Wells Fargo 2008 Annual Report Download - page 76

Comparison of 2007 with 2006
Our financial results included the following:
Net income in 2007 was $8.06 billion ($2.38 per share),
compared with $8.42 billion ($2.47 per share) in 2006. Results
for 2007 included the impact of a $1.4 billion (pre tax) credit
reserve build ($0.27 per share) and $203 million of Visa litiga-
tion expenses ($0.04 per share), and for 2006 included $95
million ($0.02 per share) of Visa litigation expenses. Despite
the challenging environment in 2007, we had a solid year and
achieved both double-digit top line revenue growth and posi-
tive operating leverage (revenue growth of 10.4% exceeding
expense growth of 9.5%).
The financial services industry faced unprecedented chal-
lenges in 2007. Home values declined abruptly and sharply,
adversely impacting the consumer lending business of many
financial service providers; credit spreads widened as the capital
markets repriced in many asset classes; price volatility increased
and market liquidity decreased in several sectors of the capital
markets; and, late in the year, economic growth declined sharply.
We were not immune to these unprecedented external
factors. Our provision for credit losses was $2.7 billion higher
in 2007 than in 2006, reflecting $1.3 billion in additional
provisions for actual charge-offs that occurred in 2007 and a
$1.4 billion provision to further build reserves for loan losses.
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Historically, our policy has been to repurchase shares
under the “safe harbor” conditions of Rule 10b-18 of the
Securities Exchange Act of 1934 including a limitation on the
daily volume of repurchases. Rule 10b-18 imposes an addi-
tional daily volume limitation on share repurchases during a
pending merger or acquisition in which shares of our stock
will constitute some or all of the consideration. Our manage-
ment may determine that during a pending stock merger or
acquisition when the safe harbor would otherwise be avail-
able, it is in our best interest to repurchase shares in excess
of this additional daily volume limitation. In such cases, we
intend to repurchase shares in compliance with the other
conditions of the safe harbor, including the standing daily
volume limitation that applies whether or not there is a pend-
ing stock merger or acquisition.
Our potential sources of capital include retained earnings
and issuances of common and preferred stock. In 2008,
retained earnings decreased $2.4 billion, predominantly as a
result of net income of $2.7 billion less common and preferred
dividends and accretion of $4.6 billion. In 2008, we issued
468.5 million shares in a common stock offering to the public
valued at $12.3 billion. We also issued approximately 86 mil-
lion shares of common stock valued at $2.3 billion under vari-
ous employee benefit and director plans (including shares
issued for our ESOP plan) and under our dividend reinvest-
ment and direct stock purchase programs, and we issued
approximately 429 million shares of common stock valued
at $14.6 billion for acquisitions, including $14.4 billion (as of
the announcement date of the acquisition) for the Wachovia
acquisition. Wachovia shareholders received 0.1991 shares
of Wells Fargo common stock in exchange for each share
of Wachovia common stock they owned, for a total of
422.7 million shares of Wells Fargo common stock. Shares of
each outstanding series of Wachovia preferred stock were
converted into shares (or fractional shares) of a correspond-
ing series Wells Fargo preferred stock having substantially
the same rights and preferences.
On October 28, 2008, at the request of the United States
Department of the Treasury (Treasury Department) and pur-
suant to a Letter Agreement and related Securities Purchase
Agreement dated October 26, 2008 (the Securities Purchase
Agreements), we issued 25,000 shares of Wells Fargo’s Fixed
Rate Cumulative Perpetual Preferred Stock, Series D without
par value, having a liquidation amount per share equal to
$1,000,000, for a total price of $25 billion. We pay cumulative
dividends on the preferred securities at a rate of 5% per year
for the first five years and thereafter at a rate of 9% per year.
Unless permitted under the provisions of the American
Recovery and Reinvestment Act of 2009, we may not redeem
the preferred securities during the first three years except
with the proceeds from a “qualifying equity offering.” After
three years, we may, at our option, redeem the preferred secu-
rities at par value plus accrued and unpaid dividends. The
preferred securities are generally non-voting. Prior to
October 28, 2011, unless we have redeemed the preferred
securities or the Treasury Department has transferred the
preferred securities to a third party, the consent of the
Treasury Department will be required for us to increase our
common stock dividend or repurchase our common stock or
other equity or capital securities, other than in connection
with benefit plans consistent with past practice and certain
other circumstances specified in the Securities Purchase
Agreements. The terms of the Treasury Department’s pur-
chase of the preferred securities include certain restrictions
on certain forms of executive compensation and limits on the
tax deductibility of compensation we pay to executive man-
agement. As part of its purchase of the preferred securities,
the Treasury Department also received warrants to purchase
110,261,688 shares of our common stock at an initial per share
exercise price of $34.01, subject to customary anti-dilution
provisions. The warrants expire ten years from the issuance
date. Both the preferred securities and warrants will be
accounted for as components of Tier 1 capital.
The Company and each of our subsidiary banks are sub-
ject to various regulatory capital adequacy requirements
administered by the Federal Reserve Board and the OCC.
Risk-based capital guidelines establish a risk-adjusted ratio
relating capital to different categories of assets and off-bal-
ance sheet exposures. At December 31, 2008, the Company
and each of our subsidiary banks were “well capitalized”
under applicable regulatory capital adequacy guidelines. See
Note 26 (Regulatory and Agency Capital Requirements) to
Financial Statements for additional information.