American Express 2006 Annual Report Download - page 57

[ 55 ]
2006 fi nancial review
american express company
RESULTS OF OPERATIONS FOR THE THREE YEARS
ENDED DECEMBER 31, 2006 – GAAP BASIS
The following discussion of U.S. Card Services’ segment
results of operations is presented on a GAAP basis.
U.S. Card Services reported segment income of $2.3
billion for 2006, a 25 percent increase from $1.8 billion
in 2005, which increased 19 percent from 2004.
Net Revenues
In 2006, U.S. Card Services’ net revenues increased 17
percent to $14.0 billion primarily due to higher discount
revenue, net card fees and other, increased cardmember
lending net finance charge revenue, and as discussed
previously, greater securitization income, net. Discount
revenue, net card fees and other of $10.0 billion in 2006,
rose 12 percent from 2005, largely due to higher billed
business volumes and the Travelers Cheque and Gift
Card investment portfolio gain discussed previously.
The 14 percent increase in billed business in 2006
reflected a 5 percent increase in spending per proprietary
basic card and a 9 percent growth in basic cards-in-force.
Within the U.S. consumer business, billed business grew
13 percent and small business volumes rose 16 percent
in 2006. Net finance charge revenue of $2.5 billion
in 2006 was 38 percent higher than in 2005, primarily
due to 31 percent growth in average owned lending
balances and a higher net portfolio yield, partially offset
by the impact of higher than anticipated cardmember
completion of consumer debt repayment programs and
associated payment waivers. Net revenues of $12.0 billion
in 2005 were 15 percent higher than 2004 as a result of
increased discount revenues, net card fees and other, and
cardmember lending net finance charge revenue.
Expenses
During 2006, U.S. Card Services’ expenses increased
13 percent to $10.7 billion, primarily due to greater
human resources and other operating expenses, and
higher marketing, promotion, rewards and cardmember
services expenses, partially offset by a lower provision
for losses. Expenses in 2006 and 2005 included $35
million and $10 million, respectively, of charges related
to reengineering activities primarily within the Travelers
Cheque business and operations area. Expenses in 2005
of $9.4 billion were 14 percent higher than in 2004,
primarily due to higher marketing, promotion, rewards
and cardmember services expenses, greater human
resources and other operating expenses, and higher
provisions for losses.
Marketing, promotion, rewards and cardmember
services expenses increased 15 percent in 2006 to $4.5
billion, due to higher volume-related rewards costs,
the charge related to a higher ultimate redemption rate
estimate within the Membership Rewards reserve in the
U.S. discussed previously, and increased marketing and
promotion costs. Provision for losses decreased 3 percent
in 2006 compared to 2005 due to a comparatively lower
level of bankruptcy-related charge offs, lower than
expected costs for Hurricane Katrina losses that were
provided for in 2005, as well as improved collections,
and continued strong credit quality, partially offset by
the impact of strong volume and loan growth. Human
resources and other operating expenses of $4.5 billion
in 2006 increased 18 percent from 2005. The increase
was due to higher interest expense, greater professional
services expenses, increased human resources expenses,
higher technology service fees, and generally higher
volume-related and business-building expenses.
The effective tax rate was 31 percent in 2006,
compared to 29 percent in 2005 and 2004. 2005
included a $29 million tax benefit primarily related to
the finalization of state tax returns.
DIFFERENCES BETWEEN GAAP AND MANAGED
BASIS PRESENTATION
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