Wells Fargo 2015 Annual Report Download - page 38

Earnings Performance (continued)
Net Interest Income
Net interest income is the interest earned on debt securities,
loans (including yield-related loan fees) and other interest-
earning assets minus the interest paid for deposits, short-term
borrowings and long-term debt. The net interest margin is the
average yield on earning assets minus the average interest rate
paid for deposits and our other sources of funding. Net interest
income and the net interest margin are presented on a taxable-
equivalent basis in Table 5 to consistently reflect income from
taxable and tax-exempt loans and securities based on a 35%
federal statutory tax rate.
While the Company believes that it has the ability to
increase net interest income over time, net interest income and
the net interest margin in any one period can be significantly
affected by a variety of factors including the mix and overall size
of our earning assets portfolio and the cost of funding those
assets. In addition, some variable sources of interest income,
such as resolutions from purchased credit-impaired (PCI) loans,
loan prepayment fees and collection of interest on nonaccrual
loans, can vary from period to period. Net interest income
growth has been challenged during the prolonged low interest
rate environment as higher yielding loans and securities runoff
have been replaced with lower yielding assets.
Net interest income on a taxable-equivalent basis was
$46.4 billion in 2015, compared with $44.4 billion in 2014, and
$43.6 billion in 2013. The net interest margin was 2.95% in
2015, down 16 basis points from 3.11% in 2014, which was down
29 basis points from 3.40% in 2013. The increase in net interest
income for 2015, compared with 2014, was primarily driven by
loan growth, the benefit of swapping a portion of our variable
rate commercial loans to fixed rate, securities purchases, higher
trading balances, and reduced deposit costs. Strong growth in
commercial loans, retained first lien real estate loans and credit
cards contributed to higher net interest income as originations
more than replaced runoff in the non-strategic/liquidating
portfolios. This increase was partially offset by the impact of
increased interest expense on higher long-term debt balances
and reduced interest income from loans held for sale (LHFS)
following the sale of substantially all of the government
guaranteed student loan portfolio in 2014. Funding costs in 2015
remained relatively flat compared with 2014 due to lower
deposit costs as a result of disciplined pricing, partially offset by
increased long-term debt interest expense. The decline in net
interest margin in 2015, compared with 2014, was primarily due
to customer-driven deposit growth and higher long-term debt
balances, partially offset by growth in loans and securities. The
growth in customer-driven deposits and funding balances during
2015 kept cash, federal funds sold, and other short-term
investments elevated, which diluted net interest margin but was
essentially neutral to net interest income. During fourth quarter
2015, we issued long-term debt to partially fund the previously
announced acquisition of certain commercial lending businesses
and assets from GE Capital, with the majority of assets
anticipated to close in first quarter 2016.
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 $142.4 billion in 2015
from a year ago, as average investment securities increased
$55.1 billion and average federal funds sold and other short-term
investments increased $25.6 billion for the same period,
respectively. In addition, average loans increased $51.0 billion in
2015, compared with a year ago.
Deposits are an important low-cost source of funding and
affect both net interest income and the net interest margin.
Deposits include noninterest-bearing deposits, interest-bearing
checking, market rate and other savings, savings certificates,
other time deposits, and deposits in foreign offices. Average
deposits rose to $1.2 trillion in 2015, compared with $1.1 trillion
in 2014, and funded 135% of average loans compared with 134%
a year ago. Average deposits decreased to 76% of average earning
assets in 2015, compared with 78% 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.
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 2015, are
analyzed in Table 6.
Wells Fargo & Company
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