American Express 2009 Annual Report Download - page 64

2009 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
on a straight-line basis over the 12-month card membership
period, net of deferred direct card acquisition costs and a
reserve for projected membership cancellation.
Interest and dividends on investment securities primarily
relates to the Company’s performing fixed-income securities.
Interest income is accrued as earned using the effective
interest method, which adjusts the yield for security
premiums and discounts, fees and other payments, so that the
related investment security recognizes a constant rate of
return on the outstanding balance throughout its term. These
amounts are recognized until these securities are in default or
when it is likely that future interest payments will not be
made as scheduled.
Interest income on deposits with banks and other is
recognized as earned, and primarily relates to the placement
of cash in excess of near-term funding requirements in
interest-bearing time deposits, overnight sweep accounts, and
other interest bearing demand and call accounts.
Interest-only strip — Interest-only strips are generated
from USCS’ securitization activity and are a form of retained
interest held by the Company in the securitization. This
financial instrument represents the present value of estimated
future positive “excess spread” expected to be generated by
the securitized assets over the estimated life of those assets.
Excess spread is the net cash flow from interest and fee
collections allocated to the third-party investors’ interests in
the securitization after deducting the interest paid on the
investor certificates, credit losses, contractual servicing fees,
and other expenses.
Merchant acquisition — Represents the signing of
merchants to accept American Express-branded cards.
Net card fees — Represents the charge card membership
fees earned during the period. These fees are recognized as
revenue over the covered card membership period (typically
one year), net of provision for projected refunds for
cancellation of card membership.
Net interest yield on cardmember loans — Represents the
net spread earned on cardmember loans. Net interest yield on
cardmember loans (both on an owned and managed basis) is
computed by dividing adjusted net interest income by
adjusted average loans, computed on an annualized basis. The
calculation of net interest yield on cardmember loans (both
on an owned and managed basis) includes interest that is
deemed uncollectible. For the owned and managed basis
presentation, reserves and net write-offs related to
uncollectible interest are recorded through provisions for
losses – cardmember loans; therefore, such reserves and net
write-offs are not included in the net interest yield
calculation.
Net loss ratio — Represents the ratio of charge card write-
offs consisting of principal (resulting from authorized and
unauthorized transactions) and fee components, less
recoveries, on cardmember receivables expressed as a
percentage of gross amounts billed to cardmembers.
Net write-off rate — Represents the amount of
cardmember loans or USCS cardmember receivables written
off consisting of principal (resulting from authorized
transactions), less recoveries, as a percentage of the average
loan balance or USCS average receivables during the period.
Return on average equity — Calculated by dividing one
year period net income by one year average total shareholders’
equity.
Return on average tangible common equity — Computed in
the same manner as ROE except the computation of average
tangible common shareholders’ equity excludes average
goodwill and other intangibles.
Return on average segment capital — Calculated by
dividing one year period segment income by one year average
segment capital.
Return on average tangible segment capital — Computed in
the same manner as return on average segment capital except
the computation of average tangible segment capital excludes
average goodwill and other intangibles.
Risk-weighted assets — Assets are weighted for risk
according to a formula used by the Federal Reserve to
conform to capital adequacy guidelines. On and off-balance
sheet items are weighted for risk, with off-balance sheet items
converted to balance sheet equivalents, using risk conversion
factors, before being allocated a risk-adjusted weight.
Securitization income, net — Includes non-credit provision
components of the net gains or losses from securitization
activities; changes in fair value of the interest-only strip;
excess spread related to securitized cardmember loans; and
servicing income, net of related discounts or fees. Excess
spread, which is recognized as earned, is the net cash flow
from interest and fee collections allocated to the third-party
investors’ interests in the securitization after deducting the
interest paid on the investor certificates, credit losses,
contractual servicing fees and other expenses.
Stored value and prepaid products — Includes Travelers
Cheques and other prepaid products such as gift cheques and
cards as well as reloadable Travelers Cheque cards. These
products are sold as safe and convenient alternatives to
currency for purchasing goods and services.
Tier 1 capital ratio — Tier 1 capital ratio is calculated as
Tier 1 capital divided by risk-weighted assets. Tier 1 capital is
the sum of common shareholders’ equity, certain perpetual
preferred stock, and minority interests in consolidated
subsidiaries, adjusted for certain other comprehensive income
items, ineligible goodwill and intangible assets. This ratio is
commonly used by regulatory agencies to assess a financial
institution’s financial strength and is the primary form of
capital used to absorb losses beyond current loss accrual
estimates.
Tier 1 leverage ratio — Tier 1 leverage ratio is calculated by
dividing Tier 1 capital (as defined above) by the Company’s
average total consolidated assets for the most recent quarter.
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