American Express 2013 Annual Report Download - page 55

AMERICAN EXPRESS COMPANY
2013 FINANCIAL REVIEW
Credit cards — Represents cards that have a range of revolving
payment terms, grace periods, and rate and fee structures.
Discount revenue — Represents revenue earned from fees generally
charged to merchants with whom the Company has entered into a
card acceptance agreement for processing Card Member transactions.
The discount fee generally is deducted from the Company’s payment
reimbursing the merchant for Card Member purchases. Discount
revenue is reduced by other payments made to merchants, third-party
card issuing partners, cash-back reward costs, corporate incentive
payments and other contra-revenue items.
Interest expense — Interest expense includes interest incurred
primarily to fund Card Member loans, charge card product
receivables, general corporate purposes, and liquidity needs, and is
recognized as incurred. Interest expense is divided principally into two
categories: (i) deposits, which primarily relates to interest expense on
deposits taken from customers and institutions and (ii) long-term
debt, which primarily relates to interest expense on the Company’s
long-term financing and short-term borrowings, which primarily
relates to interest expense on commercial paper, federal funds
purchased, bank overdrafts and other short-term borrowings.
Interest income — Interest income includes (i) interest on loans,
(ii) interest and dividends on investment securities and (iii) interest
income on deposits with banks and others.
Interest on loans — is assessed using the average daily balance
method for loans. Unless the loan is classified as non-accrual, interest
is recognized based upon the principal amount outstanding in
accordance with the terms of the applicable account agreement until
the outstanding balance is paid or written off.
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.
Merchant acquisition — Represents the signing of merchants to
accept American Express-branded cards.
Net card fees — Represents the 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 Card Member loans — Net interest yield on
Card Member 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 Card Member loans includes
interest that is deemed uncollectible. For all presentations of net
interest yield on Card Member loans, reserves and net write-offs
related to uncollectible interest are recorded through provisions for
losses — Card Member loans; therefore, such reserves and net write-
offs are not included in the net interest yield calculation.
Net loss ratio — Represents the ratio of ICS and GCS charge card
write-offs consisting of principal (resulting from authorized and
unauthorized transactions) and fee components, less recoveries, on
Card Member receivables expressed as a percentage of gross amounts
billed to Card Members.
Net write-off rate — principal only — Represents the amount of
Card Member loans or USCS Card Member 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.
Net write-off rate — principal, interest and fees — Includes, in the
calculation of the net write-off rate, amounts for interest and fees in
addition to principal for Card Member loans, and fees in addition to
principal for USCS Card Member receivables.
Operating expenses — Represents salaries and employee benefits,
professional services, occupancy and equipment, communications and
other expenses.
Return on average equity — Calculated by dividing one-year period
net income by one-year average total shareholders’ equity.
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 —Computedinthe
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 the Capital Strategy section under
“Consolidated Capital Resources and Liquidity” for the definitions
under Basel I and Basel III.
Segment capital — Represents the capital allocated to a segment
based upon specific business operational needs, risk measures and
regulatory capital requirements.
Three-party network — A payment network, such as American
Express, that acts as both the card issuer and merchant acquirer.
Tier 1 common risk-based capital ratio — Refer to the Capital
Strategy section under “Consolidated Capital Resources and
Liquidity” for the definitions under Basel I and Basel III.
Tier 1 leverage ratio — Refer to the Capital Strategy section under
“Consolidated Capital Resources and Liquidity” for the definitions
under Basel I and Basel III.
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