Wells Fargo 2010 Annual Report Download - page 42

Earnings Performance (continued)
Net Interest Income
Net interest income is the interest earned on debt securities,
loans (including yield-related loan fees) and other interest-
earning assets minus the interest paid for deposits, short-term
borrowings and long-term debt. The net interest margin is the
average yield on earning assets minus the average interest rate
paid for deposits and our other sources of funding. Net interest
income and the net interest margin are presented on a taxable-
equivalent basis in Table 5 to consistently reflect income from
taxable and tax-exempt loans and securities based on a 35%
federal statutory tax rate.
Net interest income on a taxable-equivalent basis was
$45.4 billion in 2010, compared with $47.0 billion in 2009, and
$25.4 billion in 2008. The net interest margin was 4.26% in
2010, down 2 basis points from 4.28% in 2009 and 2009 was
down 55 basis points from 4.83% in 2008. During 2010, net
interest income was affected by prepayments of higher yielding
mortgage-backed securities, relatively soft commercial loan
demand, and planned runoff of liquidating loan portfolios. The
impact of these factors was mitigated by disciplined deposit
pricing and reduced market funding costs. For 2009, changes in
net interest income from 2008 were primarily due to the impact
of acquiring Wachovia. Although the addition of Wachovia
increased earning assets and net interest income, it decreased
the net interest margin because Wachovia’s net interest margin
was lower than that of legacy Wells Fargo.
Table 4 presents the components of earning assets and
funding sources as a percentage of earning assets to provide a
more meaningful analysis of year-over-year changes that
influenced net interest income.
The mix of earning assets and their yields are important
drivers of net interest income. During 2010, there were slight
shifts in our earning asset mix from loans and investments to
more liquid assets. Although total loans increased during fourth
quarter 2010, the soft loan demand earlier in 2010 and in 2009,
as well as the impact of liquidating certain loan portfolios,
reduced average loans in 2010 to 72% of average earning assets
from 75% for 2009 and from 76% in 2008. Also, average
mortgage-backed securities (MBS) dropped to 10% in 2010 from
12% in 2009 and 13% in 2008. Average short-term investments
and trading account assets increased to 9% in 2010 from 4% in
2009 and 2% in 2008.
Average interest-bearing deposits increased to 59% of
average earning assets for 2010, from 58% for 2009 and 51% for
2008. Average short-term borrowings decreased to 4% of
average earning assets from 5% for 2009 and 13% for 2008.
Average interest-bearing deposits increased as a percentage of
funding for earning assets in 2010, yet the cost of deposits
declined significantly as the mix shifted from higher cost
certificates of deposit to checking and savings products, which
were at lower yields in 2010 due to the prolonged low interest
rate environment. Core deposits are a low-cost source of funding
and thus an important contributor to growth in net interest
income and the net interest margin. Core deposits include
noninterest-bearing deposits, interest-bearing checking, savings
certificates, certain market rate and other savings, and certain
foreign deposits (Eurodollar sweep balances). Average core
deposits rose to $772.0 billion in 2010 from $762.5 billion in
2009 and funded 100% and 93% of average loans, respectively.
In 2008, core deposits of legacy Wells Fargo funded 82% of
average loans. About 90% of our core deposits are now in
checking and savings deposits, one of the highest percentages in
the industry.
Table 5 presents the individual components of net interest
income and the net interest margin. The effect on interest
income and costs of earning asset and funding mix changes
described above, combined with rate changes during 2010, are
analyzed in Table 6.
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