Michael P. Santomassimo
Senior Executive Vice President, Chief Financial Officer at Wells Fargo & Company
Thank you, Charlie, and good morning, everyone. We had solid eesults in the fourth quarter including net income of $5.1 billion, or $1.43 for diluted common share. Underlying business performance was strong compared to a year ago. We grew fee income across most categories, maintained our expense and credit discipline, and grew customer accounts activity levels as we benefited from the investments that Charlie highlighted. We also grew net interest income from the third quarter.
Our fourth quarter results included $863 million, or $0.26 per share of discrete tax benefits related to resolution of prior-period matters. This benefit was largely offset by $647 million, or $0.15 per share of severance expense, and $448 million, or $0.10 per share of net losses on the sale of debt securities as we took the opportunity to further reposition a portion of the investment portfolio. This included the sale of approximately $80 billion of securities which we reinvested into higher yielding securities. The estimated payback period for this repositioning is approximately 2.5 years.
Turning to Slide 4. Net interest income grew $146 million, or 1% from the third quarter, the first linked-quarter increase since the fourth quarter of 2022. The increase was driven by higher customer deposit balances, which enabled us to continue to reduce higher cost market funding.
Moving to Slide 5. Average loans were down from both the third quarter and a year ago. Period-end balances grew $3 billion from the third quarter with growth in commercial and industrial loans and credit card loans more than offsetting declines in most other categories. Average deposits increased both from the third quarter and a year ago with growth in our customer deposits enabling us to reduce higher cost corporate treasury deposits. Average deposit cost declined 18 basis points from the third quarter as deposit costs stabilized or declined across all of our deposit gathering businesses. In response to the Federal Reserve rate cuts, we have reduced standard pricing for commercial clients as well as pricing for promotional deposit offers and CDs in our consumer businesses.
Lower deposit costs also reflected the slowdown of customer migration to higher yielding deposits. Additionally, lower cost consumer deposit balances and checking and savings accounts have continued to stabilize.
Turning to Slide 6. We had strong growth in non-interest income, up 11% from a year ago, benefiting from the investments we've been making in our businesses as well as market conditions. This growth was diversified with each of our operating segments generating growth from a year ago. I'll highlight the specific drivers of non-interest income when discussing our operating segment results.
Turning to expenses on Slide 7. Non-interest expense declined 12% from a year ago, driven by the lower FDIC special assessment. Excluding this assessment, expenses were relatively stable as lower severance expenses and the impact of our efficiency initiatives was largely offset by higher revenue-related compensation, predominantly in wealth and investment management as well as higher technology and equipment expense.
Turning to credit quality on Slide 8. Credit performance has been relatively stable with our net loan charge-off ratio the same as a year ago and up 4 basis points from the third quarter. Commercial net loan charge-offs increased $80 million from the third quarter to 30 basis points of average loans, driven by the commercial real estate office portfolio. Commercial real estate office fundamentals have not changed and remain weak. We still expect commercial real estate office losses to be lumpy as we continue to actively work with our clients.
Consumer net loan charge-offs increased $20 million from the third quarter to 85 basis points of average loans driven by higher losses in the credit card portfolio which was consistent with our expectations. Non-performing assets declined 5% from the third quarter driven by a $390 million decline in commercial real estate office nonaccrual loans, which includes pay-downs and net loan charge-offs.
Moving to Slide 9. Our allowance for credit losses for loans was down $103 million from the third quarter with modest declines across most asset classes, partially offset by an increase in allowance for credit card loans driven by higher loan balances. Our allowance coverage for total loans has been relatively stable over the past five quarters as credit trends have remained fairly consistent. Our allowance coverage for our corporate and investment banking commercial real estate office portfolio increased 12% as loan balances continued to decline and allowance levels were relatively stable.
Turning to capital and liquidity on Slide 10. Our capital position remains strong and our CET1 ratio of 11.1% continues to be well above our CET1 regulatory minimum plus buffers of 9.8%. We repurchased $4 billion of common stock in the fourth quarter and approximately $20 billion for the year, reducing common shares outstanding by 9% from a year ago.
Turning to our operating segments, starting with consumer banking and lending on Slide 11. Consumer, small, and business banking revenue declined 7% from a year ago, driven by lower net interest income reflecting the impact of customers migrating to higher yielding deposit products. However, the pace of the migration continues to slow. Loan lending revenue grew 2% from a year ago driven by higher mortgage banking fees. Credit card revenue grew 3% from a year ago as loan balances increased and card fees grew from a higher point-of-sale volume. We continue to be pleased with the performance of the new products that we launched over the last 3.5 years with credit performing as expected and strong growth in new accounts and usage.
Auto revenue decreased 21% from a year ago, driven by lower loan balances reflecting previous credit tightening actions and continued loan spread compression. The decline in personal lending revenue from a year ago was also driven by lower loan balances and loan spread compression.
Turning to some key business drivers on Slide 12. Retail mortgage originations increased 31% from a year ago with higher purchase volume as well as stronger refinance volume early in the quarter, when interest rates were lower. Debit card spending was strong in the fourth quarter and increased $4.9 billion, or 4% from a year ago, and credit card spending was up 9% from a year ago with growth in all categories except fuel.
Turning to commercial banking results on Slide 13. Middle market banking revenue was down 2% from a year ago, driven by lower net interest income reflecting higher deposit costs, partially offset by growth in treasury management fees. Asset-based lending and leasing revenue decreased 12% from a year ago driven by lower net interest income and lease income, partially offset by improved results from our equity investments. Average loan balances in the fourth quarter were down 1% compared with a year ago as growth in middle market banking was more than offset by lower balances in asset-based lending. While our commercial clients are generally more optimistic, we did not see a meaningful change in loan demand in the fourth quarter as many clients remained cautious.
Turning to corporate and investment banking on Slide 14. Banking revenue was down 4% from a year ago, driven by higher deposit costs and lower loan balances. This decline was partially offset by higher investment banking revenue from increased activity in equity and debt capital markets, as well as higher advisory fees. Commercial real estate revenue decreased 1% from a year ago, reflecting the impact of lower loan balances, partially offset by higher capital markets revenue from higher volumes in commercial mortgage-backed securities, real estate loan syndications, and multi-family capital as market sentiment improved.
Markets revenue was down 5% from a year ago, driven by lower revenues and equities and municipals, partially offset by stronger performance than most other products fixed-income products. Our fourth quarter results reflected the implementation of a change to incorporate funding valuation adjustments for our derivatives, which resulted in a loss of $85 million. The decline from the third quarter was also driven by seasonally lower trading activity across most asset classes.
Average loans declined 6% from a year ago, driven by continued reductions in our commercial real estate portfolio, driven by office as well as lower loan balances and banking as clients continue to access the capital markets for funding.
On Slide 15, wealth and investment management revenue increased 8% compared with a year ago due to higher asset-based fees, driven by increased market valuations. As a reminder, the majority of WIM Advisory assets are priced at the beginning of the quarter, so first quarter results will reflect market valuations as of January 1, which were up from both a year ago and from October 1. Average deposits increased by 16% and average loans grew by 2% from a year ago, which have both benefited from product enhancements and pricing improvements that provide value to our clients. The growth in deposits also reflected the slowdown in migration to cash alternatives with balances in those products lower than a year ago.
Slide 16 highlights our corporate results. Revenue increased from a year ago, driven by improved results from our venture capital investments. After having impairments on these investments for the past two years, we had net gains every quarter in 2024 with improved performance in the second of the year.
Now turning to our outlook on Slide 17. I'll go into more detail on our 2025 expectations for net interest income and non-interest expense in the next few slides, but first I want to highlight the progress we've made in improving our returns. When we first started discussing the outlook for our returns in the fourth quarter of 2020, we had an 8% ROTCE. Over the past four years, we have been successfully executing on our efficiency initiatives, diversifying our sources of revenue by investing in our businesses to better serve our customers and drive growth, and returning excess capital to shareholders. These actions helped to improve our ROTCE to 13.4% in 2024. We still believe we have an achievable path to a sustainable ROTCE of 15% as we continue to make progress on transforming the company, including the priorities highlighted earlier on the call.
On Slide 18, we provide our expectations for net interest income for 2025. We had $47.7 billion of net interest income in 2024, which was within the expected range we provided at the start of last year. Net interest income declined sequentially for the first three quarters of the year before growing modestly in the fourth quarter. Our fourth quarter annualized net interest income is $47 billion, or approximately $700 million lower than full year 2024. Our current expectation is that full year 2025 net interest income will be approximately 1% to 3% higher than full year 2024, or approximately 3% to 5% higher than the annualized fourth quarter 2024 net interest income. We expect net interest income will be relatively stable in the first half of 2025, which includes the impact from two fewer days in the first quarter with more growth in the second half of the year.
Underpinning our expectations are a series of key assumptions including using the recent forward rate curve which includes between one and two Federal Reserve rate cuts. Given our modestly asset-sensitive position, this would be a slight headwind to net interest income. Average loans are expected to grow modestly from fourth quarter 2024 to fourth quarter 2025 driven by anticipated growth in the corporate investment banking markets group and CIB banking, as well as anticipated growth in our auto and credit card portfolios.
Deposits in all our deposit gathering businesses are expected to grow modestly, which would allow us to further reduce higher cost market funding. Reinvestment of lower yielding securities into higher yielding assets. Our expectation also reflects the benefit from the actions we took in the second half 2024 to reposition the investment portfolio. And trading related-net interest income is expected to be higher due to lower interest rates, which would largely be offset by lower trading-related non-interest income.
As we've done in prior years, for the purposes of estimating net interest income, we are also assuming the asset cap will remain in place throughout the year. Ultimately, the amount of net interest income we earn in 2025 will depend on a variety of factors, many of which are uncertain, including the absolute level of interest rates, the shape of the curve, deposit balances, mix and pricing, and loan demand.
Now turning to our 2025 expense expectations on Slide 19. Following the waterfall on the slide from left to right, we reported $54.6 billion of non-interest expense in 2024, which included $647 million of severance expense in the fourth quarter that was not contemplated in our guidance. Our 2025 expense expectation includes operating losses of approximately $1.1 billion, which is approximately $700 million lower than operating losses in 2024. Looking at the next bar, we expect severance expense to be approximately $500 million lower in 2025 given the expense report we took in the fourth quarter of 2024. We expect wealth and investment management revenue-related expenses to increase by approximately $600 million in 2025. As a reminder, this is a good thing as these higher expenses are more than offset by higher non-interest income. Actual revenue-related expenses will be a function of market levels with the biggest driver being the equity markets. Our outlook assumes the S&P 500 will be up modestly from current levels, but clearly, the ultimate performance of the markets is uncertain.
We expect all other expenses to be up approximately $200 million, with the impact of efficiency initiatives more than offset by higher investment and other expenses. We expect approximately $2.4 billion of gross expense reductions in 2025 due to efficiency initiatives. We've successfully delivered on more than $12 billion of gross expense saves since we started focusing on efficiency initiatives four years ago. And we continue to believe we have opportunities to get more efficient across the company. Keep in mind, however, the resources needed to address our risk and control work are separate from our efficiency initiatives.
There are three primary areas we are expected to invest. First, we expect approximately $900 million of incremental technology expense, including investments in infrastructure and business capabilities. Second, we expect approximately $900 million of incremental other investments, including the specific areas we highlight on the next slide. Finally, we expect other expenses to increase by approximately $800 million, including expected merit increases in performance-based discretionary compensation. As a reminder, the first quarter has seasonally higher personal expenses, which are expected to be $650 million to $700 million. Putting this all together, we expect 2025 non-interest expense to be approximately $54.2 billion.
On Slide 20, we provide some examples of our areas of focus for the investments which are critical to better serving our customers and generating growth. Let me highlight a few. Building the right risk and control infrastructure remains our top priority and we will continue to invest in this important work. We continue to invest in technology and digital platforms to transform how we serve both our consumer and commercial customers. This includes continuing the transition of our applications to the cloud, migrating into new data centers, and investing in data platforms to drive more insights. We are continuing to upgrade our core lending capabilities including improvements to our fulfillment and servicing systems, enhancing credit decisioning and strengthening fraud capabilities. To drive customer growth in the consumer businesses, we plan to continue scaling our marketing efforts, modernizing our branch footprint, and increasing the number of premier bankers and financial advisors.
We are also focused on onboarding more independent advisors as we continue building out our independent brokerage channel. In addition, we continue to improve our digital capabilities for our customers, specifically our mobile account opening and onboarding, as well as Zelle. We plan to continue hiring in priority sectors to help drive growth in investment banking and capital markets. We also plan to continue hiring relationship bankers within commercial banking to build out coverage in under-penetrated markets and key industries.
In summary, our results in 2024 demonstrated the continued progress we've been making to improve our financial performance. We generated strong fee-based revenue growth, reduced our expenses, maintained strong credit discipline, increased capital returns to shareholders, and returned -- retained our strong capital position. I'm very pleased with the progress we've made so far. I'm excited about the additional opportunities we have to continue to drive improved performance.
We will now take your questions.
