EX-13 8 d280360dex13.htm 2011 ANNUAL REPORT TO STOCKHOLDERS 2011 Annual Report to Stockholders

EXHIBIT 13

 

 

Financial Review

  26     

Overview

  30     

Earnings Performance

  41     

Balance Sheet Analysis

  44     

Off-Balance Sheet Arrangements

  46     

Risk Management

  84     

Capital Management

  87     

Regulatory Reform

  89     

Critical Accounting Policies

  95     

Current Accounting Developments

  96     

Forward-Looking Statements

  97     

Risk Factors

 

Controls and Procedures

  112     

Disclosure Controls and Procedures

  112     

Internal Control over Financial Reporting

  112     

Management’s Report on Internal Control over Financial Reporting

  113     

Report of Independent Registered Public Accounting Firm

 

Financial Statements

  114     

Consolidated Statement of Income

  115     

Consolidated Balance Sheet

  116     

Consolidated Statement of Changes in Equity and Comprehensive Income

  120     

Consolidated Statement of Cash Flows

 

Notes to Financial Statements

  121     

1      Summary of Significant Accounting Policies

  131     

2      Business Combinations

  132     

3      Cash, Loan and Dividend Restrictions

  132     

4       Federal Funds Sold, Securities Purchased under Resale Agreements

         and Other Short-Term Investments

  133     

5      Securities Available for Sale

  141     

6      Loans and Allowance for Credit Losses

  159     

7      Premises, Equipment, Lease Commitments and Other Assets

  160     

8      Securitizations and Variable Interest Entities

  171     

9      Mortgage Banking Activities

  174     

10    Intangible Assets

  175     

11    Deposits

  176     

12    Short-Term Borrowings

  177     

13    Long-Term Debt

  179     

14    Guarantees

  181     

15    Legal Actions

  184     

16    Derivatives

  190     

17    Fair Values of Assets and Liabilities

  206     

18    Preferred Stock

  208     

19    Common Stock and Stock Plans

  212     

20    Employee Benefits and Other Expenses

  219     

21    Income Taxes

  221     

22    Earnings Per Common Share

  222     

23    Other Comprehensive Income

  223     

24    Operating Segments

  225     

25    Condensed Consolidating Financial Statements

  230     

26    Regulatory and Agency Capital Requirements

  231     

Report of Independent Registered Public Accounting Firm

  232     

Quarterly Financial Data

  233     

Glossary of Acronyms

 

 

25


This Annual Report, including the Financial Review and the Financial Statements and related Notes, contains forward-looking statements, which may include forecasts of our financial results and condition, expectations for our operations and business, and our assumptions for those forecasts and expectations. Do not unduly rely on forward-looking statements. Actual results may differ materially from our forward-looking statements due to several factors. Factors that could cause our actual results to differ materially from our forward-looking statements are described in this Report, including in the “Forward-Looking Statements” and “Risk Factors” sections in this Report, and the “Regulation and Supervision” section of our Annual Report on Form 10-K for the year ended December 31, 2011 (2011 Form 10-K).

When we refer to “Wells Fargo,” “the Company,” “we,” “our” or “us” in this Report, we mean Wells Fargo & Company and Subsidiaries (consolidated). When we refer to the “Parent,” we mean Wells Fargo & Company. When we refer to “legacy Wells Fargo,” we mean Wells Fargo excluding Wachovia Corporation (Wachovia). See the Glossary of Acronyms at the end of this Report for terms used throughout this Report.

Financial Review

Overview

 

 

Wells Fargo & Company is a diversified financial services company with $1.3 trillion in assets. Founded in 1852 and headquartered in San Francisco, we provide banking, insurance, trust and investments, mortgage banking, investment banking, retail banking, brokerage services and consumer and commercial finance through more than 9,000 stores, 12,000 ATMs, the internet and other distribution channels to individuals, businesses and institutions across North America and internationally. With approximately 264,000 active, full-time equivalent team members, we serve one in three households in America and ranked No. 23 on Fortune’s 2011 rankings of America’s largest corporations. We ranked fourth in assets and first in the market value of our common stock among all U.S. banks at December 31, 2011.

Our vision is to satisfy all our customers’ financial needs, help them succeed financially, be recognized as the premier financial services company in our markets and be one of America’s great companies. Our primary strategy to achieve this vision is to increase the number of products our customers utilize and to offer them all of the financial products that fulfill their needs. Our cross-sell strategy, diversified business model and the breadth of our geographic reach facilitate growth in both strong and weak economic cycles, as we can grow by expanding the number of products our current customers have with us, gain new customers in our extended markets, and increase market share in many businesses. Our retail bank household cross-sell increased each quarter during 2011 to 5.92 products per household in fourth quarter 2011, up from 5.70 in fourth quarter 2010. We believe there is more opportunity for cross-sell as we continue to earn more business from our customers. Our goal is eight products per customer, which is approximately half of our estimate of potential demand for an average U.S. household. Currently, one of every four of our retail banking households has eight or more products.

Our pursuit of growth and earnings performance is influenced by our belief that it is important to maintain a well controlled operating environment. We manage our credit risk by establishing what we believe are sound credit policies for underwriting new business, while monitoring and reviewing the performance of our loan portfolio. We manage the interest rate and market risks inherent in our asset and liability balances

within established ranges, while ensuring adequate liquidity and funding. We maintain strong capital levels to facilitate future growth.

Expense management is also important to us, but we approach this in a manner intended to help ensure our revenue is not adversely affected. Our current company-wide expense management initiative is focused on removing unnecessary complexity and eliminating duplication as a way to improve the customer experience and the work process of our team members. With this initiative and the completion of Wachovia merger integration activities, we are targeting fourth quarter 2012 noninterest expense of $11 billion. We expect first quarter 2012 noninterest expense to remain elevated because of seasonally higher personnel expenses and our final quarter of Wachovia integration expenses, partially offset by continued gains from efficiency and cost save initiatives. We expect quarterly total expenses to decline over the rest of 2012, driven by the benefit from ongoing efficiency initiatives and the conclusion of integration activities. However, quarterly expenses may vary due to cyclical or seasonal factors, among others. In addition, we will continue to invest in our businesses and add team members where appropriate.

Financial Performance

Our 2011 results were strong despite continued economic volatility during the year, with improved credit quality and lower expenses as well as solid growth in deposits and capital, which funded growth in loans and investment securities. Regulatory reform and related initiatives also created a difficult environment in which to achieve strong financial performance. For example, changes mandated by Regulation E and related overdraft policy changes implemented in third quarter 2010 decreased our service charges on deposit accounts. Also, implementation of the Durbin Amendment to the Dodd-Frank Act in fourth quarter 2011 reduced debit interchange fees and the mortgage servicing regulatory consent orders that we entered into with our regulators in April 2011 and other regulatory activities contributed to lowered residential mortgage servicing rights (MSRs) valuation and increased our estimate of losses for repurchases of serviced loans.

 

 

26


Wells Fargo net income was $15.9 billion and diluted earnings per common share were $2.82 for 2011, both up 28% from 2010. Our net income growth from 2010 was primarily driven by a lower provision for credit losses and lower noninterest expense, which more than offset lower revenues. Net income growth from 2010 included contributions from each of our three business segments: Community Banking (up 30%); Wholesale Banking (up 19%); and Wealth, Brokerage and Retirement (up 28%). Return on average assets was 1.25% for 2011, compared with 1.01% for 2010. Our return on equity was 11.93% in 2011, up from 10.33% in 2010.

On a year-over-year basis, revenue was down 5% in 2011, predominantly reflecting decreased interest income on securities available for sale and loans due to lower yields as market rates declined. The decline in revenue was also affected by lower mortgage banking noninterest income as a result of lower originations and higher servicing-related costs caused by the regulatory consent orders and other mortgage-related regulatory matters as well as lower net gains from trading activities. These decreases in revenue were partially offset by increased interest income on trading assets and decreased interest expense. Noninterest expense was down 2% from 2010 reflecting the benefit of reduced merger integration costs and lower foreclosed asset expense.

We believe loan and deposit growth have positioned us for continued improvement in financial performance. Total loans were $769.6 billion at December 31, 2011, up from $757.3 billion at December 31, 2010, and averaged $757.1 billion for 2011 compared with $770.6 billion for 2010. The net growth in loans from December 31, 2010, included the consolidation of $5.6 billion of reverse mortgage loans previously sold as well as the purchases with a period end balance of $3.6 billion of U.S.-based commercial real estate (CRE), offset by a $21.0 billion decrease in our non-strategic and liquidating loan portfolios. Our core deposits totaled $872.6 billion at December 31, 2011, up 9% from December 31, 2010, and our average core deposits grew 7% from 2010 to $826.7 billion for 2011. Average core deposits were 109% of average loans for 2011, up from 100% for 2010. We continued to attract high quality core deposits in the form of checking and savings deposits, which on average totaled $757.0 billion, up 11% from 2010 as we added new customers and deepened our relationships with existing customers. Average core checking and savings deposits were 92% of average core deposits, up from 89% for 2010.

Table 1 provides a six-year summary of selected financial data and Table 2 presents key ratios and per common share data.

Credit Quality

As in 2010, we again experienced credit improvement during 2011 in our loan portfolios with lower net charge-offs and improved or stable delinquency trends. The rate of improvement moderated in some portfolios during the latter half of 2011, consistent with our expectations at this point in the credit cycle. The improvement in our credit portfolio was due in part to the continued decline in balances in our non-strategic and liquidating loan portfolios (primarily from the Wachovia acquisition), which decreased $21.0 billion

during 2011, and $78.5 billion in total since the beginning of 2009, to $112.3 billion at December 31, 2011.

Reflecting the continued improved credit performance in our loan portfolios, the $7.9 billion provision for credit losses for 2011 was $7.9 billion less than a year ago. The 2011 provision for credit losses was $3.4 billion less than net charge-offs, compared with $2.0 billion less for 2010. Absent significant deterioration in the economy, we expect future allowance releases in 2012, although at more modest levels. Since first quarter 2010 net charge-offs have decreased every quarter until fourth quarter 2011 when they were essentially flat compared with third quarter 2011. Nonperforming assets (NPAs) have decreased every quarter since their peak in third quarter 2010. Net charge-offs totaled $11.3 billion for 2011, compared with $17.8 billion for 2010. NPAs decreased to $26.0 billion at December 31, 2011, from $32.3 billion at December 31, 2010. Loans 90 days or more past due and still accruing (excluding government insured/guaranteed loans) decreased to $2.0 billion at December 31, 2011, from $2.6 billion at December 31, 2010. In addition, our portfolio of purchased credit-impaired (PCI) loans continued to perform better than expected at the time of acquisition.

Capital

We continued to build capital in 2011, with total equity up $13.8 billion to $141.7 billion from December 31, 2010. Our Tier 1 common equity ratio grew 116 basis points during 2011 to 9.46% of risk-weighted assets under Basel I, reflecting strong internal capital generation. Based on our interpretation of current Basel III capital proposals, we estimate that our Tier 1 common equity ratio was 7.50% at the end of 2011. Our other regulatory capital ratios remained strong with a Tier 1 capital ratio of 11.33% and Tier 1 leverage ratio of 9.03% at December 31, 2011. See the “Capital Management” section in this Report for more information regarding our capital, including Tier 1 common equity.

During 2011 we redeemed $9.2 billion of trust preferred securities that carried a higher cost than other funding sources available to us, repurchased approximately 80 million shares of our common stock and entered into two separate $150 million private forward repurchase transactions. The first transaction settled in fourth quarter 2011 for approximately 6 million shares of common stock and the second transaction settled in first quarter 2012 for approximately 6 million shares of common stock. We also paid common stock dividends of $0.12 per share each quarter in 2011.

 

 

 

27


Overview (continued)

 

Table 1: Six-Year Summary of Selected Financial Data

 

 

 
(in millions, except per share amounts)    2011      2010      2009      2008      2007      2006      %
Change
2011/
2010
    Five-year
compound
growth
rate
 

 

 

Income statement

                      

Net interest income

   $ 42,763        44,757        46,324        25,143        20,974        19,951        (4 )%      16  

Noninterest income

     38,185        40,453        42,362        16,734        18,546        15,817        (6     19  

 

      

Revenue

     80,948        85,210        88,686        41,877        39,520        35,768        (5     18  

Provision for credit losses

     7,899        15,753        21,668        15,979        4,939        2,204        (50     29  

Noninterest expense

     49,393        50,456        49,020        22,598        22,746        20,767        (2     19  

Net income before noncontrolling interests

     16,211        12,663        12,667        2,698        8,265        8,567        28       14  

Less: Net income from noncontrolling interests

     342        301        392        43        208        147        14       18  

 

      

Wells Fargo net income

     15,869        12,362        12,275        2,655        8,057        8,420        28       14  

Earnings per common share

     2.85        2.23        1.76        0.70        2.41        2.50        28       3  

Diluted earnings per common share

     2.82        2.21        1.75        0.70        2.38        2.47        28       3  

Dividends declared per common share

     0.48        0.20        0.49        1.30        1.18        1.08        140       (15

 

 

Balance sheet (at year end)

                      

Securities available for sale

   $ 222,613        172,654        172,710        151,569        72,951        42,629        29     39  

Loans

     769,631        757,267        782,770        864,830        382,195        319,116        2       19  

Allowance for loan losses

     19,372        23,022        24,516        21,013        5,307        3,764        (16     39  

Goodwill

     25,115        24,770        24,812        22,627        13,106        11,275        1       17  

Assets

             1,313,867        1,258,128        1,243,646        1,309,639        575,442        481,996        4       22  

Core deposits (1)

     872,629        798,192        780,737        745,432        311,731        288,068        9       25  

Long-term debt

     125,354        156,983        203,861        267,158        99,393        87,145        (20     8  

Wells Fargo stockholders’ equity

     140,241        126,408        111,786        99,084        47,628        45,814        11       25  

Noncontrolling interests

     1,446        1,481        2,573        3,232        286        254        (2     42  

Total equity

     141,687        127,889        114,359        102,316        47,914        46,068        11       25  

 

 
(1) Core deposits are noninterest-bearing deposits, interest-bearing checking, savings certificates, certain market rate and other savings, and certain foreign deposits (Eurodollar sweep balances).

 

28


Table 2: Ratios and Per Common Share Data

 

 

 
       Year ended December 31,  
       2011        2010        2009  

 

 

Profitability ratios

              

Wells Fargo net income to average assets (ROA)

       1.25  %         1.01          0.97  

Wells Fargo net income applicable to common stock to average
Wells Fargo common stockholders’ equity (ROE)

       11.93          10.33          9.88  

Efficiency ratio (1)

       61.0          59.2          55.3  

Capital ratios

              

At year end:

              

Wells Fargo common stockholders’ equity to assets

       9.87          9.41          8.34  

Total equity to assets

       10.78          10.16          9.20  

Risk-based capital (2)

              

Tier 1 capital

       11.33          11.16          9.25  

Total capital

       14.76          15.01          13.26  

Tier 1 leverage (2)

       9.03          9.19          7.87  

Tier 1 common equity (3)

       9.46          8.30          6.46  

Average balances:

              

Average Wells Fargo common stockholders’ equity to average assets

       9.91          9.17          6.41  

Average total equity to average assets

       10.80          9.96          9.34  

Per common share data

              

Dividend payout (4)

       17.0          9.0          27.9  

Book value

     $         24.64          22.49          20.03  

Market price (5)

              

High

       34.25          34.25          31.53  

Low

       22.58          23.02          7.80  

Year end

       27.56          30.99          26.99  

 

 

 

(1) The efficiency ratio is noninterest expense divided by total revenue (net interest income and noninterest income).
(2) See Note 26 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report for additional information.
(3) See the “Capital Management” section in this Report for additional information.
(4) Dividends declared per common share as a percentage of earnings per common share.
(5) Based on daily prices reported on the New York Stock Exchange Composite Transaction Reporting System.

 

29


Earnings Performance

 

 

 

Wells Fargo net income for 2011 was $15.9 billion ($2.82 diluted earnings per common share) compared with $12.4 billion ($2.21 diluted earnings per common share) for 2010 and $12.3 billion ($1.75 diluted earnings per common share) for 2009. Our 2011 earnings reflected strong execution of our business strategy in a difficult economic environment. The key drivers of our financial performance in 2011 were improved credit quality, lower operating costs, diversified sources of fee income, balanced net interest and fee income, a diversified loan portfolio and increased deposits.

Revenue, the sum of net interest income and noninterest income, was $80.9 billion in 2011, compared with $85.2 billion in 2010 and $88.7 billion in 2009. The decline in revenue in 2011 was predominantly due to lower net interest income, mortgage banking and net gains from trading activities. Net interest income of $42.8 billion in 2011, represented 53% of revenue, compared with $44.8 billion (53%) in 2010 and $46.3 billion (52%) in 2009. The 4% decline in 2011 net interest income from 2010 reflected a 32 basis points decline in the net interest margin and a 2% decline in average loans. The decline in average loans from 2010 reflected reductions in the non-strategic and liquidating loan

portfolios, partially offset by loan growth and loan acquisitions. Continued success in generating low-cost deposits enabled the Company to grow assets by funding loan and securities growth while reducing higher cost long-term debt.

Noninterest income was $38.2 billion in 2011, representing 47% of revenue, compared with $40.5 billion (47%) in 2010 and $42.4 billion (48%) in 2009. The decrease in noninterest income in 2011 was due largely to lower service charges on deposit accounts, net gains on mortgage loan origination/sales activities and net gains from trading activities.

Noninterest expense was $49.4 billion in 2011, compared with $50.5 billion in 2010 and $49.0 billion in 2009. Noninterest expense as a percentage of revenue was 61% in 2011, 59% in 2010 and 55% in 2009. Noninterest expense for 2011 included $1.7 billion of Wachovia merger-related integration expense, compared with $1.9 billion in 2010 and $895 million in 2009.

Table 3 presents the components of revenue and noninterest expense as a percentage of revenue for year-over-year results.

 

 

30


Table 3: Net Interest Income, Noninterest Income and Noninterest Expense as a Percentage of Revenue

 

 

 
     Year ended December 31,  
  

 

 

 
(in millions)      2011      
 
% of
revenue
  
  
    2010      
 
% of
revenue
  
  
    2009      
 
% of
revenue
  
  

 

 

Interest income

            

Trading assets

   $ 1,463       2   $ 1,121       1   $ 944       1

Securities available for sale

     9,107       11       10,236       12       11,941       13  

Mortgages held for sale (MHFS)

     1,644       2       1,736       2       1,930       2  

Loans held for sale (LHFS)

     58              101              183         

Loans

     37,302       46       39,808       47       41,659       48  

Other interest income

     548       1       437       1       336         

 

   

 

 

   

 

 

 

Total interest income

     50,122       62       53,439       63       56,993       64  

 

   

 

 

   

 

 

 

Interest expense

            

Deposits

     2,275       3       2,832       3       3,774       4  

Short-term borrowings

     94              106              231         

Long-term debt

     3,978       5       4,888       6       5,786       7  

Other interest expense

     316              227              172         

 

   

 

 

   

 

 

 

Total interest expense

     6,663       8       8,053       9       9,963       11  

 

   

 

 

   

 

 

 

Net interest income (on a taxable-equivalent basis)

     43,459       54       45,386       54       47,030       53  

 

   

 

 

   

 

 

 

Taxable-equivalent adjustment

     (696     (1     (629     (1     (706     (1

 

   

 

 

   

 

 

 

Net interest income (A)

     42,763       53       44,757       53       46,324       52  

Noninterest income

            

Service charges on deposit accounts

     4,280       5       4,916       6       5,741       6  

Trust and investment fees (1)

     11,304       14       10,934       12       9,735       11  

Card fees

     3,653       5       3,652       4       3,683       4  

Other fees (1)

     4,193       5       3,990       5       3,804       4  

Mortgage banking (1)

     7,832       10       9,737       11       12,028       15  

Insurance

     1,960       2       2,126       2       2,126       2  

Net gains from trading activities

     1,014       1       1,648       2       2,674       3  

Net gains (losses) on debt securities available for sale

     54              (324            (127       

Net gains from equity investments

     1,482       2       779       1       185         

Operating leases

     524       1       815       1       685       1  

Other

     1,889       2       2,180       3       1,828       2  

 

   

 

 

   

 

 

 

Total noninterest income (B)

     38,185       47       40,453       47       42,362       48  

 

   

 

 

   

 

 

 

Noninterest expense

            

Salaries

     14,462       18       13,869       16       13,757       15  

Commission and incentive compensation

     8,857       11       8,692       10       8,021       9  

Employee benefits

     4,348       5       4,651       5       4,689       5  

Equipment

     2,283       3       2,636       3       2,506       3  

Net occupancy

     3,011       4       3,030       4       3,127       4  

Core deposit and other intangibles

     1,880       2       2,199       3       2,577       3  

FDIC and other deposit assessments

     1,266       2       1,197       1       1,849       2  

Other (2)

     13,286       16       14,182       17       12,494       14  

 

   

 

 

   

 

 

 

Total noninterest expense

     49,393       61       50,456       59       49,020       55  

 

   

 

 

   

 

 

 

Revenue (A) + (B)

   $         80,948       $         85,210       $         88,686    

 

     

 

 

     

 

 

   

 

 

 

(1) See Table 7 – Noninterest Income in this Report for additional detail.
(2) See Table 8 – Noninterest Expense in this Report for additional detail.

 

31


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 and the net interest margin are significantly influenced by the mix and overall size of our earning asset portfolio and the cost of funding those assets. In addition, some sources of interest income, such as loan prepayment fees and collection of interest on nonaccrual loans, can vary from period to period. Net interest income on a taxable-equivalent basis was $43.5 billion in 2011, compared with $45.4 billion in 2010 and $47.0 billion in 2009. The net interest margin was 3.94% in 2011, down 32 basis points from 4.26% in 2010 and down 34 basis points from 4.28% in 2009. The decline in net interest income and the net interest margin was largely due to repricing of the balance sheet as higher-yielding loan and security runoff was partially offset by new loans, investment portfolio purchases and growth in short-term investments. The decline in earning asset income was mitigated by a reduction in funding costs resulting from disciplined deposit pricing, debt maturities, and redemptions of higher cost trust preferred securities.

Table 4 presents the components of earning assets and funding sources as a percentage of earning assets and provides an analysis of year-over-year changes that influenced net interest income.

Soft consumer loan demand and the impact of liquidating certain loan portfolios reduced average loans in 2011 to 69% of average earning assets compared with 72% in 2010. Average short-term investments and trading account assets were 12% of earning assets in 2011 up from 9% in 2010.

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, certain market rate and other savings, and certain foreign deposits (Eurodollar sweep balances). Average core deposits rose to $826.7 billion in 2011 from $772.0 billion in 2010 and funded 109% and 100% of average loans, respectively. Average core deposits increased to 75% of average earning assets in 2011, compared with 73% a year ago. The cost of these deposits declined significantly as the mix shifted from higher cost certificates of deposit to checking and savings products, which were also at lower yields relative to 2010. About 91% of our average core deposits are 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 2011, are analyzed in Table 6.

 

 

32


Table 4: Average Earning Assets and Funding Sources as a Percentage of Average Earning Assets

 

 

 
     Year ended December 31,  
  

 

 

 
     2011     2010  
(in millions)    Average
balance
    % of
earning
assets
    Average
balance
    % of
earning
assets
 

 

 

Earning assets

        

Federal funds sold, securities purchased under resale agreements and other short-term investments

   $ 87,186       8   $ 62,961       6

Trading assets

     39,737       4       29,920       3  

Debt securities available for sale:

        

Securities of U.S. Treasury and federal agencies

     5,503              1,870         

Securities of U.S. states and political subdivisions

     24,035       2       16,089       2  

Mortgage-backed securities:

        

Federal agencies

     74,665       7       71,953       7  

Residential and commercial

     31,902       3       31,815       3  

 

   

 

 

 

Total mortgage-backed securities

     106,567       10       103,768       10  

Other debt securities (1)

     38,625       4       32,611       3  

 

   

 

 

 

Total debt securities available for sale (1)

     174,730       16       154,338       15  

Mortgages held for sale (2)

     37,232       3       36,716       3  

Loans held for sale (2)

     1,104              3,773         

Loans:

        

Commercial:

        

Commercial and industrial

     157,608       15       149,576       14  

Real estate mortgage

     102,236       9       98,497       9  

Real estate construction

     21,592       2       31,286       3  

Lease financing

     12,944       1       13,451       1  

Foreign

     36,768       3       29,726       3  

 

   

 

 

 

Total commercial

     331,148       30       322,536       30  

 

   

 

 

 

Consumer:

        

Real estate 1-4 family first mortgage

     226,980       21       235,568       22  

Real estate 1-4 family junior lien mortgage

     90,705       8       101,537       10  

Credit card

     21,463       2       22,375       2  

Other revolving credit and installment

     86,848       8       88,585       8  

 

   

 

 

 

Total consumer

     425,996       39       448,065       42  

 

   

 

 

 

Total loans (2)

     757,144       69       770,601       72  

Other

     4,929              5,849       1  

 

   

 

 

 

Total earning assets

   $         1,102,062       100   $         1,064,158       100

 

   

 

 

 

Funding sources

        

Deposits:

        

Interest-bearing checking

   $ 47,705       4   $ 60,941       6

Market rate and other savings

     464,450       42       416,877       39  

Savings certificates

     69,711       6       87,133       8  

Other time deposits

     13,126       1       14,654       1  

Deposits in foreign offices

     61,566       6       55,097       5  

 

   

 

 

 

Total interest-bearing deposits

     656,558       59       634,702       59  

Short-term borrowings

     51,781       5       46,824       4  

Long-term debt

     141,079       13       185,426       18  

Other liabilities

     10,955       1       6,863       1  

 

   

 

 

 

Total interest-bearing liabilities

     860,373       78       873,815       82  

Portion of noninterest-bearing funding sources

     241,689       22       190,343       18  

 

   

 

 

 

Total funding sources

   $ 1,102,062       100   $ 1,064,158       100

 

   

 

 

 

Noninterest-earning assets

        

Cash and due from banks

   $ 17,388         17,618    

Goodwill

     24,904         24,824    

Other

     125,911         120,338    

 

     

 

 

   

Total noninterest-earning assets

   $ 168,203         162,780    

 

     

 

 

   

Noninterest-bearing funding sources

        

Deposits

   $ 215,242         183,008    

Other liabilities

     57,399         47,877    

Total equity

     137,251         122,238    

Noninterest-bearing funding sources used to fund earning assets

     (241,689       (190,343  

 

     

 

 

   

Net noninterest-bearing funding sources

   $ 168,203         162,780    

 

     

 

 

   

Total assets

   $ 1,270,265         1,226,938    

 

     

 

 

   

 

 

 

(1) Includes certain preferred securities.
(2) Nonaccrual loans are included in their respective loan categories.

 

33


Earnings Performance (continued)

 

Table 5: Average Balances, Yields and Rates Paid (Taxable-Equivalent Basis) (1)(2)(3)

 

 

 
     2011         2010  
  

 

 

     

 

 

 
(in millions)    Average
balance
     Yields/
rates
    Interest
income/
expense
        Average
balance
    Yields/
rates
    Interest
income/
expense
 

 

 

Earning assets

               

Federal funds sold, securities purchased under resale agreements and other short-term investments

   $ 87,186        0.40   $ 345         62,961       0.36   $ 230  

Trading assets

     39,737        3.68       1,463         29,920       3.75       1,121  

Securities available for sale (4):

               

Securities of U.S. Treasury and federal agencies

     5,503        1.25       69         1,870       3.24       61  

Securities of U.S. states and political subdivisions

     24,035        5.09       1,223         16,089       6.09       980  

Mortgage-backed securities:

               

Federal agencies

     74,665        4.36       3,257         71,953       5.14       3,697  

Residential and commercial

     31,902        8.20       2,617         31,815       10.67       3,396  

 

      

 

 

     

 

 

     

 

 

 

Total mortgage-backed securities

     106,567        5.51       5,874         103,768       6.84       7,093  

Other debt and equity securities

     38,625        5.03       1,941         32,611       6.45       2,102  

 

      

 

 

     

 

 

     

 

 

 

Total securities available for sale

     174,730        5.21       9,107         154,338       6.63       10,236  

Mortgages held for sale (5)

     37,232        4.42       1,644         36,716       4.73       1,736  

Loans held for sale (5)

     1,104        5.25       58         3,773       2.67       101  

Loans:

               

Commercial:

               

Commercial and industrial

     157,608        4.37       6,894         149,576       4.80       7,186  

Real estate mortgage

     102,236        4.07       4,163         98,497       3.89       3,836  

Real estate construction

     21,592        4.88       1,055         31,286       3.36       1,051  

Lease financing

     12,944        7.54       976         13,451       9.21       1,239  

Foreign

     36,768        2.56       941         29,726       3.49       1,037  

 

      

 

 

     

 

 

     

 

 

 

Total commercial

     331,148        4.24       14,029         322,536       4.45       14,349  

 

      

 

 

     

 

 

     

 

 

 

Consumer:

               

Real estate 1-4 family first mortgage

     226,980        4.89       11,090         235,568       5.18       12,206  

Real estate 1-4 family junior lien mortgage

     90,705        4.33       3,926         101,537       4.45       4,519  

Credit card

     21,463        13.02       2,794         22,375       13.35       2,987  

Other revolving credit and installment

     86,848        6.29       5,463         88,585       6.49       5,747  

 

      

 

 

     

 

 

     

 

 

 

Total consumer

     425,996        5.46       23,273         448,065       5.68       25,459  

 

      

 

 

     

 

 

     

 

 

 

Total loans (5)

     757,144        4.93       37,302         770,601       5.17       39,808  

Other

     4,929        4.12       203         5,849       3.56       207  

 

      

 

 

     

 

 

     

 

 

 

Total earning assets

   $         1,102,062        4.55   $         50,122         1,064,158       5.02   $         53,439  

 

      

 

 

     

 

 

     

 

 

 

Funding sources

               

Deposits:

               

Interest-bearing checking

   $ 47,705        0.08   $ 40         60,941       0.12   $ 72  

Market rate and other savings

     464,450        0.18       836         416,877       0.26       1,088  

Savings certificates

     69,711        1.43       995         87,133       1.43       1,247  

Other time deposits

     13,126        2.04       268         14,654       2.07       302  

Deposits in foreign offices

     61,566        0.22       136         55,097       0.22       123  

 

      

 

 

     

 

 

     

 

 

 

Total interest-bearing deposits

     656,558        0.35       2,275         634,702       0.45       2,832  

Short-term borrowings

     51,781        0.18       94         46,824       0.22       106  

Long-term debt

     141,079        2.82       3,978         185,426       2.64       4,888  

Other liabilities

     10,955        2.88       316         6,863       3.31       227  

 

      

 

 

     

 

 

     

 

 

 

Total interest-bearing liabilities

     860,373        0.77       6,663         873,815       0.92       8,053  

Portion of noninterest-bearing funding sources

     241,689                        190,343                

 

      

 

 

     

 

 

     

 

 

 

Total funding sources

   $ 1,102,062        0.61       6,663         1,064,158       0.76       8,053  

 

    

 

 

   

 

 

     

 

 

   

 

 

   

 

 

 

Net interest margin and net interest income on a taxable-equivalent
basis
(6)

        3.94   $ 43,459           4.26   $ 45,386  
     

 

 

       

 

 

 

Noninterest-earning assets

               

Cash and due from banks

   $ 17,388              17,618      

Goodwill

     24,904              24,824      

Other

     125,911              120,338      

 

          

 

 

     

Total noninterest-earning assets

   $ 168,203              162,780      

 

          

 

 

     

Noninterest-bearing funding sources

               

Deposits

   $ 215,242              183,008      

Other liabilities

     57,399              47,877      

Total equity

     137,251              122,238      

Noninterest-bearing funding sources used to fund earning assets

     (241,689            (190,343    

 

          

 

 

     

Net noninterest-bearing funding sources

   $ 168,203              162,780      

 

          

 

 

     

Total assets

   $ 1,270,265              1,226,938      

 

          

 

 

     

 

 

 

(1) Because the Wachovia acquisition was completed at the end of 2008, Wachovia’s assets and liabilities are included in average balances, and Wachovia’s results are reflected in interest income/expense beginning in 2009.
(2) Our average prime rate was 3.25%, 3.25%, 3.25%, 5.09%, and 8.05% for 2011, 2010, 2009, 2008, and 2007, respectively. The average three-month London Interbank Offered Rate (LIBOR) was 0.34%, 0.34%, 0.69%, 2.93%, and 5.30% for the same years, respectively.
(3) Yields/rates and amounts include the effects of hedge and risk management activities associated with the respective asset and liability categories.
(4) Yields and rates are based on interest income/expense amounts for the period, annualized based on the accrual basis for the respective accounts. The average balance amounts represent amortized cost and the previously reported average balance amounts for all periods prior to 2011 have been changed to amortized cost, the basis used to determine yields for those periods.

 

34


 

 

 

 
     2009      2008      2007  
     Average
balance
    Yields/
rates
    Interest
income/
expense
     Average
balance
    Yields/
rates
    Interest
income/
expense
     Average
balance
    Yields/
rates
    Interest
income/
expense
 
  

 

 

 
                    
  

 

$

 

26,869

 

 

    0.56   $ 150        5,293       1.71   $ 90        4,468       4.99   $ 223  
     21,092       4.48       944        4,971       3.80       189        4,291       4.37       188  
                    
     2,436       2.83       69        1,065       3.84       41        851       4.26       36  
     13,098       6.42       840        7,329       6.83       501        4,643       7.37       342  
                    
     84,295       5.45       4,591        43,968       5.97       2,623        38,181       6.10       2,328  
     45,672       9.09       4,150        23,357       6.04       1,412        6,524       6.12       399  
  

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

 
     129,967       6.73       8,741        67,325       5.99       4,035        44,705       6.10       2,727  
     32,022       7.16       2,291        13,956       7.17       1,000        6,343       7.52       477  
  

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

 
     177,523       6.73       11,941        89,675       6.22       5,577        56,542       6.34       3,582  
     37,416       5.16       1,930        25,656       6.13       1,573        33,066       6.50       2,150  
     6,293       2.90       183        837       5.69       48        896       7.76       70  
                    
                    
     180,924       4.22       7,643        98,620       6.12       6,034        77,965       8.17       6,367  
     96,273       3.50       3,365        41,659       5.80       2,416        32,722       7.38       2,414  
     40,885       2.91       1,190        19,453       5.08       988        16,934       7.80       1,321  
     14,751       9.32       1,375        7,141       5.62       401        5,921       5.84       346  
     30,661       3.95       1,212        7,127       10.50       748        7,321       11.68       855  
  

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

 
     363,494       4.07       14,785        174,000       6.08       10,587        140,863       8.02       11,303  
  

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

 
                    
     238,359       5.45       12,992        75,116       6.67       5,008        61,527       7.25       4,463  
     106,957       4.76       5,089        75,375       6.55       4,934        72,075       8.12       5,851  
     23,357       12.16       2,841        19,601       12.13       2,378        15,874       13.58       2,155  
     90,666       6.56       5,952        54,368       8.72       4,744        54,436       9.71       5,285  
  

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

 
     459,339       5.85       26,874        224,460       7.60       17,064        203,912       8.71       17,754  
  

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

 
     822,833       5.06       41,659        398,460       6.94       27,651        344,775       8.43       29,057  
     6,113       3.05       186        1,920       4.73       91        1,402       5.07       71  
  

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

 
   $         1,098,139       5.19   $         56,993        526,812       6.69   $         35,219        445,440       7.93   $         35,341  
  

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

 
                    
                    
   $ 70,179       0.14   $ 100        5,650       1.12   $ 64        5,057       3.16   $ 160  
     351,892       0.39       1,375        166,691       1.32       2,195        147,939       2.78       4,105  
     140,197       1.24       1,738        39,481       3.08       1,215        40,484       4.38       1,773  
     20,459       2.03       415        6,656       2.83       187        8,937       4.87       435  
     53,166       0.27       146        47,578       1.81       860        36,761       4.57       1,679  
  

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

 
     635,893       0.59       3,774        266,056       1.70       4,521        239,178       3.41       8,152  
     51,972       0.44       231        65,826       2.25       1,478        25,854       4.81       1,245  
     231,801       2.50       5,786        102,283       3.70       3,789        93,193       5.18       4,824  
     4,904       3.50       172                                              
  

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

 
     924,570       1.08       9,963        434,165       2.25       9,788        358,225       3.97       14,221  
     173,569                      92,647                      87,215                
  

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

 
   $ 1,098,139       0.91       9,963        526,812       1.86       9,788        445,440       3.19       14,221  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
    

 

 

 

4.28

 

  $ 47,030          4.83   $ 25,431          4.74   $ 21,120  
    

 

 

      

 

 

      

 

 

 
                    
   $ 19,218            11,175            11,806      
     23,997            13,353            11,957      
     121,000            53,056            51,549      
  

 

 

        

 

 

        

 

 

     
   $ 164,215            77,584            75,312      
  

 

 

        

 

 

        

 

 

     
                    
   $ 171,712            87,820            88,907      
     48,193            28,658            26,287      
     117,879            53,753            47,333      
     (173,569          (92,647          (87,215    
  

 

 

        

 

 

        

 

 

     
   $ 164,215            77,584            75,312      
  

 

 

        

 

 

        

 

 

     
   $ 1,262,354            604,396            520,752      
  

 

 

        

 

 

        

 

 

     

 

 

 

(5) Nonaccrual loans and related income are included in their respective loan categories.
(6) Includes taxable-equivalent adjustments of $696 million, $629 million, $706 million, $288 million and $146 million for 2011, 2010, 2009, 2008 and 2007, respectively, primarily related to tax-exempt income on certain loans and securities. The federal statutory tax rate utilized was 35% for the periods presented.

 

 

35


Earnings Performance (continued)

 

 

Table 6 allocates the changes in net interest income on a taxable-equivalent basis to changes in either average balances or average rates for both interest-earning assets and interest-bearing liabilities. Because of the numerous simultaneous volume and rate changes during any period, it is not possible

to precisely allocate such changes between volume and rate. For this table, changes that are not solely due to either volume or rate are allocated to these categories in proportion to the percentage changes in average volume and average rate.

 

 

Table 6: Analysis of Changes in Net Interest Income

 

 

 
     Year ended December 31,  
  

 

 

 
     2011 over 2010     2010 over 2009  
  

 

 

   

 

 

 
(in millions)    Volume     Rate     Total     Volume     Rate     Total  

 

 

Increase (decrease) in interest income:

            

Federal funds sold, securities purchased under resale agreements and other short-term investments

   $ 89       26       115       148       (68     80  

Trading assets

     363       (21     342       349       (172     177  

Debt securities available for sale (1):

            

Securities of U.S. Treasury and federal agencies

     62       (54     8       (2     (6     (8

Securities of U.S. states and political subdivisions

     424       (181     243       338       (198     140  

Mortgage-backed securities:

            

Federal agencies

     135       (575     (440     (114     (780     (894

Residential and commercial

     9       (788     (779     (176     (578     (754

 

   

 

 

 

Total mortgage-backed securities

     144       (1,363     (1,219     (290     (1,358     (1,648

Other debt securities

     349       (510     (161     79       (268     (189

 

   

 

 

 

Total debt securities available for sale

     979       (2,108     (1,129     125       (1,830     (1,705

Mortgages held for sale

     24       (116     (92     (35     (159     (194

Loans held for sale

     (100     57       (43     (69     (13     (82

Loans:

            

Commercial:

            

Commercial and industrial

     373       (665     (292     (1,425     968       (457

Real estate mortgage

     147       180       327       81       390       471  

Real estate construction

     (385     389       4       (306     167       (139

Lease financing

     (45     (218     (263     (120     (16     (136

Foreign

     215       (311     (96     (36     (139     (175

 

   

 

 

 

Total commercial

     305       (625     (320     (1,806     1,370       (436

 

   

 

 

 

Consumer:

            

Real estate 1-4 family first mortgage

     (440     (676     (1,116     (150     (636     (786

Real estate 1-4 family junior lien mortgage

     (473     (120     (593     (249     (321     (570

Credit card

     (120     (73     (193     (123     269       146  

Other revolving credit and installment

     (111     (173     (284     (140     (65     (205

 

   

 

 

 

Total consumer

     (1,144     (1,042     (2,186     (662     (753     (1,415

 

   

 

 

 

Total loans

     (839     (1,667     (2,506     (2,468     617       (1,851

 

   

 

 

 

Other

     (35     31       (4     (8     29       21  

 

   

 

 

 

Total increase (decrease) in interest income

     481       (3,798     (3,317     (1,958     (1,596     (3,554

 

   

 

 

 

Increase (decrease) in interest expense:

            

Deposits:

            

Interest-bearing checking

     (13     (19     (32     (13     (15     (28

Market rate and other savings

     112       (364     (252     224       (511     (287

Savings certificates

     (252            (252     (729     238       (491

Other time deposits

     (30     (4     (34     (121     8       (113

Deposits in foreign offices

     13              13       5       (28     (23

 

   

 

 

 

Total interest-bearing deposits

     (170     (387     (557     (634     (308     (942

Short-term borrowings

     9       (21     (12     (21     (104     (125

Long-term debt

     (1,227     317       (910     (1,209     311       (898

Other liabilities

     122       (33     89       65       (10     55  

 

   

 

 

 

Total increase (decrease) in interest expense

             (1,266     (124     (1,390     (1,799     (111     (1,910

 

   

 

 

 

Increase (decrease) in net interest income on a taxable-equivalent basis

   $ 1,747       (3,674     (1,927     (159     (1,485     (1,644

 

   

 

 

 

 

 

 

(1) Volume and rate amounts for 2010 over 2009 have been revised to reflect the use of amortized cost as the basis for calculating the change between periods.

 

36


Noninterest Income

Table 7: Noninterest Income

 

 
     Year ended December 31,  
  

 

 

 
(in millions)    2011      2010     2009  

 

 

Service charges on deposit accounts

   $ 4,280        4,916       5,741  

Trust and investment fees:

       

Trust, investment and IRA fees

     4,099        4,038       3,588  

Commissions and all other fees

     7,205        6,896       6,147  

 

 

Total trust and investment fees

     11,304        10,934       9,735  
       

 

 

Card fees

     3,653        3,652       3,683  

Other fees:

       

Cash network fees

     389        260       231  

Charges and fees on loans

     1,641        1,690       1,801  

Processing and all other fees

     2,163        2,040       1,772  
       

 

 

Total other fees

     4,193        3,990       3,804  
       

 

 

Mortgage banking:

       

Servicing income, net

     3,266        3,340       5,791  

Net gains on mortgage loan origination/sales activities

     4,566        6,397       6,237  
       

 

 

Total mortgage banking

     7,832        9,737       12,028  
       

 

 

Insurance

     1,960        2,126       2,126  

Net gains from trading activities

     1,014        1,648       2,674  

Net gains (losses) on debt securities available for sale

     54        (324     (127

Net gains from equity investments

     1,482        779       185  

Operating leases

     524        815       685  

All other

     1,889        2,180       1,828  
       

 

 

Total

   $ 38,185        40,453       42,362  

 

 

Noninterest income of $38.2 billion represented 47% of revenue for 2011 compared with $40.5 billion, or 47%, for 2010. The decrease in noninterest income from 2010 was due largely to lower service charges on deposit accounts, lower net gains on mortgage loan origination/sales activities and lower net gains from trading activities.

Our service charges on deposit accounts decreased in 2011 by $636 million, or 13% from 2010, predominantly due to changes implemented in third quarter 2010 mandated by Regulation E (which limited certain overdraft fees) and related overdraft policy changes.

We earn trust, investment and IRA (Individual Retirement Account) fees from managing and administering assets, including mutual funds, corporate trust, personal trust, employee benefit trust and agency assets. At December 31, 2011, these assets totaled $2.2 trillion, up 5% from $2.1 trillion at December 31, 2010. Trust, investment and IRA fees are largely based on a tiered scale relative to the market value of the assets under management or administration. These fees increased to $4.1 billion in 2011 from $4.0 billion in 2010.

We receive commissions and other fees for providing services to full-service and discount brokerage customers as well as from investment banking activities including equity and bond underwriting. These fees increased to $7.2 billion in 2011 from $6.9 billion in 2010. Our commission and other fees include transactional commissions, which are based on the number of transactions executed at the customer’s direction, and

asset-based fees, which are based on the market value of the customer’s assets. Brokerage client assets totaled $1.1 trillion and $1.2 trillion at December 31, 2011 and 2010, respectively.

Card fees were $3.7 billion in 2011, essentially flat from 2010. Legislative and regulatory changes enacted in 2010 led to a reduction in card fee income, which was offset by growth in purchase volume and new accounts growth. The final Federal Reserve Board (FRB) rules implementing the Durbin Amendment to the Dodd-Frank Act became effective in October 2011, placing limits on debit card interchange fees. As a result, debit card interchange fees were reduced by $365 million during fourth quarter 2011 as compared to fees that would have been earned without the limits. We currently expect future volume, product or account changes may over time mitigate at least half of the earnings reduction resulting from the FRB’s debit card interchange rules.

Mortgage banking noninterest income, consisting of net servicing income and net gains on loan origination/sales activities, totaled $7.8 billion in 2011, compared with $9.7 billion in 2010. The reduction in mortgage banking noninterest income was primarily driven by a decline in net gains on mortgage loan origination/sales activities as discussed below.

Net mortgage loan servicing income includes both changes in the fair value of MSRs during the period as well as changes in the value of derivatives (economic hedges) used to hedge the MSRs. Net servicing income for 2011 included a $1.6 billion net MSR valuation gain ($3.7 billion decrease in the fair value of the MSRs offset by a $5.3 billion hedge gain) and for 2010 included a $1.5 billion net MSR valuation gain ($3.0 billion decrease in the fair value of MSRs offset by a $4.5 billion hedge gain). See the “Risk Management – Mortgage Banking Interest Rate and Market Risk” section of this Report for additional information regarding our MSRs risks and hedging approach. The valuation of our MSRs at the end of 2011 reflected our assessment of expected future levels in servicing and foreclosure costs. See the “Risk Management – Credit Risk Management – Risks Relating to Servicing Activities” section in this Report for information on the regulatory consent orders. Our portfolio of loans serviced for others was $1.85 trillion at December 31, 2011, and $1.84 trillion at December 31, 2010. At December 31, 2011, the ratio of MSRs to related loans serviced for others was 0.76%, compared with 0.86% at December 31, 2010.

Income from loan origination/sale activities was $4.6 billion in 2011 compared with $6.4 billion in 2010. The decrease in 2011 was driven by lower loan origination volume and margins on loan originations, partially offset by lower provision for mortgage loan repurchase losses. Residential real estate originations were $357 billion in 2011, compared with $386 billion a year ago, and mortgage applications were $537 billion in 2011, compared with $620 billion in 2010. The 1-4 family first mortgage unclosed pipeline was $72 billion at December 31, 2011, and $73 billion at December 31, 2010. For additional information, see the “Risk Management – Mortgage Banking Interest Rate and Market Risk” section and Note 1 (Summary of Significant Accounting Policies), Note 9 (Mortgage Banking Activities) and Note 17 (Fair Values of Assets and Liabilities) to Financial Statements in this Report.

 

 

37


Earnings Performance (continued)

 

Net gains on mortgage loan origination/sales activities include the cost of any additions to the mortgage repurchase liability. Mortgage loans are repurchased from third parties based on standard representations and warranties, and early payment default clauses in mortgage sale contracts. Additions to the mortgage repurchase liability that were charged against net gains on mortgage loan origination/sales activities during 2011 totaled $1.3 billion (compared with $1.6 billion for 2010), of which $1.2 billion ($1.5 billion for 2010) was for subsequent increases in estimated losses on prior year’s loan sales. For additional information about mortgage loan repurchases, see the “Risk Management – Credit Risk Management – Liability for Mortgage Loan Repurchase Losses” section and Note 9 (Mortgage Banking Activities) to Financial Statements in this Report.

Net gains from trading activities, which reflect unrealized changes in fair value of our trading positions and realized gains and losses, were $1.0 billion in 2011 and $1.6 billion in 2010. The year-over-year decrease was driven by challenging market conditions, including sovereign debt concerns, which pressured credit spreads, reduced prices on financial assets and limited new issue origination and trading opportunities. The decline also reflects a loss of $377 million in 2011 relating to our resolution of a legacy Wachovia position. Net gains from trading activities do not include interest income and other fees earned from related activities. Those amounts are reported within interest income from trading assets and other noninterest income, respectively, in the income statement. Net gains from trading activities are primarily from trading conducted on behalf of or driven by the needs of our customers (customer accommodation trading) and also include the results of certain economic hedging and proprietary trading activity. Net gains (losses) from proprietary trading were a $14 million net loss in 2011 and a $22 million net gain in 2010. Proprietary trading results also included interest and fees reported in their corresponding income statement line items. Proprietary trading activities are not significant to our client-focused business model. Our trading activities, customer accommodation, economic hedging and proprietary trading are further discussed in the “Asset/Liability Management – Market Risk – Trading Activities” section in this Report.

Net gains on debt and equity securities totaled $1.5 billion for 2011 and $455 million for 2010, after other-than-temporary impairment (OTTI) write downs of $711 million for 2011 and $940 million for 2010. Included in net gains on debt and equity securities for 2011 was a $271 million gain related to a legacy Wachovia position, due to redemption of our interest in an investment fund. Other income in 2011 also included a $153 million gain on the sale of our H.D. Vest Financial Services business.

 

 

38


Noninterest Expense

Table 8: Noninterest Expense

 

 
     Year ended December 31,  
  

 

 

 
(in millions)    2011      2010      2009  

 

 

Salaries

   $ 14,462        13,869        13,757  

Commission and incentive compensation

     8,857        8,692        8,021  

Employee benefits

     4,348        4,651        4,689  

Equipment

     2,283        2,636        2,506  

Net occupancy

     3,011        3,030        3,127  

Core deposit and other intangibles

     1,880        2,199        2,577  

FDIC and other deposit assessments

     1,266        1,197        1,849  

Outside professional services

     2,692        2,370        1,982  

Contract services

     1,407        1,642        1,088  

Foreclosed assets

     1,354        1,537        1,071  

Operating losses

     1,261        1,258        875  

Postage, stationery and supplies

     942        944        933  

Outside data processing

     935        1,046        1,027  

Travel and entertainment

     821        783        575  

Advertising and promotion

     607        630        572  

Telecommunications

     523        596        610  

Insurance

     515        464        845  

Operating leases

     112        109        227  

All other

     2,117        2,803        2,689  

 

 

Total

   $         49,393                50,456                49,020  

 

 

Noninterest expense was $49.4 billion in 2011, down 2% from $50.5 billion in 2010, driven by lower merger integration costs, which also contributed to decreases in equipment expense ($2.3 billion, down from $2.6 billion in 2010), lower contract services expense ($1.4 billion, down from $1.6 billion in 2010) and lower foreclosed asset expense ($1.4 billion, down from $1.5 billion in 2010). The increase in 2010 over 2009 was predominantly due to merger integration costs, Wells Fargo Financial restructuring costs and a $400 million charitable donation to the Wells Fargo Foundation.

Personnel-related expenses were up 2% in 2011 compared with 2010, primarily due to higher revenues generated by businesses with revenue-based compensation, including the retail securities brokerage and mortgage businesses, and severance expense related to our expense initiative.

Outside professional services included increased investments by our businesses in 2011 in their service delivery systems and approximately $100 million of higher costs associated with the mortgage servicing regulatory consent orders.

Merger integration costs totaled $1.7 billion in 2011 and $1.9 billion in 2010. The integration of Wachovia remained on track, and with the successful North Carolina conversion in October 2011, all retail banking store conversions are complete. Remaining integration activities are expected to be concluded by first quarter 2012.

We continue to target $11 billion of noninterest expense for fourth quarter 2012. However, we currently expect first quarter 2012 expenses to remain elevated driven by seasonally higher personnel expenses and our final quarter of Wachovia integration expenses, partially offset by continued gains from efficiency and cost save initiatives.

Income Tax Expense

The 2011 annual effective tax rate was 31.9% compared with 33.9% in 2010 and 30.3% in 2009. The lower effective tax rate for 2011 reflected tax benefits from the realization for tax purposes of a previously written down investment, a decrease in tax expense associated with leveraged leases, as well as tax benefits related to charitable donations of appreciated securities.

 

 

39


Earnings Performance (continued)

 

Operating Segment Results

We are organized for management reporting purposes into three operating segments: Community Banking; Wholesale Banking; and Wealth, Brokerage and Retirement. These segments are defined by product type and customer segment and their results are based on our management accounting process, for which there is no comprehensive, authoritative financial accounting guidance equivalent to generally accepted accounting principles (GAAP). In fourth quarter 2010, we aligned certain lending businesses into Wholesale Banking from Community Banking to

reflect our previously announced restructuring of Wells Fargo Financial. In first quarter 2011, we realigned a private equity business into Wholesale Banking from Community Banking. Prior periods have been revised to reflect these changes. Table 9 and the following discussion present our results by operating segment. For a more complete description of our operating segments, including additional financial information and the underlying management accounting process, see Note 24 (Operating Segments) to Financial Statements in this Report.

 

 

Table 9: Operating Segment Results – Highlights

 

 
     Year ended December 31,  
  

 

 

 
(in billions)    Community Banking      Wholesale Banking      Wealth, Brokerage
and Retirement
 
  

 

 

    

 

 

    

 

 

 
     2011      2010      2011      2010      2011      2010  

 

 

Revenue

   $ 50.7        54.5        21.7        22.4        12.2        11.7  

Net income

     9.1        7.0        7.0        5.9        1.3        1.0  

 

 

Average loans

             498.1                530.1                249.1                230.5        43.0        43.0  

Average core deposits

     556.2        536.4        202.1        170.0                130.4                121.2  

 

 

 

Community Banking offers a complete line of diversified financial products and services for consumers and small businesses including investment, insurance and trust services in 39 states and D.C., and mortgage and home equity loans in all 50 states and D.C. through its Regional Banking and Wells Fargo Home Mortgage business units.

Community Banking reported net income of $9.1 billion and revenue of $50.7 billion in 2011. Revenue decreased $3.8 billion, or 7%, from 2010 due to reduced mortgage banking income, lower yields on investment securities and expected reductions in the non-strategic and liquidating loan portfolios, partially offset by long-term debt run-off and lower deposit costs. Net interest income decreased $2.3 billion, or 7%, from 2010, mostly due to lower average loans (down $32.0 billion from 2010) as a result of planned run-off in the non-strategic and liquidating loan portfolios (including home equity and Pick-A-Pay), loan repricing at lower rates, and lower yields on our investment securities. This decline in interest income was mitigated by long-term debt run-off and continued low funding costs. Average core deposits increased $19.8 billion, or 4%, from 2010, as growth in liquid deposits more than offset maturities of higher yielding certificates of deposit. The number of consumer checking accounts grew 3.2% from December 31, 2010. Noninterest income decreased $1.5 billion, or 7%, from 2010, mainly due to lower volume-related mortgage banking income and lower deposit service charges as a result of the third quarter 2010 implementation of Regulation E, partially offset by lower other than temporary impairments. Noninterest expense decreased $837 million, or 3%, from 2010, due to reduced expenses across most categories, as well as a 2010 charitable donation expense of $400 million. The provision for credit losses decreased $5.8 billion from 2010 as credit quality in most of our consumer and business loan portfolios continued to improve. Charge-offs decreased $4.8 billion from 2010, reflecting improvement primarily in the home equity, credit card, and small business lending portfolios. Additionally, we released $2.4 billion of

allowance for credit losses in 2011, compared with $1.4 billion released in 2010.

Wholesale Banking provides financial solutions across the U.S. and globally to middle market and large corporate customers with annual revenue generally in excess of $20 million. Products and businesses include commercial banking, investment banking and capital markets, securities investment, government and institutional banking, corporate banking, commercial real estate, treasury management, capital finance, international, insurance, real estate capital markets, commercial mortgage servicing, corporate trust, equipment finance, asset backed finance, and asset management.

Wholesale Banking reported net income of $7.0 billion in 2011, up $1.1 billion, or 19%, from $5.9 billion in 2010. Average loans of $249.1 billion increased $18.6 billion, or 8%, driven by strong demand from both our domestic and international customers. Average core deposits of $202.1 billion in 2011 increased $32.1 billion, or 19%, from 2010 reflecting continued strong customer liquidity.

The year over year increase in net income was the result of a decrease in the provision for credit losses and noninterest expenses, which more than offset a decrease in revenue. Revenue decreased $759 million, or 3%, from 2010, as broad-based growth among many businesses, including strong loan and deposit growth, was offset by lower PCI resolutions revenue, lower sales and trading revenue, and lower crop insurance revenue.

Total noninterest expense in 2011 decreased $75 million compared with 2010 as lower operating losses and foreclosed asset expenses were partially offset by higher personnel expense. The provision for credit losses declined $2.0 billion from 2010, and reflected a $1.6 billion improvement in net credit losses along with a $950 million allowance release (compared with a $561 million release in 2010).

 

 

40


 

Wholesale Banking’s 2011 financial results benefited from loan portfolio acquisitions and strong borrowing demand across all customers segments, with most lending areas experiencing double-digit rates of growth in loans outstandings, including in Asset Backed Finance, Capital Finance, Commercial Banking, Commercial Real Estate, Government and Institutional Banking, International, and Real Estate Capital Markets.

Wealth, Brokerage and Retirement provides a full range of financial advisory services to clients using a planning approach to meet each client’s needs. Wealth Management provides affluent and high net worth clients with a complete range of wealth management solutions, including financial planning, private banking, credit, investment management and trust. Family Wealth (which will be rebranded as Abbot Downing, a Wells Fargo Business, in April 2012) meets the unique needs of ultra high net worth customers. Brokerage serves customers’ advisory, brokerage and financial needs as part of one of the largest full-service brokerage firms in the United States. Retirement is a national leader in providing institutional retirement and trust services (including 401(k) and pension plan record keeping) for businesses, retail retirement solutions for

individuals, and reinsurance services for the life insurance industry.

Wealth, Brokerage and Retirement reported net income of $1.3 billion in 2011, up $283 million, or 28%, from 2010. Revenue increased $458 million, or 4%, from 2010, as net interest income increased $148 million, or 5%, and noninterest income increased $310 million, or 3%, from 2010. Net interest income increased due to higher investment income and the impact of deposit balance growth. Average core deposits of $130.4 billion in 2011 increased 8% from 2010. Noninterest income increased as higher asset-based fees and a gain on the sale of the H.D. Vest Financial Services business exceeded losses on deferred compensation plan investments (offset in expense) and lower brokerage transaction revenue. Noninterest expense increased $167 million, or 2%, from 2010, primarily due to growth in personnel cost largely due to higher broker commissions driven by increased production levels, as well as increases in other incentive compensation, offset by lower deferred compensation. The provision for credit losses decreased $164 million, or 49%, from 2010, due to lower net charge-offs.

 

 

Balance Sheet Analysis

 

 

 

During 2011, our total assets grew 4%, funded by core deposit growth of 9% and internal capital generation, partially offset by a reduction in our long-term borrowings. Our total loans and core deposits at December 31, 2011, were up from the previous year. At December 31, 2011, core deposits totaled 113% of the loan portfolio, and we have the capacity to add higher yielding earning assets to generate future revenue and earnings growth. The strength of our business model produced record earnings and high rates of internal capital generation as reflected in our improved capital ratios. Tier 1 capital increased to 11.33% as a percentage of total risk-weighted assets, and Tier 1 common equity to 9.46% at December 31, 2011, up from 11.16% and

8.30%, respectively, at December 31, 2010. Total capital was 14.76% and Tier 1 leverage was 9.03%, compared with 15.01% and 9.19%, respectively, at December 2010. For additional information about our capital requirements, see Note 26 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report.

The following discussion provides additional information about the major components of our balance sheet. Information about changes in our asset mix and about our capital is included in the “Earnings Performance – Net Interest Income” and “Capital Management” sections of this Report.

 

 

Securities Available for Sale

Table 10: Securities Available for Sale – Summary

 

 
                                 December 31,  
  

 

 

 
     2011      2010  
  

 

 

    

 

 

 
(in millions)    Cost      Net
unrealized
gain
     Fair
value
     Cost      Net
unrealized
gain
     Fair
value
 

 

 

Debt securities available for sale

   $         212,642                6,554                219,196                160,071                7,394                167,465  

Marketable equity securities

     2,929        488        3,417        4,258        931        5,189  

 

 

Total securities available for sale

   $ 215,571        7,042        222,613        164,329        8,325        172,654  

 

 

 

        Table 10 presents a summary of our securities available-for-sale portfolio. Securities available for sale consist of both debt and marketable equity securities. We hold debt securities available for sale primarily for liquidity, interest rate risk management and long-term yield enhancement. Accordingly, this portfolio consists primarily of liquid,

high-quality federal agency debt and privately issued mortgage-backed securities (MBS). The total net unrealized gains on securities available for sale were $7.0 billion at December 31, 2011, down from net unrealized gains of $8.3 billion at December 31, 2010, primarily due to gains realized from sales partially offset by slight widening of credit spreads in some asset classes.

 

 

41


Balance Sheet Analysis (continued)

 

We analyze securities for OTTI quarterly, or more often if a potential loss-triggering event occurs. Of the $711 million OTTI write-downs recognized in 2011, $423 million related to debt securities. There were $118 million in OTTI write-downs for marketable equity securities and $170 million in OTTI write-downs related to nonmarketable equity securities. For a discussion of our OTTI accounting policies and underlying considerations and analysis see Note 1 (Summary of Significant Accounting Policies – Securities) and Note 5 (Securities Available for Sale) to Financial Statements in this Report.

At December 31, 2011, debt securities available for sale included $32.6 billion of municipal bonds, of which 78% were rated “A-” or better, based on external and, in some cases, internal ratings. Additionally, some of these bonds are guaranteed against loss by bond insurers. These guaranteed bonds are predominantly investment grade and were generally underwritten in accordance with our own investment standards prior to the determination to purchase, without relying on the bond insurer’s guarantee in making the investment decision. Our municipal bond holdings continue to be monitored as part of our ongoing impairment analysis of our securities available for sale.

The weighted-average expected maturity of debt securities available for sale was 4.9 years at December 31, 2011. Because 61% of this portfolio is MBS, the expected remaining maturity may differ from contractual maturity because borrowers generally have the right to prepay obligations before the underlying mortgages mature. The estimated effect of a 200 basis point increase or decrease in interest rates on the fair value and the expected remaining maturity of the MBS available for sale are shown in Table 11.

Table 11: Mortgage-Backed Securities

 

 
(in billions)    Fair
value
     Net
unrealized
gain (loss)
    Expected
remaining
maturity
(in years)
 

 

 

At December 31, 2011

       

Actual

   $     132.7        5.6       3.8  

Assuming a 200 basis point:

       

Increase in interest rates

     122.6        (4.5     5.2  

Decrease in interest rates

     137.4        10.3       3.1  

 

 

See Note 5 (Securities Available for Sale) to Financial Statements in this Report for securities available for sale by security type.

 

 

42


 

Loan Portfolio

Total loans were $769.6 billion at December 31, 2011, up $12.4 billion from December 31, 2010. Table 12 provides a summarized breakdown by loan portfolio. Increased balances in many commercial loan portfolios more than offset the continued reduction in the non-strategic and liquidating loan portfolios, which have declined $21.0 billion since December 31, 2010, as well as the soft demand in consumer loans in response to economic conditions. Additional information on the non-strategic and liquidating loan portfolios is included in Table 17 in the “Credit Risk Management” section of this Report.

Many loan portfolios had double-digit year-over-year loan growth in average balances, including government and institutional banking, asset-backed finance, capital finance, commercial banking, commercial real estate, international and real estate capital markets. Included in the growth of loans from year end 2010 were loan purchases in 2011 with a period end balance of $3.6 billion of U.S.-based commercial real estate. Consumer loans include the consolidation of $5.6 billion of reverse mortgage loans previously sold.

 

 

Table 12: Loan Portfolios

 

 
     December 31,  
  

 

 

 
(in millions)    2011      2010      2009      2008      2007  

 

 

Commercial

   $         345,450                322,058                336,465                389,964                160,282  

Consumer

     424,181        435,209        446,305        474,866        221,913  

 

 

Total loans

   $ 769,631        757,267        782,770        864,830        382,195  

 

 

 

A discussion of average loan balances and a comparative detail of average loan balances is included in Table 5 under “Earnings Performance – Net Interest Income” earlier in this Report. Year-end balances and other loan related information are in Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in this Report.

Table 13 shows contractual loan maturities for selected loan categories and sensitivities of those loans to changes in interest rates.

 

 

Table 13: Maturities for Selected Loan Categories

 

 
    

December 31,

 
  

 

 

 
     2011      2010  
  

 

 

    

 

 

 
(in millions)    Within
one
year
     After
one year
through
five years
     After
five
years
     Total      Within
one
year
     After
one year
through
five years
     After
five
years
     Total  

 

 

Selected loan maturities:

                       

Commercial and industrial

   $ 44,258        101,273        21,685        167,216        39,576        90,497        21,211        151,284  

Real estate mortgage

     22,537        54,201        29,237        105,975        27,544        44,627        27,264        99,435  

Real estate construction

     10,059        8,178        1,145        19,382        15,009        9,189        1,135        25,333  

Foreign

     35,258        3,142        1,360        39,760        25,087        5,508        2,317        32,912  

 

 

Total selected loans

   $   112,112          166,794        53,427        332,333        107,216        149,821        51,927        308,964  

 

 

Distribution of loans due after one year to changes in interest rates:

                       

Loans at fixed interest rates

      $ 19,319        13,712              29,886        14,543     

Loans at floating/variable interest rates

        147,475        39,715              119,935        37,384     

 

 

Total selected loans

      $ 166,794        53,427              149,821        51,927     

 

 

 

43


Balance Sheet Analysis (continued)

 

Deposits

Deposits totaled $920.1 billion at December 31, 2011, compared with $847.9 billion at December 31, 2010. Table 14 provides additional detail regarding deposits. Comparative detail of average deposit balances is provided in Table 5 under

“Earnings Performance – Net Interest Income” earlier in this Report. Total core deposits were $872.6 billion at December 31, 2011, up $74.4 billion from $798.2 billion at December 31, 2010. We continued to gain new deposit customers and deepen our relationships with existing customers in 2011.

 

 

Table 14: Deposits

 

 
     December 31,        
  

 

 

   
(in millions)    2011      % of
total
deposits
    2010      % of
total
deposits
    %
Change
 

 

 

Noninterest-bearing

   $ 243,961        26   $ 191,231        23     28  

Interest-bearing checking

     37,027        4       63,440        7       (42

Market rate and other savings

     485,534        53       431,883        51       12  

Savings certificates

     63,617        7       77,292        9       (18

Foreign deposits (1)

     42,490        5       34,346        4       24  

 

   

Core deposits

     872,629        95       798,192        94       9  

Other time and savings deposits

     20,745        2       19,412        2       7  

Other foreign deposits

     26,696        3       30,338        4       (12

 

   

Total deposits

   $ 920,070        100   $ 847,942        100     9  

 

 
(1) Reflects Eurodollar sweep balances included in core deposits.

Off-Balance Sheet Arrangements

 

 

 

In the ordinary course of business, we engage in financial transactions that are not recorded in the balance sheet, or may be recorded in the balance sheet in amounts that are different from the full contract or notional amount of the transaction. These transactions are designed to (1) meet the financial needs of customers, (2) manage our credit, market or liquidity risks, (3) diversify our funding sources, and/or (4) optimize capital.

Off-Balance Sheet Transactions with Unconsolidated Entities

We routinely enter into various types of on- and off-balance sheet transactions with special purpose entities (SPEs), which are corporations, trusts or partnerships that are established for a limited purpose. Historically, the majority of SPEs were formed in connection with securitization transactions. For more information on securitizations, including sales proceeds and cash flows from securitizations, see Note 8 (Securitizations and Variable Interest Entities) to Financial Statements in this Report.

Guarantees and Certain Contingent Arrangements

Guarantees are contracts that contingently require us to make payments to a guaranteed party based on an event or a change in an underlying asset, liability, rate or index. Guarantees are generally in the form of standby letters of credit, securities lending and other indemnifications, liquidity agreements, written put options, recourse obligations, residual value guarantees and contingent consideration.

For more information on guarantees and certain contingent arrangements, see Note 14 (Guarantees) to Financial Statements in this Report.

 

 

44


Contractual Obligations

In addition to the contractual commitments and arrangements previously described, which, depending on the nature of the obligation, may or may not require use of our resources, we enter into other contractual obligations in the ordinary course of business, including debt issuances for the funding of operations and leases for premises and equipment.

Table 15 summarizes these contractual obligations as of December 31, 2011, excluding obligations for short-term borrowing arrangements and pension and postretirement benefit plans. More information on those obligations is in Note 12 (Short-Term Borrowings) and Note 20 (Employee Benefits and Other Expenses) to Financial Statements in this Report.

 

 

Table 15: Contractual Obligations

 

 
(in millions)    Note(s) to
Financial
Statements
     Less than
1 year
     1-3
years
     3-5
years
     More
than
5 years
     Indeterminate
maturity
    Total  

 

 

Contractual payments by period:

                   

Deposits

     11      $ 98,309        26,945        14,502        3,427        776,887  (1)      920,070  

Long-term debt (2)

     7, 13         18,605        25,080        26,689        54,980               125,354  

Operating leases

     7        1,319        2,291        1,589        3,239               8,438  

Unrecognized income tax obligations

     21        10                                2,219       2,229  

Commitments to purchase debt securities

        17        1,010                               1,027  

Purchase and other obligations (3)

        454        311        125        6               896  

 

 

Total contractual obligations

      $ 118,714        55,637        42,905        61,652        779,106       1,058,014  

 

 
(1) Includes interest-bearing and noninterest-bearing checking, and market rate and other savings accounts.
(2) Includes obligations under capital leases of $116 million.
(3) Includes agreements to purchase goods or services and an annual minimum property tax obligation.

 

We are subject to the income tax laws of the U.S., its states and municipalities, and those of the foreign jurisdictions in which we operate. We have various unrecognized tax obligations related to these operations that may require future cash tax payments to various taxing authorities. Because of their uncertain nature, the expected timing and amounts of these payments generally are not reasonably estimable or determinable. We estimate the amount payable in the next 12 months based on the status of our tax examinations and settlement discussions. See Note 21 (Income Taxes) to Financial Statements in this Report for more information.

We enter into derivatives, which create contractual obligations, as part of our interest rate risk management process for our customers or for other trading activities. See the “Risk Management – Asset/Liability” section and Note 16 (Derivatives) to Financial Statements in this Report for more information.

Transactions with Related Parties

The Related Party Disclosures topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (Codification) requires disclosure of material related-party transactions, other than compensation arrangements, expense allowances and other similar items in the ordinary course of business. We had no material related-party transactions required to be reported for the years ended December 31, 2011, 2010 and 2009.

 

 

45


Risk Management

 

 

 

All financial institutions must manage and control a variety of business risks that can significantly affect their financial performance. Key among those are credit, asset/liability and market risk. The discussion that follows provides information on how we manage these risks.

Credit Risk Management

Table 16: Total Loans Outstanding by Portfolio Segment and Class of Financing Receivable

 

 
     December 31,  
  

 

 

 
(in millions)    2011      2010  

 

 

Commercial:

     

Commercial and industrial

   $         167,216        151,284  

Real estate mortgage

     105,975        99,435  

Real estate construction

     19,382        25,333  

Lease financing

     13,117        13,094  

Foreign (1)

     39,760        32,912  

 

 

Total commercial

     345,450        322,058  

 

 

Consumer:

     

Real estate 1-4 family first mortgage

     228,894        230,235  

Real estate 1-4 family junior lien mortgage

     85,991        96,149  

Credit card

     22,836        22,260  

Other revolving credit and installment

     86,460        86,565  

 

 

Total consumer

     424,181        435,209  

 

 

Total loans

   $ 769,631        757,267  

 

 
(1) Substantially all of our foreign loan portfolio is commercial. Loans are classified as foreign if the borrower’s primary address is outside of the United States.

We employ various credit risk management and monitoring activities to mitigate risks associated with multiple risk factors affecting loans we hold, could acquire or originate including:

   

Loan concentrations and related credit quality

   

Counterparty credit risk

   

Economic and market conditions

   

Legislative or regulatory mandates

   

Changes in interest rates

   

Merger and acquisition activities

   

Reputation risk

Our credit risk management process is governed centrally, but provides for decentralized management and accountability by our lines of business. Our overall credit process includes comprehensive credit policies, disciplined credit underwriting, frequent and detailed risk measurement and modeling, extensive credit training programs, and a continual loan review and audit process. The Credit Committee of our Board of Directors (Board) receives reports from management, including our Chief Risk Officer and Chief Credit Officer, and its responsibilities include oversight of the administration and effectiveness of, and compliance with, our credit policies and the adequacy of the allowance for credit losses.

A key to our credit risk management is adherence to a well controlled underwriting process, which we believe is appropriate for the needs of our customers as well as investors who purchase the loans or securities collateralized by the loans.

 

 

46


Non-Strategic and Liquidating Loan Portfolios We continually evaluate and modify our credit policies to address appropriate levels of risk. We may designate certain portfolios and loan products as non-strategic or liquidating to cease their continued origination as we actively work to limit losses and reduce our exposures.

Table 17 identifies our non-strategic and liquidating loan portfolios. They consist primarily of the Pick-a-Pay mortgage portfolio and other PCI loans acquired from Wachovia as well as some portfolios from legacy Wells Fargo Home Equity and

Wells Fargo Financial. Effective first quarter 2011, we added our education finance government guaranteed loan portfolio to the non-strategic and liquidating loan portfolios as there is no longer a U.S. Government guaranteed student loan program available to private financial institutions pursuant to legislation in 2010. The outstanding balances on non-strategic and liquidating loan portfolios have decreased 41% since the merger with Wachovia at December 31, 2008, and decreased 16% from the end of 2010.

 

 

Table 17: Non-Strategic and Liquidating Loan Portfolios

 

 
     Outstanding balance December 31,  
  

 

 

 
(in millions)    2011      2010      2009      2008  

 

 

Commercial:

           

Legacy Wachovia commercial and industrial, CRE and foreign PCI loans (1)

   $ 5,695        7,935        12,988        18,704  

 

 

Total commercial

     5,695        7,935        12,988        18,704  

 

 

Consumer:

           

Pick-a-Pay mortgage (1)

     65,652        74,815        85,238        95,315  

Liquidating home equity

     5,710        6,904        8,429        10,309  

Legacy Wells Fargo Financial indirect auto

     2,455        6,002        11,253        18,221  

Legacy Wells Fargo Financial debt consolidation

     16,542        19,020        22,364        25,299  

Education Finance - government guaranteed (2)

     15,376        17,510        21,150        20,465  

Legacy Wachovia other PCI loans (1)

     896        1,118        1,688        2,478  

 

 

Total consumer

     106,631        125,369        150,122        172,087  

 

 

Total non-strategic and liquidating loan portfolios

   $         112,326        133,304        163,110        190,791  

 

 
(1) Net of purchase accounting adjustments related to PCI loans.
(2) Effective first quarter 2011, we included our education finance government guaranteed loan portfolio as there is no longer a U.S. Government guaranteed student loan program available to private financial institutions, pursuant to legislation in 2010. Prior periods have been adjusted to reflect this change.

 

The Wells Fargo Financial debt consolidation portfolio included $1.1 billion of loans at December 31, 2011, that were considered prime based on secondary market standards, compared with $1.2 billion at December 31, 2010. The rest is non-prime but was originated with underwriting standards to reduce credit risk. Wells Fargo Financial ceased originating loans and leases through its indirect auto business channel by the end of 2008.

The home equity liquidating portfolio was designated in fourth quarter 2007 from loans generated through third party channels. This portfolio is discussed in more detail in the “Credit Risk Management – Home Equity Portfolios” section of this Report.

Information about the liquidating PCI and Pick-a-Pay loan portfolios is provided in the discussion of loan portfolios that follows.

 

 

47


Risk Management – Credit Risk Management (continued)

 

PURCHASED CREDIT-IMPAIRED (PCI) LOANS Loans acquired with evidence of credit deterioration since their origination and where it is probable that we will not collect all contractually required principal and interest payments are accounted for using the measurement provisions for PCI loans. PCI loans are recorded at fair value at the date of acquisition, and the historical allowance for credit losses related to these loans is not carried over. Such loans are considered to be accruing due to the existence of the accretable yield and not based on consideration given to contractual interest payments. Substantially all of our PCI loans were acquired in the Wachovia acquisition on December 31, 2008.

A nonaccretable difference is established for PCI loans to absorb losses expected on those loans at the date of acquisition. Amounts absorbed by the nonaccretable difference do not affect the income statement or the allowance for credit losses.

Substantially all commercial and industrial, CRE and foreign PCI loans are accounted for as individual loans. Conversely, Pick-a-Pay and other consumer PCI loans have been aggregated into several pools based on common risk characteristics. Each pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows.

Resolutions of loans may include sales to third parties, receipt of payments in settlement with the borrower, or foreclosure of the collateral. Our policy is to remove an individual PCI loan from a pool based on comparing the amount

received from its resolution with its contractual amount. Any difference between these amounts is absorbed by the nonaccretable difference. This removal method assumes that the amount received from resolution approximates pool performance expectations. The accretable yield percentage is unaffected by the resolution and any changes in the effective yield for the remaining loans in the pool are addressed by our quarterly cash flow evaluation process for each pool. For loans that are resolved by payment in full, there is no release of the nonaccretable difference for the pool because there is no difference between the amount received at resolution and the contractual amount of the loan. Modified PCI loans are not removed from a pool even if those loans would otherwise be deemed troubled debt restructurings (TDRs). Modified PCI loans that are accounted for individually are TDRs, and removed from PCI accounting, if there has been a concession granted in excess of the original nonaccretable difference. We include these TDRs in our impaired loans.

During 2011, we recognized in income $239 million released from the nonaccretable difference related to commercial PCI loans due to payoffs and other resolutions. We also transferred $373 million from the nonaccretable difference to the accretable yield for PCI loans with improving credit-related cash flows and absorbed $2.3 billion of losses in the nonaccretable difference from loan resolutions and write-downs. Table 18 provides an analysis of changes in the nonaccretable difference.

 

 

Table 18: Changes in Nonaccretable Difference for PCI Loans

 

 
(in millions)    Commercial     Pick-a-Pay     Other
consumer
    Total  

 

 

Balance, December 31, 2008

   $         10,410       26,485       4,069       40,964  

Release of nonaccretable difference due to:

        

Loans resolved by settlement with borrower (1)

     (330                   (330

Loans resolved by sales to third parties (2)

     (86            (85     (171

Reclassification to accretable yield for loans with improving credit-related cash flows (3)

     (138     (27     (276     (441

Use of nonaccretable difference due to:

        

Losses from loan resolutions and write-downs (4)

     (4,853     (10,218     (2,086     (17,157

 

 

Balance, December 31, 2009

     5,003       16,240       1,622       22,865  

Release of nonaccretable difference due to:

        

Loans resolved by settlement with borrower (1)

     (817                   (817

Loans resolved by sales to third parties (2)

     (172                   (172

Reclassification to accretable yield for loans with improving credit-related cash flows (3)

     (726     (2,356     (317     (3,399

Use of nonaccretable difference due to:

        

Losses from loan resolutions and write-downs (4)

     (1,698     (2,959     (391     (5,048

 

 

Balance, December 31, 2010

     1,590       10,925       914       13,429  

Addition of nonaccretable difference due to acquisitions

     188                     188  

Release of nonaccretable difference due to:

        

Loans resolved by settlement with borrower (1)

     (198                   (198

Loans resolved by sales to third parties (2)

     (41                   (41

Reclassification to accretable yield for loans with improving credit-related cash flows (3)

     (352            (21     (373

Use of nonaccretable difference due to:

        

Losses from loan resolutions and write-downs (4)

     (258     (1,799     (241     (2,298

 

 

Balance, December 31, 2011

   $ 929       9,126       652       10,707  

 

 
(1) Release of the nonaccretable difference for settlement with borrower, on individually accounted PCI loans, increases interest income in the period of settlement. Pick-a-Pay and Other consumer PCI loans do not reflect nonaccretable difference releases for settlements with borrowers due to pool accounting for those loans, which assumes that the amount received approximates the pool performance expectations.
(2) Release of the nonaccretable difference as a result of sales to third parties increases noninterest income in the period of the sale.
(3) Reclassification of nonaccretable difference to accretable yield for loans with increased cash flow estimates will result in increased interest income as a prospective yield adjustment over the remaining life of the loan or pool of loans.
(4) Write-downs to net realizable value of PCI loans are absorbed by the nonaccretable difference when severe delinquency (normally 180 days) or other indications of severe borrower financial stress exist that indicate there will be a loss of contractually due amounts upon final resolution of the loan.

 

48


Since December 31, 2008, we have released $5.9 billion in nonaccretable difference, including $4.2 billion transferred from the nonaccretable difference to the accretable yield and $1.7 billion released to income through loan resolutions. We have provided $1.8 billion in the allowance for credit losses for certain PCI loans or pools of PCI loans that have had credit-related decreases to cash flows expected to be collected. The net result is a $4.2 billion reduction from December 31, 2008, through December 31, 2011, in our initial projected losses on all PCI loans.

At December 31, 2011, the allowance for credit losses on certain PCI loans was $231 million. The allowance is necessary to absorb credit-related decreases since acquisition in cash flows expected to be collected and primarily relates to individual PCI loans. Table 19 analyzes the actual and projected loss results on PCI loans since acquisition through December 31, 2011.

For additional information on PCI loans, see Note 1 (Summary of Significant Accounting Policies – Loans) and Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in this Report.

 

 

Table 19: Actual and Projected Loss Results on PCI Loans

 

 
(in millions)    Commercial     Pick-a-Pay      Other
consumer
    Total  

 

 

Release of nonaccretable difference due to:

         

Loans resolved by settlement with borrower (1)

   $ 1,345                      1,345  

Loans resolved by sales to third parties (2)

     299               85       384  

Reclassification to accretable yield for loans with improving credit-related cash flows (3)

     1,216       2,383        614       4,213  

 

 

Total releases of nonaccretable difference due to better than expected losses

     2,860       2,383        699       5,942  

Provision for losses due to credit deterioration (4)

     (1,668             (116     (1,784

 

 

Actual and projected losses on PCI loans less than originally expected

   $         1,192       2,383        583       4,158  

 

 
(1) Release of the nonaccretable difference for settlement with borrower, on individually accounted PCI loans, increases interest income in the period of settlement. Pick-a-Pay and Other consumer PCI loans do not reflect nonaccretable difference releases for settlements with borrowers due to pool accounting for those loans, which assumes that the amount received approximates the pool performance expectations.
(2) Release of the nonaccretable difference as a result of sales to third parties increases noninterest income in the period of the sale.
(3) Reclassification of nonaccretable difference to accretable yield for loans with increased cash flow estimates will result in increased interest income as a prospective yield adjustment over the remaining life of the loan or pool of loans.
(4) Provision for additional losses recorded as a charge to income, when it is estimated that the cash flows expected to be collected for a PCI loan or pool of loans may not support full realization of the carrying value.

 

Significant Portfolio Reviews Measuring and monitoring our credit risk is an ongoing process that tracks delinquencies, collateral values, FICO scores, economic trends by geographic areas, loan-level risk grading for certain portfolios (typically commercial) and other indications of credit risk. Our credit risk monitoring process is designed to enable early identification of developing risk and to support our determination of an appropriate allowance for credit losses. The following analysis reviews the relevant concentrations and certain credit metrics of our significant portfolios. See Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in this Report for more analysis and credit metric information.

COMMERCIAL REAL ESTATE (CRE) The CRE portfolio, consisting of both CRE mortgage loans and CRE construction loans, totaled $125.4 billion, or 16% of total loans, at December 31, 2011. CRE construction loans totaled $19.4 billion at December 31, 2011, and CRE mortgage loans totaled $106.0 billion, of which 33% was to owner-occupants. Table 20 summarizes CRE loans by state and property type with the related nonaccrual totals. CRE nonaccrual loans totaled 5% of the non-PCI CRE outstanding balance at December 31, 2011, a decline of 24% from December 31, 2010. The portfolio is diversified both geographically and by property type. The largest geographic concentrations of combined CRE loans are in California and Florida, which represented 25% and 9% of the total CRE portfolio, respectively. By property type, the largest concentrations are office buildings at 26% and industrial/warehouse at 11% of the portfolio. We subject commercial loans to individual risk assessment using our

internal borrower and collateral quality ratings. Our ratings are aligned to pass and criticized categories with our criticized categories aligned to special mention, substandard and doubtful categories as defined by bank regulatory agencies. At December 31, 2011, we had $22.5 billion of criticized non-PCI CRE mortgage loans, a decrease of 13% from December 31, 2010, and $6.8 billion of criticized non-PCI construction loans, a decrease of 39% from December 31, 2010. Total criticized non-PCI CRE loans remained relatively high as a result of the continued challenging conditions in the real estate market. See Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in this Report for further detail on criticized loans.

The underwriting of CRE loans primarily focuses on cash flows inherent in the creditworthiness of the customer, in addition to collateral valuations. To identify and manage newly emerging problem CRE loans, we employ a high level of monitoring and regula