EX-13 7 d450230dex13.htm EX-13 EX-13

EXHIBIT 13

 

 

Financial Review

  30     

Overview

  34     

Earnings Performance

  45     

Balance Sheet Analysis

  48     

Off-Balance Sheet Arrangements

  50     

Risk Management

  89     

Capital Management

  93     

Regulatory Reform

  96     

Critical Accounting Policies

  102     

Current Accounting Developments

  103     

Forward-Looking Statements

  104     

Risk Factors

 

Controls and Procedures

  119     

Disclosure Controls and Procedures

  119     

Internal Control over Financial Reporting

  119     

Management’s Report on Internal Control over Financial Reporting

  120     

Report of Independent Registered Public Accounting Firm

 

Financial Statements

  121     

Consolidated Statement of Income

  122     

Consolidated Statement of Comprehensive Income

  123     

Consolidated Balance Sheet

  124     

Consolidated Statement of Changes in Equity

  128     

Consolidated Statement of Cash Flows

 

Notes to Financial Statements

  129     

1      Summary of Significant Accounting Policies

  141     

2      Business Combinations

  142     

3      Cash, Loan and Dividend Restrictions

  142     

4       Federal Funds Sold, Securities Purchased under Resale Agreements

         and Other Short-Term Investments

  143     

5      Securities Available for Sale

  151     

6      Loans and Allowance for Credit Losses

  168     

7      Premises, Equipment, Lease Commitments and Other Assets

  169     

8      Securitizations and Variable Interest Entities

  180     

9      Mortgage Banking Activities

  183     

10    Intangible Assets

  184     

11    Deposits

  184     

12    Short-Term Borrowings

  185     

13    Long-Term Debt

  187     

14    Guarantees, Pledged Assets and Collateral

  190     

15    Legal Actions

  193     

16    Derivatives

  200     

17    Fair Values of Assets and Liabilities

  220     

18    Preferred Stock

  222     

19    Common Stock and Stock Plans

  226     

20    Employee Benefits and Other Expenses

  233     

21    Income Taxes

  235     

22    Earnings Per Common Share

  236     

23    Other Comprehensive Income

  237     

24    Operating Segments

  239     

25    Parent-Only Financial Statements

  242     

26    Regulatory and Agency Capital Requirements

  243     

Report of Independent Registered Public Accounting Firm

  244     

Quarterly Financial Data

  245     

Glossary of Acronyms

 

 

29


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 in the “Regulation and Supervision” section of our Annual Report on Form 10-K for the year ended December 31, 2012 (2012 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 nationwide, diversified, community-based financial services company with $1.4 trillion in assets. Founded in 1852 and headquartered in San Francisco, we provide banking, insurance, investments, mortgage, and consumer and commercial finance through more than 9,000 stores, 12,000 ATMs and the Internet (wellsfargo.com), and we have offices in more than 35 countries to support our customers who conduct business in the global economy. With more than 265,000 active, full-time equivalent team members, we serve one in three households in the United States and ranked No. 26 on Fortune’s 2012 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, 2012.

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 our 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.

Financial Performance

We generated strong financial results in 2012 even with regulatory changes and an uncertain economic and political environment. We had higher net income and revenue, solid loan and deposit growth, an improved efficiency ratio and improved credit quality in 2012 compared with 2011. Our 2012 results reflected our resolution of mortgage origination, servicing, and foreclosure matters with various regulators and government entities; Super Storm Sandy, which impacted many of our customers in the northeast; and new regulatory guidance that affected our credit metrics. Our return on average assets of 1.41% was up 16 basis points from 2011, the highest it has been in five

years, and our return on equity increased to 12.95%, up 102 basis points from 11.93% for 2011.

Wells Fargo net income was $18.9 billion and our diluted earnings per common share was $3.36 for 2012, each up 19% from 2011. Our earnings per share have grown for 12 consecutive quarters through the end of 2012. The increase in our net income for 2012 over 2011 was driven by a 6% increase in total revenue and the benefit of improving our efficiency ratio to 58.5% from 61.0% in 2011.

Our total revenue increased to $86.1 billion in 2012, up $5.1 billion, or 6%, from 2011. The 6% revenue increase predominantly reflected the diversity of our business model and included:

 

$3.8 billion increase in mortgage banking income as discussed below;

 

$693 million increase in net gains from trading activities, a major portion resulting from customer accommodations; and

 

$586 million increase in trust and investment fee income due to growth in assets under management reflecting higher market values and net asset inflows as well as transaction activity on volume-driven fees.

Mortgage banking income increased due to higher net gains on higher mortgage loan origination/sales activities reflecting increased margins and a lower interest rate environment for 2012 compared with 2011. Our mortgage loan originations in 2012 totaled $524 billion (of which we retained $19.4 billion in conforming loans on balance sheet), compared with $357 billion in 2011. Our unclosed mortgage loan pipeline was $81 billion at December 31, 2012, up 13% from $72 billion at the end of 2011.

Noninterest expense totaled $50.4 billion in 2012, up from $49.4 billion in 2011. The increase from 2011 reflected elevated operating losses and other costs due to mortgage servicing regulatory consent orders, a $175 million settlement with the Department of Justice that resolved claims related to mortgage lending practices, a $766 million accrual for the Independent Foreclosure Review (IFR) settlement and other remediation-related costs, and a $250 million contribution to the Wells Fargo Foundation. In addition, our expenses in 2012 were also driven

 

 

30


Overview (continued)

 

by additional revenue opportunities from mortgage banking volume and other revenue generating activities. Because pursuing revenue opportunities can increase expenses, we believe our efficiency ratio, which measures our noninterest expense as a percentage of total revenue, is an appropriate measure of our expense management efforts. We improved our efficiency ratio by 250 basis points to 58.5% for 2012 compared to 61.0% for 2011. While we have made progress on improving our efficiency, we believe our expenses are still too high and we will continue to focus on opportunities to reduce expenses that do not impact our ability to grow revenue. We have targeted an efficiency ratio of 55 to 59%, and our efficiency ratio of 58.5% in 2012 was within this target range. Although our quarterly efficiency ratio may vary due to cyclical or seasonal factors, we believe we are well positioned to remain within our targeted range in 2013.

Our total assets grew 8% in 2012 to $1.4 trillion, funded largely by strong deposit growth. Our core deposits grew $73.1 billion ($67.2 billion on average) or 8% in 2012. The predominant areas of asset growth were in short-term investments, which increased $92.9 billion, and loans, which increased $29.9 billion. Our loan growth represented core loan growth of $47.7 billion (including retention of $19.4 billion of 1-4 family conforming first mortgage production on the balance sheet), partially offset by the planned runoff in our non- strategic/liquidating loan portfolio of $17.8 billion. We also increased securities available for sale by $12.6 billion in 2012 as rates rose and yields became more attractive.

Credit Quality

Credit quality continued to improve during 2012 as the overall financial condition of businesses and consumers strengthened and the housing market in many areas of the nation improved. The improvement in our credit portfolio was also due in part to the continued decline in balances in our non-strategic/liquidating loan portfolios, which have declined $96.3 billion since the beginning of 2009, and totaled $94.6 billion at December 31, 2012.

Our reported credit metrics in 2012 improved even though they were adversely affected by guidance issued by bank regulators in first quarter 2012 relating to junior lien mortgages (Interagency guidance) and guidance issued by the Office of the Comptroller of the Currency (OCC) in third quarter 2012 relating to loans discharged in bankruptcy (OCC guidance). The Interagency guidance requires junior lien mortgages to be placed on nonaccrual status if the related first lien mortgage is nonaccruing. The OCC guidance requires consumer loans discharged in bankruptcy to be written down to net realizable collateral value (fair value of collateral less estimated costs to sell) and classified as nonaccrual troubled debt restructurings (TDRs), regardless of their delinquency status. The Interagency guidance increased our nonperforming assets by $960 million as of December 31, 2012. The OCC guidance increased nonperforming assets by $1.8 billion as of December 31, 2012, and increased loan charge-offs by $888 million for 2012. Including the combined adverse effect of the new junior lien and bankruptcy regulatory guidance:

 

net charge-offs were $9.0 billion in 2012 (1.17% of average loans) compared with $11.3 billion in 2011 (1.49% of average loans);

 

nonperforming assets were $24.5 billion at December 31, 2012, down from $26.0 billion at December 31, 2011; and

 

loans 90 days or more past due and still accruing (excluding government insured/guaranteed loans) were $1.4 billion at December 31, 2012, compared with $2.0 billion at December 31, 2011.

Our $7.2 billion provision for credit losses in 2012, which was $682 million less than 2011, incorporated an estimate for losses attributable to Super Storm Sandy, which occurred during the last week of October 2012. The provision for 2012 was $1.8 billion lower than net loan charge-offs due to continued strong credit performance.

Capital

Total equity increased $17.2 billion in 2012 to $158.9 billion and our Tier I common equity totaled $109.0 billion under Basel I, or 10.12% of risk-weighted assets. Our other capital ratios also remained strong with a Tier 1 risk-based capital ratio of 11.75%, total risk-based capital ratio of 14.63% and Tier 1 leverage ratio of 9.47% at December 31, 2012, compared with 11.33%, 14.76% and 9.03%, respectively, at December 31, 2011.

We increased our common stock dividend by 83%, and for 2012, paid dividends of $0.88 per common share and repurchased approximately 120 million shares of common stock. During fourth quarter 2012 we also entered into a $200 million private forward repurchase contract to repurchase approximately 6 million shares that is expected to settle in first quarter 2013.

 

 

31


Table 1: Six-Year Summary of Selected Financial Data (1)

 

 

 
(in millions, except per share amounts)    2012      2011      2010      2009      2008      2007      %
Change
2012/
2011
    Five-year
compound
growth
rate
 

 

 

Income statement

                      

Net interest income

   $ 43,230        42,763        44,757        46,324        25,143        20,974        1 %     16  

Noninterest income

     42,856        38,185        40,453        42,362        16,734        18,546        12       18  

 

      

Revenue

     86,086        80,948        85,210        88,686        41,877        39,520        6       17  

Provision for credit losses

     7,217        7,899        15,753        21,668        15,979        4,939        (9     8  

Noninterest expense

     50,398        49,393        50,456        49,020        22,598        22,746        2       17  

Net income before noncontrolling interests

     19,368        16,211        12,663        12,667        2,698        8,265        19       19  

Less: Net income from noncontrolling interests

     471        342        301        392        43        208        38       18  

 

      

Wells Fargo net income

     18,897        15,869        12,362        12,275        2,655        8,057        19       19  

Earnings per common share

     3.40        2.85        2.23        1.76        0.70        2.41        19       7  

Diluted earnings per common share

     3.36        2.82        2.21        1.75        0.70        2.38        19       7  

Dividends declared per common share

     0.88        0.48        0.20        0.49        1.30        1.18        83       (6

 

 

Balance sheet (at year end)

                      

Securities available for sale

   $ 235,199        222,613        172,654        172,710        151,569        72,951        6 %     26  

Loans

     799,574        769,631        757,267        782,770        864,830        382,195        4       16  

Allowance for loan losses

     17,060        19,372        23,022        24,516        21,013        5,307        (12     26  

Goodwill

     25,637        25,115        24,770        24,812        22,627        13,106        2       14  

Assets

             1,422,968        1,313,867        1,258,128        1,243,646        1,309,639        575,442        8       20  

Core deposits (2)

     945,749        872,629        798,192        780,737        745,432        311,731        8       25  

Long-term debt

     127,379        125,354        156,983        203,861        267,158        99,393        2       5  

Wells Fargo stockholders’ equity

     157,554        140,241        126,408        111,786        99,084        47,628        12       27  

Noncontrolling interests

     1,357        1,446        1,481        2,573        3,232        286        (6     37  

Total equity

     158,911        141,687        127,889        114,359        102,316        47,914        12       27  

 

 
(1) The Company acquired Wachovia Corporation (Wachovia) on December 31, 2008. Because the acquisition was completed on December 31, 2008, Wachovia’s results are included in the income statement, average balances and related metrics beginning in 2009. Wachovia’s assets and liabilities are included in the consolidated balance sheet beginning on December 31, 2008.
(2) Core deposits are noninterest-bearing deposits, interest-bearing checking, savings certificates, certain market rate and other savings, and certain foreign deposits (Eurodollar sweep balances).

 

32


Overview (continued)

 

Table 2: Ratios and Per Common Share Data

 

 

 
       Year ended December 31,  
    

 

 

 
       2012        2011        2010  

 

 

Profitability ratios

              

Wells Fargo net income to average assets (ROA)

       1.41  %        1.25          1.01  

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

       12.95          11.93          10.33  

Efficiency ratio (1)

       58.5          61.0          59.2  

Capital ratios

              

At year end:

              

Wells Fargo common stockholders’ equity to assets

       10.23          9.87          9.41  

Total equity to assets

       11.17          10.78          10.16  

Risk-based capital (2)

              

Tier 1 capital

       11.75          11.33          11.16  

Total capital

       14.63          14.76          15.01  

Tier 1 leverage (2)

       9.47          9.03          9.19  

Tier 1 common equity (3)

       10.12          9.46          8.30  

Average balances:

              

Average Wells Fargo common stockholders’ equity to average assets

       10.36          9.91          9.17  

Average total equity to average assets

       11.27          10.80          9.96  

Per common share data

              

Dividend payout (4)

       26.2          17.0          9.0  

Book value

     $         27.64          24.64          22.49  

Market price (5)

              

High

       36.60          34.25          34.25  

Low

       27.94          22.58          23.02  

Year end

       34.18          27.56          30.99  

 

 

 

(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.

 

33


Earnings Performance

 

 

 

Wells Fargo net income for 2012 was $18.9 billion ($3.36 diluted earnings per common share), compared with $15.9 billion ($2.82 diluted per share) for 2011 and $12.4 billion ($2.21 diluted per share) for 2010. Our 2012 earnings reflected strong execution of our business strategy and growth in many of our businesses. The key drivers of our financial performance in 2012 were net interest and fee income growth, diversified sources of fee income, a diversified loan portfolio and strong underlying credit performance.

Revenue, the sum of net interest income and noninterest income, was $86.1 billion in 2012, compared with $80.9 billion in 2011 and $85.2 billion in 2010. In 2012, net interest income of $43.2 billion represented 50% of revenue, compared with $42.8 billion (53%) in 2011 and $44.8 billion (53%) in 2010. The increase in revenue for 2012 was due to strong growth in noninterest income, predominantly from mortgage banking.

Noninterest income was $42.9 billion in 2012, representing 50% of revenue, compared with $38.2 billion (47%) in 2011 and $40.5 billion (47%) in 2010. The increase in 2012 was driven predominantly by a 49% increase in mortgage banking income due to increased net gains on mortgage loan origination/sales activities, but also included higher trust and investment and other fees on higher retail brokerage asset-based fees and strong investment banking activity. Mortgage loan originations were $524 billion in 2012, up from $357 billion a year ago.

Noninterest expense was $50.4 billion in 2012, compared with $49.4 billion in 2011 and $50.5 billion in 2010. Noninterest expense as a percentage of revenue (efficiency ratio) was 58.5% in 2012, 61.0% in 2011 and 59.2% in 2010, reflecting our expense management efforts and revenue growth in 2012. The increase in noninterest expense from the prior year was due to increased revenue generating activities and elevated operating losses and other costs associated with mortgage servicing regulatory consent orders, the IFR settlement, additional remediation-related costs and the contribution to the Wells Fargo Foundation.

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

 

 

34


Earnings Performance (continued)

 

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

 

 

 
     Year ended December 31,  
  

 

 

 
(in millions)      2012      
 
% of
revenue
  
  
    2011      
 
% of
revenue
  
  
    2010      
 
% of
revenue
  
  

 

 

Interest income

            

Trading assets

   $ 1,380       2   $ 1,463       2   $ 1,121       1

Securities available for sale

     8,757       10       9,107       11       10,236       12  

Mortgages held for sale (MHFS)

     1,825       2       1,644       2       1,736       2  

Loans held for sale (LHFS)

     41             58             101        

Loans

     36,517       42       37,302       46       39,808       47  

Other interest income

     587       1       548       1       437       1  

 

   

 

 

   

 

 

 

Total interest income

     49,107       57       50,122       62       53,439       63  

 

   

 

 

   

 

 

 

Interest expense

            

Deposits

     1,727       2       2,275       3       2,832       3  

Short-term borrowings

     94             94             106        

Long-term debt

     3,110       4       3,978       5       4,888       6  

Other interest expense

     245             316             227        

 

   

 

 

   

 

 

 

Total interest expense

     5,176       6       6,663       8       8,053       9  

 

   

 

 

   

 

 

 

Net interest income (on a taxable-equivalent basis)

     43,931       51       43,459       54       45,386       54  

 

   

 

 

   

 

 

 

Taxable-equivalent adjustment

     (701     (1     (696     (1     (629     (1

 

   

 

 

   

 

 

 

Net interest income (A)

     43,230       50       42,763       53       44,757       53  

Noninterest income

            

Service charges on deposit accounts

     4,683       5       4,280       5       4,916       6  

Trust and investment fees (1)

     11,890       14       11,304       14       10,934       12  

Card fees

     2,838       3       3,653       5       3,652       4  

Other fees (1)

     4,519       5       4,193       5       3,990       5  

Mortgage banking (1)

     11,638       14       7,832       10       9,737       11  

Insurance

     1,850       2       1,960       2       2,126       2  

Net gains from trading activities

     1,707       2       1,014       1       1,648       2  

Net gains (losses) on debt securities available for sale

     (128           54             (324      

Net gains from equity investments

     1,485       2       1,482       2       779       1  

Operating leases

     567       1       524       1       815       1  

Other

     1,807       2       1,889       2       2,180       3  

 

   

 

 

   

 

 

 

Total noninterest income (B)

     42,856       50       38,185       47       40,453       47  

 

   

 

 

   

 

 

 

Noninterest expense

            

Salaries

     14,689       17       14,462       18       13,869       16  

Commission and incentive compensation

     9,504       11       8,857       11       8,692       10  

Employee benefits

     4,611       6        4,348       5       4,651       5  

Equipment

     2,068       2       2,283       3       2,636       3  

Net occupancy

     2,857       3       3,011       4       3,030       4  

Core deposit and other intangibles

     1,674       2       1,880       2       2,199       3  

FDIC and other deposit assessments

     1,356       2       1,266       2       1,197       1  

Other (2)

     13,639       16       13,286       16       14,182       17  

 

   

 

 

   

 

 

 

Total noninterest expense

     50,398       59       49,393       61       50,456       59  

 

   

 

 

   

 

 

 

Revenue (A) + (B)

   $         86,086       $         80,948       $         85,210    

 

     

 

 

     

 

 

   

 

 

 

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

 

35


Net Interest Income

Net interest income is the interest earned on debt securities, loans (including yield-related loan fees) and other interest-earning assets minus the interest paid for deposits, short-term borrowings and long-term debt. The net interest margin is the average yield on earning assets minus the average interest rate paid for deposits and our other sources of funding. Net interest income and the net interest margin are presented on a taxable-equivalent basis in Table 5 to consistently reflect income from taxable and tax-exempt loans and securities based on a 35% federal statutory tax rate.

While the Company believes that it has the ability to increase net interest income over time, net interest income and the net interest margin in any one period can be significantly affected by a variety of factors including the mix and overall size of our earning asset portfolio and the cost of funding those assets. In addition, some variable sources of interest income, such as resolutions from purchased credit-impaired (PCI) loans, loan prepayment fees and collection of interest on nonaccrual loans, can vary from period to period.

Net interest income on a taxable-equivalent basis was $43.9 billion in 2012, compared with $43.5 billion in 2011, and $45.4 billion in 2010. The net interest margin was 3.76% in 2012, down 18 basis points from 3.94% in 2011 and down 50 basis points from 4.26% in 2010. The increase in net interest income for 2012 compared with 2011, was largely driven by growth in loans and available-for-sale securities, disciplined deposit pricing, debt maturities and redemptions of higher yielding trust preferred securities, which partially offset the impact of higher yielding loan and investment securities runoff. The decline in net interest margin in 2012 compared with a year ago, was largely driven by strong deposit growth, which elevated short-term investment balances, and the continued runoff of higher yielding assets.

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

Average earning assets increased $67.4 billion in 2012 from a year ago, as average securities available for sale increased $39.4 billion and average mortgages held for sale increased $11.7 billion for the same period, respectively. In addition, the increase in commercial and industrial loans contributed $16.3 billion to higher average loans in 2012 compared with a year ago. These increases in average securities available for sale, mortgages held for sale and average loans were partially offset by a $3.1 billion decline in average short-term investments.

Core deposits are an important low-cost source of funding and affect both net interest income and the net interest margin. Core deposits include noninterest-bearing deposits, interest-bearing checking, savings certificates, market rate and other savings, and certain foreign deposits (Eurodollar sweep balances). Average core deposits rose to $893.9 billion in 2012 compared with $826.7 billion in 2011 and funded 115% of average loans compared with 109% a year ago. Average core deposits increased to 76% of average earning assets in 2012, compared with 75% a year ago. The cost of these deposits has continued to decline due to a sustained low interest rate environment and a shift in our deposit mix from higher cost certificates of deposit to lower yielding checking and savings products. About 94% of our average core deposits are in checking and savings deposits, one of the highest industry percentages.

Table 5 presents the individual components of net interest income and the net interest margin. The effect on interest income and costs of earning asset and funding mix changes described above, combined with rate changes during 2012, are analyzed in Table 6.

 

 

36


Earnings Performance (continued)

 

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

 

 

 
     Year ended December 31,  
  

 

 

 
     2012     2011  
(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

   $ 84,081       7   $ 87,186       8

Trading assets

     41,950       4       39,737       4  

Securities available for sale:

        

Securities of U.S. Treasury and federal agencies

     3,604             5,503        

Securities of U.S. states and political subdivisions

     34,875       3       24,035       2  

Mortgage-backed securities:

        

Federal agencies

     92,887       8       74,665       7  

Residential and commercial

     33,545       3       31,902       3  

 

   

 

 

 

Total mortgage-backed securities

     126,432       11       106,567       10  

Other debt and equity securities

     49,245       4       38,625       4  

 

   

 

 

 

Total securities available for sale

     214,156       18       174,730       16  

Mortgages held for sale (1)

     48,955       4       37,232       3  

Loans held for sale (1)

     661             1,104        

Loans:

        

Commercial:

        

Commercial and industrial

     173,913       15       157,608       15  

Real estate mortgage

     105,437       9       102,236       9  

Real estate construction

     17,963       2       21,592       2  

Lease financing

     12,771       1       12,944       1  

Foreign

     39,852       4       36,768       3  

 

   

 

 

 

Total commercial

     349,936       31       331,148       30  

 

   

 

 

 

Consumer:

        

Real estate 1-4 family first mortgage

     234,619       20       226,980       21  

Real estate 1-4 family junior lien mortgage

     80,840       7       90,705       8  

Credit card

     22,772       2       21,463       2  

Other revolving credit and installment

     87,057       7       86,848       8  

 

   

 

 

 

Total consumer

     425,288       36       425,996       39  

 

   

 

 

 

Total loans (1)

     775,224       67       757,144       69  

Other

     4,438             4,929        

 

   

 

 

 

Total earning assets

   $         1,169,465       100   $         1,102,062       100

 

   

 

 

 

Funding sources

        

Deposits:

        

Interest-bearing checking

   $ 30,564       3   $ 47,705       4

Market rate and other savings

     505,310       43       464,450       42  

Savings certificates

     59,484       5       69,711       6  

Other time deposits

     13,363       1       13,126       1  

Deposits in foreign offices

     67,920       6       61,566       6  

 

   

 

 

 

Total interest-bearing deposits

     676,641       58       656,558       59  

Short-term borrowings

     51,196       4       51,781       5  

Long-term debt

     127,547       11       141,079       13  

Other liabilities

     10,032       1       10,955       1  

 

   

 

 

 

Total interest-bearing liabilities

     865,416       74       860,373       78  

Portion of noninterest-bearing funding sources

     304,049       26       241,689       22  

 

   

 

 

 

Total funding sources

   $ 1,169,465       100   $ 1,102,062       100

 

   

 

 

 

Noninterest-earning assets

        

Cash and due from banks

   $ 16,303         17,388    

Goodwill

     25,417         24,904    

Other

     130,450         125,911    

 

     

 

 

   

Total noninterest-earning assets

   $ 172,170         168,203    

 

     

 

 

   

Noninterest-bearing funding sources

        

Deposits

   $ 263,863         215,242    

Other liabilities

     61,214         57,399    

Total equity

     151,142         137,251    

Noninterest-bearing funding sources used to fund earning assets

     (304,049       (241,689  

 

     

 

 

   

Net noninterest-bearing funding sources

   $ 172,170         168,203    

 

     

 

 

   

Total assets

   $ 1,341,635         1,270,265    

 

     

 

 

   

 

 

 

(1) Nonaccrual loans are included in their respective loan categories.

 

37


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

 

 

 
     2012           2011  
  

 

 

       

 

 

 
(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

   $ 84,081       0.45   $ 378           87,186       0.40   $ 345  

Trading assets (4)

     41,950       3.29       1,380           39,737       3.68       1,463  

Securities available for sale (5):

                

Securities of U.S. Treasury and federal agencies

     3,604       1.31       47           5,503       1.25       69  

Securities of U.S. states and political subdivisions

     34,875       4.48       1,561           24,035       5.09       1,223  

Mortgage-backed securities:

                

Federal agencies

     92,887       3.12       2,893           74,665       4.36       3,257  

Residential and commercial

     33,545       6.75       2,264           31,902       8.20       2,617  

 

     

 

 

       

 

 

     

 

 

 

Total mortgage-backed securities

     126,432       4.08       5,157           106,567       5.51       5,874  

Other debt and equity securities

     49,245       4.04       1,992           38,625       5.03       1,941  

 

     

 

 

       

 

 

     

 

 

 

Total securities available for sale

     214,156       4.09       8,757           174,730       5.21       9,107  

Mortgages held for sale (6)

     48,955       3.73       1,825           37,232       4.42       1,644  

Loans held for sale (6)

     661       6.22       41           1,104       5.25       58  

Loans:

                

Commercial:

                

Commercial and industrial

     173,913       4.01       6,981           157,608       4.37       6,894  

Real estate mortgage

     105,437       4.18       4,411           102,236       4.07       4,163  

Real estate construction

     17,963       4.98       894           21,592       4.88       1,055  

Lease financing

     12,771       7.22       921           12,944       7.54       976  

Foreign

     39,852       2.47       984           36,768       2.56       941  

 

     

 

 

       

 

 

     

 

 

 

Total commercial

     349,936       4.06       14,191           331,148       4.24       14,029  

 

     

 

 

       

 

 

     

 

 

 

Consumer:

                

Real estate 1-4 family first mortgage

     234,619       4.55       10,671           226,980       4.89       11,090  

Real estate 1-4 family junior lien mortgage

     80,840       4.28       3,457           90,705       4.33       3,926  

Credit card

     22,772       12.67       2,885           21,463       13.02       2,794  

Other revolving credit and installment

     87,057       6.10       5,313           86,848       6.29       5,463  

 

     

 

 

       

 

 

     

 

 

 

Total consumer

     425,288       5.25       22,326           425,996       5.46       23,273  

 

     

 

 

       

 

 

     

 

 

 

Total loans (6)

     775,224       4.71       36,517           757,144       4.93       37,302  

Other

     4,438       4.70       209           4,929       4.12       203  

 

     

 

 

       

 

 

     

 

 

 

Total earning assets

   $         1,169,465       4.20   $         49,107           1,102,062       4.55   $         50,122  

 

     

 

 

       

 

 

     

 

 

 

Funding sources

                

Deposits:

                

Interest-bearing checking

   $ 30,564       0.06   $ 19           47,705       0.08   $ 40  

Market rate and other savings

     505,310       0.12       592           464,450       0.18       836  

Savings certificates

     59,484       1.31       782           69,711       1.43       995  

Other time deposits

     13,363       1.68       225           13,126       2.04       268  

Deposits in foreign offices

     67,920       0.16       109           61,566       0.22       136  

 

     

 

 

       

 

 

     

 

 

 

Total interest-bearing deposits

     676,641       0.26       1,727           656,558       0.35       2,275  

Short-term borrowings

     51,196       0.18       94           51,781       0.18       94  

Long-term debt

     127,547       2.44       3,110           141,079       2.82       3,978  

Other liabilities

     10,032       2.44       245           10,955       2.88       316  

 

     

 

 

       

 

 

     

 

 

 

Total interest-bearing liabilities

     865,416       0.60       5,176           860,373       0.77       6,663  

Portion of noninterest-bearing funding sources

     304,049                       241,689              

 

     

 

 

       

 

 

     

 

 

 

Total funding sources

   $ 1,169,465       0.44       5,176           1,102,062       0.61       6,663  

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

Net interest margin and net interest income on a taxable-equivalent basis (7)

       3.76   $ 43,931             3.94   $ 43,459  
    

 

 

         

 

 

 

Noninterest-earning assets

                

Cash and due from banks

   $ 16,303               17,388      

Goodwill

     25,417               24,904      

Other

     130,450               125,911      

 

           

 

 

     

Total noninterest-earning assets

   $ 172,170               168,203      

 

           

 

 

     

Noninterest-bearing funding sources

                

Deposits

   $ 263,863               215,242      

Other liabilities

     61,214               57,399      

Total equity

     151,142               137,251      

Noninterest-bearing funding sources used to fund earning assets

     (304,049             (241,689    

 

           

 

 

     

Net noninterest-bearing funding sources

   $ 172,170               168,203      

 

           

 

 

     

Total assets

   $ 1,341,635               1,270,265      

 

           

 

 

     

 

 

 

(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%, 3.25%, and 5.09% for 2012, 2011, 2010, 2009, and 2008, respectively. The average three-month London Interbank Offered Rate (LIBOR) was 0.43%, 0.34%, 0.34%, 0.69%, and 2.93% for the same years, respectively.
(3) Yield/rates and amounts include the effects of hedge and risk management activities associated with the respective asset and liability categories.
(4) Interest income/expense for trading assets represents interest and dividend income earned on trading securities.

 

38


Earnings Performance (continued)

 

 

 

 

 
     2010      2009      2008  
     Average
balance
    Yields/
rates
    Interest
income/
expense
     Average
balance
    Yields/
rates
    Interest
income/
expense
     Average
balance
    Yields/
rates
    Interest
income/
expense
 
  

 

 

 
                    
  

 

$

 

62,961

 

 

    0.36   $ 230        26,869       0.56   $ 150        5,293       1.71   $ 90  
     29,920       3.75       1,121        21,092       4.48       944        4,971       3.80       189  
                    
     1,870       3.24       61        2,436       2.83       69        1,065       3.84       41  
     16,089       6.09       980        13,098       6.42       840        7,329       6.83       501  
                    
     71,953       5.14       3,697        84,295       5.45       4,591        43,968       5.97       2,623  
     31,815       10.67       3,396        45,672       9.09       4,150        23,357       6.04       1,412  
  

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

 
     103,768       6.84       7,093        129,967       6.73       8,741        67,325       5.99       4,035  
     32,611       6.45       2,102        32,022       7.16       2,291        13,956       7.17       1,000  
  

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

 
     154,338       6.63       10,236        177,523       6.73       11,941        89,675       6.22       5,577  
     36,716       4.73       1,736        37,416       5.16       1,930        25,656       6.13       1,573  
     3,773       2.67       101        6,293       2.90       183        837       5.69       48  
                    
                    
     149,576       4.80       7,186        180,924       4.22       7,643        98,620       6.12       6,034  
     98,497       3.89       3,836        96,273       3.50       3,365        41,659       5.80       2,416  
     31,286       3.36       1,051        40,885       2.91       1,190        19,453       5.08       988  
     13,451       9.21       1,239        14,751       9.32       1,375        7,141       5.62       401  
     29,726       3.49       1,037        30,661       3.95       1,212        7,127       10.50       748  
  

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

 
     322,536       4.45       14,349        363,494       4.07       14,785        174,000       6.08       10,587  
  

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

 
                    
     235,568       5.18       12,206        238,359       5.45       12,992        75,116       6.67       5,008  
     101,537       4.45       4,519        106,957       4.76       5,089        75,375       6.55       4,934  
     22,375       13.35       2,987        23,357       12.16       2,841        19,601       12.13       2,378  
     88,585       6.49       5,747        90,666       6.56       5,952        54,368       8.72       4,744  
  

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

 
     448,065       5.68       25,459        459,339       5.85       26,874        224,460       7.60       17,064  
  

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

 
     770,601       5.17       39,808        822,833       5.06       41,659        398,460       6.94       27,651  
     5,849       3.56       207        6,113       3.05       186        1,920       4.73       91  
  

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

 
   $         1,064,158       5.02   $         53,439        1,098,139       5.19   $         56,993        526,812       6.69   $         35,219  
  

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

 
                    
                    
   $ 60,941       0.12   $ 72        70,179       0.14   $ 100        5,650       1.12   $ 64  
     416,877       0.26       1,088        351,892       0.39       1,375        166,691       1.32       2,195  
     87,133       1.43       1,247        140,197       1.24       1,738        39,481       3.08       1,215  
     14,654       2.07       302        20,459       2.03       415        6,656       2.83       187  
     55,097       0.22       123        53,166       0.27       146        47,578       1.81       860  
  

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

 
     634,702       0.45       2,832        635,893       0.59       3,774        266,056       1.70       4,521  
     46,824       0.22       106        51,972       0.44       231        65,826       2.25       1,478  
     185,426       2.64       4,888        231,801       2.50       5,786        102,283       3.70       3,789  
     6,863       3.31       227        4,904       3.50       172                     
  

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

 
     873,815       0.92       8,053        924,570       1.08       9,963        434,165       2.25       9,788  
     190,343                    173,569                    92,647              
  

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

 
   $ 1,064,158       0.76       8,053        1,098,139       0.91       9,963        526,812       1.86       9,788  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
    

 

 

 

4.26

 

  $ 45,386          4.28   $ 47,030          4.83   $ 25,431  
    

 

 

      

 

 

      

 

 

 
                    
   $ 17,618            19,218            11,175      
     24,824            23,997            13,353      
     120,338            121,000            53,056      
  

 

 

        

 

 

        

 

 

     
   $ 162,780            164,215            77,584      
  

 

 

        

 

 

        

 

 

     
                    
   $ 183,008            171,712            87,820      
     47,877            48,193            28,658      
     122,238            117,879            53,753      
     (190,343          (173,569          (92,647    
  

 

 

        

 

 

        

 

 

     
   $ 162,780            164,215            77,584      
  

 

 

        

 

 

        

 

 

     
   $ 1,226,938            1,262,354            604,396      
  

 

 

        

 

 

        

 

 

     

 

 

 

(5) The average balance amounts represent amortized cost for the periods presented.
(6) Nonaccrual loans and related income are included in their respective loan categories.
(7) Includes taxable-equivalent adjustments of $701 million, $696 million, $629 million, $706 million and $288 million for 2012, 2011, 2010, 2009 and 2008, respectively, primarily related to tax-exempt income on certain loans and securities. The federal statutory tax rate utilized was 35% for the periods presented.

 

39


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 on a pro-rata basis based on the absolute value of the change due to average volume and average rate.

 

 

Table 6: Analysis of Changes in Net Interest Income

 

 

 
     Year ended December 31,  
  

 

 

 
     2012 over 2011     2011 over 2010  
  

 

 

   

 

 

 
(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

   $ (12     45       33       89       26       115  

Trading assets

     78       (161     (83     363       (21     342  

Debt securities available for sale:

            

Securities of U.S. Treasury and federal agencies

     (25     3       (22     62       (54     8  

Securities of U.S. states and political subdivisions

     499       (161     338       424       (181     243  

Mortgage-backed securities:

            

Federal agencies

     687       (1,051     (364     135       (575     (440

Residential and commercial

     129       (482     (353     9       (788     (779

 

   

 

 

 

Total mortgage-backed securities

     816       (1,533     (717     144       (1,363     (1,219

Other debt securities

     475       (424     51       349       (510     (161

 

   

 

 

 

Total debt securities available for sale

     1,765       (2,115     (350     979       (2,108     (1,129

Mortgages held for sale

     465       (284     181       24       (116     (92

Loans held for sale

     (26     9       (17     (100     57       (43

Loans:

            

Commercial:

            

Commercial and industrial

     680       (593     87       373       (665     (292

Real estate mortgage

     133       115       248       147       180       327  

Real estate construction

     (182     21       (161     (385     389       4  

Lease financing

     (13     (42     (55     (45     (218     (263

Foreign

     77       (34     43       215       (311     (96

 

   

 

 

 

Total commercial

     695       (533     162       305       (625     (320

 

   

 

 

 

Consumer:

            

Real estate 1-4 family first mortgage

     367       (786     (419     (440     (676     (1,116

Real estate 1-4 family junior lien mortgage

     (424     (45     (469     (473     (120     (593

Credit card

     167       (76     91       (120     (73     (193

Other revolving credit and installment

     13       (163     (150     (111     (173     (284

 

   

 

 

 

Total consumer

     123       (1,070     (947     (1,144     (1,042     (2,186

 

   

 

 

 

Total loans

     818       (1,603     (785     (839     (1,667     (2,506

 

   

 

 

 

Other

     (21     27       6       (35     31       (4

 

   

 

 

 

Total increase (decrease) in interest income

     3,067       (4,082     (1,015     481       (3,798     (3,317

 

   

 

 

 

Increase (decrease) in interest expense:

            

Deposits:

            

Interest-bearing checking

     (12     (9     (21     (13     (19     (32

Market rate and other savings

     65       (309     (244     112       (364     (252

Savings certificates

     (135     (78     (213     (252           (252

Other time deposits

     5       (48     (43     (30     (4     (34

Deposits in foreign offices

     13       (40     (27     13             13  

 

   

 

 

 

Total interest-bearing deposits

     (64     (484     (548     (170     (387     (557

Short-term borrowings

                       9       (21     (12

Long-term debt

     (362     (506     (868     (1,227     317       (910

Other liabilities

     (25     (46     (71     122       (33     89  

 

   

 

 

 

Total increase (decrease) in interest expense

     (451     (1,036     (1,487     (1,266     (124     (1,390

 

   

 

 

 

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

   $          3,518       (3,046     472       1,747       (3,674     (1,927

 

   

 

 

 

 

 

 

40


Earnings Performance (continued)

 

Noninterest Income

Table 7: Noninterest Income

 

 
     Year ended December 31,  
  

 

 

 
(in millions)    2012     2011      2010  

 

 

Service charges on deposit accounts

   $ 4,683       4,280        4,916  

Trust and investment fees:

       

Brokerage advisory, commissions and other fees

     6,386       6,241        5,930  

Trust, investment and IRA fees

     4,218       4,099        4,038  

Investment banking fees

     1,286       964        966  

 

 

Total trust and investment fees

     11,890       11,304        10,934  
       

 

 

Card fees

     2,838       3,653        3,652  

Other fees:

       

Charges and fees on loans

     1,746       1,641        1,690  

Merchant transaction processing fees

     583       478        444  

Cash network fees

     470       389        260  

Commercial real estate brokerage commissions

     307       236        176  

Letters of credit fees

     441       472        523  

All other fees

     972       977        897  
       

 

 

Total other fees

     4,519       4,193        3,990  
       

 

 

Mortgage banking:

       

Servicing income, net

     1,378       3,266        3,340  

Net gains on mortgage loan origination/sales activities

     10,260       4,566        6,397  
       

 

 

Total mortgage banking

     11,638       7,832        9,737  
       

 

 

Insurance

     1,850       1,960        2,126  

Net gains from trading activities

     1,707       1,014        1,648  

Net gains (losses) on debt securities available for sale

     (128     54        (324

Net gains from equity investments

     1,485       1,482        779  

Life insurance investment income

     757       700        697  

Operating leases

     567       524        815  

All other

     1,050       1,189        1,483  
       

 

 

Total

   $ 42,856       38,185        40,453  

 

 

Noninterest income of $42.9 billion represented 50% of revenue for 2012 compared with $38.2 billion, or 47%, for 2011 and $40.5 billion, or 47%, for 2010. The increase in noninterest income from 2011 was primarily due to higher net gains on higher mortgage loan origination/sales activities reflecting increased margins and a lower interest rate environment in 2012.

Our service charges on deposit accounts increased in 2012 by $403 million, or 9%, from 2011, predominantly due to product and account changes including changes to service charges and fewer fee waivers, continued customer adoption of overdraft services and customer account growth. The decrease in service charges in 2011 from 2010 was predominantly due to changes implemented in third quarter 2010 mandated by Regulation E (which limited certain overdraft fees) and related overdraft policy changes.

We receive brokerage advisory, commissions and other fees for providing services to full-service and discount brokerage customers. Brokerage advisory, commissions and other fees increased to $6.4 billion in 2012 from $6.2 billion in 2011 and

$5.9 billion in 2010, and includes transactional commissions 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 $1.2 trillion at December 31, 2012, up 8% from $1.1 trillion at December 31, 2011, due to growth in assets under management and higher market values.

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, 2012, these assets totaled $2.2 trillion, up 3% from December 31, 2011, due to growth in assets under management and higher market values. 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 $4.2 billion in 2012 from $4.1 billion in 2011, which increased from $4.0 billion in 2010.

We earn investment banking fees from underwriting debt and equity securities, loan syndications, and performing other related advisory services. Investment banking fees increased to $1.3 billion in 2012 from $964 million in 2011 and $966 million in 2010 due to increased volume.

Card fees were $2.8 billion in 2012, compared with $3.7 billion in both 2011 and 2010. Card fees decreased because of lower debit card interchange rates resulting from the Federal Reserve Board (FRB) rules implementing the debit interchange provision of the Dodd-Frank Act, which became effective in fourth quarter 2011. The reduction in debit card interchange income was partially offset by growth in purchase volume and new accounts.

Mortgage banking noninterest income, consisting of net servicing income and net gains on loan origination/sales activities, totaled $11.6 billion in 2012, compared with $7.8 billion in 2011 and $9.7 billion in 2010. The increase in mortgage banking noninterest income from 2011 was predominantly driven by an increase in net gains on higher mortgage loan origination volumes and margins reflecting the impact of limited industry capacity in a lower interest rate environment and various other factors, while the decline in 2011 from 2010 was primarily driven by a decline in net gains on mortgage loan originations reflecting lower volume and margins.

Net mortgage loan servicing income includes amortization of commercial mortgage servicing rights (MSRs), changes in the fair value of residential MSRs during the period, as well as changes in the value of derivatives (economic hedges) used to hedge the residential MSRs. Net servicing income for 2012 included a $681 million net MSR valuation gain ($2.9 billion decrease in the fair value of the MSRs offset by a $3.6 billion hedge gain) and for 2011 included a $1.6 billion net MSR valuation gain ($3.7 billion decrease in the fair value of MSRs offset by a $5.3 billion hedge gain). The 2012 MSRs valuation included a $677 million reduction reflecting the additional costs associated with implementation of the servicing standards developed in connection with our settlement with the Department of Justice (DOJ) and other state and federal agencies relating to our mortgage servicing and foreclosure practices, as well as higher foreclosure costs. Our portfolio of

 

 

41


loans serviced for others was $1.91 trillion at December 31, 2012, and $1.85 trillion at December 31, 2011. At December 31, 2012, the ratio of MSRs to related loans serviced for others was 0.67%, compared with 0.76% at December 31, 2011. 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 and the “Risk Management – Credit Risk Management – Risks Relating to Servicing Activities” section in this Report for information on the DOJ settlement and the regulatory consent orders that we entered into relating to our mortgages servicing and foreclosure practices.

Net gains on mortgage loan origination/sale activities were $10.3 billion in 2012, compared with $4.6 billion in 2011 and $6.4 billion in 2010. The increase in 2012 was driven by higher loan origination volume and margins while the decrease in 2011 was the result of lower origination volume and margins on loan originations. Mortgage loan originations were $524 billion in 2012, compared with $357 billion a year ago. During 2012 we retained for investment $19.4 billion of 1-4 family conforming first mortgage loans, forgoing approximately $575 million of fee revenue that could have been generated had the loans been originated for sale along with other agency conforming loan production. While retaining these mortgage loans on our balance sheet reduced mortgage revenue, we expect to generate spread income in future quarters from mortgage loans with higher yields than mortgage-backed securities we could have purchased in the market. While we do not currently plan to hold additional conforming mortgages on balance sheet (other than $3.3 billion from our unclosed pipeline at December 31, 2012), we have a large mortgage business and strong capital that provides us with the flexibility to make such choices in the future to benefit our long-term results. Mortgage applications were $736 billion in 2012, compared with $537 billion in 2011. The 1-4 family first mortgage unclosed pipeline was $81 billion at December 31, 2012, and $72 billion at December 31, 2011. For additional information about our mortgage banking activities and results, see the “Risk Management – Mortgage Banking Interest Rate and Market Risk” section and Note 9 (Mortgage Banking Activities) and Note 17 (Fair Values of Assets and Liabilities) to Financial Statements in this Report.

Net gains on mortgage loan origination/sales activities include the cost of 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 2012 totaled $1.9 billion (compared with $1.3 billion for 2011), of which $1.7 billion ($1.2 billion for 2011) was for subsequent increases in estimated losses on prior period 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.

We engage in trading activities primarily to accommodate the investment activities of our customers, execute economic

hedging to manage certain of our balance sheet risks and for a very limited amount of proprietary trading for our own account. Net gains (losses) from trading activities, which reflect unrealized changes in fair value of our trading positions and realized gains and losses, were $1.7 billion in 2012, $1.0 billion in 2011 and $1.6 billion in 2010. The year-over-year increase in trading activities in 2012 was driven by gains on customer accommodation trading activities and economic hedging gains, which included higher gains on deferred compensation plan investments based on participant elections (offset entirely in employee benefits expense). Net gains (losses) from trading activities do not include interest and dividend income on trading securities. Those amounts are reported within net interest income from trading assets. Proprietary trading generated $15 million of net gains in 2012, compared with a $14 million net loss in 2011. 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.

Net gains on debt and equity securities totaled $1.4 billion for 2012, $1.5 billion for 2011 and $455 million for 2010, after other-than-temporary impairment (OTTI) write-downs of $416 million, $711 million and $940 million, respectively, for the same periods.

 

 

42


Earnings Performance (continued)

 

Noninterest Expense

Table 8: Noninterest Expense

 

 
     Year ended December 31,  
  

 

 

 
(in millions)    2012      2011      2010  

 

 

Salaries

   $ 14,689        14,462        13,869  

Commission and incentive compensation

     9,504        8,857        8,692  

Employee benefits

     4,611        4,348        4,651  

Equipment

     2,068        2,283        2,636  

Net occupancy

     2,857        3,011        3,030  

Core deposit and other intangibles

     1,674        1,880        2,199  

FDIC and other deposit assessments

     1,356        1,266        1,197  

Outside professional services

     2,729        2,692        2,370  

Operating losses

     2,235        1,261        1,258  

Foreclosed assets

     1,061        1,354        1,537  

Contract services

     1,011        1,407        1,642  

Outside data processing

     910        935        1,046  

Travel and entertainment

     839        821        783  

Postage, stationery and supplies

     799        942        944  

Advertising and promotion

     578        607        630  

Telecommunications

     500        523        596  

Insurance

     453        515        464  

Operating leases

     109        112        109  

All other

     2,415        2,117        2,803  

 

 

Total

   $         50,398                49,393                50,456  

 

 

Noninterest expense was $50.4 billion in 2012, up 2% from $49.4 billion in 2011, which was down 2% from $50.5 billion in 2010. The increase was driven predominantly by higher personnel expense ($28.8 billion, up from $27.7 billion in 2011) and higher operating losses ($2.2 billion, up from $1.3 billion in 2011), partially offset by lower merger integration costs ($218 million in 2012, down from $1.7 billion in 2011). The decrease in 2011 from 2010 was driven by lower merger integration costs, decreases in equipment expense, contract services expense and foreclosed assets expense.

Personnel expenses were up $1.1 billion, or 4%, in 2012 compared with 2011, due to higher revenue-based compensation and a $263 million increase in employee benefits due primarily to higher deferred compensation expense which was offset in trading income, and increased staffing, primarily to support strong mortgage banking activities. For 2011 these expenses were up 2% compared with 2010, also due to higher revenue-based compensation as well as severance expense related to our expense reduction initiative.

Outside professional services were elevated for 2012 and 2011 reflecting investments by our businesses in their service delivery systems and higher costs associated with regulatory driven mortgage servicing and foreclosure matters.

The completion of Wachovia integration activities in first quarter 2012 significantly contributed to year-over-year reductions in equipment, occupancy, contract services, and postage, stationery and supplies. Equipment expense in 2012 also declined due to lower annual software license fees and savings in equipment purchases and maintenance.

Foreclosed assets expense was down $293 million, or 22%, in 2012 compared with 2011, mainly due to lower write-downs and gains on sale of foreclosed properties.

Operating losses were up $974 million, or 77%, in 2012 compared with the prior year, predominantly due to additional mortgage servicing and foreclosure-related matters, including the Attorneys General settlement announced in February 2012, our $175 million settlement in July 2012 with the U.S. Department of Justice (DOJ), which resolved alleged claims related to our mortgage lending practices, a $766 million accrual for the IFR settlement and additional remediation-related costs. See “Risk Management – Credit Risk Management – Other Mortgage Matters” and Note 15 (Legal Actions) to Financial Statements in this Report for additional information regarding these items.

All other expenses of $2.4 billion in 2012 were up from $2.1 billion in 2011, primarily due to a $250 million charitable contribution to the Wells Fargo Foundation.

Income Tax Expense

The 2012 annual effective tax rate was 32.5% compared with 31.9% in 2011 and 33.9% in 2010. The lower effective tax rates for 2012 and 2011, compared with 2010, were primarily due to the realization, for tax purposes, of tax benefits on previously written down investments. For 2012 this includes a $332 million tax benefit resulting from the surrender of previously written-down Wachovia life insurance investments. In addition, the 2011 effective tax rate was lower than the 2010 effective tax rate due to a decrease in tax expense associated with leveraged leases, as well as tax benefits related to charitable donations of appreciated securities.

 

 

43


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 first quarter 2012, we modified internal funds transfer rates and the allocation of funding. The 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

 
  

 

 

    

 

 

    

 

 

 
     2012      2011      2012      2011      2012      2011  

 

 

Revenue

   $ 53.4        50.8        24.1        21.6        12.2        12.2  

Net income

     10.5        9.1        7.8        7.0        1.3        1.3  

 

 

Average loans

             487.1                496.3                273.8                249.1        42.7        43.0  

Average core deposits

     591.2        556.3        227.0        202.1                137.5                130.0  

 

 

 

Community Banking offers a complete line of diversified financial products and services for consumers and small businesses. These products include 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 Lending business units. Cross-sell of our products is an important part of our strategy to achieve our vision to satisfy all our customers’ financial needs. Our retail bank household cross-sell was 6.05 products per household in fourth quarter 2012, up from 5.93 a year ago. 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. In fourth quarter 2012, one of every four of our retail banking households had eight or more of our products.

Community Banking reported net income of $10.5 billion in 2012, up $1.4 billion, or 15%, from 2011. Revenue was $53.4 billion for 2012, an increase of $2.6 billion, or 5%, compared with 2011, as a result of higher mortgage banking revenue and growth in deposit service charges, partially offset by lower debit card revenue due to regulatory changes enacted in October 2011, and lower net interest income. Average core deposits increased $35 billion, or 6%, from a year ago. Noninterest expense increased $1.6 billion, or 5%, from 2011, largely the result of higher mortgage volume-related expenses, costs associated with settling mortgage servicing and foreclosure-related matters, including the DOJ and the IFR settlements, and a $250 million contribution to the Wells Fargo Foundation. The provision for credit losses was $1.1 billion, or 14%, lower than 2011 due to improved portfolio performance.

Wholesale Banking provides financial solutions to businesses across the United States and globally with annual sales generally in excess of $20 million. Products and business segments include Middle Market Commercial Banking, Government and Institutional Banking, Corporate Banking, Commercial Real Estate, Treasury Management, Wells Fargo Capital Finance, Insurance, International, Real Estate Capital Markets,

Commercial Mortgage Servicing, Corporate Trust, Equipment Finance, Wells Fargo Securities, Principal Investments, Asset Backed Finance, and Asset Management.

Wholesale Banking reported net income of $7.8 billion in 2012, up $787 million, or 11%, from $7.0 billion in 2011. The year over year increase in net income was the result of strong revenue growth partially offset by increased noninterest expense and a higher provision for loan losses.

Revenue in 2012 of $24.1 billion increased $2.5 billion, or 12%, from 2011, due to broad-based business growth as well as growth from acquisitions. Net interest income of $12.6 billion increased $1.0 billion or 9% driven by strong loan and deposit growth. Average loans of $273.8 billion increased $24.7 billion, or 10%, driven by strong customer demand and acquisitions. Average core deposits of $227.0 billion in 2012 increased $24.9 billion, or 12%, from 2011 reflecting continued strong customer liquidity. Noninterest income of $11.4 billion increased $1.5 billion, or 15%, due to strong growth in asset backed finance, commercial banking, commercial real estate, investment banking, real estate capital markets and sales & trading.

Total noninterest expense in 2012 increased $905 million, or 8%, compared with 2011 due to higher personnel expenses related to revenue growth and higher non-personnel expenses related to growth initiatives and compliance and regulatory requirements as well as increased operating losses. The provision for credit losses increased $396 million from 2011, as a $319 million decline in loan losses was more than offset by a provision for increase in loans, particularly from acquisitions.

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. Abbot Downing, a Wells Fargo business, provides comprehensive wealth management services to ultra high net worth families and individuals as well as their endowments and foundations. Brokerage serves customers’ advisory, brokerage

 

 

44


Earnings Performance (continued)

 

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 2012, up $47 million, or 4%, from 2011. The prior year results include the H.D. Vest Financial Services business that was sold in fourth quarter 2011 at a gain of $153 million. Revenue of $12.2 billion decreased $17 million from 2011. Net interest income decreased due to lower interest rates on the loan

and investment portfolios partially offset by the impact of growth in low-cost core deposits. Average core deposits of $137.5 billion in 2012 increased 6% from 2011. Noninterest income increased year over year due to higher asset-based fees and gains on deferred compensation plan investments (offset in expense). The increase was partially offset by the 2011 gain on the sale of H.D. Vest, lower transaction revenue and reduced securities gains in the brokerage business. Noninterest expense was flat, including the impact of deferred compensation plan expense (offset in revenue), for 2012 compared with 2011. The provision for credit losses decreased $45 million, or 26%, from 2011, due to improved credit quality and lower net charge-offs.

 

 

Balance Sheet Analysis

 

 

 

Our total assets grew 8% in 2012 to $1.4 trillion, funded predominantly by strong deposit growth. Our core deposits grew $73.1 billion ($67.2 billion on average) or 8% in 2012. The predominant areas of asset growth were in short-term investments, which increased $92.9 billion, and loans, which increased $29.9 billion. The strong loan growth represents core loan growth of $47.7 billion (including retention of $19.4 billion of 1-4 family conforming first mortgage production on the balance sheet), partially offset by the runoff in our non strategic/liquidating loan portfolio of $17.8 billion. We also increased securities available for sale by $12.6 billion in 2012. The strength of our business model produced record earnings and continued internal capital generation as reflected in our

capital ratios, substantially all of which improved from December 31, 2011. Tier 1 capital as a percentage of total risk-weighted assets increased to 11.75%, total capital decreased to 14.63%, Tier 1 leverage increased to 9.47%, and Tier 1 common equity increased to 10.12% at December 31, 2012, compared with 11.33%, 14.76%, 9.03%, and 9.46%, respectively, at December 31, 2011.

The following discussion provides additional information about the major components of our balance sheet. Information regarding our capital and changes in our asset mix is included in the “Earnings Performance – Net Interest Income” and “Capital Management” sections and Note 26 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report.

 

 

Securities Available for Sale

Table 10: Securities Available for Sale – Summary

 

 
                                 December 31,  
  

 

 

 
     2012      2011  
  

 

 

    

 

 

 
(in millions)    Cost      Net
unrealized
gain
    

Fair

value

     Cost      Net
unrealized
gain
    

Fair

value

 

 

 

Debt securities available for sale

   $         220,946                11,468                232,414                212,642                6,554                219,196  

Marketable equity securities

     2,337        448        2,785        2,929        488        3,417  

 

 

Total securities available for sale

   $ 223,283        11,916        235,199        215,571        7,042        222,613  

 

 

 

        Table 10 presents a summary of our securities available-for-sale portfolio, which consists of both debt and marketable equity securities. The total net unrealized gains on securities available for sale were $11.9 billion at December 31, 2012, up from net unrealized gains of $7.0 billion at December 31, 2011, due mostly to a decline in long-term yields and tightening of credit spreads.

The size and composition of the available-for-sale portfolio is largely dependent upon the Company’s liquidity and interest rate risk management objectives. Our business generates assets and liabilities, such as loans, deposits and long-term debt, which have different maturities, yields, re-pricing, prepayment characteristics and other provisions that expose us to interest rate and liquidity risk. The available-for-sale securities portfolio consists primarily of liquid, high quality federal agency debt, privately issued mortgage-backed securities (MBS), securities issued by U.S. states and political subdivisions and corporate

debt securities. Due to its highly liquid nature, the available-for-sale portfolio can be used to meet funding needs that arise in the normal course of business or due to market stress. Changes in our interest rate risk profile may occur due to changes in overall economic or market conditions that could influence drivers such as loan origination demand, prepayment speeds, or deposit balances and mix. In response, the available-for-sale securities portfolio can be rebalanced to meet the Company’s interest rate risk management objectives. In addition to meeting liquidity and interest rate risk management objectives, the available-for-sale securities portfolio may provide yield enhancement over other short-term assets. See the “Risk Management – Asset/Liability Management” section of this Report for more information on liquidity and interest rate risk.

We analyze securities for OTTI quarterly or more often if a potential loss-triggering event occurs. Of the $416 million in

 

 

45


OTTI write-downs recognized in 2012, $240 million related to debt securities. There was $16 million in OTTI write-downs for marketable equity securities and $160 million in OTTI write-downs related to nonmarketable equity investments. For a discussion of our OTTI accounting policies and underlying considerations and analysis see Note 1 (Summary of Significant Accounting Policies – Investments) and Note 5 (Securities Available for Sale) to Financial Statements in this Report.

At December 31, 2012, debt securities available for sale included $38.7 billion of municipal bonds, of which 82% were rated “A-” or better based predominantly on external and, in some cases, internal ratings. Additionally, some of the securities in our total municipal bond portfolio 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 are 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 5.5 years at December 31, 2012. Because 57% of this portfolio is MBS, the expected remaining maturity is shorter than the remaining 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, 2012

       

Actual

   $     133.2        7.7       3.7  

Assuming a 200 basis point:

       

Increase in interest rates

     123.6        (1.9     5.3  

Decrease in interest rates

     135.8        10.3       2.8  

 

 

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

 

 

 

46


Balance Sheet Analysis (continued)

 

Loan Portfolio

Total loans were $799.6 billion at December 31, 2012, up $29.9 billion from December 31, 2011. Table 12 provides a summary of total outstanding loans for our commercial and consumer loan portfolios. Excluding the runoff in the non-strategic/liquidating portfolios of $17.8 billion, loans in the core portfolio grew $47.7 billion during 2012. Our core loan growth in 2012 included:

 

an $18.3 billion increase in the commercial segment, mostly due to growth in commercial and industrial loans, which included:

  ¡    

$6.9 billion from our second quarter 2012 acquisitions of BNP Paribas’ North American energy lending business and WestLB’s subscription finance loan portfolio; and

  ¡    

$858 million of commercial asset-based loans acquired with the acquisition of Burdale Financial Holdings Limited (Burdale) and the portfolio of Burdale Capital Finance Inc. in first quarter 2012; and

 

a $29.4 billion increase in consumer loans with growth in first mortgage (including the retention of $19.4 billion of 1-4 family conforming first mortgages), auto, credit card and private student lending.

Additional information on the non-strategic and liquidating loan portfolios is included in Table 17 in the “Credit Risk Management” section of this Report.

 

 

Table 12: Loan Portfolios

 

 
     December 31, 2012      December 31, 2011  
  

 

 

    

 

 

 
(in millions)    Core      Liquidating      Total      Core      Liquidating      Total  

 

 

Commercial

   $         358,028        3,170                361,198                339,755        5,695                345,450  

Consumer

     346,984        91,392        438,376        317,550              106,631        424,181  

 

 

Total loans

   $ 705,012                  94,562        799,574        657,305        112,326        769,631  

 

 

 

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,  
  

 

 

 
     2012      2011  
  

 

 

    

 

 

 
(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

   $ 45,212        123,578        18,969        187,759        44,258        101,273        21,685        167,216  

Real estate mortgage

     22,328        56,085        27,927        106,340        22,537        54,201        29,237        105,975  

Real estate construction

     7,685        7,961        1,258        16,904        10,059        8,178        1,145        19,382  

Foreign

     27,219        7,460        3,092        37,771        35,258        3,142        1,360        39,760  

 

 

Total selected loans

   $  102,444          195,084        51,246        348,774        112,112        166,794        53,427        332,333  

 

 

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

                       

Loans at fixed interest rates

      $ 20,894        11,387              19,319        13,712     

Loans at floating/variable interest rates

        174,190        39,859              147,475        39,715     

 

 

Total selected loans

      $ 195,084        51,246              166,794        53,427     

 

 

 

47


Deposits

Deposits totaled $1.0 trillion at December 31, 2012, compared with $920.1 billion at December 31, 2011. Table 14 provides additional information regarding deposits. Information regarding the impact of deposits on net interest income and a comparison of average deposit balances is provided in

“Earnings Performance – Net Interest Income” and Table 5 earlier in this Report. Total core deposits were $945.7 billion at December 31, 2012, up $73.1 billion from $872.6 billion at December 31, 2011.

 

 

Table 14: Deposits

 

 
($ in millions)    Dec. 31,
2012
     % of
total
deposits
    Dec. 31,
2011
     % of
total
deposits
    %
Change
 

 

 

Noninterest-bearing

   $ 288,207        29   $ 243,961        26     18  

Interest-bearing checking

     35,275        4       37,027        4       (5

Market rate and other savings

     517,464        52       485,534        53       7  

Savings certificates

     55,966        6       63,617        7       (12

Foreign deposits (1)

     48,837        4       42,490        5       15  

 

   

Core deposits

     945,749        95       872,629        95       8  

Other time and savings deposits

     33,755        3       20,745        2       63  

Other foreign deposits

     23,331        2       26,696        3       (13

 

   

Total deposits

   $ 1,002,835        100    $ 920,070        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. Generally, SPEs are 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, Pledged Assets and Collateral) to Financial Statements in this Report.

 

 

 

48


Contractual Cash 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 that may require future cash payments 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, 2012, excluding the projected cash payments for 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 Cash 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 (1)

     11      $ 56,921        20,197        9,030        3,959        912,728        1,002,835  

Long-term debt (2)

     7, 13         15,961        28,342        31,318        51,758               127,379  

Interest (3)

        3,056        4,415        3,206        17,498               28,175  

Operating leases

     7        1,311        2,154        1,465        2,594               7,524  

Unrecognized tax obligations

     21        19                             2,725        2,744  

Commitments to purchase debt securities

        1,523                                    1,523  

Purchase and other obligations (4)

        518        727        57        10               1,312  

 

 

Total contractual obligations

      $ 79,309        55,835        45,076        75,819        915,453        1,171,492  

 

 
(1) Includes interest-bearing and noninterest-bearing checking, and market rate and other savings accounts.
(2) Balances are presented net of unamortized debt discounts and premiums and purchase accounting adjustments.
(3) Represents the future interest obligations related to interest-bearing time deposits and long-term debt in the normal course of business including a net reduction of $17 billion related to hedges used to manage interest rate risk. These interest obligations assume no early debt redemption. We estimated variable interest rate payments using December, 31 2012 rates, which we held constant until maturity. We have excluded interest related to structured notes where our payment obligation is contingent on the performance of certain benchmarks.
(4) Represents agreements to purchase goods or services.

 

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 attempt to 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 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 related party transactions required to be reported for the years ended December 31, 2012, 2011 and 2010.

 

 

 

49


Risk Management

 

 

 

All financial institutions must manage and control a variety of business risks that can significantly affect their financial performance. Among the key risks that we must manage are credit risks, asset/liability interest rate and market risks, and operational risks. Our Board of Directors (Board) and executive management have overall and ultimate responsibility for management of these risks, which they carry out through committees with specific and well-defined risk management functions. For example, the Board’s Credit Committee oversees the annual credit quality plan and lending policies, credit trends, the allowance for credit loss policy, and high risk portfolios and concentrations. The Finance Committee oversees the Company’s major financial risks, including market, interest rate, and liquidity and funding risks, as well as equity exposure and fixed income investments, and also oversees the Company’s capital management and planning processes. The Audit and Examination Committee oversees operational, legal and compliance risk, in addition to the policies and management activities relating to the Company’s financial reporting. The Risk Committee oversees the Company’s enterprise-wide risk management framework, including the strategies, policies, processes and systems used to identify, assess, measure and manage the major risks facing the Company. The Risk Committee does not duplicate the risk oversight of the Board’s other committees, but rather helps ensure end-to-end ownership of oversight of all risk issues in one Board committee and enhances the Board’s and management’s understanding of the Company’s aggregate enterprise-wide risk appetite.

The Board and its committees work closely with management in overseeing risk. Each Board committee receives reports and information regarding risk issues directly from management and, in some cases, management committees have been established to inform the risk management framework and provide governance and advice regarding risk management functions. These management committees include the Company’s Operating Committee, which consists of the Company’s senior executives who report to the CEO and who meet weekly to, among other things, discuss strategic, operational and risk issues at the enterprise level, and the Enterprise Risk Management Committee, which is chaired by the Company’s Chief Risk Officer and includes other senior executives responsible for managing risk across the Company. Management’s corporate risk organization is headed by the Chief Risk Officer who, among other things, oversees the Company’s credit, market and operational risks. The Chief Risk Officer and the Chief Credit, Market and Operational Risk Officers, who report to the Chief Risk Officer, work closely with the Board’s Risk, Credit and Audit and Examination Committees and frequently provide reports to these and other Board committees and update the committee chairs and other Board members on risk issues outside of regular committee meetings, as appropriate. The full Board receives reports at each of its meetings from the committee chairs about committee activities, including risk oversight matters, and receives a quarterly report from the Enterprise

Risk Management Committee regarding current or emerging risk issues.

Operating Risk Management

Effective management of operational risks, which include risks relating to management information systems, security systems, and information security, is also an important focus for financial institutions such as Wells Fargo. Wells Fargo and reportedly other financial institutions have been the target of various denial-of-service or other cyber attacks as part of what appears to be a coordinated effort to disrupt the operations of financial institutions and potentially test their cybersecurity in advance of future and more advanced cyber attacks. To date Wells Fargo has not experienced any material losses relating to these or other cyber attacks. Cybersecurity and the continued development and enhancement of our controls, processes and systems to protect our networks, computers, software, and data from attack, damage or unauthorized access remain a priority for Wells Fargo. See the “Risk Factors” section of this Report for additional information regarding the risks associated with a failure or breach of our operational or security systems or infrastructure, including as a result of cyber attacks.

Credit Risk Management

Loans represent the largest component of assets on our balance sheet and their related credit risk is among the most significant risks we manage. We define credit risk as the risk of loss associated with a borrower or counterparty default (failure to meet obligations in accordance with agreed upon terms). Table 16 presents our total loans outstanding by portfolio segment and class of financing receivable.

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

 

 
     December 31,  
  

 

 

 
(in millions)    2012      2011  

 

 

Commercial:

     

Commercial and industrial

   $         187,759        167,216  

Real estate mortgage

     106,340        105,975  

Real estate construction

     16,904        19,382  

Lease financing

     12,424        13,117  

Foreign (1)

     37,771        39,760  

 

 

Total commercial

     361,198        345,450  

 

 

Consumer:

     

Real estate 1-4 family first mortgage

     249,900        228,894  

Real estate 1-4 family junior lien mortgage

     75,465        85,991  

Credit card

     24,640        22,836  

Other revolving credit and installment

     88,371        86,460  

 

 

Total consumer

     438,376        424,181  

 

 

Total loans

   $ 799,574        769,631  

 

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

 

 

50


Risk Management – Credit Risk Management (continued)

 

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 existing loan portfolios. 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 oversight 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.

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.

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 PCI loans acquired from Wachovia, certain portfolios from legacy Wells Fargo Home Equity and Wells Fargo Financial, and our education finance government guaranteed loan portfolio. The total balance of our non-strategic and liquidating loan portfolios has decreased 50% since the merger with Wachovia at December 31, 2008, and decreased 16% from the end of 2011.

The home equity portfolio of loans generated through third party channels is designated as liquidating. Additional information regarding this portfolio, as well as the liquidating PCI and Pick-a-Pay loan portfolios, is provided in the discussion of loan portfolios that follows.

 

 

Table 17: Non-Strategic and Liquidating Loan Portfolios

 

 
     Outstanding balance December 31,  
  

 

 

 
(in millions)    2012      2011      2010      2009      2008  

 

 

Commercial:

              

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

   $ 3,170        5,695        7,935        12,988        18,704  

 

 

Total commercial

     3,170        5,695        7,935        12,988        18,704  

 

 

Consumer:

              

Pick-a-Pay mortgage (1)

     58,274        65,652        74,815        85,238        95,315  

Liquidating home equity

     4,647        5,710        6,904        8,429        10,309  

Legacy Wells Fargo Financial indirect auto

     830        2,455        6,002        11,253        18,221  

Legacy Wells Fargo Financial debt consolidation

     14,519        16,542        19,020        22,364        25,299  

Education Finance - government guaranteed

     12,465        15,376        17,510        21,150        20,465  

Legacy Wachovia other PCI loans (1)

     657        896        1,118        1,688        2,478  

 

 

Total consumer

     91,392        106,631        125,369        150,122        172,087  

 

 

Total non-strategic and liquidating loan portfolios

   $         94,562        112,326        133,304        163,110        190,791  

 

 
(1) Net of purchase accounting adjustments related to PCI loans.

 

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 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 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

 

 

51


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 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 2012, we recognized as income $85 million released from the nonaccretable difference related to commercial PCI loans due to payoffs and other resolutions. We also transferred $1.1 billion from the nonaccretable difference to the accretable yield for PCI loans with improving credit-related cash flows and absorbed $2.5 billion of losses in the nonaccretable difference from loan resolutions and write-downs. Our cash flows expected to be collected have been favorably affected by lower expected defaults and losses as a result of observed economic strengthening, particularly in housing prices, and our loan modification efforts. See the “Real Estate 1-4 Family First and Junior Lien Mortgage Loans” section in this Report for additional information. These factors led to the reduction in expected losses on PCI loans, primarily Pick-a-Pay, which resulted in a reclassification from nonaccretable difference to accretable yield in 2012, which has also occurred in prior years. Table 18 provides an analysis of changes in the nonaccretable difference.

 

 

52


Risk Management – Credit Risk Management (continued)

 

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