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Wells Fargo 10-Q 2012
Quarterly Report on Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

Commission file number 001-2979

WELLS FARGO & COMPANY

(Exact name of registrant as specified in its charter)

 

Delaware   No. 41-0449260
(State of incorporation)   (I.R.S. Employer Identification No.)

420 Montgomery Street, San Francisco, California 94163

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: 1-866-249-3302

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ            No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ            No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   þ    Accelerated filer ¨  
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company ¨  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨            No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

    

Shares Outstanding

July 31, 2012

    
Common stock, $1-2/3 par value    5,282,185,586   


Table of Contents

FORM 10-Q

CROSS-REFERENCE INDEX

 

PART I

 

Financial Information

  

Item 1.

 

Financial Statements

     Page   
 

Consolidated Statement of Income

     53   
 

Consolidated Statement of Comprehensive Income

     54   
 

Consolidated Balance Sheet

     55   
 

Consolidated Statement of Changes in Equity

     56   
 

Consolidated Statement of Cash Flows

     58   
 

Notes to Financial Statements

  
 

  1  -  Summary of Significant Accounting Policies

     59   
 

  2  -  Business Combinations

     61   
 

  3  -   Federal Funds Sold, Securities Purchased under Resale Agreements and Other Short-Term Investments

     61   
 

  4  -  Securities Available for Sale

     62   
 

  5  -  Loans and Allowance for Credit Losses

     70   
 

  6  -  Other Assets

     91   
 

  7  -  Securitizations and Variable Interest Entities

     92   
 

  8  -  Mortgage Banking Activities

     103   
 

  9  -  Intangible Assets

     106   
 

10  -  Guarantees, Pledged Assets and Collateral

     107   
 

11  -  Legal Actions

     109   
 

12  -  Derivatives

     110   
 

13  -  Fair Values of Assets and Liabilities

     117   
 

14  -  Preferred Stock

     142   
 

15  -  Employee Benefits

     144   
 

16  -  Earnings Per Common Share

     145   
 

17  -  Other Comprehensive Income

     146   
 

18  -  Operating Segments

     148   
 

19  -  Condensed Consolidating Financial Statements

     150   
 

20  -  Regulatory and Agency Capital Requirements

     155   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and
Results of Operations (Financial Review)

  
 

Summary Financial Data

     2   
 

Overview

     3   
 

Earnings Performance

     5   
 

Balance Sheet Analysis

     13   
 

Off-Balance Sheet Arrangements

     16   
 

Risk Management

     17   
 

Capital Management

     46   
 

Regulatory Reform

     49   
 

Critical Accounting Policies

     49   
 

Current Accounting Developments

     50   
 

Forward-Looking Statements

     50   
 

Risk Factors

     51   
 

Glossary of Acronyms

     156   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     42   

Item 4.

 

Controls and Procedures

     52   

PART II

 

Other Information

  

Item 1.

 

Legal Proceedings

     157   

Item 1A.

 

Risk Factors

     157   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     157   

Item 6.

 

Exhibits

     158   

Signature

       158   

Exhibit Index

       159   

 

 

 

1


Table of Contents

PART I - FINANCIAL INFORMATION

FINANCIAL REVIEW

Summary Financial Data

 

 

     Quarter ended      % Change
June 30, 2012 from
    Six months ended         
($ in millions, except per share amounts)   

June 30,

2012

   

March 31,

2012

    

June 30,

2011

    

March 31,

2012

   

June 30,

2011

   

June 30,

2012

     June 30,
2011
    

%

Change

 

 

 

For the Period

                    

Wells Fargo net income

   $             4,622        4,248         3,948         9  %      17        8,870         7,707         15  % 

Wells Fargo net income applicable to common stock

     4,403        4,022         3,728         9        18        8,425         7,298         15   

Diluted earnings per common share

     0.82        0.75         0.70         9        17        1.57         1.37         15   

Profitability ratios (annualized):

                    

Wells Fargo net income to average assets (ROA)

     1.41  %      1.31         1.27         8        11        1.36         1.25         9   

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

     12.86        12.14         11.92         6        8        12.51         11.95         5   

Efficiency ratio (1)

     58.2        60.1         61.2         (3     (5     59.1         61.9         (5

Total revenue

   $ 21,289        21,636         20,386         (2     4        42,925         40,715         5   

Pre-tax pre-provision profit (PTPP) (2)

     8,892        8,643         7,911         3        12        17,535         15,507         13   

Dividends declared per common share

     0.22        0.22         0.12         -        83        0.44         0.24         83   

Average common shares outstanding

     5,306.9        5,282.6         5,286.5         -        -        5,294.9         5,282.7         -   

Diluted average common shares outstanding

     5,369.9        5,337.8         5,331.7         1        1        5,354.3         5,329.9         -   

Average loans

   $ 768,223        768,582         751,253         -        2        768,403         752,657         2   

Average assets

     1,321,584        1,302,921         1,250,945         1        6        1,312,252         1,246,088         5   

Average core deposits (3)

     880,636        870,516         807,483         1        9        875,576         802,184         9   

Average retail core deposits (4)

     624,329        616,569         592,974         1        5        620,445         588,561         5   

Net interest margin

     3.91  %      3.91         4.01         -        (2     3.91         4.03         (3

At Period End

                    

Securities available for sale

   $ 226,846        230,266         186,298         (1     22        226,846         186,298         22   

Loans

     775,199        766,521         751,921         1        3        775,199         751,921         3   

Allowance for loan losses

     18,320        18,852         20,893         (3     (12     18,320         20,893         (12

Goodwill

     25,406        25,140         24,776         1        3        25,406         24,776         3   

Assets

     1,336,204        1,333,799         1,259,734         -        6        1,336,204         1,259,734         6   

Core deposits (3)

     882,137        888,711         808,970         (1     9        882,137         808,970         9   

Wells Fargo stockholders’ equity

     148,070        145,516         136,401         2        9        148,070         136,401         9   

Total equity

     149,437        146,849         137,916         2        8        149,437         137,916         8   

Tier 1 capital (5)

     117,856        117,444         113,466         -        4        117,856         113,466         4   

Total capital (5)

     149,813        150,788         149,538         (1     -        149,813         149,538         -   

Capital ratios:

                    

Total equity to assets

     11.18  %      11.01         10.95         2        2        11.18         10.95         2   

Risk-based capital (5):

                    

Tier 1 capital

     11.69        11.78         11.69         (1     -        11.69         11.69         -   

Total capital

     14.85        15.13         15.41         (2     (4     14.85         15.41         (4

Tier 1 leverage (5)

     9.25        9.35         9.43         (1     (2     9.25         9.43         (2

Tier 1 common equity (6)

     10.08        9.98         9.15         1        10        10.08         9.15         10   

Common shares outstanding

     5,275.7        5,301.5         5,278.2         -        -        5,275.7         5,278.2         -   

Book value per common share

   $ 26.06        25.45         23.84         2        9        26.06         23.84         9   

Common stock price:

                    

High

     34.59        34.59         32.63         -        6        34.59         34.25         1   

Low

     29.80        27.94         25.26         7        18        27.94         25.26         11   

Period end

     33.44        34.14         28.06         (2     19        33.44         28.06         19   

Team members (active, full-time equivalent)

     264,400        264,900         266,600         -        (1     264,400         266,600         (1

 

 

 

(1) The efficiency ratio is noninterest expense divided by total revenue (net interest income and noninterest income).
(2) Pre-tax pre-provision profit (PTPP) is total revenue less noninterest expense. Management believes that PTPP is a useful financial measure because it enables investors and others to assess the Company’s ability to generate capital to cover credit losses through a credit cycle.
(3) Core deposits are noninterest-bearing deposits, interest-bearing checking, savings certificates, certain market rate and other savings, and certain foreign deposits (Eurodollar sweep balances).
(4) Retail core deposits are total core deposits excluding Wholesale Banking core deposits and retail mortgage escrow deposits.
(5) See Note 20 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report for additional information.
(6) See the “Capital Management” section in this Report for additional information.

 

2


Table of Contents

This Quarterly 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” section, and the “Risk Factors” and “Regulation and Supervision” sections of our Annual Report on Form 10-K for the year ended December 31, 2011 (2011 Form 10-K).

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

Financial Review

Overview

 

 

Wells Fargo & Company is a diversified financial services company with $1.3 trillion in assets. Founded in 1852 and headquartered in San Francisco, we provide banking, insurance, trust and investments, mortgage banking, investment banking, retail banking, brokerage services and consumer and commercial finance through more than 9,000 stores, 12,000 ATMs, the internet and other distribution channels to individuals, businesses and institutions across North America and internationally. With approximately 265,000 active, full-time equivalent team members, we serve one in three households in America 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 June 30, 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. Our retail bank household cross-sell increased each quarter during 2011, as well as in first quarter 2012, and in May 2012 we achieved a milestone of 6.00 products per household, up from 5.82 in May 2011. 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. At May 31, 2012, one of every four of our retail banking households had eight or more products.

Our pursuit of growth and earnings performance is influenced by our belief that it is important to maintain a well controlled operating environment. We manage our credit risk by establishing what we believe are sound credit policies for underwriting new business, while monitoring and reviewing the

performance of our loan portfolio. We manage the interest rate and market risks inherent in our asset and liability balances within established ranges, while ensuring adequate liquidity and funding. We maintain strong capital levels to facilitate future growth.

Expense management is also important to us, but our efforts are not intended to adversely affect revenue. Our current company-wide expense management initiative, which we publicly announced with our second quarter 2011 results, is focused on removing unnecessary complexity and eliminating duplication as a way to improve our customers’ experience and the work process of our team members. Our expenses, however, are driven in part by our revenue opportunities. Given the continued momentum in revenue opportunities in second quarter 2012, including a record number of mortgage applications, and our continued reinvestment in our businesses, we currently expect fourth quarter 2012 noninterest expense to be higher than our previously announced target of $11.25 billion. Reflecting these higher revenue opportunities, we believe our efficiency ratio, which measures our noninterest expense as a percentage of total revenue, is a better measure of our expense management than specific dollar estimates. We have targeted an efficiency ratio of 55 to 59%, and our efficiency ratio of 58.2% in second quarter 2012 was within this target range. For the remainder of 2012, we expect noninterest expense to decline from second quarter 2012 levels and that we will operate within our targeted efficiency ratio range.

Financial Performance

We reported strong financial results in second quarter 2012 driven by a $903 million increase in total revenues and $78 million decrease in noninterest expenses as compared to second quarter 2011. Wells Fargo net income was $4.6 billion and diluted earnings per common share were $0.82 in second quarter 2012, each up 17% from the prior year. Second quarter 2012 was our tenth consecutive quarter of earnings per share growth. Total revenue was $21.3 billion in second quarter 2012, up 4% from the prior year. Credit quality trends continued to show improvement in second quarter 2012, with reductions in net losses, nonperforming assets, nonaccrual loans, and loans 90

 

 

3


Table of Contents

days or more past due and still accruing. Our return on assets of 1.41% was up 14 basis points from the prior year and our return on equity of 12.86% was up 94 basis points.

Our net income growth from second quarter 2011 was primarily driven by higher noninterest income as well as higher net interest income and lower noninterest expenses.

The 4% year-over-year increase in second quarter 2012 revenue predominantly reflects increased mortgage banking net gains on mortgage loan origination/sales activities due to higher margins and the continued low interest rate environment which contributed to higher loan applications. Net gains on mortgage loan originations/sales activities were negatively affected in second quarter 2012 by a provision of $669 million for mortgage loan repurchases losses, compared with a provision of $242 million in second quarter 2011. As a result of increased mortgage loan applications our unclosed mortgage loan pipeline at June 30, 2012, was $102 billion, the second largest in our history.

Noninterest expense of $12.4 billion in second quarter 2012 was down from $12.5 billion in second quarter 2011. Our efficiency ratio of 58.2% in second quarter 2012 improved by 300 basis points from a year ago and was at the lowest level in nine quarters. Second quarter 2012 noninterest expense included $524 million of operating losses, up from $428 million for the prior year, predominantly due to additional litigation accruals.

Our balance sheet continued to strengthen in second quarter 2012 with core loan growth and growth in average core deposits. Our non-strategic/liquidating loan portfolios decreased $5.1 billion during the quarter and, excluding the planned runoff of these loans, our core loan portfolios increased $13.8 billion. Included in our core loan growth was $6.9 billion of commercial loans acquired during the quarter in connection with the acquisition of WestLB’s subscription finance loan portfolio and BNP Paribas’s North American energy lending business. Our securities portfolios decreased $3.4 billion during second quarter 2012 as new investments were more than offset by the call of lower-yielding securities and portfolio run-off. Our average core deposits were up $10.1 billion from first quarter 2012 and up $73.2 billion, or 9%, from a year ago. We have grown deposits while reducing our deposit costs for seven consecutive quarters. Our costs on average deposits in second quarter 2012 were 19 basis points, down 9 basis points from the same quarter a year ago. Our average core deposits were 115% of average loans in second quarter 2012, up from 107% for the second quarter last year.

Credit Quality

Our key credit quality indicators continued to improve during second quarter 2012. Net charge-offs of $2.2 billion were 1.15% (annualized) of average loans, down 37 basis points from 1.52% a year ago, our lowest charge-off rate since 2007. Loans 90 days or more past due and still accruing (excluding government insured/guaranteed loans) decreased to $1.4 billion from $2.0 billion at December 31, 2011. Nonperforming assets decreased by $1.1 billion to $24.9 billion at June 30, 2012, from $26.0 billion at December 31, 2011. The year to date decrease is inclusive of the offsetting impact of our $1.7 billion reclassification of real estate 1-4 family junior lien mortgages to nonaccrual status in

first quarter 2012 in accordance with junior lien mortgage industry guidance issued by bank regulators during that quarter. The improvement in our credit portfolio was due in part to the continued decline in balances in our non-strategic/liquidating loan portfolios, which decreased $5.1 billion during the quarter, and $87.7 billion in total since the beginning of 2009, to $103.1 billion at June 30, 2012.

With the continued credit performance improvement in our loan portfolios, our $1.8 billion provision for credit losses in second quarter 2012 was $38 million less than a year ago. The provision included a release of $400 million from the allowance for credit losses (the amount by which net charge-offs exceeded the provision), compared with a release of $1.0 billion a year ago. Absent significant deterioration in the economy, we expect continued but more modest improvement in credit performance for the remainder of the year, and we continue to expect future allowance releases in 2012.

Capital

Our capital position continued to grow in second quarter 2012, as total equity increased by $2.6 billion from the prior quarter to $149.4 billion and our Tier 1 common equity ratio grew 10 basis points during the quarter to 10.08% of risk-weighted assets under Basel I.

In June 2012, the three federal banking agencies, including the Board of Governors of the Federal Reserve System (FRB), jointly published notices of proposed rulemaking, which would substantially amend the risk-based capital rules for banks. The proposed capital rules are intended to implement in the U.S. the Basel III regulatory capital reforms, comply with changes required by the Dodd-Frank Act, and replace the existing Basel I-based capital requirements. Based on our current interpretation of the proposed Basel III capital rules contained in the notices of proposed rulemaking, we estimate that our Tier 1 common equity ratio was 7.78% at June 30, 2012.

Our other regulatory capital ratios remained strong with a small decrease in the Tier 1 capital ratio to 11.69% and Tier 1 leverage ratio to 9.25% at June 30, 2012, compared with 11.78% and 9.35%, respectively, at March 31, 2012. See the “Capital Management” section in this Report for more information regarding our capital, including Tier 1 common equity.

In second quarter 2012 we repurchased approximately 53 million shares of common stock and entered into a forward repurchase contract to repurchase an estimated 11 million shares expected to settle in third quarter 2012. We also paid quarterly common stock dividends of $0.22 per share, and redeemed $2.7 billion of trust preferred securities with an average coupon of 6.33%.

 

 

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Earnings Performance

 

 

Wells Fargo net income for second quarter 2012 was $4.6 billion ($0.82 diluted earnings per common share) compared with $3.9 billion ($0.70 diluted earnings per common share) for second quarter 2011. Net income for the first half of 2012 was $8.9 billion compared with $7.7 billion for the same period a year ago. Our June 30, 2012, quarterly and six month earnings reflected strong execution of our business strategy and growth throughout many of our businesses. The key drivers of our financial performance in second quarter 2012 were continued improved credit quality, strong mortgage banking results, diversified sources of fee income, balanced net interest and fee income, and a diversified loan portfolio.

Revenue, the sum of net interest income and noninterest income, was $21.3 billion in second quarter 2012, compared with $20.4 billion in second quarter 2011. Revenue for the first half of 2012 was $42.9 billion, up 5% from a year ago. The increase in revenue for the second quarter and first half of 2012 was due to growth in noninterest income, predominantly from mortgage banking, as well as modest growth in net interest income. Mortgage banking revenue in second quarter 2012 increased 79% from a year ago with strong originations and margins reflecting some stabilization in the housing market and the low interest rate environment. Mortgage originations were $131 billion in second quarter 2012, more than double what they were a year ago. The unclosed mortgage pipeline at June 30, 2012, was very strong at $102 billion, up 100% from second quarter 2011. In addition to mortgage banking, businesses generating double-digit year-over-year revenue growth for second quarter 2012 included capital markets, commercial banking, commercial real estate, corporate trust, asset backed finance, merchant services, government and institutional banking, global remittance services and business payroll services. Net interest income was $11.0 billion in second quarter 2012, representing 52% of revenue, compared with $10.7 billion (52%) in second quarter 2011. Continued success in generating low-cost deposits enabled us to grow assets by funding loans and securities growth while reducing higher cost long-term debt.

Noninterest income was $10.3 billion in second quarter 2012, representing 48% of revenue, compared with $9.7 billion (48%) in second quarter 2011. Noninterest income was $21.0 billion for the first half of 2012 compared with $19.4 billion for the same period a year ago. The increase in noninterest income for the second quarter and first half of 2012 was driven by increases in net gains on mortgage loan origination/sales activities as well as service charges on deposit accounts.

Noninterest expense was $12.4 billion in second quarter 2012, compared with $12.5 billion in second quarter 2011. Noninterest expense was $25.4 billion for the first half of 2012 compared with $25.2 billion for the same period a year ago. The decrease in noninterest expense in second quarter 2012 from second quarter 2011 was predominantly due to lower merger-related integration expense, offset by higher revenue-based commissions and incentive compensation. Our efficiency ratio was 58.2% in second quarter 2012 compared with 61.2% in second quarter 2011, reflecting our expense management efforts and revenue growth.

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 1 to consistently reflect income from taxable and tax-exempt loans and securities based on a 35% federal statutory tax rate.

Net interest income and the net interest margin are significantly influenced by the mix and overall size of our earning asset portfolio and the cost of funding those assets. In addition, some sources of interest income, such as loan prepayment fees and collection of interest on nonaccrual loans, can vary from period to period. Net interest income on a taxable-equivalent basis was $11.2 billion and $22.3 billion in the second quarter and first half of 2012, compared with $10.9 billion and $21.7 billion for the same periods a year ago. The net interest margin was 3.91% for both the second quarter and first half of 2012, down from 4.01% and 4.03% for the same periods a year ago. The increase in net interest income was largely driven by loan growth, redeployment of short-term investments into available-for-sale securities, disciplined deposit pricing, debt maturities and redemptions of higher yielding trust preferred securities, which offset the impact of higher yielding loan and investment runoff. Continued runoff of higher yielding assets was the primary driver of the decline in net interest margin in second quarter 2012 compared with second quarter 2011. Pressure on our second quarter 2012 net interest margin was in part offset by variable sources of interest income, including resolution of PCI loans. We expect continued pressure on our net interest margin as the balance sheet reprices in the current low interest rate environment.

Average earning assets increased $66.4 billion and $63.1 billion in the second quarter and first half of 2012 from a year ago, as average securities available for sale increased $54.3 billion and $56.6 billion, and average mortgages held for sale increased $18.9 billion and $13.5 billion for the same periods, respectively. In addition, solid commercial loan demand offset the impact of liquidating certain loan portfolios, resulting in $17.0 billion and $15.7 billion higher average loans in the second quarter and first half of 2012 compared with a year ago. These increases in average securities available for sale, mortgages held for sale and average loans were predominantly offset by a $27.3 billion and $27.4 billion decline in average short-term investments from the second quarter and first half of 2011.

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 $880.6 billion in second quarter 2012 ($875.6 billion in the first half of 2012) compared with $807.5 billion in second quarter 2011 ($802.2 billion in the first half of 2011) and funded 115% of average loans in second

 

 

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quarter 2012 (114% in the first half of 2012) compared with 107% a year ago (107% for the first half of 2011). Average core deposits increased to 76% and 77% of average earning assets in second quarter and first half of 2012, respectively, compared with 74% for each respective period 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 93% of our average core deposits are in checking and savings deposits, one of the highest industry percentages.

 

 

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Table of Contents

Earnings Performance (continued)

 

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

 

 

     Quarter ended June 30,  
     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

   $ 71,250         0.47  %    $ 83          98,519         0.32  %    $ 80    

Trading assets

     42,614         3.27        348          38,015         3.71        352    

Securities available for sale (3):

             

Securities of U.S. Treasury and federal agencies

     1,954         1.60                2,058         2.33        12    

Securities of U.S. states and political subdivisions

     34,560         4.39        379          22,536         5.35        302    

Mortgage-backed securities:

             

Federal agencies

     95,031         3.37        800          70,891         4.76        844    

Residential and commercial

     33,870         6.97        591          29,981         8.86        664    

 

     

 

 

    

 

 

     

 

 

 

Total mortgage-backed securities

     128,901         4.32        1,391          100,872         5.98        1,508    

Other debt and equity securities

     48,915         4.39        535          34,580         5.81        502    

 

     

 

 

    

 

 

     

 

 

 

Total securities available for sale

     214,330         4.32        2,313          160,046         5.81        2,324    

Mortgages held for sale (4)

     49,528         3.86        477          30,674         4.73        362    

Loans held for sale (4)

     833         5.48        12          1,356         5.05        17    

Loans:

             

Commercial:

             

Commercial and industrial

     171,776         4.21        1,801          153,630         4.60        1,761    

Real estate mortgage

     105,509         4.60        1,208          101,437         4.16        1,051    

Real estate construction

     17,943         4.96        221          21,987         4.64        254    

Lease financing

     12,890         6.86        221          12,899         7.72        249    

Foreign

     38,917         2.57        249          36,445         2.65        241    

 

     

 

 

    

 

 

     

 

 

 

Total commercial

     347,035         4.28        3,700          326,398         4.37        3,556    

 

     

 

 

    

 

 

     

 

 

 

Consumer:

             

Real estate 1-4 family first mortgage

     230,065         4.62        2,658          224,873         4.97        2,792    

Real estate 1-4 family junior lien mortgage

     82,076         4.30        878          91,934         4.25        975    

Credit card

     22,065         12.70        697          20,954         12.97        679    

Other revolving credit and installment

     86,982         6.09        1,317          87,094         6.32        1,372    

 

     

 

 

    

 

 

     

 

 

 

Total consumer

     421,188         5.29        5,550          424,855         5.48        5,818    

 

     

 

 

    

 

 

     

 

 

 

Total loans (4)

     768,223         4.83        9,250          751,253         5.00        9,374    

Other

     4,486         4.56        51          4,997         4.10        52    

 

     

 

 

    

 

 

     

 

 

 

Total earning assets

   $ 1,151,264         4.37  %    $         12,534                  1,084,860         4.64  %    $ 12,561    

 

     

 

 

    

 

 

     

 

 

 

Funding sources

             

Deposits:

             

Interest-bearing checking

   $ 30,440         0.07  %    $         53,344         0.09  %    $ 12    

Market rate and other savings

     500,327         0.12        152          455,126         0.20        226    

Savings certificates

     60,341         1.34        200          72,100         1.42        256    

Other time deposits

     12,803         1.83        59          12,988         2.03        67    

Deposits in foreign offices

     65,587         0.17        27          57,899         0.23        33    

 

     

 

 

    

 

 

     

 

 

 

Total interest-bearing deposits

     669,498         0.27        443          651,457         0.37        594    

Short-term borrowings

     51,698         0.19        24          53,340         0.18        24    

Long-term debt

     127,660         2.48        789          145,431         2.78        1,009    

Other liabilities

     10,408         2.48        65          10,978         3.03        83    

 

     

 

 

    

 

 

     

 

 

 

Total interest-bearing liabilities

     859,264         0.62        1,321          861,206         0.80        1,710    

Portion of noninterest-bearing funding sources

     292,000         -                223,654         -          

 

     

 

 

    

 

 

     

 

 

 

Total funding sources

   $         1,151,264         0.46        1,321          1,084,860         0.63        1,710    

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net interest margin and net interest income on a taxable-equivalent basis (5)

       3.91  %    $ 11,213            4.01  %    $         10,851    
    

 

 

      

 

 

 

Noninterest-earning assets

             

Cash and due from banks

   $ 16,200              17,373        

Goodwill

     25,332              24,773        

Other

     128,788              123,939        

 

        

 

 

     

Total noninterest-earning assets

   $ 170,320              166,085        

 

        

 

 

     

Noninterest-bearing funding sources

             

Deposits

   $ 254,442              199,339        

Other liabilities

     58,441              53,169        

Total equity

     149,437              137,231        

Noninterest-bearing funding sources used to fund earning assets

     (292,000)             (223,654)       

 

        

 

 

     

Net noninterest-bearing funding sources

   $ 170,320              166,085        

 

        

 

 

     

Total assets

   $ 1,321,584              1,250,945        

 

        

 

 

     

 

 

 

(1) Our average prime rate was 3.25% for the quarters ended June 30, 2012 and 2011, and 3.25% for the first six months of both 2012 and 2011. The average three-month London Interbank Offered Rate (LIBOR) was 0.47% and 0.26% for the quarters ended June 30, 2012 and 2011, respectively, and 0.49% and 0.29%, respectively, for the first six months of 2012 and 2011.
(2) Yield/rates and amounts include the effects of hedge and risk management activities associated with the respective asset and liability categories.
(3) Yields and rates are based on interest income/expense amounts for the period, annualized based on the accrual basis for the respective accounts. The average balance amounts represent amortized cost for the periods presented.
(4) Nonaccrual loans and related income are included in their respective loan categories.
(5) Includes taxable-equivalent adjustments of $176 million and $173 million for the quarters ended June 30, 2012 and 2011, respectively, and $346 million and $334 million for the first six months of 2012 and 2011, respectively, primarily related to tax-exempt income on certain loans and securities. The federal statutory tax rate utilized was 35% for the periods presented.

 

7


Table of Contents
     Six months ended June 30,  
     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

   $ 63,635         0.49  %    $ 156          90,994         0.34  %    $ 152    

Trading assets

     43,190         3.39        731          37,711         3.76        708    

Securities available for sale (3):

             

Securities of U.S. Treasury and federal agencies

     3,875         1.13        22          1,804         2.56        23    

Securities of U.S. states and political subdivisions

     33,578         4.45        747          21,220         5.39        572    

Mortgage-backed securities:

             

Federal agencies

     93,165         3.43        1,597          70,656         4.74        1,676    

Residential and commercial

     34,201         6.89        1,178          30,104         9.28        1,396    

 

     

 

 

    

 

 

     

 

 

 

Total mortgage-backed securities

     127,366         4.36        2,775          100,760         6.10        3,072    

Other debt and equity securities

     49,658         4.10        1,015          34,093         5.68        967    

 

     

 

 

    

 

 

     

 

 

 

Total securities available for sale

     214,477         4.26        4,559          157,877         5.87        4,634    

Mortgages held for sale (4)

     48,218         3.88        936          34,686         4.61        799    

Loans held for sale (4)

     790         5.29        21          1,167         4.98        29    

Loans:

             

Commercial:

             

Commercial and industrial

     169,279         4.20        3,534          151,849         4.62        3,484    

Real estate mortgage

     105,750         4.33        2,280          100,621         4.04        2,018    

Real estate construction

     18,337         4.87        444          23,128         4.44        509    

Lease financing

     13,009         7.89        513          12,959         7.78        504    

Foreign

     40,042         2.54        507          35,050         2.73        476    

 

     

 

 

    

 

 

     

 

 

 

Total commercial

     346,417         4.22        7,278          323,607         4.35        6,991    

 

     

 

 

    

 

 

     

 

 

 

Consumer:

             

Real estate 1-4 family first mortgage

     229,859         4.66        5,346          227,208         4.99        5,659    

Real estate 1-4 family junior lien mortgage

     83,397         4.28        1,778          93,313         4.30        1,993    

Credit card

     22,097         12.81        1,408          21,230         13.08        1,388    

Other revolving credit and installment

     86,633         6.14        2,646          87,299         6.34        2,743    

 

     

 

 

    

 

 

     

 

 

 

Total consumer

     421,986         5.31        11,178          429,050         5.51        11,783    

 

     

 

 

    

 

 

     

 

 

 

Total loans (4)

     768,403         4.82        18,456          752,657         5.01        18,774    

Other

     4,545         4.49        103          5,111         4.00        102    

 

     

 

 

    

 

 

     

 

 

 

Total earning assets

   $         1,143,258         4.38  %    $         24,962                  1,080,203         4.69  %    $ 25,198    

 

     

 

 

    

 

 

     

 

 

 

Funding sources

             

Deposits:

             

Interest-bearing checking

   $ 31,299         0.06  %    $ 10          55,909         0.09  %    $ 26    

Market rate and other savings

     498,177         0.12        305          449,388         0.21        463    

Savings certificates

     61,515         1.35        413          73,229         1.41        511    

Other time deposits

     12,727         1.88        119          13,417         2.14        143    

Deposits in foreign offices

     65,217         0.16        53          57,687         0.23        66    

 

     

 

 

    

 

 

     

 

 

 

Total interest-bearing deposits

     668,935         0.27        900          649,630         0.38        1,209    

Short-term borrowings

     50,040         0.17        43          54,041         0.20        54    

Long-term debt

     127,599         2.54        1,619          147,774         2.86        2,113    

Other liabilities

     10,105         2.55        129          10,230         3.13        159    

 

     

 

 

    

 

 

     

 

 

 

Total interest-bearing liabilities

     856,679         0.63        2,691          861,675         0.82        3,535    

Portion of noninterest-bearing funding sources

     286,579         -                218,528         -          

 

     

 

 

    

 

 

     

 

 

 

Total funding sources

   $ 1,143,258         0.47        2,691          1,080,203         0.66        3,535    

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net interest margin and net interest income on a taxable-equivalent basis (5)

       3.91  %    $ 22,271            4.03  %    $         21,663    
    

 

 

      

 

 

 

Noninterest-earning assets

             

Cash and due from banks

   $ 16,587              17,367        

Goodwill

     25,230              24,774        

Other

     127,177              123,744        

 

        

 

 

     

Total noninterest-earning assets

   $ 168,994              165,885        

 

        

 

 

     

Noninterest-bearing funding sources

             

Deposits

   $ 250,528              196,237        

Other liabilities

     57,821              54,237        

Total equity

     147,224              133,939        

Noninterest-bearing funding sources used to fund earning assets

     (286,579)             (218,528)       

 

        

 

 

     

Net noninterest-bearing funding sources

   $ 168,994              165,885        

 

        

 

 

     

Total assets

   $ 1,312,252              1,246,088        

 

        

 

 

     

 

 

 

8


Table of Contents

Earnings Performance (continued)

 

Noninterest Income

Table 2: Noninterest Income

 

 

     Quarter ended June 30,      %     Six months ended June 30,      %  
(in millions)    2012      2011      Change     2012      2011      Change  

 

 

Service charges on deposit accounts

   $ 1,139         1,074          6   $ 2,223         2,086          7

Trust and investment fees:

                

Trust, investment and IRA fees

     1,041         1,020          2        2,065         2,080          (1)   

Commissions and all other fees

     1,857         1,924          (3)        3,672         3,780          (3)   

 

      

 

 

    

Total trust and investment fees

     2,898         2,944          (2)        5,737         5,860          (2)   

 

      

 

 

    

Card fees

     704         1,003          (30)        1,358         1,960          (31)   

Other fees:

                

Cash network fees

     120         94          28        238         175          36   

Charges and fees on loans

     427         404          6        872         801          9   

Processing and all other fees

     587         525          12        1,119         1,036          8   

 

      

 

 

    

Total other fees

     1,134         1,023          11        2,229         2,012          11   

 

      

 

 

    

Mortgage banking:

                

Servicing income, net

     679         877          (23)        931         1,743          (47)   

Net gains on mortgage loan origination/sales activities

     2,214         742          198        4,832         1,892          155   

 

      

 

 

    

Total mortgage banking

     2,893         1,619          79        5,763         3,635          59   

 

      

 

 

    

Insurance

     522         568          (8)        1,041         1,071          (3)   

Net gains from trading activities

     263         414          (36)        903         1,026          (12)   

Net losses on debt securities available for sale

     (61)         (128)         (52)        (68)         (294)         (77)   

Net gains from equity investments

     242         724          (67)        606         1,077          (44)   

Operating leases

     120         103          17        179         180          (1)   

All other

     398         364          9        1,029         773          33   

 

      

 

 

    

Total

   $           10,252         9,708          6      $           21,000         19,386          8   

 

 

 

Noninterest income was $10.3 billion and $9.7 billion for second quarter 2012 and 2011, respectively, and $21.0 billion and $19.4 billion for the first half of 2012 and 2011, respectively. Noninterest income represented 48% of revenue for the quarter and 49% for the first half of 2012. The increase in total noninterest income in the second quarter and first half of 2012 from the same periods a year ago was due predominantly to higher net gains on mortgage loan origination/sales activities.

Our service charges on deposit accounts increased 6% in the second quarter and 7% in the first half of 2012 from the same periods a year ago. This increase was 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.

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 June 30, 2012, these assets totaled $2.2 trillion, up 1% from a year ago. 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 were $1.0 billion and $2.1 billion in the second quarter and first half of 2012, respectively, essentially flat from a year ago for both