Michael P. Santomassimo
Senior Executive Vice President and Chief Financial Officer at Wells Fargo & Company
Thank you, Charlie, and good morning, everyone. Net income for the second quarter was $4.9 billion, or $1.33 per diluted common share. EPS grew from both the first quarter and a year ago, reflecting the solid performance in our fee-based businesses as we benefited from the market environment and the investments we've been making. We also continue to focus on driving efficiency across the company.
I will also note that our second quarter effective income tax rate reflected the impact of the first quarter adoption of the new accounting standard for renewable energy tax credit investments, which increased our effective tax rate by approximately 3 percentage points versus a year ago. This increase in the effective tax rate had a minimal impact on net income since it had an offsetting increase to non-interest income.
Turning to Slide 4. As expected, non-interest income was down -- net interest income was down $1.2 billion or 9% from a year ago. This decline was driven by higher funding costs, including the impact of lower deposit balances and customers migrating to higher-yielding deposit products in our consumer businesses and higher deposit costs in our commercial businesses, as well as lower loan balances. This was partially offset by higher yields on earning assets.
Net interest income declined $304 million, or 2% from the first quarter. Given the higher rate environment and weak commercial loan demand, loan balances continues to decline as expected. We saw positive trends, including average deposit balances growing from the first quarter with growth in all of our customer-facing businesses, including within our consumer business.
Customer migration to higher-yielding alternatives was also lower in the quarter. This slowed the pace of growth in deposit pricing with our average deposit cost up 10 basis points in the second quarter after increasing 16 basis points in the first quarter. If the Fed were to start cutting rates later this year, we expect that deposit pricing will begin to decline with the most immediate impact from new promotional rates in our consumer business and standard pricing for commercial deposits where pricing moved faster as rates increased, and we would expect betas to also be higher as rates decline.
On Slide 5, we highlight loans and deposits. Average loans were down from both the first quarter and a year ago. Credit card loans continue to grow while most other categories declined. I'll highlight specific drivers when discussing our operating segment results. Average deposits were relatively stable from a year ago as growth in our commercial businesses and corporate funding offset declines in our consumer businesses, driven by customers migrating to higher-yielding alternatives and continued consumer spending. Average deposits grew $4.9 billion in the first quarter.
Commercial deposits have grown for three consecutive quarters as we've successfully attracted clients' operational deposits. After declining for nearly two years, consumer deposit balances grew modestly from the first quarter. We've seen outflows slow as many rate-seeking customers in wealth and investment management have already moved into cash alternative products, and we've successfully used promotion and retention-oriented strategies to retain and acquire new balances in consumer small and business banking.
These improved deposit trends allowed us to reduce higher cost market funding. The migration from non-interest-bearing to interest-bearing deposits was similar to last quarter with our percentage of non-interest-bearing deposits declining 26% in the first quarter to 25%.
Turning to non-interest income on Slide 6. Non-interest income increased 19% from a year ago with growth across most categories reflecting both the benefit of the investments we've been making in our businesses as well as the market conditions, as Charlie highlighted. This growth more than offset the expected decline in net interest income with revenue increasing from a year ago, the sixth consecutive quarter of year-over-year revenue growth. I will highlight the specific drivers of this growth when discussing our operating segment goals.
Turning to expenses on Slide 7. Second quarter non-interest expense increased 2% from a year ago, driven by higher operating losses, an increase in revenue-related compensation, and higher technology and equipment expense. These increases were partially offset by the impact of efficiency initiatives, including lower salaries expense and professional and outside services expense. Operating losses increased from a year ago and included higher customer remediation accruals for a small number of historical matters that we're working hard to get behind us. The 7% decline in non-interest expense in the first quarter was primarily driven by seasonally higher personnel expense in the first quarter.
Turning to credit quality on Slide 8. Net loan charge-offs increased 7 basis points from the first quarter to 57 basis points of average loans. The increase was driven by higher commercial net loan charge-offs, which were up $127 million in the first quarter to 35 basis points of average loans, primarily reflecting higher losses in our commercial real estate office portfolio. While losses in the commercial real estate office portfolio increased in the second quarter after declining last quarter, they were in line with our expectations.
As we have previously stated, commercial real estate office losses have been and will continue to be lumpy as we continue to work with clients. We continue to actively work to derisk our office exposure, including a rigorous monitoring process. These efforts help to reduce our office commitment by 13% and loan balances by 9% from a year ago.
Consumer net loan charge-offs increased $25 million from the first quarter to 88 basis points of average loans. Auto losses continued to decline, benefiting from the credit tightening actions we implemented starting in late 2021. The increase in credit card losses was in line with our expectations as older vintages are no longer benefiting from pandemic stimulus as more recent vintages -- and as more recent vintages mature. Importantly, the credit performance of our newer vintages has been consistent with our expectations, and we currently expect the credit card charge-off rate to decline in the third quarter. Non-performing assets increased 5% from the first quarter, driven by the higher commercial real estate office non-accruals.
Moving to Slide 9. Our allowance for credit losses was down modestly from the first quarter, driven by declines across most asset classes, partially offset by a higher allowance for credit card loans, driven by higher balances. Our allowance coverage for total loans has been relatively stable over the past four quarters as credit trends remain generally consistent. Our allowance coverage for our commercial real estate office portfolio has also been relatively stable at approximately 11% for the past several quarters.
Turning to capital and liquidity on Slide 10. Our capital position remained strong and our CET1 ratio of 11% continue to be well above our current 8.9% regulatory minimum plus buffers. We're also above our expected new CET1 regulatory minimum plus buffers of 9.8% starting in the fourth quarter of this year as our stressed capital buffer is expected to increase from 2.9% to 3.8%. We repurchased $6.1 billion of common stock in the second quarter, and while the pace will slow, we have the capacity to continue to repurchase common stock, as Charlie highlighted. Also, we expect to increase our common stock dividend in the third quarter by 14% [Phonetic], subject to Board approval.
Turning to our operating segments, starting with Consumer Banking and Lending on Slide 11. Consumer, small and business banking revenue declined 5% from a year ago, driven by lower deposit balances and the impact of customers migrating to higher yielding deposit products. Home lending revenue was down 3% from a year ago due to lower net interest income as loan balances continued to decline.
Credit card revenue was stable from a year ago as higher loan balances driven by higher point-of-sale volume and new account growth was offset by lower other fee revenue. Auto revenue declined 25% from last year, driven by lower loan balances and continued loan spread compression. Personal lending revenue was down 4% from a year ago, driven by lower loan balances and loan spread compression.
Turning to some key business drivers on Slide 12. Retail mortgage originations declined 31% from a year ago, reflecting our focus on simplifying the home lending business, as well as the decline in mortgage market. Since we announced our new strategy at the start of 2023, we have reduced headcount in home lending by approximately 45%. Balances in our auto portfolio declined 14% compared with a year ago, driven by lower origination volumes, which were down 23% from a year ago, reflecting previous credit tightening actions. Both debit and credit card spend increased from a year ago.
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 due to higher deposit costs, partially offset by growth in treasury management fees. Asset-based lending and leasing revenue decreased 17% year-over-year, including lower net interest income, lower lease income, and revenue from equity investments. Average loan balances were down 1% compared with a year ago. Loan demand has remained tepid, reflecting the higher for longer rate environment in a market where competition has been more aggressive on pricing and loan structure.
Turning to Corporate and Investment Banking on Slide 14. Banking revenue increased 3% from a year ago, driven by higher investment banking revenue due to increased activity across all products, partially offset by lower treasury management results, driven by the impact of higher interest rates on deposit accounts. Commercial real estate revenue was down 4% from a year ago, reflecting the impact of lower loan balances.
Markets revenue grew 16% from a year ago, driven by strong performance in equities, structured products and credit products. Average loans declined 5% from a year ago as growth in markets was more than offset by reductions in commercial real estate, where originations remain muted, and we've strategically reduced balances in our office portfolio as well as declines in banking where clients continue to access capital goods funding.
On Slide 15, Wealth and Investment Management revenue increased 6% compared with a year ago. Higher asset-based fees driven by an increase in market valuations were partially offset by lower net interest income, reflecting lower deposit balances and higher deposit costs as customers reallocated cash into higher-yielding alternatives. As a reminder, the majority of WIM advisory assets are priced at the beginning in the quarter, so third quarter results will reflect market valuations as of July 1, which were up from both a year ago and from April 1.
Slide 16 highlights our corporate results. Revenue grew from a year ago due to improved results from our venture capital investments.
Turning to our 2024 outlook for net interest income and non-interest expense on Slide 17. At the beginning of the year, we expected 2024 net interest income to be approximately 7% to 9% lower than full-year 2023. During the first half of this year, the drivers of net interest income largely played out as expected with net interest income down 9% from the same period a year ago. Compared with where we began the year, our current outlook reflects the benefit of fewer rate cuts as well as higher deposit balances in our businesses than what we had assumed in our original expectations, which has helped us reduce market funding.
Deposit costs increased during the first half of this year as expected, but the pace of the increase has slowed. However, late in the second quarter, we increased pricing in Wealth and Investment Management on sweep deposits and advisory brokerage accounts. This change was not anticipated in our original guidance, federal lines rates paid in money market funds and is expected to reduce net interest income by approximately $350 million this year.
Our current outlook also reflects lower loan balances. At the beginning of the year, we assumed a slight decline in average loans for the full year, which reflected modest growth in commercial and credit card loans in the second half of the year after a slow start to the year. As we highlighted on our first quarter earnings call, loan balances were weaker than expected, and that trend continued into the second quarter. We expect this underperformance to continue into the second half of the year with loan balances declining slightly from second quarter levels.
As a result of these factors, we currently expect our full-year 2024 net interest income to be in the upper half of the range we provided in January, or down approximately 89% from full-year 2023. We continue to expect net interest income will trough towards the end of the year. We are only halfway through the year and many of the factors driving net interest income are uncertain, and we will continue to see how each of these assumptions plays out during the remainder of the year.
Turning to expenses. At the beginning of this year, we expected our full-year 2024 non-interest expense to be approximately $52.6 billion. We currently expect our full-year 2024 non-interest expense to be approximately $54 billion. There are three primary drivers for this increase. First, the equity markets have outperformed our expectations, driving higher revenue-related compensation expense in Wealth and Investment Management. As a reminder, this is a good thing as these higher expenses are more than offset by higher non-interest income.
Second, operating losses and the other customer remediation-related expenses have been higher during the first half of the year than we expected. As a reminder, we have outstanding litigation, regulatory, and customer remediation matters that could impact operating losses during the remainder of the year. Finally, we did not anticipate the $336 million of expense in the first half of the year for the FDIC special assessment, which is now included in our updated guidance. We'll continue to update you as the year progresses.
In summary, our results in the second quarter reflected the progress we're making to transform Wells Fargo and improve our financial performance. Our strong growth in fee-based businesses offset the expected decline in net interest income. We made further progress on our efficiency initiatives. Our capital position remains strong, enabling us to return excess capital to shareholders, and we continue to make progress on our path to a sustainable ROTCE of 15%.
We will now take your questions.
