Wells Fargo Q4 2007 Earnings Call Transcript

| About: Wells Fargo (WFC)

Wells Fargo & Company (NYSE:WFC)

Q4 2007 Earnings Conference Call

January 16, 2008 8:30 am EST


Bob Strickland - Director, Investor Relations

Howard Atkins - Chief Financial Officer

Bob Strickland

Hello, this is Bob Strickland. Thank you for calling in to the Wells Fargo fourth quarter 2007 earnings review pre-recorded call.

Before we talk about our fourth quarter and full year results, we need to make the standard securities law disclosure.

In this call we will make forward-looking statements about specific income statement and balance sheet items and other measures of future results of operations and financial conditions such as statements about credit quality and future credit losses generally, specifically that we believe the allowance for credit losses is adequate for losses inherent in the loan portfolio at December 31, 2007, and we expect credit losses to be higher in 2008 than they were in 2007.

Forward-looking statements give our expectations about the future. They are not guarantees and results may differ from expectations.

Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update them to reflect changes that occur after that date.

For a discussion of some of the factors that may cause actual results to differ from expectations, refer to our SEC filings - including the 8-K filed today, which includes a press release announcing our fourth quarter results - and to our most recent annual and quarterly reports filed with the SEC and to the information incorporated into those documents.

Now, I will turn the review over to our Chief Financial Officer, Howard Atkins.

Howard Atkins

Thanks, Bob.

Despite the economic, housing and capital markets challenges in 2007, Wells Fargo's businesses performed well overall and relative to our industry peers. By focusing on the core fundamentals of our time-tested business model, we acquired new customers, solidified relationships through cross-sell, filled in our franchise with valuable acquisitions, grew revenues at double-digit rates once again and at a faster rate than expenses, and maintained our strong capital and liquidity positions. As a result, we generated double-digit growth in revenue, loans, deposits, and fee income for the year.

Fourth quarter diluted earnings per share of $0.41 included a previously announced credit reserve build that cost $0.27 per share, largely for expected future losses in our home equity portfolio originated in certain indirect channels through which we are no longer accepting business.

To date, the financial services industry has announced over $100 billion in credit reserve builds in asset write-downs. While we were not immune to the adverse economic environment, we largely avoided many of the problems and costly write-downs that other large financial institutions incurred.

The $1.4 billion credit provision in excess of charge-offs we took in the fourth quarter to build reserves represents less than 2% after tax of our common equity, significantly less as a percent of capital than almost all the financial institutions which have announced credit-related write-downs or reserve builds.

We had double-digit revenue growth of 10.4% for the full year, and revenue rose to a record $10.2 billion in the fourth quarter, up 8% year-over-year on 20% loan growth, 11% core deposit growth, and 8% fee growth.

Since we grew revenue more than expenses for the year, we once again had positive operating leverage, reflecting this strong revenue growth combined with disciplined expense management.

Our pre-tax, pre-provision profit - that is, our total revenue less non-interest expense grew to an annual record of $16.6 billion for the year, up 12% from 2006, and grew to a quarterly record of $4.3 billion, up 8% from fourth quarter 2006 and 12% annualized linked quarter.

I want to start with our typical review of how our diversified businesses performed, and how broad based our growth drivers continue to be in both our commercial and consumer businesses. I will then review our credit quality across our various loan portfolios.

Let me start with our commercial businesses.

Our Wholesale and Commercial Banking Group, which serves primarily middle-market customers and select niches in the large corporate market, had a strong quarter and year, with double-digit net income and revenue growth. These results reflect our ongoing focus on developing long-term relationships while avoiding riskier, one-off transactions.

Net income grew 20% from the fourth quarter of 2006, and revenue grew 14%, reflecting strong growth in commercial loans and business deposits and fee based business such as asset management, insurance and international.

Our Wholesale Banking Group achieved record earnings in each of the past nine years, including 2007. Cross-sell was 6.1 products per Wholesale relationship and 7.6 products per middle-market relationship; 31% of middle-market offices, located in 30 states coast to coast, have over eight products per customer.

Wholesale Banking Group's average loans grew 27% year-over-year as a result of new customers and opportunistic loan portfolio acquisitions. Asset-based lending, middle-market lending, commercial real estate and specialized financial services, which include our capital markets activities and relationships with Fortune 500 companies, all experienced double-digit loan growth.

Throughout the market disruption, we have been very clear that we are open for business, and we have been actively meeting the financing needs of our commercial customers. However, we remain focused on making quality loans and on maintaining the continued low level of loan losses in our Wholesale Group which I will describe in a moment. This reflects the benefit of the long-standing relationship orientation and conservative underwriting in this business.

Wholesale Banking Group's average core deposits were up $18 billion or 40% from the fourth quarter of 2006. The growth came primarily from large corporate and middle-market relationships, international and correspondent banking customers, and from higher institutional sweep and liquidity balances from our asset management customers.

The International Group had double-digit revenue and earnings growth for the quarter and for the year.

Due to volatility in the currency and credit markets, the Foreign Exchange Group traded a record $16 billion per day in transactions during the quarter, and quarterly volumes were up 51% from a year ago. We have foreign exchange sales and trading desks in San Francisco, New York, Minneapolis, and sales offices in 11 other markets. We also serve our customers through Foreign Exchange Online, the online foreign exchange platform on our industry leading commercial electronic office portal.

More than 70% of our commercial banking relationships are active users of our online business portal. Foreign Exchange Online grew revenue 24% in the fourth quarter.

We serve our retail and small business customers through approximately 325 international teller locations in our banking stores, with 40% revenue growth in the fourth quarter.

Despite a weak dollar, Wells Fargo customers continued to travel overseas, with bank note revenue up 25% in 2007.

Wells Fargo Insurance, Inc., our Consumer and Small Business Insurance Group, had double-digit revenue, up 32%, and double-digit earnings, up 45%, in the fourth quarter. Strong revenue growth was driven by homeowner's insurance, debt cancellation and crop insurance.

Cross-sell was also a major growth driver, with store and phone banker referrals to our insurance agents exceeding $1 million 2007, up 50% from 2006.

Wells Fargo Insurance Services, Inc., our middle-market commercial insurance broker, also continued to grow revenue and acquired insurance agencies in Minnesota, New Hampshire, Texas and California in the fourth quarter. A total of 16 insurance agency acquisitions were completed in 2007.

We continued to make it more convenient for our wholesale customers to do more business with Wells Fargo. Through our electronic deposit services, including the Internet-based Desktop Deposit Service, on several occasions we captured and cleared over 1 million check images and more than $2 billion in deposits in a single day.

In 2007, over 102 million checks were cleared electronically, over three times the total in 2006 and over $232 billion in deposit dollars were received electronically, more than double the amount in 2006.

Our electronic deposit services, including Desktop Deposit, now account for approximately 12% of our treasury management customers' checking deposit volume. Desktop Deposit is an important product for us because it adds convenience and flexibility for our customers, reduces our check processing expenses, and provides a good source of fee income for our treasury management business.

The Asset Management Group, which is responsible for managing and administering a total of $644 billion in client assets, had double-digit growth in revenue earnings and assets under management.

Assets under management were up 16% from the fourth quarter of 2006.

Wells Fargo Advantage Funds, our mutual fund business, grew average assets by 24% from a year ago, and ended the year with $155 billion in fund balances, making it the third-largest fund manager among U.S. banks. This growth was driven by strong fund performance and new balances. Over half of the Wells Fargo Advantage Funds were in the top two Lipper performance quintiles for the past three-year period. Wells Fargo Advantage Funds won 10 Mutual Fund Education Alliance awards, winning over 30% of the total awards - more than any competitor in our category, including Vanguard, Fidelity, T. Rowe Price and American Century.

Our capital markets business was largely not impacted by the credit crunch or market dislocations during the quarter, including industry problem areas of collateralized debt obligations, collateralized loan obligations, and structured investment vehicles.

On the investment side of this business, we operate within Wells Fargo's disciplined credit standards and regularly monitor and manage our securities portfolios to provide liquidity for the company and to build long-term portfolio yield.

From a lending standpoint, we have not participated in a significant way in any of the large leveraged buyouts that were covenant light, and we have minimal direct exposure to hedge funds. Similarly, we have not made a market in subprime securities.

Let me shift now to our Community Banking Group. Our Community Banking Group, which includes regional banking, wealth management, home equity, mortgage banking and retail Internet, had solid revenue growth, up 9% in the fourth quarter and up 11% in 2007.

Bottom-line results as reported for this business included the credit reserve build of $1.4 billion pre-tax.

Regional banking, serving 11 million households, continued to focus on helping customers achieve their financial goals, with record core product sales of $19.7 million in 2007, up 11% from 2006 on a comparable basis and $4.7 million in core product sales in the fourth quarter, up 12% from the fourth quarter of 2006 on a comparable basis.

California continued to be one of our fastest-growing states, with a 16% increase in core product sales from the fourth quarter of 2006 on a comparable basis. These strong sales results largely reflected greater productivity, with core sales per platform banker FTE of 4.93 per day in 2007, up from 4.75 per day in 2006.

With over 16,000 platform banker FTE across our 23 banking states, small increases in sales productivity results in meaningful increases in core product sales. The average retail bank household now has 5.5 products with Wells Fargo, up from 5.2 products a year ago and up from around three products in 1998.

Six of our 32 regions now have an average retail bank household cross-sell of over six; 22% of our retail customers had over eight products with us, our long-term goal, nearly double the amount of customers who bought eight products five years ago. And in our top region, 31% of our customers had over eight products with us.

Sales of Wells Fargo Packages, which include a checking account and at least three other products such as a debit card, a credit card, a savings account or home equity loan, we up 22% from the fourth quarter of 2006, purchased by 70% of new checking account customers.

Increased customer penetration and usage of credit and debit cards grew total card fee income by 22% from fourth quarter 2006 and 19% annualized on a linked-quarter basis.

At quarter end, 37% of our retail bank consumer households had a Wells Fargo credit card, up from 35% a year ago and up from 24% five years ago. Purchase volume on these cards was up 19% from fourth quarter 2006, and average balances were up 28%.

91% of our consumer checking account customers had a debit card, up from 85% five years ago, and purchase volume increased by 14% in the fourth quarter from a year ago.

Wells Fargo's best in class Rewards suite for our credit and debit card customers has contributed to both our growth in balances and purchase volume. In addition, customers are finding our patent-pending MySpendingReport a helpful tool for understanding and managing their spending.

Average core deposits of $315 billion, including $3.6 billion of deposits from Greater Bay Bancorp - an acquisition completed in the fourth quarter - grew 11% from a year ago and 11% annualized on a linked-quarter basis.

Average mortgage escrow deposits were down $392 million from the fourth quarter of 2006 and down $3 billion from the third quarter of 2007 due to slower mortgage repayments and the timing of tax payments.

Excluding mortgage escrow balances, total average core deposits grew 12% from the fourth quarter of 2006 and 16% annualized on a linked-quarter basis.

Average retail core deposits, which exclude wholesale banking and mortgage escrow deposits, were up 6% from a year ago and 10% annualized on a linked-quarter basis. The average balance per retail account continued to decline slightly, reflecting the increase in debt service and energy costs faced by many consumers.

Deposit mix continued to shift in favor of higher-yielding savings and CDs relative to lower-cost savings and demand deposit accounts.

Unlike many of our competitors, we lowered our deposit rates in the fourth quarter in connection with the Fed Funds rate cuts while continuing to grow both deposits and net new accounts, positioning us well for the future.

Consumer checking accounts were up a net 4.7% from last year, and small business checking accounts were up a net 3.6% from last year.

California continued to be our fastest-growing market, with new consumer checking accounts up a net 5.7%. This is the tenth consecutive quarter where net new accounts in California exceeded the average across our footprint.

We have also had good growth in deposit fees, which were up 13% from the fourth quarter of 2006.

We continue to better meet the financial needs of our small business customers. 2007 sales of store-based business solutions were up 16% from 2006 on a comparable basis, and fourth quarter sales were up 13% from fourth quarter 2006 on a comparable basis.

Sales of Wells Fargo Business Services Packages, which include a business checking account and at least three other business products, such as a business debit card, a business credit card, a business savings account, or business loan or a line of credit, were up 33% and purchased by 44% of new business checking account customers in the fourth quarter.

These strong sales results increased our cross-sell to our business banking households to 3.5, up from 3.3 a year ago. Bank loans to small businesses, loans primarily less than $100,000 on our business direct platform, grew 18% from the fourth quarter of 2006.

We continued to focus on delivering a great experience for our customers and measuring our progress through 50,000 store-based customer surveys per month, over 2 million surveys since we began surveying four years ago.

For customers transacting at the teller line, welcoming and wait time scores improved 11% and customer loyalty scores have improved 7% from 2006. One reason for this improvement is the increase in team member engagement. The more engaged our team members are, the better they serve our customers. In 2007, our team member engagement ratio increased to 8.5 to 1, up from 7.1 to 1 in 2006, more than four times the U.S. average of 2 to 1 and up from 2.5 to 1 five years ago. This continued to place Wells Fargo in the top quartile of all companies in the Gallup team member engagement database.

Our Wealth Management Group had another outstanding quarter, with revenue up 14% from a year ago. These results were driven by double-digit fee, deposit and loan growth. We are also attracting new customers and better penetrating our existing customer base with our expanding product line.

Strong customer trading activity and the introduction of the Wells Fargo Cash Sweep, an FDIC deposit sweep for brokerage accounts, drove our retail brokerage business to achieve 22% revenue growth and 17% net income growth in the fourth quarter of 2007 compared to fourth quarter of 2006.

Brokerage assets under administration reached $103 billion, increasing 10% from a year ago.

Wells Trade, our online brokerage service, introduced new pricing during the first quarter of 2007, offering 100 commission-free online trades per year to Wells Fargo PMA customers. This relationship-based pricing offer has increased new account openings by 42%, our self-directed assets under administration by 34%, and Wells Trade revenue by 26% from the fourth quarter of 2006.

Wells Fargo Wealth Management was recently named among the top 10 wealth managers in the United States by Barron's. Recognition and a flight to quality by customers during these challenging economic times continued to generate customer growth for us.

Wells Fargo continues to be a leader in retail online banking. At year end, we had 9.7 million active online consumers, up 13% from a year ago; 65% of all Wells Fargo consumer checking account customers are now active online customers.

We had 980,000 active online small business customers, up 18% from a year ago.

Internet sales continue to be an important channel for overall sales growth, with consumer product sales up 29% from the fourth quarter of 2006.

Wells Fargo launched another component of its Wells Fargo Mobile service, text banking. This addition makes Wells Fargo the first major financial services company in the country to offer its consumer and small business customers both browser and text-based account access through their mobile devices.

Let me now shift to mortgage banking. In a year in which many mortgage companies folded and most large originators incurred substantial losses, our mortgage business continued to grow and gain market share as we remained open for business for our existing and new customers.

Our owned servicing portfolio grew 12%, ending the year at a record $1.53 trillion. This serving portfolio growth significantly contributed to the 36% growth in our mortgage banking non-interest income for the year, 23% fourth quarter year-over-year growth.

The 73% fourth quarter year-over-year increase in net servicing fee income more than offset the 28% decline in net gains on mortgage loan origination and sales activities, once again demonstrating the value of our balanced mortgage business model.

Fourth quarter net servicing fee income included a net MSR gain of $280 million, consisting of a $1.9 billion reduction in the market value of MSRs due in part to the impact of more than a 40 basis point decline in 30-year mortgage rates offset by a $2.2 billion gain on the economic hedge of the MSR.

At December 31, the ratio of capitalized MSRs to the total amount of mortgages serviced for others was 1.2%, the lowest ratio in 10 quarters and a 15 basis point decline from the third quarter of 2007.

Net gains on mortgage loan origination and sales activities in the fourth quarter were adversely impacted by continuing illiquidity in the secondary mortgage markets for primarily ARM and nonconforming fixed-rate products. As a result, mortgage origination gains include $119 million of write-down during the fourth quarter to reflect the fair value of the mortgage warehouse and pipeline, which is comprised predominantly of prime mortgages.

During the quarter, nearly $15 billion of our warehouse loans were securitized, and about half retained as securities in our available for sale investment portfolio at very attractive yields. None of these new securities are collateralized by subprime loans.

In addition to the warehouse markdown, mortgage origination gains were reduced by $91 million, primarily to reflect a write-down of repurchased mortgage loans, and an increase in the repurchase reserve.

Net gain on mortgage loan origination sale activities also included a $58 million reduction in share value of servicing associated with mortgage loans held for sale.

During the last half of 2007, we continued to reduce our mortgage banking risk and improve profitability. These efforts, combined with the general decline in mortgage demand, caused our originations during the fourth quarter to decline to $56 billion, down $12 billion or 17% from the third quarter and down $14 billion or 20% from the fourth quarter of 2006. Much of this decline is attributable to actions we took, such as heightening credit standards and eliminating certain distribution channels and loan products. Most of the origination decline occurred in the correspondent and wholesale mortgage channels and in home equity originations.

We remained one of the nation's leading retail mortgage originators, with Wells Fargo home mortgage quarterly retail originations totalling $28 billion, down only $1 billion linked-quarter and year-over-year.

Our applications continue to be strong. At $91 billion, mortgage applications in the fourth quarter were seasonally down $4 billion on a linked-quarter basis or actually up $1 billion from the fourth quarter of 2006.

The unclosed pipeline of mortgage applications stood at a relatively high $43 billion at 12/31/07, down only 10% from a year ago.

Let me now shift to credit quality. Net charge-offs in the fourth quarter increased to $1.2 billion or 1.28% of loans annualized, up from $892 million in the third quarter. Almost half of the increase was concentrated in our consumer real estate portfolios, largely in home equity products and channels we have now discontinued.

In the commercial portfolios, the increase in charge-offs were primarily from loans originated through our business direct channel, while loss levels in our commercial loans to mid-size and large corporations continued to remain exceptionally low.

Total non-performing assets were $3.87 billion or 1.01% of loans in the fourth quarter compared with $3.18 billion or 0.88% of loans in the third quarter. The majority of the increase in non-performing assets was concentrated in the first mortgage portfolios, consistent with the rise in foreclosure rates in many markets.

Due to market conditions, it has taken longer to workout foreclosed properties than would typically be the case at stronger stages of the housing cycle.

Our non performing loan portfolio continued to have relatively low loss potential based on the high percentage of consumer real estate and auto secured loans, where we take an initial write-down to estimated net realizable value as the loan is transferred to non-performing status.

Loans 90 days or more past due and still accruing, excluding insured and guaranteed GNMA balances, increased by $296 million from the third quarter. This increase was concentrated in our consumer real estate and unsecured portfolios and was consistent with the increases in non-performing and net charge-offs previously mentioned.

Let me review the individual loan portfolios in detail, and I'll start by focusing on our exposure to the residential real estate market.

Our first mortgage portfolio continued to perform well in the fourth quarter, with annualized charge-offs of only 0.19%. In other words, only $32 million in fourth quarter losses on the entire $71 billion first mortgage portfolio. The $71 billion of first mortgages that were on our balance sheet at 12/31/2007 consisted primarily of $23 billion of debt consolidation loans at Wells Fargo Financial, $12 billion of home equity loans in the first mortgage position, and $36 billion of mostly prime customers, relationship-based first mortgages held at Wells Fargo Home Mortgage, regional banking, and our Wealth Management Group.

While our disciplined underwriting standards have resulted in first mortgage delinquencies considerably below industry levels, we continued to tighten our underwriting standards in the fourth quarter, including adjusting maximum LTVs based on local market conditions.

At year end, Wells Fargo Financial had $24 billion in U.S.-based real estate secured debt consolidation loans. These loans are for debt consolidation purposes, not for the purchase of a home. 96% of this portfolio was in the first lien position. Wells Fargo Financial has not originated any interest-only, stated income, option ARMs, or negative amortizing residential real estate loans. All U.S.-based debt consolidation loans are originated by Wells Fargo Financial team members. We do not use any brokers or correspondents in this business.

Wells Fargo Financial does not do any national advertising campaigns. New real estate customers primarily come from outbound calling to customers with an existing Wells Fargo relationship and where we can clearly demonstrate a tangible benefit for our customers by improving their financial situations through debt consolidation.

We conservatively underwrite these loans with full documentation, and we require income verification. 63% of the portfolio had a FICO score above 620. The average LTV was 79%. The average loan size was $130,000. Approximately 49% of the portfolio was fixed-rate loans. The remaining were 3/27 adjustable rate mortgages, with a fixed payment for the first three years of the loan. These loans do not contain initial rate adjusters on reset and were underwritten to the fully indexed rate.

This prudent product strategy, combined with cautious underwriting has resulted in better credit performance than published industry rates for non-prime mortgage portfolios.

While delinquency and charge-offs have increased in this portfolio due to the weak housing market, annualized net charge-offs in the fourth quarter were 31 basis points, with total fourth quarter losses of only $18 million on the entire $24 billion portfolio.

Our National Home Equity Group manages a portfolio of $84 billion in home equity loans. As we disclosed in November, we have identified $12 billion of higher-loss content home equity loans, primarily sourced through third-party originators, which were segregated into a liquidating portfolio under a dedicated management team.

The December annualized loss rate in the liquidating portfolio was 4.80%. This portfolio accounted for about half the total increase in home equity charge-offs in the fourth quarter. The liquidating portfolio was primarily sourced through third parties, where 55% had an updated combined loan-to-value of greater than 90%.

The remaining home equity portfolio of $72 billion had a December annualized loss rate of 0.86%; 16% of this portfolio was in the first position, and 63% in the second lien position were behind a Wells Fargo first mortgage. 98% were retail originated, which have performed better than loans originated through third-party channels; 25% had an updated combined loan-to-value greater than 90%.

While home equity financing continues to be an important relationship product that helps our customers manage their finances, we have exited most of our indirect wholesale and correspondent channels and tightened underwriting standards throughout our retail channels due to higher losses.

As we previously announced, Wells Fargo is no longer acquiring home equity loans through correspondent relationships and will no longer originate home equity loans through wholesalers unless the second mortgage is behind a Wells Fargo first mortgage and the combined loan-to-value ratio of the first and second mortgage is less than 90%.

In our continuing channels, we have developed MSA-based combined loan to value maximums based on market conditions which are reviewed monthly. For example, in severely distressed markets, the maximum combined loan-to-value is 75%.

We have eliminated borrower-selected reduced income documentation home equity loans. We have also reorganized the home equity business within our community banking segment to enhance the execution of our relationship-based strategy.

While we do not retain credit risk on the majority of our residential mortgage servicing portfolio, which services over 10 million mortgages, we closely monitor the credit performance of the portfolio. Over 90% of the mortgage loans we service are for prime customers. The vast majority of the subprime loans we service are held by investors, and the subprime loans originated by Wells Fargo Home Mortgage have historically had foreclosures that are half that of loans not originated by our company.

This outperformance is primarily a result of our long-standing responsible lending practices, which include focusing on the customer's ability to repay, providing the customer with the information needed to make fully informed decisions, and making only those loans that provide demonstrable benefit to the customer.

Delinquencies and foreclosures continued to increase as the housing market remained weak, however only 0.88% of our servicing portfolio - less than 1% was in foreclosure. Throughout 2007, our foreclosure rate was more than 20% better than the industry average.

We work hard at keeping people in their homes. For example, Wells Fargo worked closely with the U.S. Treasury Department, federal banking regulators, the HOPE NOW Alliance, and the American Securitization Forum to help launch Fast-Track for subprime ARM loan modifications and refinances. We will launch the Fast-Track program this month, and we continue to work to find additional ways to further assist our customers with delinquencies.

While loan modifications and foreclosures increase our servicing costs, many of these costs are reimbursed by investors, and we continue to have efficiency gains in other areas.

We continue to proactively staff our call centers in order to provide high-quality assistance for our customers.

Credit losses in our $27 billion auto portfolio at Wells Fargo Financial increased due primarily to expected seasonality in the second half of the year, including fourth quarter. Net auto charge-offs increased $21 million from the prior quarter and were up $10 million from the fourth quarter of 2006.

Delinquencies and 90 days past due and still accruing were up on a linked-quarter basis, but 90 days past due were down 19% from the fourth quarter 2006 peak.

Over 70% of the auto portfolio had FICO scores above 620. The size of our auto portfolio was essentially unchanged from last quarter and last year, reflecting tightening of account acquisition strategies to reduce loan volume in higher-risk tiers.

Two other retail portfolios that are important to our credit performance are credit card and business direct. The $11 billion community banking credit card portfolio was primarily issued to our banking customers within our banking states. Our relationship focus helps us to control loss rates, but losses are increasing from historical low levels as a result of higher bankruptcy rates and seasoning of the portfolio.

In response, we proactively manage these accounts by maintaining good collection capacity and modifying existing accounts, including reducing lines and closing accounts where appropriate.

Wells Fargo Financial has a $7.7 billion credit card portfolio. These cards are primarily sold to existing Wells Fargo Financial customers and through retail stores and manufacturers with large dealer networks, not through mass mailing campaigns.

Losses in this portfolio have increased, however we have made significant investments in default management and continue to tighten underwriting standards, a process that first started in the middle of 2006.

Our $11.6 billion business direct portfolio consists primarily of unsecured small loans and lines of credit to small business owners nationwide, with an average balance of less than $20,000. These loans are included in our commercial loan totals, but tend to perform in a manner similar to credit cards and unsecured consumer loans. Similar to our credit card portfolios, we continue to tighten our underwriting standards, including reducing line limits where appropriate.

Our remaining commercial and commercial real estate portfolios continue to produce good credit performance and healthy loan growth. This segment of our lending business benefits from our focus on deep and long-term relationships with middle market commercial, commercial real estate and small business customers as well as from diversifying the portfolio geographically and by product type.

At year end 2007, we had approximately $6 billion in residential one to four-family construction and land development loans, which is only about 1.5% of total loans. While losses in this portfolio are increasing due to the decline in the residential real estate market, losses remained acceptable because we maintained our credit discipline during the boom times of the real estate market.

Our commercial real estate management team has been together for over 20 years, and they have successfully managed our commercial real estate portfolio through numerous cycles and their experience is invaluable during the current real estate cycle.

With the additional $1.4 billion of loan loss provision above charge-offs in the fourth quarter, largely from home equity losses, our allowance for credit losses was $5.5 billion, up 37% from the third quarter. We believe the allowance is adequate for losses inherent in the loan portfolio at December 31, 2007.

In summary, the high credit losses we experienced late in the year were due in part to overall portfolio growth and the expected seasoning of portfolios following many quarters of unusually low loss rates. In addition, we experienced typical second half seasonality, especially in auto, higher loss rates in the liquidating home equity portfolio, which is now in runoff mode, and somewhat higher loss rates in the higher loan-to-value tier of the remaining home equity portfolio.

While continuing to prudently provide credit to existing and new customers throughout 2007, we took aggressive action to exit higher-risk indirect channels, slow growth in the ongoing home equity and auto portfolios by eliminating and/or tightening higher-risk tiers, focused resources ahead of the curve on early problem resolution, and enhance our collection and customer management processes.

Given the weakness in housing and the overall state of the U.S. economy, it is likely that charge-offs will be higher in 2008 than they were in 2007, but we believe our business model, the actions we've already taken to reduce risk, and our deep, experienced team, which has successfully managed through many prior cycles, will position us properly for the challenges that may be ahead, especially relative to our large bank peers.

On December 31, 2007, shareholders equity was $48 billion, up $2 billion from a year ago. Our leverage, tier-1 capital and total capital ratios were 6.83%, 7.59% and 10.68%, respectively. Our capital ratios remained very strong, reflecting our ongoing focus on producing high risk-adjusted returns in all of our activities, and in turn, giving us capacity to continue to take advantage of attractive growth opportunities to produce strong returns for our shareholders.

In the fourth quarter, we repurchased 83 million shares of Wells Fargo common stock. In 2007 overall, we repurchased 220 million shares, all but 80 million of which have been used to complete the acquisition of Placer Sierra Bancshares and Greater Bay Bancorp and also for employee stock option exercises, 401(k) matched contributions, and other employee benefit plans.

At December 31, 2007, 42 million shares remain available for repurchase under board authority.

One opportunity the challenging environment provides is the potential to do more acquisitions. Because of our strong balance sheet, we are in a strong position to take advantage of well-priced transactions. However, our disciplined M&A strategy has not changed, and we remain focused on niche opportunities that add to stockholder value. We will not do any acquisitions unless they meet our longstanding financial criteria for accretion and returns.

During the quarter, we completed the acquisition of Greater Bay Bancorp with $7.4 billion in assets, our third-largest bank acquisition in our company's history, making 2007 our most active banking deal year since 2000.

We also just announced our agreement to acquire the banking operations of United Bancorporation of Wyoming, with $1.7 billion in assets. After completing this acquisition, Wells Fargo will be the number one in both deposits and assets among banks in Wyoming, that nation's ninth fastest-growing state.

Our preferred use of capital is to invest in our businesses, particularly to build and strengthen our distribution. In 2007, we opened 87 banking stores and converted 42 banking stores from acquisitions, bringing our total retail store count to 3,298. We also added eight new commercial offices, and continue to add to our ATM network, adding 153 new, web-enabled ATMs and converting 908 to envelope-free ATMS during the year.

We added a total of 578 platform banker FTEs in 2007 through both hiring and acquisitions.

The company's effective tax rate for full year 2007 was 30.7% compared with 33.44% for 2006. Income tax expense for 2007 included FIN 48 tax benefits of $235 million for the full year, of which $130 million was in the fourth quarter, as well as the impact of lower pre-tax earnings in relation to the level of tax exempt income and tax credits.

The tax benefits recorded in 2007 primarily related to the resolution of certain matters with federal and state taxing authorities and statute expirations, reduced by accruals for uncertain tax positions in accordance with FASB Interpretation No. 48.

In summary, despite a turbulent housing market and credit crunch, 2007 was another solid year for Wells Fargo, with double-digit revenue, double-digit loan, and double-digit deposit growth, increases in market share and wallet share, as well as effective expense management.

While we did have an increase in credit costs, our costs were lower compared with most of those peers who also experienced credit and or asset write-downs.

Our absolute and relative liquidity and capital positioned us better than peers to take advantage of opportunities as asset risk becomes properly priced. We look forward to taking advantage of these opportunities while maintaining our long-standing financial discipline in 2008.

Thank you for listening, and if you have any questions, please call Bob Strickland, Director of Investor Relations, at 415-396-0523.

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