1 Financial Review 30 Overview 50 3 Cash, Loan and Dividend Restrictions 34 Earnings Performance 5 4 Federal Funds Sold, Securities Purchased under Resale Agreements and Other Short-Term Investments 49 Balance Sheet Analysis 52 5 Investment Securities 52 Off-Balance Sheet Arrangements 60 6 Loans and Allowance for Credit Losses 54 Risk Management 79 7 Premises, Equipment, Lease Commitments and Other Assets 00 Capital Management 80 8 Securitizations and Variable Interest Entities 06 Regulatory Reform 9 9 Mortgage Banking Activities 08 Critical Accounting Policies 94 0 Intangible Assets 2 Current Accounting Developments 95 Deposits 3 Forward-Looking Statements 96 2 Short-Term Borrowings 4 Risk Factors 97 3 Long-Term Debt 99 4 Guarantees, Pledged Assets and Collateral Controls and Procedures Legal Actions 29 Disclosure Controls and Procedures Derivatives 29 Internal Control Over Financial Reporting 22 7 Fair Values of Assets and Liabilities Preferred Stock Common Stock and Stock Plans Employee Benefits and Other Expenses Financial Statements Income Taxes 3 Consolidated Statement of Income Earnings Per Common Share 32 Consolidated Statement of Comprehensive Income Other Comprehensive Income 33 Consolidated Balance Sheet Operating Segments 34 Consolidated Statement of Changes in Equity Parent-Only Financial Statements 38 Consolidated Statement of Cash Flows Regulatory and Agency Capital Requirements Management's Report on Internal Control over Financial Reporting Report of Independent Registered Public Accounting Firm Notes to Financial Statements 259 Report of Independent Registered Public Accounting Firm 39 Summary of Significant Accounting Policies 260 Quarterly Financial Data 49 2 Business Combinations 262 Glossary of Acronyms 29
2 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, and in the Regulation and Supervision section of our Annual Report on Form 0-K for the year ended December 3, 204 (204 Form 0-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 for terms used throughout this Report. Financial Review Overview Wells Fargo & Company is a nationwide, diversified, community-based financial services company with.7 trillion in assets. Founded in 852 and headquartered in San Francisco, we provide banking, insurance, investments, mortgage, and consumer and commercial finance through more than 8,700 locations, 2,500 ATMs, the internet (wellsfargo.com) and mobile banking, and we have offices in 36 countries to support our customers who conduct business in the global economy. With approximately 265,000 active, full-time equivalent team members, we serve one in three households in the United States and ranked No. 29 on Fortune s 204 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 3, 204. We use our Vision and Values to guide us toward growth and success. 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. Important to our strategy to achieve this vision is to increase the number of our products our customers use and to offer them all of the financial products that fulfill their financial needs. We aspire to create deep and enduring relationships with our customers by discovering their needs and delivering the most relevant products, services, advice, and guidance. We have six primary values, which are based on our vision and provide the foundation for everything we do. First, we value and support our people as a competitive advantage and strive to attract, develop, retain and motivate the most talented people we can find. Second, we strive for the highest ethical standards with our team members, our customers, our communities and our shareholders. Third, with respect to our customers, we strive to base our decisions and actions on what is right for them in everything we do. Fourth, for team members we strive to build and sustain a diverse and inclusive culture - one where they feel valued and respected for who they are as well as for the skills and experiences they bring to our company. Fifth, we also look to each of our team members to be leaders in establishing, sharing and communicating our vision. Sixth, we strive to make risk management a competitive advantage by working hard to ensure Financial information for certain periods prior to 204 was revised to reflect our determination that certain factoring arrangements did not qualify as loans. See Note (Summary of Significant Accounting Policies) to Financial Statements in this Report for more information. 30 that appropriate controls are in place to reduce risks to our customers, maintain and increase our competitive market position, and protect Wells Fargo s long-term safety, soundness and reputation. Financial Performance We completed another outstanding year of financial results in 204 and remained America s most profitable bank. We generated record earnings, produced strong loan and deposit growth, grew the number of customers we serve, improved credit quality, enhanced our strong risk management practices, strengthened our capital and liquidity levels and rewarded our shareholders by increasing our dividend and buying back more shares. Wells Fargo net income was 23. billion in 204, an increase of 5% compared with 203, with record diluted earnings per share (EPS) of 4.0, also up 5% from the prior year. Our achievements during 204 demonstrated the benefit of our diversified business model and our continued focus on the real economy. Noteworthy items included: revenue of 84.3 billion, up % from 203; pre-tax pre-provision profit (PTPP) of 35.3 billion, up %; our loans increased 40.3 billion, up 5%, even with the planned runoff in our non-strategic/liquidating portfolios, and our core loan portfolio grew by 60.3 billion, up 8%; our deposit franchise continued to generate strong customer deposit growth, with total deposits up 89. billion, or 8%; our credit performance continued to be strong with total net charge-offs down.6 billion, or 35%, from a year ago and our net charge-off ratio declined to 35 basis points of average loans; we continued to maintain solid customer relationships across the Company, with retail banking household crosssell of 6.7 products per household (November 204); Wholesale Banking cross-sell of 7.2 products per relationship (September 204); and Wealth, Brokerage and Retirement cross-sell of 0.49 products per retail banking household (November 204); we maintained strong capital levels as our estimated Common Equity Tier I ratio under Basel III (Advanced Approach, fully phased-in) was 0.43%; and our common stock price increased 2% and we returned 2.5 billion in capital to our shareholders through an increased common stock dividend and additional net share repurchases (up 74% from 203).
3 Balance Sheet and Liquidity Our balance sheet grew % in 204 to.7 trillion, as we increased our liquidity position, improved the quality of our assets and held more capital. We grew deposits by 8% in 204 while reducing our deposit costs. We also grew our loans on a year-over-year basis for the 4th consecutive quarter (for the past quarters year-over-year loan growth has been 3% or greater) despite the planned runoff from our non-strategic/ liquidating portfolios. Our non-strategic/liquidating loan portfolios decreased 20. billion during the year (now less than 8% of total loans) and our core loan portfolios increased 60.3 billion from the prior year. Our federal funds sold, securities purchased under resale agreements and other shortterm investments (collectively referred to as federal funds sold and other short-term investments elsewhere in this Report) increased by 44.6 billion, or 2%, during the year on continued strong growth in interest-earning deposits, and we grew our investment securities portfolio by 48.6 billion in 204. While we believe our liquidity position continued to remain strong with increased regulatory expectations, we have added to our position over the past year. We issued 24.0 billion of liquidity-related long-term debt as well as additional liquidity-related short-term funding in 204. Deposit growth remained strong with period-end deposits up 89. billion from 203. This increase reflected solid growth across both our commercial and consumer businesses. We grew our primary consumer checking customers by 5.2% and primary small business and business banking checking customers by 5.4% from a year ago (November 204 compared with November 203). Our ability to grow primary customers is important to our results because these customers have more interactions with us, have higher cross-sell and are more than twice as profitable as non-primary customers. Credit Quality Credit quality continued to improve in 204, with solid performance in several of our commercial and consumer loan portfolios as losses remained near historically low levels, reflecting our long-term risk focus and the benefit from the improving housing market. Net charge-offs of 2.9 billion were 0.35% of average loans, down 2 basis points from a year ago. Net losses in our commercial portfolio were only 44 million, or basis point of average loans. Net consumer losses declined to 65 basis points in 204 from 98 basis points in 203. Our commercial real estate portfolios were in a net recovery position for each quarter of 204 and 203, reflecting our conservative risk discipline and improved market conditions. Losses on our consumer real estate portfolios declined.4 billion, or 55%, from a year ago. The consumer loss levels reflected the benefit of the improving economy and our continued focus on originating high quality loans. Approximately 60% of the consumer first mortgage portfolio was originated after 2008, when new underwriting standards were implemented. Reflecting these improvements in our loan portfolios, our provision for credit losses in 204 was.4 billion compared with 2.3 billion a year ago. This provision reflected a release of.6 billion from the allowance for credit losses, compared with a release of 2.2 billion a year ago. Future allowance levels may increase or decrease based on a variety of factors, including loan growth, portfolio performance and general economic conditions. In addition to lower net charge-offs and provision expense, nonperforming assets (NPAs) also improved and were down 4. billion, or 2%, from 203. Nonaccrual loans declined 2.8 billion from the prior year while foreclosed assets were down.3 billion from 203. Capital We continued to strengthen our capital levels in 204 even as we returned more capital to our shareholders, increasing total equity to 85.3 billion at December 3, 204, up 4.3 billion from the prior year. In 204, our common shares outstanding declined by 86.8 million shares as we continued to reduce our common share count through the repurchase of 83. million common shares during the year. Also, we entered into a 750 million forward repurchase contract with an unrelated third party in October 204 that settled in January 205 for 4.3 million shares. In addition, we entered into another 750 million forward repurchase contract with an unrelated third party in January 205 that is expected to settle in second quarter 205 for approximately 4.3 million shares. We expect our share count to continue to decline in 205 as a result of anticipated net share repurchases. We believe an important measure of our capital strength is the estimated Common Equity Tier ratio under Basel III, using the Advanced Approach, fully phased-in, which increased to 0.43% in 204 from 9.76% a year ago. Our regulatory capital ratios under Basel III (General Approach) remained strong with a total risk-based capital ratio of 5.53%, Tier risk-based capital ratio of 2.45% and Tier leverage ratio of 9.45% at December 3, 204, compared with 5.43%, 2.33% and 9.60%, respectively, at December 3, 203. See the Capital Management section in this Report for more information regarding our capital, including the calculation of common equity for regulatory purposes. 3
4 Overview (continued) Table : Six-Year Summary of Selected Financial Data (in millions, except per share amounts) % Change 204/ 203 Five-year compound growth rate ,527 42,800 43,230 42,763 44,757 46,324 2% 40,820 40,980 42,856 38,85 40,453 42,362 84,347 83,780 86,086 80,948 85,20 88,686,395 2,309 7,27 7,899 5,753 2,668 (40) (42) Noninterest expense 49,037 48,842 50,398 49,393 50,456 49,020 Net income before noncontrolling interests 23,608 22,224 9,368 6,2 2,663 2, Income statement Net interest income Noninterest income Revenue Provision for credit losses Less: Net income from noncontrolling interests ,057 2,878 8,897 5,869 2,362 2, Earnings per common share Diluted earnings per common share Dividends declared per common share , , ,99 222,63 72,654 72,70 8% 3 862,55 822, ,35 769,63 757, , ,39 4,502 7,060 9,372 23,022 24,56 Wells Fargo net income Balance sheet (at year end) Investment securities Loans Allowance for loan losses Goodwill (5) 2 (3) 25,705 25,637 25,637 25,5 24,770 24,82 Assets,687,55,523,502,42,746,33,867,258,28,243,646 6 Core deposits,054, , , , ,92 780,737 8 Long-term debt 83,943 52,998 27,379 25,354 56, ,86 20 Wells Fargo stockholders' equity 84,394 70,42 57,554 40,24 26,408, ,357,446,48 2,573 (20) 85,262 7,008 58,9 4,687 27,889 4, Noncontrolling interests Total equity 32 Core deposits are noninterest-bearing deposits, interest-bearing checking, savings certificates, certain market rate and other savings, and certain foreign deposits (Eurodollar sweep balances). 6
5 Table 2: Ratios and Per Common Share Data Year ended December 3, % Profitability ratios Wells Fargo net income to average assets (ROA) Wells Fargo net income applicable to common stock to average Wells Fargo common stockholders' equity (ROE) Efficiency ratio Capital ratios At year end: Tier capital Total capital Average Wells Fargo common stockholders' equity to average assets Average total equity to average assets Wells Fargo common stockholders' equity to assets Total equity to assets Risk-based capital Tier leverage Common Equity Tier (3) Average balances: Per common share data Dividend payout (4) High Low Year end Book value Market price (5) (3) (4) (5) The efficiency ratio is noninterest expense divided by total revenue (net interest income and noninterest income). See Note 26 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report for additional information. See the "Capital Management" section in this Report for additional information. Dividends declared per common share as a percentage of diluted earnings per common share. Based on daily prices reported on the New York Stock Exchange Composite Transaction Reporting System. 33
6 Earnings Performance Wells Fargo net income for 204 was 23. billion (4.0 diluted earnings per common share), compared with 2.9 billion (3.89 diluted per share) for 203 and 8.9 billion (3.36 diluted per share) for 202. Our 204 earnings reflected strong execution of our business strategy as well as growth in many of our businesses. Our financial performance in 204 benefited from a 94 million reduction in our provision for credit losses, reflecting strong underlying credit performance. We also generated diversified sources of fee income across many of our businesses and grew loans and deposits. Revenue, the sum of net interest income and noninterest income, was 84.3 billion in 204, compared with 83.8 billion in 203 and 86. billion in 202. The increase in revenue for 204 compared with 203 was predominantly due to an increase in net interest income, reflecting increases in income from trading assets and investment securities. Our diversified sources of revenue generated by our businesses continued to be balanced between net interest income and noninterest income. In 204, net interest income of 43.5 billion represented 52% of revenue, compared with 42.8 billion (5%) in 203 and 43.2 billion (50%) in Noninterest income was 40.8 billion in 204, representing 48% of revenue, compared with 4.0 billion (49%) in 203 and 42.9 billion (50%) in 202. The decrease in 204 was driven predominantly by a 27% decline in mortgage banking income due to decreased net gains on mortgage loan origination/sales activities, partially offset by higher trust and investment fee income. Mortgage loan originations were 75 billion in 204, down from 35 billion a year ago. Noninterest expense was 49.0 billion in 204, compared with 48.8 billion in 203 and 50.4 billion in 202. The increase in noninterest expense in 204, compared with 203, reflected higher salaries expense and other expenses, including operating losses and outside professional services. Noninterest expense as a percentage of revenue (efficiency ratio) was 58.% in 204, 58.3% in 203 and 58.5% in 202, reflecting our expense management efforts. Table 3 presents the components of revenue and noninterest expense as a percentage of revenue for year-over-year results.
7 Table 3: Net Interest Income, Noninterest Income and Noninterest Expense as a Percentage of Revenue Year ended December 3, 204 % of revenue 203 % of revenue 202 % of revenue Interest income Trading assets Investment securities,72 9,253 Mortgages held for sale (MHFS) Loans held for sale (LHFS) Loans Other interest income Total interest income 2%,406 8, , ,457 2%,380 2% 8,757 0,290 2, , , , ,07 57,096,337 2, , , , , , , , , ,93 5 Interest expense Deposits Short-term borrowings Long-term debt Other interest expense Total interest expense Net interest income (on a taxable-equivalent basis) Taxable-equivalent adjustment (902) Net interest income (A) 43,527 (792) 52 42,800 (70) 5 43, Noninterest income Service charges on deposit accounts 5, , , , ,430 6,890 4 Card fees 3,43 4 3,9 4 2,838 3 Other fees 4, , ,59 5 Mortgage banking 6,38 8 8,774 0,638 4 Insurance,655 2,84 2,850 2 Net gains from trading activities,6,623 2, ,380 3,472 2, ,04 679, , , , Trust and investment fees Net gains (losses) on debt securities Net gains from equity investments Lease income Other Total noninterest income (B) (29) (28) 2 Noninterest expense Salaries 5, ,52 8 4,689 7 Commission and incentive compensation 9, ,95 2 9,504 Employee benefits 4, , ,6 5 Equipment,973 2, ,068 2 Net occupancy 2, , ,857 3 Core deposit and other intangibles,370 2,504 2, ,356 2,899 4, , , , , FDIC and other deposit assessments Other Total noninterest expense Revenue (A) + (B) 84,347 83,780 86,086 See Table 7 Noninterest Income in this Report for additional detail. See Table 8 Noninterest Expense in this Report for additional detail. 35
8 Earnings Performance (continued) Net Interest Income Net interest income is the interest earned on debt securities, loans (including yield-related loan fees) and other interestearning 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 taxableequivalent 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. The pace of this repricing has slowed in recent quarters. Net interest income on a taxable-equivalent basis was 44.4 billion in 204, compared with 43.6 billion in 203, and 43.9 billion in 202. The net interest margin was 3.% in 204, down 29 basis points from 3.40% in 203, which was down 36 basis points from 3.76% in 202. The increase in net interest income for 204, compared with 203, was largely driven by securities purchases, higher trading balances, and reduced funding costs due to disciplined deposit pricing and lower longterm debt yields. Strong growth in commercial, retained real estate and automobile loans also contributed to higher net interest income as originations replaced runoff in the nonstrategic/liquidating portfolios. The improvement in net interest income was partially offset by the impact of lower mortgages held for sale (MHFS) balances. The decline in net interest margin in 204, compared with a year ago, was primarily driven by higher funding balances, including actions taken in response to increased regulatory liquidity expectations, which raised longterm debt and term deposits in addition to customer-driven deposit growth. This growth in funding increased cash and federal funds sold and other short-term investments and was dilutive to net interest margin although essentially neutral to net interest income. 36 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 47.3 billion in 204 from a year ago, as average investment securities increased 30.6 billion and average federal funds sold and other shortterm investments increased 86.4 billion for the same period, respectively. In addition, average loans increased 3.8 billion in 204, compared with a year ago. The increases in average investment securities, average federal funds sold and other short-term investments and average loans were partially offset by a 6.3 billion decline in average MHFS. 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, interestbearing checking, savings certificates, market rate and other savings, and certain foreign deposits (Eurodollar sweep balances). Average core deposits rose to.0 trillion in 204, compared with 942. billion in 203, and funded 20% of average loans compared with 7% a year ago. Average core deposits decreased to 70% of average earning assets in 204, compared with 73% 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 96% 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 204, are analyzed in Table 6.
9 Table 4: Average Earning Assets and Funding Sources as a Percentage of Average Earnings Assets Year ended December 3, 204 Average balance 203 % of earning assets Average balance % of earning assets Earning assets Federal funds sold, securities purchased under resale agreements and other short-term investments Trading assets Investment securities: Available-for-sale securities: Securities of U.S. Treasury and federal agencies Securities of U.S. states and political subdivisions Mortgage-backed securities: Federal agencies Residential and commercial Total mortgage-backed securities Other debt and equity securities Total available-for-sale securities Held-to-maturity securities Mortgages held for sale Loans held for sale Loans: Commercial: Commercial and industrial - U.S. Commercial and industrial - Non U.S. Real estate mortgage Real estate construction Lease financing Total commercial 24,282 55,40 7% 4 54,902 44,745 2% 3 0,400 43,38 3 6,750 39, ,076 26, ,48 30, , ,865 47, , , , ,39 9,08 4, , ,89 42,66 2,70 7,676 2, ,83 40,987 07,36 6,537 2, , , ,620 62,50 27,49 53,854 38, ,02 70,264 24,757 48,476 42, , , , , ,673 4,354 Consumer: Real estate -4 family first mortgage Real estate -4 family junior lien mortgage Credit card Automobile Other revolving credit and installment Total consumer Total loans Other Total earning assets,429,667 00%,282,363 00% 39, ,854 38, 5,434 95,889 8,07 3% , ,394 49,50 28,090 76, ,458 3% , 67,420 4, ,76 34,937 2,47 4,052, , , ,78 Funding sources Deposits: Interest-bearing checking Market rate and other savings Savings certificates Other time deposits Deposits in foreign offices Total interest-bearing deposits Short-term borrowings Long-term debt Other liabilities Total interest-bearing liabilities Portion of noninterest-bearing funding sources Total funding sources,429,667 00%,282,363 6,36 25,687 2,634 6,272 25,637 2,7 63,682 63, ,27 56,985 80,288 (376,78) 280,229 58,78 64,994 (339,78) 26 00% Noninterest-earning assets Cash and due from banks Goodwill Other Total noninterest-earning assets Noninterest-bearing funding sources Deposits Other liabilities Total equity Noninterest-bearing funding sources used to fund earning assets Net noninterest-bearing funding sources Total assets 63,682 63,620,593,349,445,983 Nonaccrual loans are included in their respective loan categories. 37
10 Earnings Performance (continued) Table 5: Average Balances, Yields and Rates Paid (Taxable-Equivalent Basis) Average balance Yields/ rates Interest income/ expense Average balance Interest income/ expense Yields/ rates Earning assets Federal funds sold, securities purchased under resale agreements and other short-term investments Trading assets Investment securities (3): Available-for-sale securities: Securities of U.S. Treasury and federal agencies Securities of U.S. states and political subdivisions Mortgage-backed securities: Federal agencies Residential and commercial Total mortgage-backed securities Other debt and equity securities Total available-for-sale securities Held-to-maturity securities: Securities of U.S. Treasury and federal agencies Securities of U.S. states and political subdivisions Federal agency mortgage-backed securities Other debt securities Held-to-maturity securities Total investment securities Mortgages held for sale (4) Loans held for sale (4) Loans: Commercial: Commercial and industrial - U.S. Commercial and industrial - non U.S. Real estate mortgage Real estate construction Lease financing Total commercial 24, ,902 55, % 3.0,72 44, % 3.4, ,400 43, ,852 6,750 39, ,748 4,076 26, ,235,597 07,48 30, ,03,988 40, ,832 37, ,09 47, ,74 55, ,940 24, , , ,89 7, ,92 5, , , , , ,84 9,08 4, , , ,89 42, , ,83 40, , ,70 7,676 2, , ,36 6,537 2, , , , , ,44 26,620 62,50 27,49 53,854 38, ,96 2,686 3,294 3,377 2,27 254,02 70,264 24,757 48,476 42, ,77 3,04 3,084 3,365 2, , , , , , ,75 802, ,68 4, , Consumer: Real estate -4 family first mortgage Real estate -4 family junior lien mortgage Credit card Automobile Other revolving credit and installment Total consumer Total loans (4) Other Total earning assets 235,429, % 48,457,282, % 47,892 39, ,854 38, 5,434 95, % , ,394 49,50 28,090 76, % ,07 0.4, , ,337 60, 67,420 4, , ,76 34,937 2, , ,052, , , , ,78 339,78,429, ,028,282, ,300 Funding sources Deposits: Interest-bearing checking Market rate and other savings Savings certificates Other time deposits Deposits in foreign offices Total interest-bearing deposits Short-term borrowings Long-term debt Other liabilities Total interest-bearing liabilities Portion of noninterest-bearing funding sources Total funding sources Net interest margin and net interest income on a taxableequivalent basis (5) 3.% 44, % 43,592 Noninterest-earning assets Cash and due from banks Goodwill Other Total noninterest-earning assets 6,36 25,687 2,634 6,272 25,637 2,7 63,682 63, ,27 56,985 80, ,229 58,78 64,994 (376,78) (339,78) Noninterest-bearing funding sources Deposits Other liabilities Total equity Noninterest-bearing funding sources used to fund earning assets Net noninterest-bearing funding sources Total assets 38 63,682 63,620,593,349,445,983 Our average prime rate was 3.25% for 204, 203, 202, 20, and 200, respectively. The average three-month London Interbank Offered Rate (LIBOR) was 0.23%, 0.27%, 0.43%, 0.34%, and 0.34% for the same years, respectively. Yield/rates and amounts include the effects of hedge and risk management activities associated with the respective asset and liability categories.
11 Average balance Yields/ rates Interest income/ expense Average balance Interest income/ expense Average balance Interest income/ expense Yields/ rates Yields/ rates 84, % , % , % 4, ,380 39, ,463 29, ,2 3,604 34, ,56 5,503 24, ,223,870 6, ,887 33, ,893 2,264 74,665 3, ,257 2,67 7,953 3, ,697 3,396 26, ,57 06, ,874 03, ,093 49, ,992 38, ,94 32, ,02 24, ,757 74, ,07 54, , , ,757 74, ,07 54, ,236 48, , ,232, , ,76 3, , ,93 38,838 05,492 8,047 3, , , ,608 35,042 02,320 2,672 3, , ,67, ,576 27,76 98,558 3,306 3, , ,839,052, , ,43 329, , , , ,0 80,887 22,809 44,986 42, ,704 3,460 2,892 3,390, ,676 90,755 2,556 43,834 43, ,56 3,930 2,8 3,568, ,673 0,598 22,542 43,986 45, ,32 4,525 3,07 3,905 2,07 425, , , , , , , ,57 757, , , ,808 4, , , ,69, % 49,07,02, % 50,22,064, % 53,439 30, ,30 59,484 3,363 67, % , ,450 69,7 3,26 6, % ,94 46,877 87,33 4,654 55, % ,088, , , , , , ,832 5,96 27,547 0, , ,78 4,079 0, , ,824 85,426 6, , , ,76 860, , , , ,049 24,689 90,343,69, ,76,02, ,663,064, , % 43, % 43, % 6,303 25,47 30,450 7,388 24,904 25,9 7,68 24,824 20,338 72,70 68,203 62, ,863 6,24 5,42 25,242 57,399 37,25 83,008 47,877 22,238 (90,343) (304,049) (24,689) 72,70 68,203 62,780,34,635,270,265,226,938 (3) (4) (5) 45,386 The average balance amounts represent amortized cost for the periods presented. Nonaccrual loans and related income are included in their respective loan categories. Includes taxable-equivalent adjustments of 902 million, 792 million, 70 million, 696 million and 629 million for 204, 203, 202, 20 and 200, 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
12 Earnings Performance (continued) Table 6 allocates the changes in net interest income on a taxable-equivalent basis to changes in either average balances or average rates for both interest-earning assets and interestbearing 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 of Net Interest Income Year ended December 3, 204 over 203 Volume Rate 203 over 202 Total Volume Rate Total Increase (decrease) in interest income: Federal funds sold, securities purchased under resale agreements and other short-term investments Trading assets Investment securities: Available-for-sale securities: Securities of U.S. Treasury and federal agencies Securities of U.S. states and political subdivisions Mortgage-backed securities: Federal agencies Residential and commercial Total mortgage-backed securities 252 (68) (34) 324 (8) (64) (36) (36) (262) (29) 204 (39) 42 (85) (283) (9) 38 (276) (69) (8) (87) 236 (374) (38) (270) 7 (99) 27 (269) (52) Total available-for-sale securities (39) (84) (223) 725 (663) 62 Held-to-maturity securities Mortgages held for sale Loans held for sale Loans: Commercial: Commercial and industrial - U.S. Commercial and industrial - non U.S. Real estate mortgage Real estate construction Lease financing 643 (643) 82 (8) 20 (7) 635 (523) (502) (37) (33) 9 22 (535) (28) (7) (602) (336) (95) (58) (33) (43) (65) (73) (48) (633) (26) (260) (37) (36) (74) (78) (83) (0) (84) (,09) (44) 463 (,92) (729) (76) 7 (22) (342) (328) (454) (82) 8 (5) (279) 98 3 (446) 92 (25) (263) (,036) (70),45 (,354) 97,329 (2,228) (899) Other debt and equity securities Total commercial 947 Consumer: Real estate -4 family first mortgage Real estate -4 family junior lien mortgage Credit card Automobile Other revolving credit and installment 320 (335) (67) Total consumer Total loans Other 7 Total increase (decrease) in interest income,987 7 (,422) (4), (3,083) (,25) (97) (00) (83) (8) 3 (42) (223) (3) 3 Increase (decrease) in interest expense: Deposits: Interest-bearing checking Market rate and other savings Savings certificates Other time deposits Deposits in foreign offices 2 2 (4) 7 32 Total interest-bearing deposits Short-term borrowings Long-term debt Other liabilities Total increase (decrease) in interest expense Increase (decrease) in net interest income on a taxable-equivalent basis 40 2 (68) (22) (04) (7) 4 (47) (236) (23) (299) (24) 98 (488) (390) (6) (648) 25 (9) (97) (29) (696) (23) (525) (938) (272) 336 (,22) (876),32 (484) 837,532 (,87) (339)
13 Noninterest Income Table 7: Noninterest Income Year ended December 3, Service charges on deposit accounts Trust and investment fees: Brokerage advisory, commissions and other fees ,050 5,023 4,683 9,83 8,395 7,524 Trust and investment management Investment banking 3,387,70 3,289,746 3,080,286 Total trust and investment fees 4,280 3,430,890 Card fees 3,43 3,9 2,838 Other fees: Charges and fees on loans Merchant processing fees Cash network fees Commercial real estate brokerage commissions, , , ,349 4,340 4,59 3,337,920,378 3,044 6,854 0,260 Letters of credit fees All other fees Total other fees Mortgage banking: Servicing income, net Net gains on mortgage loan origination/sales activities 6,38 8,774,638 Insurance Total mortgage banking,655,84,850 Net gains from trading activities Net gains (losses) on debt securities Net gains from equity investments Lease income Life insurance investment income All other, , ,623 (29), ,707 (28), ,050 Total 40,820 40,980 42,856 Noninterest income of 40.8 billion represented 48% of revenue for 204 compared with 4.0 billion, or 49%, for 203 and 42.9 billion, or 50%, for 202. The decrease in noninterest income in 204 was primarily due to a decline in mortgage banking, partially offset by growth in many of our other businesses including debit card, corporate banking, principal investments, asset-backed finance, equipment finance, international, venture capital, wealth management and retail brokerage. Excluding mortgage banking, noninterest income increased 2.2 billion from a year ago. Service charges on deposit accounts increased 27 million from 203 due to account growth, new commercial product sales and commercial product re-pricing, partially offset by changes we implemented in early October 204 designed to provide customers with more real time information to manage their deposit accounts and avoid overdrafts. Service charges on deposit accounts in 203 increased 340 million, or 7%, from 202 due to primary consumer checking customer growth, product changes and customer adoption of overdraft services. Brokerage advisory, commissions and other fees are received for providing services to full-service and discount brokerage customers. Income from these brokerage-related activities include asset-based fees, which are based on the market value of the customer s assets, and transactional commissions based on the number and size of transactions executed at the customer s direction. These fees increased to 9.2 billion in 204, from 8.4 billion and 7.5 billion in 203 and 202, respectively. The increase in brokerage income was predominantly due to higher asset-based fees as a result of higher market values and growth in assets under management, partially offset by a decrease in brokerage transaction revenue. Retail brokerage client assets totaled.42 trillion at December 3, 204, up 4% from.36 trillion at December 3, 203, which was up 2% from.22 trillion at December 3, 202. We earn trust and investment management fees from managing and administering assets, including mutual funds, corporate trust, personal trust, employee benefit trust and agency assets. Trust and investment management fees are largely based on a tiered scale relative to the market value of the assets under management or administration. These fees increased to 3.4 billion in 204 from 3.3 billion in 203 and 3. billion in 202, primarily due to growth in assets under management reflecting higher market values. At December 3, 204, these assets totaled 2.5 trillion, an increase from 2.4 trillion and 2.2 trillion at December 3, 203 and 202, respectively. We earn investment banking fees from underwriting debt and equity securities, arranging loan syndications, and performing other related advisory services. Investment banking fees remained unchanged at.7 billion in 204 compared with 203 as higher advisory services results were offset by lower loan syndication and origination fees. Investment banking fees increased 460 million in 203 compared with 202, primarily due to increased loan syndication volume and equity originations. Card fees were 3.4 billion in 204, compared with 3.2 billion in 203 and 2.8 billion in 202. Card fees increased in 204 and 203 primarily due to account growth and increased purchase activity. Other fees of 4.3 billion in 204 were unchanged compared with 203 as a decline in charges and fees on loans was offset by an increase in commercial real estate brokerage commissions. Other fees in 203 declined 79 million compared with 202 due to a decline in charges and fees on loans. Charges and fees on loans decreased to.3 billion in 204 compared with.5 billion and.7 billion in 203 and 202, respectively, primarily due to the phase out of the direct deposit advance product during the first half of 204. Commercial real estate brokerage commissions increased to 469 million in 204 compared with 338 million in 203 and 307 million in 202, driven by increased sales and other property-related activities including financing and advisory services. Mortgage banking income, consisting of net servicing income and net gains on loan origination/sales activities, totaled 6.4 billion in 204, compared with 8.8 billion in 203 and.6 billion in 202. In addition to servicing fees, 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 of 3.3 billion for 204 included a.4 billion net MSR valuation gain (2. billion decrease in the fair value of the MSRs offset by a 3.5 billion hedge gain). Net servicing income of.9 billion for 203 included a 489 million net MSR valuation gain (3.4 billion increase in the fair value of the MSRs offset by a 2.9 billion hedge loss), and net servicing income of.4 billion for 202 included a 68 million net MSR valuation gain (2.9 billion decrease in the fair value of MSRs offset by a 3.6 billion hedge gain). The lower net MSR valuation gain in 203, compared with 204, was attributable to MSR valuation adjustments associated with higher prepayments and increases in servicing and foreclosure costs. Our portfolio of loans serviced for others was.86 trillion at December 3, 204,.90 trillion at December 3, 203, and.9 trillion at December 3, 202. At December 3, 204, the ratio of MSRs to related loans serviced for others was 0.75%, 4
14 Earnings Performance (continued) compared with 0.88% at December 3, 203 and 0.67% at December 3, 202. See the Risk Management Asset/Liability Management Mortgage Banking Interest Rate and Market Risk section in this Report for additional information regarding our MSRs risks and hedging approach. Net gains on mortgage loan origination/sale activities were 3.0 billion in 204, compared with 6.9 billion in 203 and 0.3 billion in 202. The decrease from 203 and 202 was primarily driven by lower origination volume and margins. Mortgage loan originations were 75 billion in 204, of which 68% were for home purchases, compared with 35 billion and 47%, respectively, for 203 and 524 billion and 35%, respectively, for 202. Mortgage applications were 262 billion in 204, compared with 438 billion in 203 and 736 billion in 202. The -4 family first mortgage unclosed pipeline was 26 billion at December 3, 204, compared with 25 billion at December 3, 203 and 8 billion at December 3, 202. For additional information about our mortgage banking activities and results, see the Risk Management Asset/Liability Management Mortgage Banking Interest Rate and Market Risk section and Note 9 (Mortgage Banking Activities) and Note 7 (Fair Values of Assets and Liabilities) to Financial Statements in this Report. Net gains on mortgage loan origination/sales activities include adjustments 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. For 204, we released a net 40 million from the repurchase liability, compared with a provision of 428 million for 203 and.9 billion for 202. 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.2 billion in 204,.6 billion in 203 and.7 billion in 202. The year-over-year decrease in 204 was driven by lower trading from customer accommodation activity within our capital markets business and lower deferred compensation gains (offset in employee benefits expense), and the decrease in 203 from 202 was largely driven by lower results in customer accommodation activity. Net gains from trading activities do not include interest and dividend income and expense on trading securities. Those amounts are reported within interest income from trading assets and other interest expense from trading liabilities. Interest and fees related to proprietary trading are reported in their corresponding income statement line items. Proprietary trading activities are not significant to our client-focused business model. For additional information about proprietary and other trading, see the Risk Management Asset/Liability Management Market Risk Trading Activities section in this Report. 42 Net gains on debt and equity securities totaled 3.0 billion for 204 and.4 billion for both 203 and 202, after otherthan-temporary impairment (OTTI) write-downs of 322 million, 344 million and 46 million, respectively, for the same periods. The increase in net gains on debt and equity securities reflected the benefit of strong public and private equity markets. All other income was 456 million for 204 compared with 3 million in 203 and. billion in 202. All other income includes ineffectiveness recognized on derivatives that qualify for hedge accounting, losses on low-income housing tax credit investments, foreign currency adjustments and income from investments accounted for under the equity method, any of which can cause decreases and net losses in other income. Higher other income for 204 compared with a year ago primarily reflected larger ineffectiveness gains on derivatives that qualify for hedge accounting, a gain on sale of governmentguaranteed student loans in fourth quarter 204, and a gain on sale of 40 insurance offices in second quarter 204. These were partially offset by lower income from equity method investments.
15 Noninterest Expense Table 8: Noninterest Expense Year ended December 3, Salaries ,375 5,52 4,689 Commission and incentive compensation 9,970 9,95 9,504 Employee benefits 4,597 5,033 4,6 Equipment,973,984 2,068 Net occupancy 2,925 2,895 2,857 Core deposit and other intangibles,370,504,674 FDIC and other deposit assessments ,356 Outside professional services 2,689 2,59 2,729 Operating losses, ,235 Outside data processing, Contract services ,0 Travel and entertainment Postage, stationery and supplies Advertising and promotion Foreclosed assets ,06 Telecommunications Insurance Operating leases ,984 2,25 2,45 49,037 48,842 50,398 All other Total Noninterest expense was 49.0 billion in 204, up slightly from 48.8 billion in 203, which was down 3% from 50.4 billion in 202. The increase in 204 was driven predominantly by higher operating losses (.2 billion, up from 82 million in 203) and higher outside professional services (2.7 billion, up from 2.5 billion in 203), partially offset by lower personnel expenses (29.9 billion, down from 30. billion in 203). The decrease in 203 from 202 was driven by lower operating losses, lower foreclosed assets expense and lower FDIC and other deposit assessments, as well as the completion of Wachovia merger integration activities in first quarter 202. Personnel expenses, which include salaries, commissions, incentive compensation and employee benefits, were down 94 million, or %, in 204 compared with 203, due to lower deferred compensation plan expense (offset in trading revenue) and other employee benefit costs, and reduced staffing and lower volume-related compensation in our mortgage business. These decreases were partially offset by higher revenue-based compensation, annual salary increases, and increased staffing for risk management and our non-mortgage businesses. For 203, these expenses were up 5% compared with 202, due to annual salary increases and related salary taxes, higher revenuebased compensation, and higher employee benefit costs. Outside professional services were up 7% in 204 compared with 203 due to continued investments by our businesses in their service delivery systems and in our risk management infrastructure to meet increased regulatory and compliance requirements as well as evolving cybersecurity risk. Operating losses were up 428 million, or 52%, in 204 compared with 203, predominantly due to higher litigation accruals. All other expenses of 2.0 billion in 204 were down slightly from 2. billion in 203, which were down from 2.4 billion in 202. The decrease in 203 compared with 202 was primarily due to a 250 million charitable contribution to Wells Fargo Foundation in 202. Our full year 204 efficiency ratio improved slightly to 58.% compared with 58.3% in 203. The Company expects to operate within its targeted efficiency ratio range of 55% - 59% for full year 205. Income Tax Expense The 204 annual effective tax rate was 30.9% compared with 32.2% in 203 and 32.5% in 202. The effective tax rate for 204 included a net reduction in the reserve for uncertain tax positions primarily due to the resolution of prior period matters with state taxing authorities. The effective tax rate for 203 included a net reduction in the reserve for uncertain tax positions primarily due to settlements with authorities regarding certain cross border transactions and tax benefits recognized from the realization for tax purposes of a previously written down investment. The 202 effective tax rate included a tax benefit resulting from the surrender of previously written-down Wachovia life insurance investments. See Note 2 (Income Taxes) to Financial Statements in this Report for information regarding tax matters related to undistributed foreign earnings. 43
16 Earnings Performance (continued) Operating Segments performance, each of our operating segments monitors cross-sell metrics to measure the extent they are satisfying our customers financial needs. The following discussion presents our methodology for measuring cross-sell for each of our operating segments, and along with Tables 9, 9a, 9b and 9c, presents our results by operating segment. For additional financial information and the underlying management accounting process, see Note 24 (Operating Segments) to Financial Statements in this Report. We are organized for management reporting purposes into three operating segments: Community Banking; Wholesale Banking; and Wealth, Brokerage and Retirement (WBR). 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 addition to measuring financial Table 9: Operating Segment Results Highlights Year ended December 3, (in millions, except average balances which are in billions) Community Banking Wholesale Banking Wealth, Brokerage and Retirement 50,862 23,482 4,28 Other Consolidated Company 204 Revenue Provision (reversal of provision) for credit losses,68 Net income (loss) Average loans Average core deposits (266) 4,80 7, ,339 (4,25) (50) 30 84,347,395 2,083 (790) 23, (34.3) (67.6), ,064 3,203 (3,826) 83, Revenue 2,755 Provision (reversal of provision) for credit losses Net income (loss) Average loans Average core deposits (445) 2,732 8, (6) 5 2,309,72 (699) 2, (30.4) (65.3) ,405 24,092 2,60 (3,57) 86,086 6, (29) 7,27 0,492 7,774,328 (697) 8, (28.4) (6.8) Revenue Provision (reversal of provision) for credit losses Net income (loss) Average loans Average core deposits Includes items not assigned to a specific business segment and elimination of certain items that are included in more than one business segment, substantially all of which represents products and services for wealth management customers provided in Community Banking stores. Cross-sell Our cross-sell strategy is to increase the number of products our customers use by offering them all of the financial products that satisfy their financial needs. We track our crosssell activities based on whether the customer is a retail banking household or has a wholesale banking relationship. A retail banking household is a household that uses at least one of the following retail products - a demand deposit account, savings account, savings certificate, individual retirement account (IRA) certificate of deposit, IRA savings account, personal line of credit, personal loan, home equity line of credit or home equity loan. A household is determined based on aggregating all accounts with the same address. For our wholesale banking relationships, we aggregate all related entities under common ownership or control. We report cross-sell metrics for our Community Banking and WBR operating segments based on the average number of retail products used per retail banking household. For Community Banking the cross-sell metric represents the relationship of all retail products used by customers in retail banking households. For WBR the cross-sell metric represents the relationship of all retail products used by customers in retail banking households who are also WBR customers. Products included in our retail banking household cross-sell metrics must be retail products and have the potential for 44 revenue generation and long-term viability. Products and services that generally do not meet these criteria - such as ATM cards, online banking and direct deposit - are not included. In addition, multiple holdings by a brokerage customer within an investment category, such as common stock, mutual funds or bonds, are counted as a single product. We may periodically update the products included in our cross-sell metrics to account for changes in our product offerings. For our Wholesale Banking operating segment cross-sell represents the average number of Wholesale Banking (nonretail) products used per Wholesale Banking customer relationship. What we include as products in the cross-sell metric comes from a defined set of revenue generating products within the following product families: credit, treasury management, deposits, risk management, foreign exchange, capital markets and advisory, investments, insurance, trade financing, and trust and servicing. The number of customer relationships is based on tax identification numbers adjusted to combine those entities under common ownership or another structure indicative of a single relationship and includes only relationships that produced revenue for the period of measurement.
17 Operating Segment Results The following discussion provides a description of each of our operating segments, including cross-sell metrics and financial results. COMMUNITY BANKING offers a complete line of diversified financial products and services for consumers and small businesses including checking and savings accounts, credit and debit cards, and auto, student, and small business lending. These products also 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. The Community Banking segment also includes the results of our Corporate Treasury activities net of allocations in support of the other operating segments and results of investments in our affiliated venture capital partnerships. Our retail banking household cross-sell was 6.7 products per household in November 204, up from 6.6 in November 203 and 6.05 in November 202. The November 204 cross-sell ratio included the acquisition of an existing private label and co-branded credit card loan portfolio in connection with a new program agreement with Dillard's, Inc. (Dillard's), a major retail department store. 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 household, which is approximately one-half of our estimate of potential demand for an average U.S. household. In November 204, one of every four of our retail banking households had eight or more of our products. Table 9a provides additional financial information for Community Banking. Table 9a - Community Banking Year ended December 3, (in millions, except average balances which are in billions) Net interest income ,709 28,839 29,045 3,386 3,463 3,298 Noninterest income: Service charges on deposit accounts Trust and investment fees:,796,603,40 Trust and investment management Investment banking (80) (77) Brokerage advisory, commissions and other fees (4) 2,533 2,28 2,059 Card fees 3,67 2,958 2,638 Other fees 2,296 2,342 2,294 Mortgage banking 6,0 8,335,235 Insurance Net gains from trading activities Net gains (losses) on debt securities 253 (77) Total trust and investment fees 33 (20) Net gains from equity investments,73, Other income of the segment,55 79,80 2,53 2,500 24,360 50,862 50,339 53,405,68 2,755 6,835 Total noninterest income Total revenue Provision for credit losses Noninterest expense: 7,077 7,693 7,95 Equipment,740,733,759 Net occupancy 2,8 2,33 2,093 Core deposit and other intangibles FDIC and other deposit assessments Outside professional services,24,7,3 Operating losses, ,029 Other expense of the segment 3,726 4,03 4,765 28,26 28,723 30,840 2,055 8,86 5,730 6,350 5,799 4, Personnel expense Total noninterest expense Income before income tax expense and noncontrolling interests Income tax expense Net income from noncontrolling interests (3) Net income 4,80 2,732 0,492 Average loans Average core deposits (3) Represents syndication and underwriting fees paid to Wells Fargo Securities which are offset in our Wholesale Banking segment. Predominantly represents gains resulting from venture capital investments. Reflects results attributable to noncontrolling interests primarily associated with the Company s consolidated merchant services joint venture and venture capital investments. 45
18 Earnings Performance (continued) Community Banking reported net income of 4.2 billion in 204, up.4 billion, or %, from 2.7 billion in 203, which was up 2% from 0.5 billion in 202. Revenue was 50.9 billion in 204, an increase of 523 million, or %, compared with 50.3 billion in 203, which was down 6% compared with 53.4 billion in 202. The increase in revenue for 204 was primarily driven by higher net interest income, gains on sale of equity investments and debt securities, higher trust and investment fees, and higher card fees, partially offset by lower mortgage banking revenue, the phase out of the direct deposit advance product during the first half of 204, and lower deferred compensation plan investment gains (offset in employee benefits expense). Higher other income for 204 compared with a year ago reflected larger ineffectiveness gains on derivatives that qualify for hedge accounting and a gain on sale of government guaranteed student loans in fourth quarter 204. The decrease in 203 was a result of lower mortgage banking revenue, partially offset by higher trust and investment fees, and revenue from debit, credit and merchant card volumes. Lower other segment income for 203 compared with 202 was due to larger ineffectiveness losses on derivatives that qualify for hedge accounting and interest-related valuation changes on certain mortgage-related assets carried at fair value. Average core deposits increased 22.2 billion in 204, or 4%, from 203, which increased 28.9 billion, or 5%, from 202. Noninterest expense decreased 597 million in 204, or 2%, from 203, which declined 2. billion, or 7%, from 202. The decrease in 46 noninterest expense for 204 largely reflected lower mortgage volume-related expenses and deferred compensation expense (offset in revenue), partially offset by higher operating losses. The decrease in noninterest expense for 203 reflected lower FDIC and other deposit insurance assessments primarily due to lower FDIC assessment rates. The provision for credit losses of.7 billion in 204 was 39% lower than 203, which was 2.8 billion, or 60%, lower than 202, due to improved performance of the consumer real estate portfolio in both 204 and 203. 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 cross-sell was 7.2 products per relationship in September 204, up from 7. in September 203 and 6.8 in September 202. Table 9b provides additional financial information for Wholesale Banking.
19 Table 9b - Wholesale Banking Year ended December 3, (in millions, except average balances which are in billions) Net interest income ,955 2,298 2,648,663,559,383 Noninterest income: Service charges on deposit accounts Trust and investment fees: Brokerage advisory, commissions and other fees Trust and investment management,824,789,672 Investment banking,803,839,34 3,960 3,898 3, ,048,993 2,29 Total trust and investment fees Card fees Other fees Mortgage banking ,352,559,585 Net gains from trading activities 872,2,426 Net gains (losses) on debt securities Net gains from equity investments Insurance Other income of the segment Total noninterest income Total revenue Provision (reversal of provision) for credit losses (3) ,527,766,444 23,482 24,064 24,092 (266) (445) 286 Noninterest expense: 7,093 6,763 6,35 Equipment Net occupancy Core deposit and other intangibles FDIC and other deposit assessments ,07, ,389 3,27 3,26 2,975 2,378 2,082 0,773 2,3,724 3,65 3,984 3, Personnel expense Outside professional services Operating losses Other expense of the segment Total noninterest expense Income before income tax expense and noncontrolling interest Income tax expense Net income from noncontrolling interest Net income 7,584 8,33 7,774 Average loans Average core deposits Wholesale Banking reported net income of 7.6 billion in 204, down 549 million, or 7%, from 8. billion in 203, which was up 5% from 7.8 billion in 202. The year over year decrease in net income during 204 was the result of lower revenues, increased noninterest expense and higher provision for credit losses. The year over year increase in net income during 203 was the result of improvement in provision for credit losses and stable revenue performance partially offset by increased noninterest expense. Revenue in 204 of 23.5 billion decreased 582 million, or 2%, from 24. billion in 203, as growth in asset backed finance, asset management, commercial real estate brokerage, corporate banking, equipment finance, international, principal investing and treasury management was more than offset by lower PCI resolution income as well as lower crop insurance fee income. Revenue in 203 of 24. billion was flat from 202, as business growth from asset backed finance, asset management, capital markets and commercial real estate was offset by lower PCI resolution income. Net interest income of 2.0 billion in 204 decreased 343 million, or 3%, from 203, which was down 3% from 202. The decrease in 204 and 203 was due to lower PCI resolutions and net interest margin compression due to declining loan yields and fees that was partially offset by increased interest income primarily from strong loan growth. Average loans of 33.4 billion in 204 increased 25.7 billion, or 9%, from billion in 203, which was up 5% from billion in 202. The loan growth in 204 and 203 was broad based across many Wholesale Banking businesses. Average core deposits of billion in 204 increased 36.8 billion, or 6%, from 203 which was up 4%, from 202, reflecting continued strong customer liquidity for both years. Noninterest income of.5 billion in 204 decreased 239 million, or 2%, from 203 as business growth in asset backed finance, asset management, commercial real estate brokerage, corporate banking, equipment finance, international, principal investing and treasury management was more than offset by lower customer accommodation related gains on 47
20 Earnings Performance (continued) trading assets, lower insurance income related to a decline in crop insurance fee income and the 204 divestiture of 40 insurance offices, and lower other income. The reduction in other income was caused by the financial results of low-income housing tax credits and other nonmarketable investments which are accounted for under the equity accounting method, partially offset by a gain on the divestiture of the 40 insurance offices. Noninterest income of.8 billion in 203 increased 322 million, or 3%, from 202 due to strong growth in asset backed finance, asset management, capital markets, commercial banking, commercial real estate and corporate banking. Noninterest expense in 204 increased 597 million, or 5%, compared with 203, which was up 2%, or 296 million, from 202. The increase in both 204 and 203 was due to higher personnel expenses and higher non-personnel expenses related to growth initiatives and compliance and regulatory requirements. The provision for credit losses increased 79 million from 203 due primarily to strong commercial loan growth in 204. The provision for credit losses in 203 decreased 73 million from 202, due to lower loan losses. WEALTH, BROKERAGE AND RETIREMENT provides a full range of financial advisory services to clients using a planning approach to meet each client's financial 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 fiduciary services. Abbot Downing, a Wells Fargo business, provides comprehensive wealth management services to ultra-high net worth families and individuals as well as endowments and foundations. Brokerage serves customers' advisory, brokerage and financial needs as part of one of the largest full-service brokerage firms in the United States. Retirement is a national leader in providing institutional retirement and trust services (including 40(k) and pension plan record keeping) for businesses and reinsurance services for the life insurance industry. Wealth, Brokerage and Retirement cross-sell was 0.49 products per retail banking household in November 204, up from 0.42 in November 203 and 0.27 in November 202. Table 9c provides additional financial information for Wealth, Brokerage and Retirement. Table 9c - Wealth, Brokerage and Retirement Year ended December 3, (in millions, except average balances which are in billions) ,79 2,888 2, Brokerage advisory, commissions and other fees 8,855 8,33 7,299 Trust and investment management,595,532,435 Net interest income Noninterest income: Service charges on deposit accounts Trust and investment fees: (3) Investment banking Total trust and investment fees 0,437 Card fees Other fees (6) 9,649 (4) 8, (24) (38) Insurance Net gains from trading activities Mortgage banking Net gains on debt securities Net gains from equity investments Other income of the segment Total noninterest income Total revenue ,039 0,35 9,392 4,28 3,203 2,60 (50) Provision (reversal of provision) for credit losses (6) 25 Noninterest expense: 7,320 7, Net occupancy Core deposit and other intangibles FDIC and other deposit assessments Outside professional services ,063,880,825 Personnel expense Equipment Operating losses Other expense of the segment 6,544 0,907 0,455 9,893 Income before income tax expense and noncontrolling interest 3,36 2,764 2,42 Income tax expense,276, ,083,72,328 Total noninterest expense Net income from noncontrolling interest Net income Average loans Average core deposits Represents syndication and underwriting fees paid to Wells Fargo Securities which are offset in our Wholesale Banking segment.