Wells Fargo 2008 Annual Report Download - page 49


Earnings Performance
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 and long-
term and short-term debt. The net interest margin is the aver-
age yield on earning assets minus the average interest rate
paid for deposits and our other sources of funding. Net inter-
est income and the net interest margin are presented on a
taxable-equivalent basis to consistently reflect income from
taxable and tax-exempt loans and securities based on a 35%
federal statutory tax rate.
Net interest income on a taxable-equivalent basis was
$25.4 billion in 2008, up 20% from $21.1 billion in 2007. Our
net interest margin increased to 4.83% for 2008 from 4.74%
for 2007. Both the increase in net interest income and the
increase in the net interest margin were largely driven by
disciplined deposit pricing and lower market funding costs.
Average earning assets increased $77.6 billion to
$523.5 billion in 2008 from $445.9 billion in 2007. Average
loans increased to $398.5 billion in 2008 from $344.8 billion
in 2007. Average mortgages held for sale decreased to
$25.7 billion in 2008 from $33.1 billion in 2007. Average debt
securities available for sale increased to $86.3 billion in 2008
from $57.0 billion in 2007.
The purchase accounting adjustments that we recorded on
Wachovia's interest-earning assets and interest-bearing lia-
bilities to reflect market rates of interest for each instrument
or pool of instruments will affect net interest income begin-
ning in first quarter 2009. The more significant of these
adjustments include an $8.2 billion net increase to loans
where amortization will decrease net interest income, a $4.4
billion net increase to deposits, specifically certificates of
deposit, and a $190 million increase to long-term debt, where
amortization for both will increase net interest income.
Core deposits are an important contributor to growth in
net interest income and the net interest margin, and are a
low-cost source of funding. Core deposits are noninterest-
bearing deposits, interest-bearing checking, savings certifi-
cates, market rate and other savings, and certain foreign
deposits (Eurodollar sweep balances). We have one of the
largest bases of core deposits among large U.S. banks.
Average core deposits grew 7% to $325.2 billion in 2008 from
$303.1 billion in 2007 and funded 82% and 88% of average
total loans in 2008 and 2007, respectively. Total average
retail core deposits, which exclude Wholesale Banking core
deposits and retail mortgage escrow deposits, for 2008 grew
$13.1 billion (6%) from 2007. Average mortgage escrow
deposits decreased to $21.0 billion in 2008 from $21.5 billion
in 2007. Average savings certificates of deposit decreased to
$39.5 billion in 2008 from $40.5 billion in 2007 and average
noninterest-bearing checking accounts and other core
deposit categories (interest-bearing checking and market
rate and other savings) increased to $260.2 billion in 2008
from $241.9 billion in 2007. Total average interest-bearing
deposits increased to $266.1 billion in 2008 from $239.2 bil-
lion in 2007, predominantly due to growth in market rate and
other savings, along with growth in foreign deposits, offset by
a decline in other time deposits.
Table 3 presents the individual components of net interest
income and the net interest margin.
ment taxing authorities, both domestic and foreign. Our
interpretations may be subjected to review during examina-
tion by taxing authorities and disputes may arise over the
respective tax positions. We attempt to resolve these dis-
putes during the tax examination and audit process and ulti-
mately through the court systems when applicable.
We monitor relevant tax authorities and revise our esti-
mate of accrued income taxes due to changes in income tax
laws and their interpretation by the courts and regulatory
authorities on a quarterly basis. Revisions of our estimate of
accrued income taxes also may result from our own income
tax planning and from the resolution of income tax contro-
versies. Such revisions in our estimates may be material to
our operating results for any given quarter.
See Note 21 (Income Taxes) to Financial Statements for a
further description of our provision for income taxes and
related income tax assets and liabilities.