American Express 2010 Annual Report Download - page 42

The following table presents the regulatory risk-based capital
ratios and leverage ratio for the Company and its significant
banking subsidiaries, as well as additional ratios widely utilized
in the market place, as of the fourth quarter of 2010:
Well-
Capitalized
Ratio Actual
Risk-Based Capital
Tier 1 6%
American Express Company 11.1%
Centurion Bank 18.3%
FSB 16.3%
Total 10%
American Express Company 13.1%
Centurion Bank 19.5%
FSB
(a)
18.8%
Tier 1 Leverage 5%
American Express Company 9.3%
Centurion Bank 19.4%
FSB 16.1%
Tier 1 Common Risk-Based
American Express Company 11.1%
Common Equity to Risk-
Weighted Assets
American Express Company 13.7%
Tangible Common Equity to
Risk-Weighted Assets
American Express Company 10.7%
(a) Refer to Note 23 to the Consolidated Financial Statements for further
discussion of FSB’s Total capital ratio.
On December 16, 2010, the Basel Committee on Banking
Supervision issued the Basel III rules text, which presents
details of global regulatory standards on bank capital
adequacy and liquidity agreed to by Governors and Heads of
Supervision, and endorsed by the G20 Leaders at their
November 2010 summit. Basel III, when implemented by the
U.S. banking agencies and fully phased-in, will require bank
holding companies and their bank subsidiaries to maintain
substantially more capital, with a greater emphasis on
common equity. While final implementation of the rules
related to capital ratios will be determined by the Federal
Reserve, the Company estimates that had the new rules been
in place during the fourth quarter of 2010, the reported Tier 1
risk-based capital and Tier 1 common risk-based ratios would
decline by approximately 50 basis points. In addition, the impact
of the new rules on the reported Tier 1 leverage ratio would be a
decline of approximately 150 basis points.
The following provides definitions for the Company’s regulatory
risk-based capital ratios and leverage ratio, all of which are
calculated as per standard regulatory guidance:
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. The off-balance
sheet items comprise a minimal part of the overall calculation.
Risk-weighted assets as of December 31, 2010 were $118.3 billion.
Tier 1 Risk-Based Capital Ratio — The 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 (not applicable to the Company),
and noncontrolling interests in consolidated subsidiaries,
adjusted for ineligible goodwill and intangible assets, as well
as certain other comprehensive income items as follows: net
unrealized gains/losses on securities and derivatives, and net
unrealized pension and other postretirement benefit losses, all
net of tax. Tier 1 capital as of December 31, 2010 was
$13.1 billion. 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.
Total Risk-Based Capital Ratio — The total risk-based capital
ratio is calculated as the sum of Tier 1 capital and Tier 2 capital,
divided by risk-weighted assets. Tier 2 capital is the sum of the
allowance for receivable and loan losses (limited to 1.25 percent
of risk-weighted assets) and 45 percent of the unrealized gains
on equity securities, plus a $750 million subordinated hybrid
security, for which the Company received approval from the
Federal Reserve Board for treatment as Tier 2 capital. Tier 2
capital as of December 31, 2010 was $2.4 billion.
Tier 1 Leverage Ratio — The Tier 1 leverage ratio is calculated by
dividing Tier 1 capital by the Company’s average total
consolidated assets for the most recent quarter. Average
consolidated assets as of December 31, 2010 were $141.3 billion.
The following provides definitions for capital ratios widely used
in the marketplace, although they may be calculated differently
by different companies.
Tier 1 Common Risk-Based Capital Ratio — The Tier 1 common
risk-based capital ratio is calculated as Tier 1 common capital
divided by risk weighted assets. As of December 31, 2010, the
Tier 1 common capital was $13.1 billion and is calculated as
Tier 1 capital less (a) certain noncontrolling interests (applicable
but immaterial for the Company), (b) qualifying perpetual
preferred stock and (c) trust preferred securities. Items
(b) and (c) are not applicable for the Company. While this
was not one of the required risk-based capital ratios for
regulatory reporting purposes, it was submitted to the Federal
Reserve on January 7, 2011 as part of its 2011 Capital
Plan Review.
Common Equity and Tangible Common Equity to Risk-Weighted
Assets Ratios — Common equity equals the Company’s
shareholders’ equity of $16.2 billion as of December 31, 2010,
and tangible common equity equals common equity, less
goodwill and other intangibles of $3.6 billion. Management
believes presenting the ratio of tangible common equity to
risk-weighted assets is a useful measure of evaluating the
strength of the Company’s capital position.
40
AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW