Michael P. Santomassimo
Senior EVP, Chief Financial Officer at Wells Fargo & Company
Great. Thanks, Charlie, and good morning everybody. Charlie summarized how we helped our customers, communities, and employees last year on slides two and three. So I'm going to start with our fourth quarter financial results on slide 4. Net income for the quarter was $5.8 billion or $1.38 per share -- common share. Our fourth quarter results included: a $943 million net gain on the sales of our Corporate Trust Services business and Wells Fargo Asset Management. There could be future gains related to these sales due to post-closing adjustments and earn-out provisions; an $875 million decrease in allowance for credit losses as credit trends continue to be strong; and a $260 million impairment of certain leased rail cars due to changes in demand for these cars. We also had $2.5 billion or $1.9 billion after noncontrolling interest of equity gains primarily from our affiliated venture capital and private equity businesses, the third consecutive quarter of strong returns on these businesses.
Our effective income tax rate in the fourth quarter was, approximately, 23%, including the discrete impacts related to business divestitures. Our CET1 ratio declined to 11.4% in the fourth quarter, reflecting share repurchases and an increase in risk-weighted assets, primarily from loan growth in the quarter. We repurchased $7 billion of common stock in the fourth quarter, partially offset by $1.4 billion of new issuances, predominantly for the annual matching contribution for our 401(k) plans. As a reminder, the regulatory minimum for our CET1 ratio will be 9.1% in the first quarter of 2022, reflecting a lower G-SIB capital surcharge.
Turning to credit quality on slide 6. Our net chargeoff ratio was 19 basis points in the fourth quarter. Commercial credit performance continued to be strong with net loan chargeoffs declining $10 million from the third quarter to 2 basis points. Despite the challenges created by the pandemic, the commercial real estate portfolio has continued to perform well. Commercial real estate valuations and investment activity has rebounded off their lows across all property types, although there still is some risk in office and select hotel and retail segments. Consumer credit performance also remained strong with higher collateral values for homes and autos, and consumer cash reserves remain above pre-pandemic levels. Consumer net chargeoffs of $393 million increased $172 million from the third quarter, $152 million of the increase is related to a change in practice to fully chargeoff certain delinquent legacy residential mortgage loans.
Nonperforming assets increased $145 million, or 2%, from the third quarter, driven by an increase in residential mortgage nonaccruals, primarily resulting from certain customers exiting COVID-related accommodation programs. Loans that were modified in 2021 upon exiting forbearance are reported as non-accrual until they perform for a period of time. Overall, early performance of loans that have exited forbearance have been aligned with our expectations. After increasing during the first four quarters of the pandemic, commercial nonperforming assets have declined for four consecutive quarters, and we're back to pre-pandemic levels in the fourth quarter. Our allowance level at the end of the fourth quarter reflected continued strong credit performance, the ongoing economic recovery, and the uncertainties that still remain. If the economic recovery continues, we would expect to have additional reserve releases.
On slide 7, we highlight loans and deposits. Average loans grew 2% from the third quarter, with growth in both our commercial and consumer portfolios. We had strong growth late in the quarter and period end loans grew $32.6 billion, or 4% from the third quarter, with broad-based growth across most of our commercial and consumer portfolios. I'll highlight the specific growth drivers when discussing business segment results. Average deposits increased $89.9 billion, or 7% from a year ago with growth in our consumer businesses and commercial banking, partially offset by continued declines in corporate -- investment banking and corporate treasury, reflecting targeted actions to manage under the asset cap.
Turning to net interest income on slide 8. A year ago, we provided our expectation for 2021 net interest income to be flat-to-down 4% from the originally reported annualized fourth quarter 2020 level, and we ended up being down 3% for the full year. Fourth quarter net interest income was down $93 million, or 1% from a year ago and grew $353 million or 4% from the third quarter. The increase in the third quarter was driven by higher loan balances, including higher interest income from loans purchased from securitization pools or EPBOs. We also benefited from higher trading assets and a favorable funding mix. In the fourth quarter, we had $318 million of interest income associated with EPBOs, and at year end we had a total of $17.3 billion of these loans, down from $34.8 billion a year ago. And as I highlighted last quarter, we expect these balances to decline substantially by the end of this year. We also had $130 million of interest income in the fourth quarter from Paycheck Protection Program loans or PPP loans, and were outstanding -- and their outstanding declined to $2.4 billion at year end. We've reflected the headwind from these portfolios running off in our 2022 net interest income waterfall that I will review later on the call. The net interest margin increased 8 basis points from the third quarter, 3 basis points of which was due to higher interest income from EPBOs.
Now turning the expenses on slide 9. Non-interest expense declined 11% from a year ago. The decrease reflected progress we made on our efficiency initiatives, including reductions in personnel costs, consultant spend, and occupancy expense. I will provide specific examples of the progress we made in our efficiency initiatives in 2021 later on the call before updating you on our expense expectations for 2022. We also had lower restructuring charges and operating losses in the fourth quarter compared with a year ago. Fourth quarter expenses included one month or, approximately, $100 million of operating expenses from our Corporate Trust Services business and Wells Fargo Asset Management prior to their sales on November 1st.
Now turning to our business segment, starting with Consumer Banking and Lending on slide 10. Consumer and small business banking revenue increased 4% from a year ago, primarily due to higher deposit-related fees as fourth quarter 2020 included some COVID-related fee waivers. Fourth quarter 2021 also reflected an increase in consumer activity, including higher debit card transactions compared with a year ago, and the benefit of strong deposit growth was largely offset by lower spreads. Charlie highlighted the enhancements and changes we're making to help our customers avoid overdraft fees. The impact from the fees that will be reduced, including the elimination of non-sufficient fund or NSF fees as well as overdraft protection transfer fees is estimated to be, approximately, $700 million annually. Also, we expect that they may be partially offset by other fees due to higher levels of activity as well as the expiration of various fee-related waivers that were in place in 2021.
In terms of new features to be rolled out in the latter part of the year, including a 24-hour grace period for overdrafts and a new short-term loan product, we will have to observe how customers respond. Home lending revenue declined 8% from a year ago, primarily due to lower mortgage banking income driven by lower gain-on-sale margins and origination volumes. Even before the recent rate back up, we started to see a drop in application volume in December, and we expect originations to decline in 2022, which will put pressure on margins as the industry adapts to the lower volume. Credit card revenue was up 3% from a year ago, driven by higher point-of-sale volume, partially offset by higher rewards costs, including promotional offers on our new Active Cash card. Auto revenue increased 17% from a year ago and higher loan balances with the average balances up $6.8 billion.
Turning to some key business drivers on slide 11. Our mortgage originations declined 7% from the third quarter. We expect our first quarter originations to continue this decline due to lower refinance activity and the typical seasonal slowdown in the purchase market. We increased our non-conforming originations in the fourth quarter and have grown our non-conforming portfolio for seven consecutive months. Reflecting the improvements in our capabilities as well as the reintroduction of cash out refinancing late in the first quarter of 2021.
Turning to auto. Limited vehicle inventories continued to constrain industry new car sales. However, we had our third consecutive quarter of record originations with volume up 77% from a year ago with the majority of our originations coming from used cars. Originations also benefited from the enhancements we continue to make in our capabilities. Importantly, we are maintaining our underwriting standards and continue to be cautious about the increase in vehicle prices over the last year or so.
Turning to debit card. Transactions were relatively stable from the third quarter and up 10% from a year ago with increases across nearly all categories. Credit card point-of-sale purchase volume continued to be strong, was up 28% from a year ago and 11% from the third quarter. While payment rates remain elevated, balances grew 5% from a year ago due to strong purchase volume and the launch of new products. New credit card accounts more than doubled from a year ago driven by our new Active Cash card, and we're pleased by the quality of the accounts we've been attracting.
Turning to Commercial Banking results on slide 12. Middle Market Banking revenue increased 2% from a year ago. Results included higher deposit balances and modestly higher investment banking fees, partially offset by the impact of lower interest rates. Asset-based lending and leasing revenue increased 1% from a year ago, driven by higher net gains from equity securities and higher revenue from renewable energy investments, partially offset by lower loan balances. Non-interest expense declined 10% from a year ago, primarily driven by lower personnel and consulting expense due to the efficiency initiatives as well as lower lease expense. Loan balances started to increase late in the third quarter and now have grown for four consecutive months with growth accelerating in December. As with other portfolios, we are adhering to the same credit risk appetite. Increases in the Middle Market Banking were driven by growth from our larger clients, a modest uptick in revolver utilization, and strong seasonal borrowing. Growth in asset-based lending and leasing was driven by new client wins as well as increased levels from higher prices and some increases in inventory levels.
Turning to Corporate and Investment Banking on slide 13. Banking revenue increased 17% from a year ago. Investment banking had a strong quarter with higher debt origination and advisory fees. Banking results also benefited from higher loan balances. Commercial real estate revenue grew 8% from a year ago, driven by higher loan balances and capital markets results on stronger commercial real estate financing activity. Loan originations returned to pre-pandemic levels, and we had a healthy pipeline as we started the new year. Markets revenue was relatively stable from a year ago and was down 14% from the third quarter, primarily due to lower trading activity in spread products and equity derivatives. Average deposits in Corporate and Investment Banking were down $23.7 billion from a year ago, driven by actions taken across all lines of business to manage under the asset cap. Average loans increased from both the third quarter and a year ago across all lines of business. On a period-end basis, loans grew every month since June and growth accelerated in December.
Wealth & Investment Management on slide 14, the revenue grew 6% from a year ago as higher asset-based fees on market valuations more than offset a decline in net interest income due to lower interest rates. The 5% increase in expenses from a year ago was primarily driven by higher revenue-related compensation, which was more than offset by higher revenue. This increase was partially offset by lower salaries expense, reflecting progress on efficiency initiatives. Client assets reached a record $2.2 trillion, up 9% from a year ago, primarily driven by higher market valuations. Average deposits were up 7% from a year ago and average loans increased 5% from a year ago, driven by the continued momentum in securities-based lending.
Slide 15 highlights our corporate results. Revenue increased from a year ago, driven by strong results in our affiliated venture capital and private equity businesses and gains on the sales of our Corporate Trust Services business and Wells Fargo Asset Management. These businesses contributed $1.6 billion of revenue in 2021, excluding net gains on sale, and $1.5 billion of noninterest expense. We expect, approximately, $200 million of these expenses associated with transition services agreements to remain in 2022, with offsetting revenue so it's P&L neutral. We also expect, approximately, $300 million of corporate overhead expenses related to these businesses to remain in 2022, which we expect to manage down over time.
Turning now to our expectations for 2022, starting with net interest income on slide 16. As the last couple weeks have demonstrated, it's challenging this early in the year to predict the rate environment, loan demand, and other variables that impact net interest income for the full year. But let me highlight the key drivers of our net interest income for 2022. We are assuming the asset cap will remain in place throughout 2022. Moving left to right on the waterfall, as we've discussed previously, we have a headwind this year from the runoff of PPP and EPBO loans. However, our current outlook for loans is for average balances to grow low-to-mid-single digits from the fourth quarter of 2021 to the fourth quarter of 2022. Along with other balance sheet mix changes, this is expected to more than offset that headwind. This net result would increase net interest income, approximately, 3% in 2022 from the $35.8 billion we generated in 2021.
Moving to rates and repricing. The recent forward curve includes, approximately, three 25 basis-point rate hikes this year beginning in May. Assuming this were to play out, net interest income has the potential to grow up to an additional 5%, resulting in approximately 8% in net interest income growth in 2022 versus 2021. That said, the implied forward curve has changed a lot over the last month and a half, so it's very hard to forecast with any certainty. Another way to view our asset sensitivity is from the disclosure we provided in our third quarter 10-Q filing. It showed that the estimated impact of an instantaneous 50 basis points increase in short term rates would increase net interest income by, approximately, $2.7 billion over the next 12 months. Ultimately, the amount of net interest income we earn in 2022 will depend on a variety of factors, including the absolute level of interest rates, the shape of the yield curve, loan demand, and cash redeployment.
Now turning to expenses on slide 17. We made progress last year on our efficiency initiatives, and we've continued to identify new opportunities. Our portfolio of initiatives that includes realized and identified potential gross saves has grown from, approximately, $8 billion to $10 billion, and we are continuing to work across the company. We expect to execute on our remaining identified initiatives over the next two to three years and we'll continue to invest across our businesses. Importantly, similar to last year, we are excluding from our efficiency initiatives the resources needed to address our risk and control work and will continue to add resources as necessary to complete this important work. We've been reducing expenses across our businesses, but let me highlight a few examples of the progress we made last year.
We eliminated management layers and increased span of control, a 20% decrease in managers with low span of control. We completed, approximately, 270 branch consolidations in 2021, a continuation of the progress we've made the last few years with branches down 11% since 2019. We've also optimized branch staffing levels to better reflect our customers -- how our customers are using our branches. Within our technology organization, we reduced non-engineering roles by, approximately, 40% driven by accelerated adoption of the Agile framework, and headcount across the company declined, approximately, 6% from a year ago, excluding divested businesses.
In addition to reducing the number of branches, we also reduced our office real estate portfolio by, approximately, 7% and occupancy expense was down 9% compared with a year ago. This year we expect to continue to realize savings from these initiatives, including an incremental 5% reduction in office real estate. Additionally, the investments we're making in technology should drive improvements in operations, consumer banking, consumer lending, commercial banking. Importantly, these efforts should not only reduce expenses, but also improve the customer experience with enhanced fraud detection, more self-service capabilities, and faster underwriting decisions.
Now turning to our 2022 expense outlook on slide 18. Following the waterfall from left to right, we reported $53.8 billion of noninterest expense in 2021. This was largely in line with our most recent guidance, except for higher operating losses. We had, approximately, $500 million of expenses in 2021 related to business exits and restructuring charges and the civil money penalty associated with the OCC enforcement action in September. We also had, approximately, $1 billion of expenses in 2021 from the Wells Fargo Asset Management and our Corporate Trust Services business which were sold and that will not continue in 2022. So we believe a good starting point for the discussion of 2022 expenses is the $52.3 billion. We are assuming a modest increase in equity markets this year and expect revenue-related expenses to grow by, approximately, $300 million. This includes expected increases in Wealth & Investment Management and Corporate and Investment Banking, partially offset by expected declines in home lending reflecting lower origination volumes. Higher revenue-related compensation is a good thing and the associated revenue will more than offset any increase in expenses.
We also expect, approximately, $500 million of wage and benefits related inflationary increases in 2022 above and beyond the normal level of merit and pay increases driven by higher personnel expenses, including the minimum wage increase that Charlie highlighted and other compensation changes. Through our efficiency initiatives, we expect to realize, approximately, $3.3 billion of gross expense reductions in 2022. This reduction is expected to be partially offset by, approximately, $1.2 billion of incremental investments primarily related to higher personnel expenses in Commercial Banking, Corporate and Investment Banking and technology, as well as increased spending on risk management. We also expect, approximately, $500 million in increased spending in other areas, including higher FDIC insurance assessments, higher travel and entertainment expenses, which were significantly lower in 2021 due to the pandemic. Accordingly, our full year 2022 expenses are expected to be, approximately, $51.5 billion, a net reduction of, approximately, $800 million versus the $52.3 billion. Embedded in our assumptions are, approximately, $1.3 billion of operating losses for 2022, which is the amount we had in 2021, excluding the $250 million associated with the OCC enforcement action. While we've made significant progress on working through legacy issues, as we've previously disclosed, we still have outstanding litigation and regulatory issues and related expenses could significantly exceed the levels we had in 2021. We made substantial progress last year in executing our efficiency initiatives, but we still have significant opportunity to get more efficient across the company. We are focused on achieving net expense reductions while appropriately investing in our businesses. This remains a multi-year process with the ultimate goal of achieving an efficiency ratio in line with our peers and based on our business mix.
We'll now take your questions.
