Wells Fargo 2010 Annual Report Download - page 84

We have an active program for managing stockholders’ equity
and regulatory capital and we maintain a comprehensive process
for assessing the Company’s overall capital adequacy. We
generate capital internally primarily through the retention of
earnings net of dividends. Our objective is to maintain capital
levels at the Company and its bank subsidiaries above the
regulatory “well-capitalized” thresholds by an amount
commensurate with our risk profile. Our potential sources of
stockholders’ equity include retained earnings and issuances of
common and preferred stock. Retained earnings increased
$10.4 billion from December 31, 2009, predominantly from
Wells Fargo net income of $12.4 billion, less common and
preferred dividends of $1.8 billion. During 2010, we issued
approximately 87 million shares of common stock, with net
proceeds of $1.4 billion, including 28 million shares during the
period under various employee benefit (including our employee
stock option plan) and director plans, as well as under our
dividend reinvestment and direct stock purchase programs.
Capital Management
On April 29, 2010, following stockholder approval, the
Company amended its certificate of incorporation to provide for
an increase in the number of shares of the Company’s common
stock authorized for issuance from 6 billion to 9 billion.
From time to time the Board authorizes the Company to
repurchase shares of our common stock. Although we announce
when the Board authorizes share repurchases, we typically do
not give any public notice before we repurchase our shares.
Various factors determine the amount and timing of our share
repurchases, including our capital requirements, the number of
shares we expect to issue for acquisitions and employee benefit
plans, market conditions (including the trading price of our
stock), and regulatory and legal considerations. The FRB
published clarifying supervisory guidance in first quarter 2009
and amended in December 2009, SR 09-4 Applying
Supervisory Guidance and Regulations on the Payment of
Dividends, Stock Redemptions, and Stock Repurchases at Bank
Holding Companies, pertaining to the FRB’s criteria,
assessment and approval process for reductions in capital. As
with all 19 participants in the FRB’s Supervisory Capital
Assessment Program (SCAP), under this supervisory letter,
before repurchasing our common shares, we must consult with
the FRB staff and demonstrate that the proposed actions are
consistent with the existing supervisory guidance, including
demonstrating that our internal capital assessment process is
consistent with the complexity of our activities and risk profile.
In 2008, the Board authorized the repurchase of up to 25 million
additional shares of our outstanding common stock. During
2010, we repurchased 3 million shares of our common stock, all
from our employee benefit plans. At December 31, 2010, the
total remaining common stock repurchase authority from the
2008 authorization was approximately 3 million shares.
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 additional 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 management may determine that
during a pending stock merger or acquisition when the safe
harbor would otherwise be available, 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 pending stock merger or acquisition.
In connection with our participation in the TARP Capital
Purchase Program (CPP), we issued to the U.S. Treasury
Department warrants to purchase 110,261,688 shares of our
common stock with an exercise price of $34.01 per share
expiring on October 28, 2018. On May 26, 2010, in an auction by
the U.S. Treasury, we purchased 70,165,963 of the warrants at a
price of $7.70 per warrant. In addition, we purchased
651,244 warrants from the open market throughout the year. At
December 31, 2010, 39,444,481 warrants were outstanding and
exercisable. In June 2010, the Board authorized the purchase of
up to $1 billion of the warrants, including the warrants
purchased in the auction. As of December 31, 2010, $455 million
of that authority remained. Depending on market conditions, we
may purchase from time to time additional warrants and/or our
outstanding debt securities in privately negotiated or open
market transactions, by tender offer or otherwise.
The Company and each of our subsidiary banks are subject to
various regulatory capital adequacy requirements administered
by the FRB and the OCC. Risk-based capital (RBC) guidelines
establish a risk-adjusted ratio relating capital to different
categories of assets and off-balance sheet exposures. At
December 31, 2010, the Company and each of our subsidiary
banks were “well capitalized” under applicable regulatory capital
adequacy guidelines. See Note 25 (Regulatory and Agency
Capital Requirements) to Financial Statements in this Report for
additional information.
Current regulatory RBC rules are based primarily on broad
credit-risk considerations and limited market-related risks, but
do not take into account other types of risk a financial company
may be exposed to. Our capital adequacy assessment process
contemplates a wide range of risks that the Company is exposed
to and also takes into consideration our performance under a
variety of economic conditions, as well as regulatory
expectations and guidance, rating agency viewpoints and the
view of capital market participants.
Wells Fargo was a participant in the FRB’s Capital Plan
Review in December 2010. We submitted a Capital Plan Review
including proposed future dividends and share repurchase
programs to the FRB on January 7, 2011. We cannot guarantee
whether or when the FRB will approve our Capital Plan Review
or what other conditions the FRB may impose on us in order to
increase our common stock dividend or repurchase shares.
In July 2009, the Basel Committee on Bank Supervision
published an additional set of international guidelines for review
known as Basel III and finalized these guidelines in December
2010. The additional guidelines were developed in response to
the financial crisis of 2009 and 2010 and address many of the
weaknesses identified in the banking sector as contributing to
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