Wells Fargo 2011 Annual Report Download - page 105

enhanced prudential standards on large bank holding companies
such as the Company, including enhanced capital, stress testing,
and liquidity requirements.
The Basel standards and FRB regulatory capital and liquidity
requirements may limit or otherwise restrict how we utilize our
capital, including common stock dividends and stock
repurchases, and may require us to increase our capital and/or
liquidity. Any requirement that we increase our regulatory
capital, regulatory capital ratios or liquidity could require us to
liquidate assets or otherwise change our business and/or
investment plans, which may negatively affect our financial
results. Although not currently anticipated, the proposed Basel
capital requirements and/or our regulators may require us to
raise additional capital in the future. Issuing additional common
stock may dilute the ownership of existing stockholders.
For more information, refer to the “Capital Management” and
“Regulatory Reform” sections in this Report and the “Regulation
and Supervision” section of our 2011 Form 10-K.
FRB policies, including policies on interest rates, can
significantly affect business and economic conditions
and our financial results and condition. The FRB regulates
the supply of money in the United States. Its policies determine
in large part our cost of funds for lending and investing and the
return we earn on those loans and investments, both of which
affect our net interest income and net interest margin. The FRB’s
interest rate policies also can materially affect the value of
financial instruments we hold, such as debt securities and MSRs.
In addition, its policies can affect our borrowers, potentially
increasing the risk that they may fail to repay their loans.
Changes in FRB policies are beyond our control and can be hard
to predict. As a result of the FRB’s concerns regarding, among
other things, continued slow economic growth and a weak
housing market, the FRB recently indicated that it intends to
keep the target range for the federal funds rate near zero at least
through late 2014. The FRB also may increase its purchases of
U.S. government and mortgage-backed securities or take other
actions in an effort to reduce or maintain low long-term interest
rates. As noted above, a declining or low interest rate
environment and a flattening yield curve which may result from
the FRB’s actions could negatively affect our net interest income
and net interest margin as it may result in us holding lower
yielding loans and investment securities on our balance sheet.
RISKS RELATED TO CREDIT AND OUR MORTGAGE
BUSINESS
As one of the largest lenders in the U.S., increased
credit risk, including as a result of a deterioration in
economic conditions, could require us to increase our
provision for credit losses and allowance for credit
losses and could have a material adverse effect on our
results of operations and financial condition. When we
loan money or commit to loan money we incur credit risk, or the
risk of losses if our borrowers do not repay their loans. As one of
the largest lenders in the U.S., the credit performance of our loan
portfolios significantly affects our financial results and condition.
As noted above, if the current economic environment were to
deteriorate, more of our customers may have difficulty in
repaying their loans or other obligations which could result in a
higher level of credit losses and provision for credit losses. We
reserve for credit losses by establishing an allowance through a
charge to earnings. The amount of this allowance is based on our
assessment of credit losses inherent in our loan portfolio
(including unfunded credit commitments). The process for
determining the amount of the allowance is critical to our
financial results and condition. It requires difficult, subjective
and complex judgments about the future, including forecasts of
economic or market conditions that might impair the ability of
our borrowers to repay their loans. We might increase the
allowance because of changing economic conditions, including
falling home prices and higher unemployment, or other factors.
For example, changes in borrower behavior or the regulatory
environment also could influence recognition of credit losses in
the portfolio and our allowance for credit losses.
Reflecting the continued improved credit performance in our
loan portfolios, our provision expense was $3.4 billion and
$2.0 billion less than net charge-offs in 2011 and 2010,
respectively, which had a positive effect on our earnings. Absent
significant deterioration in the economy, we expect future
allowance releases in 2012, although at more modest levels.
While we believe that our allowance for credit losses was
appropriate at December 31, 2011, there is no assurance that it
will be sufficient to cover future credit losses, especially if
housing and employment conditions worsen. In the event of
significant deterioration in economic conditions, we may be
required to build reserves in future periods, which would reduce
our earnings.
For more information, refer to the “Risk Management –
Credit Risk Management” and “Critical Accounting Policies –
Allowance for Credit Losses” sections in this Report.
We may have more credit risk and higher credit losses
to the extent our loans are concentrated by loan type,
industry segment, borrower type, or location of the
borrower or collateral. Our credit risk and credit losses can
increase if our loans are concentrated to borrowers engaged in
the same or similar activities or to borrowers who as a group may
be uniquely or disproportionately affected by economic or
market conditions. We experienced the effect of concentration
risk in 2009 and 2010 when we incurred greater than expected
losses in our home equity loan portfolio due to a housing
slowdown and greater than expected deterioration in residential
real estate values in many markets, including the Central Valley
California market and several Southern California metropolitan
statistical areas. As California is our largest banking state in
terms of loans and deposits, continued deterioration in real
estate values and underlying economic conditions in those
markets or elsewhere in California could result in materially
higher credit losses. As a result of the Wachovia merger, we have
increased our exposure to California, as well as to Arizona and
Florida, two states that have also suffered significant declines in
home values, as well as significant declines in economic activity.
Deterioration in economic conditions, housing conditions and
real estate values in these states and generally across the country
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