American Express 2014 Annual Report Download - page 62

AMERICAN EXPRESS COMPANY
2014 FINANCIAL REVIEW
Discount revenue — Represents revenue earned from fees generally charged to merchants with whom we have entered into a card
acceptance agreement for processing Card Member transactions. The discount fee generally is deducted from our 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) debt, which primarily
relates to interest expense on our 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 other.
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 our 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.
Liquidity Coverage Ratio — Represents the proposed minimum standards being established by the regulatory agencies as a measure to
determine whether the regulated entity has sufficient liquidity to meet liquidity needs in periods of financial and economic stress.
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
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 and ICS Card Member receivables written
off consisting of principal (resulting from authorized transactions), less recoveries, as a percentage of the average loan balance or USCS and
ICS 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 and ICS 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.
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