Securitization Equivalent GAAP Basis Effect Effect Managed Basis ------------------------------------------------------------------- ---------------- --------------- ------------------------- % % Inc/ Inc/ Quarters Ended December 31, 2005 2004 (Dec) 2005 2004 2005 2004 2005 2004 (Dec) ------------------------------------------------------------------- ---------------- --------------- -------------------------- Revenues: Discount revenue, net card fees and other $2,397 $2,127 13% $53 $54 $56 $57 $2,506 $2,238 12% Cardmember Lending: Finance charge revenue 685 455 51 744 621 1,429 1,076 33 Interest expense 200 96 # 226 132 426 228 87 ------------------------------------------------------------------- ---------------- ------------------------- Net finance charge revenue 485 359 35 518 489 1,003 848 18 ------------------------------------------------------------------- ---------------- ------------------------- Securitization income, net 295 325 (9) (295) (325) - - - ------------------------------------------------------------------- ---------------- --------------- ------------------------- Total 3,177 2,811 13 276 218 56 57 3,509 3,086 14 ------------------------------------------------------------------- ---------------- --------------- ------------------------- Expenses: Marketing, promotion, rewards and cardmember services 1,097 976 12 (6) - 1,091 976 12 Provision for losses 509 386 32 287 218 796 604 32 Human resources and other operating expenses 1,038 950 9 (5) - 1,033 950 9 ------------------------------------------------------------------- ---------------- ------------------------- Total 2,644 2,312 14 $276 $218 2,920 2,530 15 ------------------------------------------------------------------- ---------------- ------------------------- Pretax segment income 533 499 7 56 57 589 556 6 Income tax provision 122 136 (11) $56 $57 $178 $193 (8) ------------------------------------------------------------------- ---------------- --------------- ------------------------- Segment income $411 $363 13 ------------------------------------------------------------------- # Denotes greater than 100% variance.
-10- AMERICAN EXPRESS COMPANY FOURTH QUARTER 2005 OVERVIEW U.S. CARD SERVICES STATISTICAL INFORMATION
Quarters Ended Percentage December 31, Inc/(Dec) --------------------------------- ------------- 2005 2004 ------------- ------------- Card billed business (billions) $81 $70 16% Total cards in force (millions) 37.5 35.0 7 Basic cards in force (millions) 27.7 25.7 8 Average basic cardmember spending* $2,945 $2,734 8 Segment Capital (billions) $5.1 $4.5 14 Return on Segment Capital** 39.3% 38.2% -
*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. MANAGED P&L Discussion o NET INCOME: Increased 13% as revenues rose 14% and expenses increased 15%. - PRE-TAX MARGIN: Was 16.8% in 4Q '05 versus 21.0% in 3Q '05 and 18.1% in 4Q `04. - EFFECTIVE TAX RATE: Was 30% in 4Q '05 compared to 36% in 3Q '05 and 35% in 4Q '04. The 4Q '05 tax rate reflects a $29MM tax benefit primarily related to the finalization of state tax returns. o DISCOUNT REVENUE, NET CARD FEES AND OTHER REVENUES: Increased 12%, largely due to increases in billed business volumes. - BILLED BUSINESS: The 16% increase in USCS billed business reflected an 8% increase in spending per proprietary basic card and 7% growth in cards in force. -- Within the U.S. consumer business, billed business grew 15%; small business volumes rose 18%. - CARDS IN FORCE: Increased by 2.5MM, or 7% versus last year on continued strong card acquisition activity. o NET FINANCE CHARGE REVENUE: Increased 18% on 15% growth in average lending balances and a higher portfolio yield. - Annualized net finance charge revenue as a percentage of average loans was 9.1% in 4Q `05 versus 9.2% in 3Q '05 and 8.8% in 4Q `04. The increase versus last year reflects a lower proportion of the portfolio on introductory rates and increased finance charge rates, partially offset by rising funding costs. o MARKETING, PROMOTION, REWARDS AND CARDMEMBER SERVICES EXPENSES: Rose 12% on increased volume-related rewards expense growth and the continuation of business-building activities. o PROVISION FOR LOSSES: Increased 32% reflecting substantially higher write-offs related to increased bankruptcy filings resulting from the October 17, 2005 change in bankruptcy legislation, in addition to strong volume and lending growth. - CHARGE CARD: * -- The loss ratio rose from last year and last quarter. Past due levels were down from last year and last quarter.
12/05 9/05 12/04 ----------- ----------- ---------- Total Receivables (billions) $19.2 $16.8 $17.4 Net loss ratio as a % of charge volume 0.38% 0.30% 0.29% 90 days past due as a % of total 1.8% 2.0% 2.0%
-11- AMERICAN EXPRESS COMPANY FOURTH QUARTER 2005 OVERVIEW U.S. CARD SERVICES - CARD LENDING: ** -- The write-off rate rose substantially versus last year and last quarter due to the bankruptcy legislation effect. Past due rates declined versus last year and last quarter.
12/05 9/05 12/04 ---------- ------------ ----------- Total Loans (billions) $46.0 $43.0 $39.9 Net write-off rate 4.6% 3.8% 4.0% 30 days past due as a % of loans 2.3% 2.4% 2.5%
* There are no off-balance sheet Charge Card securitizations. Therefore, "Owned basis" and "Managed basis" credit quality statistics for the Charge Card portfolio are the same. ** As previously described, this information is presented on a "Managed basis". "Owned basis" credit quality statistics are available in the Fourth Quarter/Full Year 2005 Earnings Release on the U.S. Card Servives Selected Statistical Information pages. Credit trends are generally consistent under both reporting methods. o HUMAN RESOURCES AND OTHER OPERATING EXPENSES: Increased 9% due to higher management incentives, including an additional year of incremental stock-based compensation expenses, merit increases, and increased employee benefit costs. In addition, operating expenses rose, reflecting volume related costs. -12- AMERICAN EXPRESS COMPANY FOURTH QUARTER 2005 OVERVIEW INTERNATIONAL CARD & GLOBAL COMMERCIAL SERVICES
(Preliminary) CONDENSED STATEMENTS OF INCOME (Managed Basis)* Quarters Ended Percentage (millions) December 31, Inc/(Dec) ---------------------------------- ---------------- 2005 2004 ---- ---- Revenues: Discount revenue, net card fees and other $2,188 $2,145 2% Cardmember Lending: Finance charge revenue 278 240 16 Interest expense 21 94 78 -------- -------- Net finance charge revenue 184 162 13 -------- -------- Total 2,372 2,307 3 -------- -------- Expenses: Marketing, promotion, rewards and cardmember services 321 312 2 Provision for losses and benefits 286 199 43 Human resources and other operating expenses 1,462 1,560 (6) -------- -------- Total 2,069 2,071 - -------- -------- Pretax segment income 303 236 28 Income tax provision 62 52 20 -------- -------- Net income $241 $184 30 ======== ========
*Managed basis P&L differs from GAAP basis due to a change in classification of certain foreign exchange activities. Specifically, $32MM and $42MM, respectively, of revenues are reclassified from a contra-expense under the GAAP basis presentation to other revenue within the managed basis presentation in 4Q '05 and 4Q '04. STATISTICAL INFORMATION
Quarters Ended Percentage December 31, Inc/(Dec) -------------------------------------- --------------- 2005 2004 ---- ---- Card billed business (billions) $45 $41 10% Total cards in force (millions) 22.7 21.6 5 Basic cards in force (millions) 18.0 17.2 5 Average basic cardmember spending* $2,534 $2,387 6 Segment Capital (billions) $4.1 $3.8 8 Return on Segment Capital** 24.1% 22.0% -
* 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 10% increase in billed business reflects a 6% increase in spending per proprietary basic card and 5% growth in cards in force. -- Excluding the impact of foreign exchange translation, billed business and spending per proprietary basic card in force increased 13% and 9%, respectively. - All of AXP's major geographic regions experienced double-digit growth. - International consumer and small business spending rose 14%; global corporate spending rose 13%. - CARDS IN FORCE: Rose 5% versus last year. Total cards in force rose 500K during the quarter. -13- AMERICAN EXPRESS COMPANY FOURTH QUARTER 2005 OVERVIEW INTERNATIONAL CARD & GLOBAL COMMERCIAL SERVICES MANAGED P&L DISCUSSION o NET INCOME: Increased 30% as revenues rose 3% and expenses were unchanged. - 4Q '05 included $54MM ($35MM after-tax) of reengineering costs, related principally to initiatives in our business travel function. 4Q '04 reflected $90MM ($59MM after-tax) of costs related to restructuring activities within business travel and the decision to sell certain banking operations. - PRE-TAX MARGIN: Was 12.7% in 4Q '05, versus 14.3% in 3Q '05 and 10.2% in 4Q `04. - EFFECTIVE TAX RATE: Was 20% in 4Q '05, compared to 22% in 3Q '05 and 4Q'04. o DISCOUNT REVENUE, NET CARD FEES AND OTHER REVENUES: The increase of 2% versus 4Q '04 was driven primarily by increases in spending and cards-in-force, as well as greater volume-related foreign exchange conversion fees and higher card-related assessments, partially offset by a decline in travel commissions and fees and modest growth in international banking revenues. o NET FINANCE CHARGE REVENUE: Increased 13% due to the 13% growth in average lending balances. o MARKETING, PROMOTION, REWARDS AND CARDMEMBER SERVICES EXPENSES: Increased 2%, reflecting greater rewards costs, which were partially offset by lower marketing and promotion expenses. o PROVISION FOR LOSSES AND BENEFITS: Increased 43% on strong charge and lending volume growth and higher provision rates. - CHARGE CARD: * -- The loss ratio decreased versus last year and last quarter, while past due amounts declined from last year, but rose versus last quarter.
12/05 9/05 12/04 ------------ ----------- ----------- Total Receivables (billions) $14.5 $15.2 $13.7 Net loss ratio as a % of charge volume 0.18% 0.24% 0.21% 90 days past due as a % of total 1.3% 1.2% 1.5%
- CARDMEMBER LENDING:* -- Past due rates rose from last year, but were unchanged from last quarter; write-off rates decreased from last year and last quarter.
12/05 9/05 12/04 --------------- ---------- ----------- Cardmember Loans (billions) $8.3 $7.5 $7.3 30 days past due as a % of loans 2.8% 2.8% 2.3% Net write-off rate 4.4% 5.0% 4.5%
*There are no off-balance sheet Charge Card and currently no off-balance sheet international lending securitizations. Therefore, "Owned basis" and "Managed basis" credit quality statistics for the Charge Card and lending portfolio are the same. o HUMAN RESOURCES AND OTHER OPERATING EXPENSES: Decreased by 6% reflecting the lower reengineering costs versus last year, discussed above, and the benefit of reengineering activities over the past four quarters. -14- AMERICAN EXPRESS COMPANY FOURTH QUARTER 2005 OVERVIEW GLOBAL NETWORK & MERCHANT SERVICES
CONDENSED STATEMENTS OF INCOME (GAAP Basis) (Preliminary) Quarters Ended Percentage December 31, Inc/(Dec) ------------------------ ----------- (millions) 2005 2004 ---- ---- Revenues: Discount revenue, fees and other $745 $703 6% ---- ---- Expenses: Marketing and promotion 141 105 35 Provision for losses 13 14 (7) Human resources and other operating expenses 349 373 (7) ---- ---- Total 503 492 2 ---- ---- Pretax segment income 242 211 15 Income tax provision 83 77 9 ---- ---- Segment income $159 $134 19 ==== ====
STATISTICAL INFORMATION
Quarters Ended Percentage (billions) December 31, Inc/(Dec) ----------------------- ----------- 2005 2004 ---- ---- Global Card Billed Business* $132 $116 15% Segment Capital $1.3 $1.1 20 Return on Segment Capital** 48.4% 55.8% - Global Network Services: Card billed business $7 $5 34 Total cards in force (millions) 10.8 8.8 23
*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. P&L DISCUSSION o NET INCOME: Increased 19% on 6% revenue growth and a 2% increase in expenses. - PRE-TAX MARGIN: Was 32.7% in 4Q '05 versus 30.0% in 3Q '05 and 30.1% in 4Q `04. - EFFECTIVE TAX RATE: Was 35% in 4Q '05 and 3Q '05, and 37% in 4Q '04. o DISCOUNT REVENUE, FEES AND OTHER REVENUE: Increased 6% reflecting growth in network-related discount revenues generated from the strong growth in network volumes offset by the impact of the decline in the overall discount rate which is largely absorbed by this segment, and includes costs associated with investments in certain strategic merchant partnerships. o MARKETING AND PROMOTION: Expenses increased 35%, reflecting higher marketing and promotion costs primarily due to the ongoing costs of the "MyLife, MyCard" brand advertising campaign. o HUMAN RESOURCES AND OTHER OPERATING EXPENSES: Decreased by 7% reflecting well-controlled operating costs and a larger interest expense credit related to internal transfer pricing which recognizes the network business' accounts payable-related funding benefit, partially offset by greater salary and benefit costs. -15- AMERICAN EXPRESS COMPANY FULL YEAR 2005 OVERVIEW CONSOLIDATED
(Preliminary) STATEMENTS OF INCOME (GAAP basis) (millions) Years Ended Percentage December 31, Inc/(Dec) --------------------------- ----------- 2005 2004 ---- ---- Revenues: Discount revenue $11,730 $10,249 14% Cardmember lending net finance charge revenue 2,580 2,224 16 Net card fees 2,033 1,909 7 Travel commissions and fees 1,780 1,795 (1) Other commissions and fees 2,456 2,284 7 Securitization income, net 1,260 1,132 11 Other investment and interest income 1,055 997 6 Other 1,373 1,374 - ------- ------- Total 24,267 21,964 10 ------- ------- Expenses: Human Resources 4,829 4,538 6 Marketing, promotion, rewards and cardmember services 5,841 4,965 18 Provisions for losses: Charge Card 1,038 833 25 Cardmember lending 1,349 1,130 19 Investment certificates and other 386 301 28 ------- ------- Total 2,773 2,264 22 Professional services 2,308 2,141 8 Occupancy and equipment 1,428 1,353 6 Interest 920 814 13 Communications 457 474 (4) Other 1,463 1,584 (8) ------- ------- Total 20,019 18,133 10 ------- ------- Pretax income from continuing operations 4,248 3,831 11 Income tax provision 1,027 1,145 (10) ------- ------- Income from continuing operations before accounting 3,221 2,686 20 change Income from discontinued operations, net of tax 513 830 (38) ------- ------- Income before cumulative effect of accounting change 3,734 3,516 6 Cumulative effect of accounting change - (71) # ------- ------- Net income $3,734 $3,445 8 ======= ======= EPS-Basic Income from continuing operations $2.61 $2.13 23 ======= ======= Income from discontinued operations $0.42 $0.66 (36) ======= ======= Cumulative effect of accounting change - $(0.05) # ======= ======= Net Income $3.03 $2.74 11 ======= ======= EPS-Diluted Income from continuing operations $2.56 $2.09 22 ======= ======= Income from discontinued operations $0.41 $0.65 (37) ======= ======= Cumulative effect of accounting change - $(0.06) # ======= ======= Net Income $2.97 $2.68 11 ======= =======
o Income from continuing operations before accounting change increased 20% to $3,221MM. - 2005 Income from continuing operations included: -- A $123MM ($80MM after-tax) increase in the GAAP provision for losses, or a $192MM ($125MM after-tax) increase in the provision on a managed basis within the USCS segment in 4Q '05, reflecting substantially higher write-offs related to increased bankruptcy filings resulting from the October 17, 2005 change in bankruptcy legislation; -- $286MM ($186MM after-tax) of total reengineering costs, principally related to restructuring efforts in our business travel, international operations, finance and technology areas; -- A $49MM ($32MM after-tax) provision in 3Q'05 to reflect the estimated costs related to Hurricane Katrina; -- $242MM of tax benefits including the $60MM benefit related primarily to the previously discussed finalization of state tax returns in the fourth quarter, and $195MM of benefits related to resolution of IRS audits of previous years' tax returns in prior quarters; and -- A $113MM ($73MM after-tax) benefit from the recovery of 9/11-related insurance claims in 2Q'05. -16- AMERICAN EXPRESS COMPANY FULL YEAR 2005 OVERVIEW CONSOLIDATED - 2004 Income from continuing operations included: -- The $117MM ($76MM after-tax) net gain during 4Q '04 in connection with the sale of the Company's equipment leasing product line within its small business financing unit; -- A charge of $115MM during 3Q'04 as a result of the reconciliation of prior year's securitization-related lending receivable accounts; -- $99MM ($64MM after-tax) in aggregate restructuring charges recorded during 4Q '04; and -- A $60MM benefit during 3Q'04 reflecting a reduction in merchant-related reserves. o Net Income including discontinued operations rose 8% to $3,734MM. - 2005 Income from discontinued operations of $513MM included a net gain in 3Q '05 of $63MM after-tax from certain dispositions, including the sale of TBS, $127MM after-tax of Ameriprise spin-off-related expenses. o SHARE REPURCHASES:
Millions of Shares ----------------------- - AVERAGE SHARES: 2005 2004 ---- ---- Basic 1,233 1,259 ===== ===== Diluted 1,258 1,285 ===== ===== - ACTUAL SHARE ACTIVITY: Shares outstanding - beginning of period 1,249 1,284 Repurchase of common shares (34) (69) Employee benefit plans, compensation and other 26 34 ----- ----- Shares outstanding - end of period 1,241 1,249 ===== =====
o CONSOLIDATED REVENUES: Consolidated revenues increased 10% reflecting increases versus last year of 15% within USCS, 7% within ICGCS and 8% within GNMS. Revenues increased due to higher discount revenues, increased Cardmember lending net finance charge revenue, greater other commissions and fees, higher securitization income, net, increased net card fees and greater other investment and interest income. Translation of foreign currency revenues contributed less than 1% to the 10% revenue growth rate. o CONSOLIDATED EXPENSES: Consolidated expenses increased 10%, reflecting increases versus last year of 13% within USCS, 8% within ICGCS and 14% within GNMS. Expense growth reflected higher marketing, promotion, rewards and cardmember services costs, greater provision for losses, higher human resources expenses, larger professional services expenses, greater interest expense, and larger occupancy and equipment costs, partially offset by lower other expenses and lower communication costs. Translation of foreign currency expenses contributed less than 1% to the 10% consolidated expense growth rate. o PRE-TAX MARGIN: Was 17.5% in 2005 and 2004. o EFFECTIVE TAX RATE: Was 24% in 2005 compared to 30% in 2004. The lower tax rate in 2005 reflect benefits of $195MM from the resolution of IRS audits of previous years' tax return items and the $60MM benefit in 4Q '05 primarily related to the finalization of state tax returns. -17- AMERICAN EXPRESS COMPANY FULL YEAR 2005 OVERVIEW CONSOLIDATED o DISCOUNT REVENUE: A 16% increase in billed business, partially offset by a lower average discount rate, yielded a 14% increase in discount revenue. - The average discount rate* was 2.57% in 2005 versus 2.60% in 2004. The decrease versus last year continues to reflect, in part, changes in the mix of spending between various merchant segments.
Years Ended Percentage December 31, Inc/(Dec) -------------------------- ------------ 2005 2004 ---- ---- Card billed business* (billions): United States $350 $305 16% Outside the United States 134 111 17 ------ ------ Total $484 $416 16 ====== ====== Average basic cardmember spending** United States $11,660 $10,686 9 Outside the United States $7,817 $6,914 13 Total $10,445 $9,460 10
* For additional information about billed business and discount rate calculations, please refer to the Fourth Quarter/Full Year 2005 Earnings Release, American Express Company Selected Statistical Information pages. **Proprietary card activity only. - WORLDWIDE BILLED BUSINESS: The 16% increase in worldwide billed business reflected a 16% increase in USCS, a 13% increase in ICGCS and a 36% increase in GNS partner volume. Worldwide average spend per proprietary basic card grew by 10% and total cards in force grew by 9%. -- U.S. billed business was up 16% reflecting growth of 15% within our consumer card business, a 20% increase in small business spending and a 11% improvement in Corporate Services volumes. - Spending per proprietary basic card in force increased 9%. - U.S. non-T&E-related volume categories (which represented approximately 67% of 2005 U.S. billed business) grew 18%, while T&E volumes rose 11%. - U.S. airline-related volume, which represented approximately 12% of total U.S. volumes during the year, rose 9% as 13% transaction volume growth was suppressed by an approximately 4% lower average airline charge. -- Excluding the impact of foreign exchange translation: - Worldwide billed business and spending per proprietary basic card in force increased 16% and 10%, respectively. - Total billed business outside the U.S. rose 13%, reflecting double-digit proprietary growth in all regions, with the largest increases in Canada and Latin America. - Within our proprietary business, billed business outside the U.S. reflected 13% growth in consumer and small business spending, as well as a 14% increase in Corporate Services volumes. - Spending per proprietary basic card in force outside the U.S. rose 14%. - Worldwide airline volumes, which represented approximately 12% of total volumes during the year, increased 13% on 14% growth in transaction volume and a lower average airline charge. o CARDMEMBER LENDING NET FINANCE CHARGE REVENUE: Increased 16% on 10% 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 portfolio was 9.1% in 2005 versus 8.6% in 2004. The increase versus last year reflects a lower proportion of the U.S. portfolio on introductory rates and increased finance charge rates, partially offset by rising funding costs. -18- AMERICAN EXPRESS COMPANY FULL YEAR 2005 OVERVIEW CONSOLIDATED o NET CARD FEES: Grew 7% due to higher cards in force and a greater average fee. In 2005, the average annual fee per proprietary card in force was $35 versus $34 in 2004. o TRAVEL COMMISSIONS AND FEES: Declined 1% as higher travel sales were partially offset by lower transaction fees as a greater proportion of bookings were made on-line. o OTHER COMMISSIONS AND FEES: Increased 7% on higher card-related assessments. o SECURITIZATION INCOME, NET: Increased 11% on a greater average balance of securitized loans, a higher portfolio yield and a decrease in portfolio write-offs, partially offset by greater interest expense due to a higher coupon rate paid to certificate holders and an increase in the payment speed of the trust assets. 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 2005 and 2004, results reflected net securitization gains, including the credit components, of $21MM ($14MM after-tax) and $26MM ($17MM after-tax), respectively. The average balance of Cardmember lending securitizations was $20.6B in 2005 compared with $19.4B in 2004. o OTHER INVESTMENT AND INTEREST INCOME: Increased 6% largely due to higher interest rates on a greater level of short-term investments. o OTHER REVENUES: Were flat for the year, with increases due to fees associated with transition services agreements with Ameriprise Financial, Inc. and higher publishing revenues offset by lower ATM revenues resulting from the sale of the business in 3Q '04. o HUMAN RESOURCES EXPENSE: Increased 6% due to $203MM of severance costs in 2005 versus $76MM in 2004, higher management incentives, including an additional year of incremental stock-based compensation expenses, merit increases and increased employee benefit costs which were partially offset by reengineering benefits. o MARKETING, PROMOTION, REWARDS AND CARDMEMBER SERVICES EXPENSES: Increased 18%, reflecting higher marketing and promotion expenses and greater rewards costs. The increase in marketing and promotion expenses is due to the Company's ongoing global brand advertising campaign and our continued focus on business-building initiatives. The growth in rewards costs is attributable to volume growth, a higher redemption rate and strong cardmember loyalty program participation. o PROVISIONS FOR LOSSES AND BENEFITS: Increased 22% as the charge card and lending provisions rose 25% and 19%, respectively, and the other provisions grew by 28%. The charge and lending growth reflects strong volume increases within both activities and higher provision rates, mostly due to substantially higher write-offs during 4Q `05 within the lending business due to the October 17, 2005 change in bankruptcy legislation, as well as a $49MM provision in 3Q '05 due to estimated costs related to Hurricane Katrina. The increase in the other provision reflects higher interest rates on larger investment certificate balances in addition to a $115MM charge in 3Q '04 resulting from the reconciliation of prior year's securitization-related lending receivables accounts and a $60MM benefit in 3Q '04 reflecting a reduction in merchant-related reserves. - CREDIT QUALITY: -- The charge card net loss ratio remained unchanged versus last year at 0.26%.* -- The lending net write-off rate for 2005 was 4.1% versus 4.0% for 2004.** * 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 Fourth Quarter/Full Year 2005 Earnings Release on the Consolidated Selected Statistical Information pages. Credit trends are generally consistent under both reporting methods. o PROFESSIONAL SERVICES EXPENSE: Rose 8% reflecting increased technology costs related to higher business and service-related volumes. o OCCUPANCY AND EQUIPMENT EXPENSE: Rose 6% primarily due to higher rent expense and the amortization of software costs. o INTEREST EXPENSE: Rose 13% due to higher receivable balances and a higher effective cost of funds. o COMMUNICATIONS EXPENSE: Decreased 4% versus last year due to increased volumes more than offset by reengineering-related savings. o OTHER OPERATING EXPENSE: Decreased 8% due to the inclusion last year of a $117MM net gain from the sale of the equipment leasing product line and lower expenses as a result of our 3Q '04 sale of the ATM business. -19- AMERICAN EXPRESS COMPANY FULL YEAR 2005 OVERVIEW MANAGED BASIS USCS and ICGCS segment results are presented on a managed basis and GNMS and Corporate & Other segment results are presented on a GAAP basis. For a discussion of the managed basis presentation please see page 8 of this document. CORPORATE & OTHER o Net expense of $111MM in 2005 compared with net expense of $187MM in 2004. - 2005 reflects $159MM of the tax benefits previously discussed, $105MM ($68MM after-tax) of reengineering costs and $11MM after-tax of spin-off related expenses. - 2004 reflects higher corporate investment spending on compliance and technology projects, partially offset by the $117MM ($76MM after-tax) net gain on the sale of the equipment leasing product line and an $18MM benefit from the final settlement of a Federal tax audit. -20- AMERICAN EXPRESS COMPANY FULL YEAR 2005 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 was offset by higher marketing, promotion, rewards and cardmember services expenses of $13MM in 2005 and $16MM in 2004, and other operating expenses of $8MM in 2005 and $10MM in 2004. Accordingly, the incremental expenses, as well as the impact of the net lending securitization activity, are eliminated.
CONDENSED STATEMENTS OF INCOME MANAGED BASIS RECONCILIATION ---------------------------------------------------------------------------------------------------------------------------------- (Preliminary, millions) Tax Securitization Equivalent GAAP Basis Effect Effect Managed Basis ---------------------------------------------------------------- ---------------- -------------- ---------------------------- % % Inc/ Inc/ Years Ended December 31, 2005 2004 (Dec) 2005 2004 2005 2004 2005 2004 (Dec) ---------------------------------------------------------------- ---------------- -------------- ---------------------------- Revenues: Discount revenue, net card fees and other $8,897 $7,893 13% $210 $210 $226 $228 $9,333 $8,331 12% Cardmember Lending: Finance charge revenue 2,408 1,776 36 2,692 2,222 5,100 3,998 28 Interest expense 616 406 52 739 384 1,355 790 71 ---------------------------------------------------------------- ---------------- ---------------------------- Net finance charge 1,792 1,370 31 1,953 1,838 3,745 3,208 17 revenue ---------------------------------------------------------------- ---------------- ---------------------------- Securitization income, net 1,260 1,132 11 (1,260) (1,132) - - - ---------------------------------------------------------------- ---------------- -------------- ---------------------------- Total 11,949 10,395 15 903 916 226 228 13,078 11,539 13 ---------------------------------------------------------------- ---------------- -------------- ---------------------------- Expenses: Marketing, promotion, rewards and cardmember services 3,911 3,325 18 (13) (16) 3,898 3,309 18 Provision for losses 1,676 1,508 11 924 942 2,600 2,450 6 Human resources and other operating expenses 3,763 3,422 10 (8) (10) 3,755 3,412 10 ---------------------------------------------------------------- ---------------- ---------------------------- Total 9,350 8,255 13 $903 $916 10,253 9,171 12 ---------------------------------------------------------------- ---------------- -------------- ---------------------------- Pretax segment income 2,599 2,140 21 226 228 2,825 2,368 19 Income tax provision 765 622 23 $226 $228 $991 $850 17 ---------------------------------------------------------------- ---------------- -------------- ---------------------------- Segment income $1,834 $1,518 21 ----------------------------------------------------------------
-21- AMERICAN EXPRESS COMPANY FULL YEAR 2005 OVERVIEW U.S. CARD SERVICES
STATISTICAL INFORMATION Years Ended Percentage December 31, Inc/(Dec) --------------------------------- ------------- 2005 2004 --------------- ------------- Card billed business (billions) $293 $252 16% Average basic cardmember spending* $10,996 $10,118 9
* Proprietary cards only. MANAGED P&L DISCUSSION o NET INCOME: Increased 21% as revenues rose 13% and expenses increased 12%. - PRE-TAX MARGIN: Was 21.6% in 2005, versus 20.5% in 2004. - EFFECTIVE TAX RATE: Was 35% in 2005 compared to 36% in 2004. 2005 included the aforementioned state tax benefit of $29MM. o DISCOUNT REVENUE, NET CARD FEES AND OTHER REVENUES: Increased 12%, largely due to increases in billed business volumes. - BILLED BUSINESS: The 16% increase in billed business reflected a 9% increase in spending per proprietary basic card and 7% growth in cards in force. -- Within the U.S. consumer business, billed business grew 15%; small business volumes rose 20%. o NET FINANCE CHARGE REVENUE: Increased 17% on 11% growth in average lending balances and a higher portfolio yield. - Annualized net finance charge revenue as a percentage of average loans was 9.0% in 2005 versus 8.6% in 2004. The increase versus last year reflects a lower proportion of the portfolio on introductory rates and increased finance charge rates, partially offset by rising funding costs. o MARKETING, PROMOTION, REWARDS AND CARDMEMBER SERVICES EXPENSES: Rose 18% on increased business-building activities and volume-related rewards expense growth. o PROVISIONS FOR LOSSES AND BENEFITS: Increased 6% reflecting strong volume increases within both charge and lending activities and higher provision rates, reflecting the impact of the new bankruptcy legislation and a $38MM provision in 3Q '05 due to estimated costs related to Hurricane Katrina. These were partially offset by last year's $115MM securitization reconciliation charge. - CREDIT QUALITY: -- The charge card net loss ratio remained unchanged versus last year at 0.30%. * -- The lending net write-off rate for 2005 was 4.1% versus 4.3% for 2004.** * 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 Fourth Quarter/Full Year 2005 Earnings Release on the U.S. Card Selected Statistical Information pages. Credit trends are generally consistent under both reporting methods. o HUMAN RESOURCES AND OTHER OPERATING EXPENSES: Increased 10% due to greater interest costs and larger human resources expenses. In addition, other operating expenses rose reflecting volume related costs. -22- AMERICAN EXPRESS COMPANY FULL YEAR 2005 OVERVIEW INTERNATIONAL CARD & GLOBAL COMMERCIAL SERVICES
(Preliminary) CONDENSED STATEMENTS OF INCOME (Managed Basis)* Years Ended Percentage (millions) December 31, Inc/(Dec) ----------------------------- ------------ 2005 2004 ---- ---- Revenues: Discount revenue, net card fees and other $8,489 $7,961 7% Cardmember Lending: Finance charge revenue 1,035 907 14 Interest expense 351 267 31 ------- ------- Net finance charge revenue 684 640 7 ------- ------- Total 9,173 8,601 7 ------- ------- Expenses: Marketing, promotion, rewards and cardmember services 1,269 1,130 12 Provision for losses and benefits 1,023 740 38 Human resources and other operating expenses 5,732 5,615 2 ------- ------- Total 8,024 7,485 7 ------- ------- Pretax segment income 1,149 1,116 3 Income tax provision 215 335 (35) ------- ------- Net income $934 $781 19 ======= =======
* Managed basis P&L differs from GAAP basis due to a change in classification of certain foreign exchange activities. Specifically, $135MM and $172MM, respectively, of revenues are reclassified from a contra-expense under the GAAP basis presentation to other revenue within the managed basis presentation in 2005 and 2004. STATISTICAL INFORMATION
Years Ended Percentage December 31, Inc/(Dec) ------------------------- ------------ 2005 2004 ---- ---- Card billed business (billions) $168 $148 13% Average basic cardmember spending* $9,641 $8,610 12
* Proprietary cards only. - BILLED BUSINESS: The 13% increase in billed business reflects a 12% increase in spending per proprietary basic card and 5% growth in cards in force. -- Excluding the impact of foreign exchange translation, billed business and spending per proprietary basic card in force increased 12% and 11%, respectively. - International consumer and small business spending rose 13%; global corporate spending rose 12%. - All of AXP's major geographic regions experienced double-digit growth. MANAGED P&L DISCUSSION o NET INCOME: Increased 19% on 7% growth in revenues, 7% higher expenses and a substantially lower tax rate. - 2005 included $168MM ($109MM after-tax) of reengineering costs versus $90MM ($59MM after-tax) in 2004, related principally to ongoing restructuring activities in the Corporate Travel business and international operations. - PRE-TAX MARGIN: Was 12.5% in 2005 versus 13.0% in 2004. - EFFECTIVE TAX RATE: Was 19% in 2005, compared to 30% in 2004. The 2005 tax rate reflects tax benefits of $33MM, resulting from the resolution of IRS audits of previous years' tax returns, in addition to the positive effect of changes in our international funding strategy in 2004. o DISCOUNT REVENUE, NET CARD FEES AND OTHER REVENUES: The increase of 7% versus 2004 was driven primarily by increases in both, spending and cards-in-force as well as greater volume-related foreign exchange conversion fees and higher card-related assessments, which were partially offset by lower travel revenues. o NET FINANCE CHARGE REVENUE: Increased 7% due to 11% growth in average lending balances partially offset by a higher cost of funds. o MARKETING, PROMOTION, REWARDS AND CARDMEMBER SERVICES EXPENSES: Increased 12%, reflecting greater rewards costs and higher marketing and promotion expenses due to our ongoing business-building initiatives. -23- AMERICAN EXPRESS COMPANY FULL YEAR 2005 OVERVIEW INTERNATIONAL CARD & GLOBAL COMMERCIAL SERVICES o PROVISIONS FOR LOSSES AND BENEFITS: Increased 38% on strong volume increases within both charge and lending activities and higher provision rates. - CREDIT QUALITY: -- The charge card net loss ratio increased to 0.21% in 2005 from 0.19% in 2004.* -- The lending net write-off rate for 2005 was 4.7% versus 5.2% for 2004. * There are no off-balance sheet Charge Card and currently no 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: Increased 2% reflecting higher reengineering costs, which were partially offset by lower human resources costs and other reengineering-related savings. -24- AMERICAN EXPRESS COMPANY FULL YEAR 2005 OVERVIEW GLOBAL NETWORK & MERCHANT SERVICES
CONDENSED STATEMENTS OF INCOME (GAAP Basis) (Preliminary) Years Ended Percentage December 31, Inc/(Dec) ----------------------- ----------- (millions) 2005 2004 ---- ---- Revenues: Discount revenue, fees and other $2,842 $2,639 8% ------ ------ Expenses: Marketing and promotion 604 389 55 Provision for losses 66 (2) # Human resources and other operating expenses 1,302 1,348 (3) ------ ------ Total 1,972 1,735 14 ------ ------ Pretax segment income 870 904 (4) Income tax provision 306 330 (7) ------ ------ Segment income $564 $574 (2) ====== ====== # Denotes variance greater than 100%.
STATISTICAL INFORMATION
Years Ended Percentage (billions) December 31, Inc/(Dec) ----------------------- ----------- 2005 2004 ---- ---- Global Card Billed Business* $484 $416 16% Global Network Services: Card billed business $24 $18 36
* 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. P&L DISCUSSION o NET INCOME: Declined 2% as 8% revenue growth was offset by substantially higher marketing costs. - PRE-TAX MARGIN: Was 30.6% in 2005 versus 34.2% in 2004. - EFFECTIVE TAX RATE: Was 35% in 2005 compared with 36% in 2004. o DISCOUNT REVENUE, FEES AND OTHER REVENUE: Increased 8% primarily due to growth in network-related discount revenues generated from the strong growth in network volumes, which were partially offset by the 3Q '04 sale of our ATM business and the impact of a lower overall discount rate. o MARKETING AND PROMOTION: Expenses increased 55%, reflecting higher marketing and promotion costs primarily due to the ongoing costs of the "MyLife, MyCard" brand advertising campaign. o PROVISION FOR LOSSES: Increased substantially due to the $60MM benefit in 3Q '04 resulting from the reduction in merchant-related reserves. o HUMAN RESOURCES AND OTHER OPERATING EXPENSES: Decreased 3% reflecting well-controlled operating costs, the 3Q '04 ATM business sale and a larger interest expense credit related to internal transfer pricing which recognizes the network business' accounts payable-related funding benefit, partially offset by greater salary and benefit costs, which reflect headcount growth due to GNS business-building initiatives. -25- "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% TO 30%; THE COMPANY'S ABILITY TO GROW ITS BUSINESS AND MEET OR EXCEED ITS RETURN ON SHAREHOLDERS' EQUITY TARGET BY REINVESTING APPROXIMATELY 35% OF ANNUALLY-GENERATED CAPITAL, AND RETURNING APPROXIMATELY 65% 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 & MERCHANT 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 & MERCHANT 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 & MERCHANT 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; SUCCESSFULLY CROSS-SELLING FINANCIAL, TRAVEL, CARD AND OTHER PRODUCTS AND SERVICES TO THE COMPANY'S CUSTOMER BASE, BOTH IN THE UNITED STATES AND ABROAD; THE COMPANY'S ABILITY TO GENERATE SUFFICIENT REVENUES FOR EXPANDED INVESTMENT SPENDING, AND THE ABILITY TO CAPITALIZE ON SUCH INVESTMENTS TO IMPROVE BUSINESS METRICS; 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 -26- 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 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 $350 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, 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, INCLUDING CHANGES IN TAX LAWS OR REGULATIONS THAT COULD RESULT IN THE ELIMINATION OF CERTAIN TAX BENEFITS; OUTCOMES AND COSTS ASSOCIATED WITH LITIGATION AND COMPLIANCE AND REGULATORY MATTERS; DEFICIENCIES AND INADEQUACIES IN THE COMPANY'S INTERNAL CONTROL OVER FINANCIAL REPORTING, WHICH COULD RESULT IN INACCURATE OR INCOMPLETE FINANCIAL REPORTING; 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, 2004, AND ITS OTHER REPORTS FILED WITH THE SEC. -27-