Wells Fargo 2013 Annual Report Download - page 38

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.
While the Company believes that it has the ability to increase
net interest income over time, net interest income and the net
interest margin in any one period can be significantly affected by
a variety of factors including the mix and overall size of our
earning assets portfolio and the cost of funding those assets. In
addition, some variable sources of interest income, such as
resolutions from purchased credit-impaired (PCI) loans, loan
prepayment fees and collection of interest on nonaccrual loans,
can vary from period to period. Net interest income growth has
been challenged during the prolonged low interest rate
environment as higher yielding loans and securities runoff have
been replaced with lower yielding assets. The pace of this
repricing has slowed in recent periods.
Net interest income on a taxable-equivalent basis was
$43.6 billion in 2013, compared with $43.9 billion in 2012, and
$43.5 billion in 2011. The net interest margin was 3.39% in 2013,
down 37 basis points from 3.76% in 2012 and down 55 basis
points from 3.94% in 2011. The decrease in net interest income
for 2013, compared with 2012, was largely driven by declines in
interest income from MHFS and loans as the portfolio mix
changed. Strong growth in commercial, retained real estate and
automobile loans has replaced runoff of higher yielding
liquidating portfolios. Net interest income declines were
partially offset by reduced funding costs due to disciplined
deposit pricing and the maturity of higher yielding long-term
debt. The decline in net interest margin in 2013, compared with
a year ago, was primarily driven by higher funding balances,
including actions taken in response to increased regulatory
liquidity expectations which raised long-term debt and term
deposits in addition to customer-driven deposit growth. This
growth in funding increased cash and federal funds sold and
other short-term investments and was dilutive to net interest
margin although essentially neutral to net interest income.
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.
Average earning assets increased $115.2 billion in 2013 from
a year ago, as average investment securities increased
$26.1 billion and average federal funds sold and other short-
term investments increased $70.8 billion for the same period,
respectively. In addition, average loans increased $29.8 billion
in 2013, compared with a year ago. The increases in average
investment securities, average federal funds sold and other
short-term investments and average loans were partially offset
by a $13.7 billion decline in average MHFS.
Core deposits are an important low-cost source of funding
and affect both net interest income and the net interest margin.
Core deposits include noninterest-bearing deposits, interest-
bearing checking, savings certificates, market rate and other
savings, and certain foreign deposits (Eurodollar sweep
balances). Average core deposits rose to $942.1 billion in 2013,
compared with $893.9 billion in 2012, and funded 117% of
average loans compared with 115% a year ago. Average core
deposits decreased to 73% of average earning assets in 2013,
compared with 76% a year ago. The cost of these deposits has
continued to decline due to a sustained low interest rate
environment and a shift in our deposit mix from higher cost
certificates of deposit to lower yielding checking and savings
products. About 95% of our average core deposits are in
checking and savings deposits, one of the highest industry
percentages.
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 2013, are
analyzed in Table 6.
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