American Express 2003 Annual Report Download - page 48

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The quality of TRS’ card customer base, the breadth of its product portfolio, the benefits of its reward-based, spend-
oriented business model and its improved revolving credit capabilities combined to create a competitive advantage that was
leveraged effectively to deliver strong results at TRS, despite the continuation of a difficult travel environment during most
of 2003. TRS continued to expand into everyday spending categories, and the Company’s investments in growth initiatives
over the past two years drove strong cardmember spending, cards-in-force and lending balance growth.
The following management discussion includes information on both a GAAP basis and managed basis. The managed basis
presentation assumes there have been no securitization transactions, i.e., all securitized cardmember loans and related
income effects are reflected in the Company’s balance sheet and income statement, respectively. The Company presents TRS
information on a managed basis because that is the way the Company’s management views and manages the business. Man-
agement believes that a full picture of trends in the Company’s cardmember lending business can only be derived by eval-
uating 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. For example, irrespective of the 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 it is more representative of the economics of the aggregate cardmember rela-
tionships 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 and changes in market share, which are significant metrics in evaluating the Com-
pany’s performance and which can only be properly assessed when all non-securitized and securitized cardmember loans
are viewed together on a managed basis.
On a GAAP basis, results reflect finance charge revenue on the owned portfolio as well as finance charge revenue on retained,
undivided interests in securitized loans, referred to as seller’s interest. GAAP basis results also include interest income on
the Company’s subordinated securities, which are retained security interests of a U.S. cardmember loan securitization trust,
as well as securitization income. Securitization income includes gains on securitizations (as discussed below), cash flows
from a third retained interest known as interest-only strips (present value of future net cash flows related to securitized loan
balances) and servicing revenue, net of related discounts. Net securitization income increased 10 percent in 2003 and 24
percent in 2002 primarily as a result of a higher average balance of cardmember lending securitizations. See Selected
Statistical Information below for data relating to TRS’ owned portfolio.
TRS’ results for the years ended December 31, 2003, 2002 and 2001 included net cardmember lending securitization gains
of $124 million ($81 million after-tax), $136 million ($88 million after-tax) and $155 million ($101 million after-tax), respec-
tively. Management views the gains from securitizations as discretionary benefits to be used for card acquisition expenses,
which are reflected in both marketing, promotion, rewards and cardmember services expenses and other operating
expenses. Consequently, the managed basis presentation for the years ended December 31, 2003, 2002 and 2001 assumes
that lending securitization gains were offset by higher marketing, promotion, rewards and cardmember services expenses
of $74 million, $81 million and $92 million, respectively, and other operating expenses of $50 million, $55 million and
$63 million, respectively. Accordingly, the incremental expenses, as well as the gains, have been eliminated. The following
table compares and reconciles the GAAP basis for certain TRS income statement line items to the managed basis information,
where different.
(p.46_axp_ financial review)