Wells Fargo 2007 Annual Report Download - page 69

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Risk Factors
An investment in the Company has risk. We discuss below
and elsewhere in this Report and in other documents we file
with the SEC various risk factors that could cause our finan-
cial results and condition to vary significantly from period to
period. We refer you to the Financial Review section and
Financial Statements and related Notes in this Report for
more information about credit, interest rate and market risks
and to the “Regulation and Supervision” section of our 2007
Form 10-K for more information about legislative and regu-
latory risks. Any factor described below or elsewhere in this
Report or in our 2007 Form 10-K could, by itself or together
with other factors, have a material negative effect on our
financial results and condition and on the value of an invest-
ment in Wells Fargo. Refer to our quarterly reports on Form
10-Q that we will file with the SEC in 2008 for material
changes to the discussion of risk factors.
In accordance with the Private Securities Litigation
Reform Act of 1995, we caution you that one or more of the
factors discussed below, in the Financial Review section of
this Report, in the Financial Statements and related Notes
included in this Report, in the 2007 Form 10-K, or in other
documents we file with the SEC from time to time could
cause us to fall short of expectations for our future financial
and business performance that we may express in forward-
looking statements. We make forward-looking statements
when we use words such as “believe,” “expect,” “antici-
pate,” “estimate,” “will,” “may,” “can” and similar expres-
sions. Do not unduly rely on forward-looking statements.
Actual results may differ significantly from expectations.
Forward-looking statements speak only as of the date made.
We do not undertake to update them to reflect changes or
events that occur after that date.
rates above 5% at year-end 2006, our cumulative sales of
ARMs and debt securities from mid-2004 to mid-2006 had a
positive impact on our net interest margin and net interest
income. We completed our sales of over $90 billion of
ARMs since mid-2004 with the sales of $26 billion of ARMs
in second quarter 2006. Average earning assets grew 8%
from 2005, or 17% excluding 1-4 family first mortgages (the
loan category that includes ARMs). Our net interest margin
was 4.83% for 2006, compared with 4.86% in 2005.
Noninterest income increased 9% to $15.7 billion in
2006 from $14.4 billion in 2005. Growth in noninterest
income was driven by growth across our businesses, with
particular strength in trust and investment fees (up 12%),
card fees (up 20%), insurance fees (up 10%) and gains on
equity investments (up 44%).
Revenue, the sum of net interest income and noninterest
income, increased 8% to a record $35.7 billion in 2006 from
$32.9 billion in 2005. Home Mortgage revenue decreased
$704 million (15%) to $4.2 billion in 2006 from $4.9 billion
in 2005. Combined revenue in businesses other than Home
Mortgage grew 12% from 2005 to 2006, with double-digit
revenue growth in virtually every major business line other
than Home Mortgage.
Noninterest expense was $20.8 billion in 2006, up 10%
from $19.0 billion in 2005, primarily due to continued
investments in new stores and additional sales and service-
related team members. We began expensing stock options on
January 1, 2006. Total stock option expense reduced 2006
earnings by approximately $0.025 per share.
During 2006, net charge-offs were $2.25 billion (0.73%
of average total loans), compared with $2.28 billion (0.77%)
during 2005. Net charge-offs for auto loans increased $160
million in 2006 partially due to growth and seasoning, but
largely due to collection capacity constraints and restrictive
payment extension practices that occurred when Wells Fargo
Financial integrated its prime and nonprime auto loan businesses
during 2006. Net charge-offs for 2005 included $171 million
of incremental fourth quarter bankruptcy losses and increased
net charge-offs of $163 million in first quarter 2005 to con-
form Wells Fargo Financial’s charge-off practices to more
stringent Federal Financial Institutions Examination Council
guidelines. The provision for credit losses was $2.20 billion
in 2006, down $179 million from $2.38 billion in 2005. The
2005 provision for credit losses also included $100 million
for estimated charge-offs related to Hurricane Katrina. We
subsequently realized approximately $50 million of Katrina-
related losses. Because we no longer anticipated further credit
losses attributable to Katrina, we released the remaining
$50 million reserve in 2006. The allowance for credit losses,
which consists of the allowance for loan losses and the reserve
for unfunded credit commitments, was $3.96 billion, or
1.24% of total loans, at December 31, 2006, compared
with $4.06 billion (1.31%) at December 31, 2005.
At December 31, 2006, total nonaccrual loans were
$1.67 billion (0.52% of total loans), up from $1.34 billion
(0.43%) at December 31, 2005. Total nonperforming assets
were $2.42 billion (0.76% of total loans) at December 31,
2006, compared with $1.53 billion (0.49%) at December 31,
2005. Foreclosed assets were $745 million at December 31,
2006, compared with $191 million at December 31, 2005.
Foreclosed assets, a component of total nonperforming assets,
included an additional $322 million of foreclosed real estate
securing GNMA loans at December 31, 2006, due to a
change in regulatory reporting requirements effective January 1,
2006. The foreclosed real estate securing GNMA loans of
$322 million represented 10 basis points of the ratio of
nonperforming assets to loans at December 31, 2006.