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 quarter was $3.5 billion or $0.85 per diluted common share. As Charlie highlighted, our results included $2 billion or $0.45 per share of accruals primarily related to a variety of historical matters. These accruals drove our total expenses higher. However, if you exclude operating losses, our expenses would have declined as we continue to execute on our efficiency initiatives. Revenue grew in the third quarter, driven by higher net interest income, while noninterest income also increased from the second quarter. Our effective income tax rate for the third quarter was 20.2%.
We highlight capital on Slide 3. Our CET1 ratio is 10.3%, down 6 basis points from the second quarter as the 21 basis point decline from AOCI as well as the impact from dividend payments was nearly offset by our third quarter earnings. Our CET1 ratio remained well above our required regulatory minimum plus buffers, which increased by 10 basis points to 9.2% at the start of the fourth quarter as our new stress capital buffer took effect. As a reminder, our G-SIB surcharge will not increase in 2023. We did not buy back any common stock in the second or third quarters, and we will continue to be prudent regarding the amount and timing of any share repurchases.
Turning to credit quality on Slide 5. Credit performance remained strong, with only 17 basis points of net charge-offs in the third quarter. However, as expected, losses are slowly increasing from historical lows, and we expect them to continue to normalize towards pre-pandemic levels over time as the Federal Reserve continues to take actions to combat inflation. We are closely monitoring our portfolio for potential risks, and are continuing to take some targeted actions to further tighten underwriting standards.
Commercial credit performance remained strong across our commercial businesses, with only $6 million of net charge-offs and net recoveries in our commercial real estate portfolio for the third consecutive quarter. We also had net recoveries in our consumer real estate portfolios. However, total consumer net charge-offs increased $72 million from the second quarter to 40 basis points on average loans, driven by an increase in net charge-offs in the auto portfolio.
Higher loss rates on certain auto loans originated primarily in the latter part of 2021 contributed to the linked quarter increase in charge-offs and delinquent loans in the auto portfolio. Lower loan balances also impacted the loss rate, which started -- we started taking credit tightening actions earlier this year, which have improved the quality of 2022 originations. As a result of these actions, increased pricing competition and continued industry supply chain constraints, the third quarter origination volumes were down over 40% compared to a year ago.
Nonperforming assets declined again in the third quarter and were down $411 million or 7% from the second quarter and down 20% from a year ago. While commercial nonaccruals continued to decline, lower levels of consumer nonaccruals were the primary driver of lower nonperforming assets due to a decrease in residential mortgage nonaccrual loans from the impact of customers' sustained payment performance after exiting COVID-related accommodation programs. Our allowance for credit losses increased $385 million in the third quarter, primarily reflecting loan growth and a less favorable economic environment.
On Slide 6, we highlight [Phonetic] loans and deposits. Average loans grew 11% from a year ago and 2% from the second quarter. Period-end loans increased for the fifth consecutive quarter, but growth slowed as expected, with commercial loan balances holding relatively stable from the second quarter while consumer loans grew driven by credit card and first lien residential mortgage loans, partially offset by continued declines in our auto portfolio. I'll highlight the specific growth drivers when discussing our operating segment results.
Average loan yields increased nearly 100 basis points from a year ago and 76 basis points from the second quarter, reflecting the higher rate environment. Average deposits declined 3% from both the year ago and the second quarter with declines across our deposit-gathering businesses. Compared with the second quarter, Wealth and Investment Management had the largest decline by dollar amount as clients looked for higher-yielding alternatives. Declines in our commercial businesses were driven mostly by outflows of nonoperational deposits, which can be more price sensitive and a less stable source of funding.
Outflows in Consumer and Small Business Banking were driven by continued customer spending and increased outflows from customers seeking higher-yielding products. Our average deposit cost increased 10 basis points from the second quarter to 14 basis points. Pricing has been consistent with our expectations, with deposit costs holding relatively stable in Consumer Banking and Lending while trending higher across other businesses. As rates continue to rise, we would expect deposit betas to continue to increase in customer migration from lower-yielding to higher-yielding deposit products to also increase.
Turning to net interest income on Slide 7. Third quarter net interest income increased $3.2 billion or 36% from a year ago and $1.9 billion or 19% from the second quarter. The growth from the second quarter was primarily driven by the impact of higher rates, which increased earning asset yields and reduced premium amortization from mortgage-backed securities. We also benefit from higher loan balances and one additional day in the quarter. These benefits were partially offset by higher funding costs. In the first nine months of this year, net interest income was up 19% compared with a year ago. We currently expect full year 2022 net interest income to be approximately 24% higher than a year ago, with fourth quarter 2022 net interest income expected to be approximately $12.9 billion.
Turning to expenses on Slide 8. The increase in noninterest expense from both a year ago and from the second quarter was due to the higher operating losses that I highlighted earlier. Excluding operating losses, other noninterest expense was down 5% from a year ago as we had lower revenue-related compensation, expenses related to divestitures came out of the run rate, and we continue to make progress on our efficiency initiatives. Excluding operating losses, our expenses would have been down on a year-over-year basis for six consecutive quarters.
Another way you can see the impact of our efficiency initiatives is due to lower head count, which has declined for nine consecutive quarters and was down 6% from a year ago. We've also reduced professional and outside services expense by 10% and occupancy expense by 4% during the first nine months of this year. The higher level of operating losses in the third quarter will cause us to exceed our $51.5 billion expense outlook for 2022, which included $1.3 billion of operating losses for the full year. We currently expect our fourth quarter other expenses, excluding operating losses to be approximately $12.3 billion. As Charlie highlighted, outstanding litigation, customer remediation and regulatory matters still remain -- that will still remain, and will likely result in additional expense in the coming quarters, which could be significant.
Turning to our operating segments, starting with Consumer Banking and Lending on Slide 9. Consumer and Small Business Banking revenue increased 29% from a year ago driven by the impact of higher interest rates and higher deposit balances. Deposit-related fees were impacted by the overdraft policy changes we rolled out earlier this year, which eliminated non-sufficient funds and some other fees. The extra day grace period launched in the beginning of August and early payday begin in select states in mid-September, so we would expect our deposit-related fees to decline further in the fourth quarter.
Industry mortgage rates have increased over 300 basis points since the beginning of the year and ended the quarter at the highest level since 2007, driving weekly mortgage applications as measured by the Mortgage Bankers Association to a 25-year low at quarter end. As a result, our Home Lending revenue declined 52% from a year ago, driven by lower mortgage originations and gain on sale margins, as well as lower revenue from the resecuritization of loans purchased from securitization pools.
While the mortgage market adjusts to lower volumes, we expect it to remain challenging in the near term, and it's possible that we have a further decline in the mortgage banking revenue in the fourth quarter when originations are seasonally slower. We continue to remove excess capacity to align with the reduced demand and expect these adjustments will continue over the next couple of quarters. Credit card revenue was up 8% from a year ago due to higher loan balances, which benefited from higher point-of-sale volume and new product launches. Auto revenue declined 5% from a year ago, driven by loan spread compression and partially offset by higher loan balances. And Personal Lending was 9% from a year ago due to higher loan balances driven by growth in origination volumes.
Turning to some key business drivers on Slide 10. Mortgage originations declined 59% from a year ago and 37% in the second quarter, with declines in both correspondent and retail originations. Refinances as a percentage of total originations declined to 16% in the third quarter. Average home lending loan balances grew 2% from the second quarter, driven by growth in our non-conforming portfolio. I already highlighted the drivers of the decline in auto originations, so turning to debit card. While debit card spend increased 3% from a year ago, spending declined 2% from the second quarter. As Charlie highlighted, credit card point-of-sale purchase volumes were up 25% from a year ago, with the largest percentage increases in fuel and travel. Average balances were up 21% from a year ago, reflecting the strong point of sale volume which also benefited from the launch of new products, with new accounts up 11%. We will continue to remain disciplined in our underwriting of new credit card accounts.
Turning to Commercial Banking results on Slide 11. Middle Market Banking revenue increased 54% from a year ago, driven by higher net interest income due to the impact of higher rates and higher loan balances. Asset-Based Lending and Leasing revenue increased 27% from a year ago, driven by higher net gains from equity securities, higher loan balances and higher revenue from renewable energy investments. Noninterest expense increased 9% from a year ago, primarily driven by higher operating costs and higher operating losses.
Average loan balances have grown for five consecutive quarters, and were up 17% from a year ago. Line utilization rates were fairly stable relative to the second quarter, inflation and our customers' continued efforts to rebuild inventory as supply chain challenges remain drove the growth in Asset-Based Lending and Leasing. Loan growth in the Middle Market Banking continued to come from larger clients, which more than offset declines from smaller clients.
Turning to Corporate and Investment Banking on Slide 12. Banking revenue increased 28% from a year ago driven by stronger treasury management results, reflecting the impact of higher interest rates as well as higher loan balances. Investment banking fees declined from a year ago, reflecting lower market activity. Compared with the second quarter, the increase in investment banking fees was due to the write-down of unfunded leveraged finance commitments last quarter.
Commercial real estate revenue grew 29% from a year ago, driven by higher loan balances, the impact of higher interest rates as well as improved commercial mortgage bank-backed securities gain on sale margins. Markets revenue increased 6% from a year ago, reflecting volatility and strong client-demanded equities, rates and commodities and foreign exchange trading. Average loans grew 19% from a year ago, with broad-based growth across our businesses to fund clients' working capital needs, but the pace of growth slowed in the third quarter with average balances up 3% and period-end loans down 3% from the second quarter.
On Slide 13, Wealth and Investment Management revenue grew 1% from a year ago as the increase in net interest income driven by the impact of higher rates offset the decline in asset-based fees driven by lower market valuations. As a reminder, the majority of WIM advisory assets are priced at the beginning of the quarter, so third quarter results reflected the lower market valuations as of July 1. And while the S&P 500 and fixed income indices declined again in the third quarter, the decrease was not as steep as the second quarter decline. So while there will be another step down in asset-based fees in the fourth quarter, it will be less significant than the third quarter decline. Expenses decreased 4% from a year ago due to lower revenue-related compensation. Average loans increased 3% from a year ago driven by continued momentum in securities-based lending.
Slide 14 highlights our Corporate results. Both revenue and expenses were impacted by the divestitures last year of our Corporate Trust services business and Wells Fargo Asset Management. These businesses contributed $459 million of revenue and accounted for approximately $305 million of expense in the third quarter of 2021. Revenue also declined from a year ago due to lower equity gains in our affiliated venture capital and private equity businesses, and given current market conditions, we don't expect the equity gains to improve in the fourth quarter. Expenses increased from a year ago due to higher operating losses.
In summary, although the high level of operating losses we had in the quarter significantly impacted our results, the underlying results in the quarter continue to reflect our improving earnings capacity. We had strong net interest income growth from rising rates, and if you exclude operating losses, our expenses would have declined as we continue to execute on our efficiency initiatives. Both our credit performance and capital levels remain strong.
We will now take your questions.
