American Express 2006 Annual Report Download - page 58

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2006 fi nancial review
american express company
of both securitized and non-securitized cardmember
loans. Management also believes that use of a managed
basis presentation presents a more accurate picture of
the key dynamics of the cardmember lending business.
Irrespective of the on- and off-balance sheet funding
mix, it is important for management and investors to
see metrics for the entire cardmember lending portfolio
because they are more representative of the economics
of the aggregate cardmember relationships and ongoing
business performance and trends over time. It is also
important for investors to see the overall growth of
cardmember loans and related revenue in order to
evaluate market share. These metrics are significant
in evaluating the Company’s performance and can
only be properly assessed when all non-securitized and
securitized cardmember loans are viewed together on
a managed basis. The Company does not currently
securitize international loans.
On a GAAP basis, revenue and expenses from
securitized cardmember loans are reflected in the
Company’s income statements in securitization
income, net, fees and commissions, and credit
provision for cardmember lending. At the time of a
securitization transaction, the securitized cardmember
loans are removed from the Company’s balance
sheet, and the resulting gain on sale is reflected in
securitization income, net, as well as an impact to
credit provision (credit reserves are no longer recorded
for the cardmember loans once sold). Over the life of
a securitization transaction, the Company recognizes
servicing fees and other net revenues (referred to
as “excess spread”) related to the interests sold to
investors (i.e. the investors’ interests). These amounts
are reflected in securitization income, net, and fees
and commissions. The Company also recognizes net
finance charge revenue over the life of the securitization
transaction related to the interest it retains (i.e. the
seller’s interest). At the maturity of a securitization
transaction, cardmember loans on the balance sheet
increase, and the impact of the incremental required
loss reserves is recorded in credit provision.
As presented, in aggregate over the life of a
securitization transaction, the pretax income impact to
the Company is the same whether or not the Company
had securitized cardmember loans or funded these loans
through other financing activities (assuming the same
financing costs). The income statement classifications,
however, of specific items will differ.
U.S. CARD SERVICES
SELECTED FINANCIAL INFORMATION
MANAGED BASIS PRESENTATION
Years Ended December 31,
(Millions) 2006 2005 2004
Discount revenue, net card fees
and other:
Reported for the period
(GAAP) $9,989$ 8,926 $ 7,940
Securitization adjustments(a) 199 210 210
Tax adjustments(b) 217 226 228
Managed discount revenue,
net card fees and other $10,405 $ 9,362 $ 8,378
Net finance charge revenue:
Reported for the period
(GAAP) $2,477$ 1,792 $ 1,370
Securitization adjustments(a) 1,880 1,953 1,838
Managed net finance charge
revenue $4,357$ 3,745 $ 3,208
Securitization income, net:
Reported for the period
(GAAP) $1,489$ 1,260 $ 1,132
Securitization adjustments(a) (1,489) (1,260) (1,132)
Managed securitization
income, net $—$—$—
Provision for losses:
Reported for the period
(GAAP) $1,630$ 1,676 $ 1,508
Securitization adjustments(a) 550 924 942
Managed provision for losses $2,180$ 2,600 $ 2,450
(a) The managed basis presentation 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.
(b) 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.