Wells Fargo 2006 Annual Report Download - page 116

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(in billions) To be well capitalized
For capital under the FDICIA prompt
Actual adequacy purposes corrective action provisions
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 2006:
Total capital (to risk-weighted assets)
Wells Fargo & Company $51.4 12.50% >$32.9 >8.00%
Wells Fargo Bank, N.A. 40.6 12.05 > 27.0 >8.00 >$33.7 >10.00%
Tier 1 capital (to risk-weighted assets)
Wells Fargo & Company $36.8 8.95% >$16.5 >4.00%
Wells Fargo Bank, N.A. 29.2 8.66 > 13.5 >4.00 >$20.2 > 6.00%
Tier 1 capital (to average assets)
(Leverage ratio)
Wells Fargo & Company $36.8 7.89% >$18.7 >4.00%
(1)
Wells Fargo Bank, N.A. 29.2 7.46 > 15.7 >4.00
(1)
>$19.6 > 5.00%
(1) The leverage ratio consists of Tier 1 capital divided by quarterly average total assets, excluding goodwill and certain other items. The minimum leverage ratio guideline
is 3% for banking organizations that do not anticipate significant growth and that have well-diversified risk, excellent asset quality, high liquidity, good earnings,
effective management and monitoring of market risk and, in general, are considered top-rated, strong banking organizations.
Note 25: Regulatory and Agency Capital Requirements
The Company and each of its subsidiary banks are subject to
various regulatory capital adequacy requirements administered
by the Federal Reserve Board (FRB) and the OCC, respectively.
The Federal Deposit Insurance Corporation Improvement
Act of 1991 (FDICIA) required that the federal regulatory
agencies adopt regulations defining five capital tiers for banks:
well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized.
Failure to meet minimum capital requirements can initiate
certain mandatory, and possibly additional discretionary,
actions by regulators that, if undertaken, could have a
direct material effect on our financial statements.
Quantitative measures, established by the regulators to
ensure capital adequacy, require that the Company and each
of the subsidiary banks maintain minimum ratios (set forth
in the table below) of capital to risk-weighted assets. There
are three categories of capital under the guidelines. Tier 1
capital includes common stockholders’ equity, qualifying
preferred stock and trust preferred securities, less goodwill
and certain other deductions (including a portion of servicing
assets and the unrealized net gains and losses, after taxes, on
securities available for sale). Tier 2 capital includes preferred
stock not qualifying as Tier 1 capital, subordinated debt,
the allowance for credit losses and net unrealized gains on
marketable equity securities, subject to limitations by the
guidelines. Tier 2 capital is limited to the amount of Tier 1
capital (i.e., at least half of the total capital must be in the
form of Tier 1 capital). Tier 3 capital includes certain
qualifying unsecured subordinated debt.
We do not consolidate our wholly-owned trusts (the Trusts)
formed solely to issue trust preferred securities. The amount of
trust preferred securities issued by the Trusts that was includable
in Tier 1 capital in accordance with FRB risk-based capital
guidelines was $4.1 billion at December 31, 2006. The junior
subordinated debentures held by the Trusts were included in
the Company’s long-term debt. (See Note 12.)
Under the guidelines, capital is compared with the relative
risk related to the balance sheet. To derive the risk included
in the balance sheet, a risk weighting is applied to each balance
sheet asset and off-balance sheet item, primarily based on the
relative credit risk of the counterparty. For example, claims
guaranteed by the U.S. government or one of its agencies are
risk-weighted at 0% and certain real estate related loans
risk-weighted at 50%. Off-balance sheet items, such as loan
commitments and derivatives, are also applied a risk weight
after calculating balance sheet equivalent amounts. A credit
conversion factor is assigned to loan commitments based on
the likelihood of the off-balance sheet item becoming an
asset. For example, certain loan commitments are converted
at 50% and then risk-weighted at 100%. Derivatives are
converted to balance sheet equivalents based on notional
values, replacement costs and remaining contractual terms.
(See Notes 6 and 26 for further discussion of off-balance
sheet items.) For certain recourse obligations, direct credit
substitutes, residual interests in asset securitization, and
other securitized transactions that expose institutions
primarily to credit risk, the capital amounts and classification
under the guidelines are subject to qualitative judgments
by the regulators about components, risk weightings and
other factors.
Management believes that, as of December 31, 2006, the
Company and each of the covered subsidiary banks met all
capital adequacy requirements to which they are subject.
The most recent notification from the OCC categorized
each of the covered subsidiary banks as well capitalized,
under the FDICIA prompt corrective action provisions
applicable to banks. To be categorized as well capitalized,
the institution must maintain a total risk-based capital ratio
as set forth in the table above and not be subject to a
capital directive order. There are no conditions or events