American Express 2005 Annual Report Download - page 48

Download and view the complete annual report

Please find page 48 of the 2005 American Express annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 106

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106

Business Segment Results
Effective September 30, 2005, the Company realigned its
segment presentation to reflect the spin-off of Ameriprise.
The new segments are: U.S. Card Services, International
Card & Global Commercial Services, Global Network &
Merchant Services, and Corporate & Other.
Results of the business segments reflect essentially each
segment as a stand-alone business. The management
reporting process that derives these results allocates
income and expense using various methodologies as
described below.
Revenues
The Company applies a transfer pricing methodology
for the allocation of discount revenue and certain other
revenues between segments. Discount revenue is earned
by segments based on the volume of merchant business
generated by cardmembers at predetermined rates.
Within the U.S. Card Services and International Card &
Global Commercial Services segments, discount rev-
enue reflects the issuer component of the overall dis-
count rate and within the Global Network & Merchant
Services segment, discount revenue reflects the network
component of the overall discount rate. Net finance
charge revenue and net card fees are directly attributable
to the segment in which they are reported.
Expenses
Marketing, promotion, rewards and cardmember ser-
vices expenses are reflected in each segment based on
actual expenses incurred within the segment, with the
exception of brand advertising, which is reflected in the
Global Network & Merchant Services segment. The pro-
vision for losses reflects credit-related expenses as
incurred within each segment.
Human resources and other expenses reflect expenses
incurred directly within each segment as well as
expenses related to the Company’s support services,
which are allocated to each segment based on support
service activities directly attributable to the segment.
Other overhead expenses are allocated to segments
based on each segment’s level of pretax income. Financ-
ing requirements are managed on a consolidated basis.
Funding costs are allocated to segments based on
segment funding requirements.
Capital
Each business segment is allocated capital based on
business model operating requirements, risk measures
and regulatory capital requirements. Business model
requirements include capital needed to support
operations and specific balance sheet items. The risk
measures include considerations for credit, market and
operational risk. Regulatory capital requirements
include the capital amounts defined for well-capitalized
financial institutions.
Income Taxes
Income tax provision (benefit) is allocated to each busi-
ness segment based on the effective tax rates applicable
to various businesses that comprise the segment.
As discussed more fully below, U.S. Card Services’ and
International Card & Global Commercial Services’
results are presented on a managed basis and Global
Network & Merchant Services’ and Corporate & Other
results are presented on a basis consistent with GAAP.
U.S. Card Services
Differences between GAAP and Managed
Basis Presentation
The Company presents certain information on a
managed basis because that is the way the Company’s
management views and manages the business.
For U.S. Card Services, managed basis means the pre-
sentation 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 sheets and income statements,
respectively. 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 man-
aged basis presentation, including non-securitized
and securitized cardmember loans, presents a more
accurate picture of the key dynamics of the cardmem-
ber 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.
U.S. Card Services’ owned portfolio (i.e., on-balance
sheet) is primarily comprised of cardmember receiv-
ables generated by the Company’s charge card products
and unsecuritized cardmember loans. The Company
securitizes cardmember loans as part of its financing
strategy; consequently, the level of unsecuritized card-
member loans is primarily a function of the Company’s
financing requirements. Delinquency, reserve coverage
Financial Review
AXP / AR.2005
[46 ]