American Express 2010 Annual Report Download - page 64

the applicable account agreement until the outstanding balance
is paid or written-off. Loan fees are deferred and recognized in
interest income 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 — Net interest yield on
cardmember loans is a non-GAAP financial measure that
represents the net spread earned on cardmember loans. Net
interest yield on cardmember loans 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 includes interest that is
deemed uncollectible. For all presentations of net interest
yield on cardmember loans, 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 from average
total shareholders’ equity 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
from average segment capital average goodwill and
other intangibles.
Risk-weighted assets — Refer to Capital Strategy section
for definition.
Securitization income, net — Prior to 2010, 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.
Segment capital — Represents capital allocated to a segment
based upon specific business operational needs, risk measures,
and regulatory capital requirements.
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 leverage ratio — Refer to Capital Strategy section
for definition.
Tier 1 risk-based capital ratio — Refer to Capital Strategy
section for definition.
Total cards-in-force — Represents the number of cards that
are issued and outstanding. Proprietary basic consumer
cards-in-force includes basic cards issued to the primary
account owner and does not include additional supplemental
cards issued on that account. Proprietary basic small business
and corporate cards-in-force include basic and supplemental
cards issued to employee cardmembers. Non-proprietary
cards-in-force includes all cards that are issued and
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AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW