American Express 2007 Annual Report Download - page 57

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2007 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
Expenses in 2006 of $7.7 billion were $1.0 billion or 16 percent
higher than in 2005, primarily due to higher marketing,
promotion, rewards and cardmember services expenses, and
greater human resources and other operating expenses.
Marketing, promotion, rewards and cardmember services
expenses increased $695 million or 16 percent in 2007 to $5.1
billion, reflecting the increase to the Membership Rewards
liability resulting from enhancements to the method of liability
estimation, a higher redemption rate, and higher volume-
driven rewards costs, partially offset by slightly lower marketing
and promotion expenses and the charges associated with
adjustments made to the U.S. Membership Rewards reserve
model in 2006 discussed previously. Marketing, promotion,
rewards and cardmember services expenses increased $614
million or 16 percent in 2006 to $4.4 billion, due to higher
volume-related rewards costs, the charge associated with certain
adjustments to the Membership Rewards reserve model in the
United States discussed previously, and increased marketing
and promotion costs. Human resources and other operating
expenses of $3.4 billion in 2007 increased $127 million or 4
percent from 2006. The increase was due to higher technology
and volume-related operating expenses partially offset by
the previously discussed pension-related gain of $36 million
in 2007 and the reclassification to revenues of certain card
acquisition-related costs beginning in the third quarter of 2006
as discussed previously. Human resources and other operating
expenses of $3.2 billion in 2006 increased $417 million or 15
percent from 2005. The increase was due to greater professional
services expenses, increased human resources expenses, higher
technology service fees, and generally higher volume-related and
business-building expenses partially offset by the reclassification
to revenues of certain card acquisition-related costs beginning
prospectively July 1, 2006, as discussed previously.
Provisions for losses increased $1.4 billion or 84 percent to
$3.0 billion for 2007 compared to 2006, reflecting increased
write-off and delinquency rates, the impact of loan growth, and
the credit-related charge previously discussed. Provisions for
losses decreased $33 million or 2 percent to $1.6 billion for
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 strong credit quality, partially
offset by the impact of strong volume and loan growth.
The effective tax rate was 33 percent for 2007 compared to
35 percent for both 2006 and 2005. The effective tax rate for
2007 reflected $74 million of tax benefits previously discussed.
DIFFERENCES BETWEEN GAAP AND MANAGED
BASIS PRESENTATION
For U.S. Card Services, 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 other commissions
and fees (included in discount revenue, net card fees and other
in the U.S. Card Services Selected Financial Information),
cardmember lending finance revenue, cardmember lending
interest expense, and provisions for losses. 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 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 provisions for losses 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 provisions for losses (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, in addition to
changes in the fair value of interest-only strips, are reflected
in securitization income, net and fees and commissions. The
Company also recognizes cardmember lending finance 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
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