Thank you, Allen. Good morning, everyone. We share some of the highlights of our second quarter results on page two, including earnings of $6.2 billion or $1.30 per diluted common share.
Our ROE increased to 13.26% and our ROTCE was 15.78%. We returned $6.1 billion to shareholders through common stock dividends, and net share repurchases in the second quarter, up from $4 billion a year ago.
In his comments, Allen highlighted the positive business momentum shown on this page and I'll provide more detail on these results throughout the call.
On the next page, we summarize noteworthy items in the second quarter, including a $721 million gain on the sale of $1.9 billion of Pick-a-Pay PCI loans. The remaining balance in the Pick-a-Pay PCI loan portfolio was $1.1 billion at the end of the second quarter, down from $8.8 billion a year ago, reflecting portfolio sales and runoff.
We had $150 million reserve release, primarily driven by strong overall credit portfolio performance and our effective income tax rate was 17.3%. We currently expect the effective income tax rate for the remainder of 2019 to be approximately 18%, excluding the impact of any unanticipated discrete items.
We highlight some year-over-year results on page four, compared with the second quarter 2018 revenue was stable with an increase of $477 million in noninterest income largely offset by a $446 million decline in net interest income.
Our expenses declined 4% from a year ago. I will highlight the key drivers later on the call.
Our net charge-offs remained near historic lows at 28 basis points and our $150 million reserve release in the second quarter was the same amount as a year ago.
Our capital levels remained above our internal target, even as we reduced common shares outstanding by 9% from a year ago.
I'll be highlighting the balance sheet and income statement drivers on pages five and six throughout the calls, we’ll turn to page seven. Average loans were up $3.4 billion from a year ago, but declined $2.5 billion from the first quarter, driven by lower commercial loans. The average loan yield was up 16 basis points from a year ago from the repricing impacts of higher interest rates, and it declined 4 basis points from the first quarter due to changes in loan mix and the repricing impact of lower interest rates.
Period-end loans increased $5.6 billion from a year ago with growth in first mortgage, C&I and credit card loans partially offset by declines in junior lien mortgage loans as well as commercial real estate loans.
Over the past year, we've sold or moved to held for sale a total of $9 billion of loans.
In addition to the $1.9 billion of Pick-a-Pay PCI loans that we sold in the second quarter, we also moved $1.8 billion of first mortgage loans to held for sale. We moved these loans to held for sale as we intend to sell them rather than recognize recoveries and retained earnings as we would be required for adoption of CECL.
I’ll highlight the drivers of the $1.6 billion linked quarter increase in period-end loans starting on page nine. Commercial loans increased $19 million from the first quarter, C&I loans were down $288 million, as growth in our credit investment portfolio from purchasing CLOs in loan form was offset by declines in commercial capital, corporate and investment banking and commercial real estate credit facilities to REITs and non-depository financial institutions.
Commercial real estate loans increased $105 million from the first quarter, the second consecutive linked quarter increase, as growth in mortgage lending was partially offset by runoff of construction loans reflecting cyclicality of commercial real estate construction projects and our continued credit discipline. Lease financing increased $202 million from the first quarter, driven by growth in our equipment finance business.
As we show on page 10, consumer loans increased $1.6 billion from the first quarter despite $1.9 billion of Pick-a-Pay PCI loan sales and the transfer of $1.8 billion of first mortgage loans to held for sale.
The first mortgage loan portfolio increased $1.9 billion from the prior quarter, driven by $19.8 billion of mortgage loan originations held for investment. 38% of our total mortgage originations in the second quarter were held for investment, which was up from 26% a year ago. This shift benefited loan growth and helped us meet the home financing needs of our customers. But these loan originations do not generate mortgage banking fees.
Junior lien mortgage loans were down $1 billion from the first quarter, as paydowns continue to outpace new loan originations. Credit card loans increased $541 million, up from a seasonally low first quarter.
As Allen highlighted, our auto portfolio grew for the first time since 2016, with the balances up $751 million from the first quarter and originations up 17% while maintaining credit discipline. Other revolving credit and installment loans declined $533 million from the first quarter, on lower margin loans as well as lower student loans and personal loans and lines.
Turning to deposits on page 11, average deposits declined $2.3 billion from a year ago as wealth and investment management and wholesale banking customers continue to allocate more cash into higher yielding liquid alternatives. Average deposits increased $6.9 billion from the first quarter driven by higher retail banking deposits, reflecting increased promotional activity, partially offset by lower wealth and investment management deposits.
Our average deposit costs of 70 basis points increased 5 basis points from the first quarter and 30 basis points from a year ago, reflecting higher deposit rates in wholesale banking and wealth and investment management, deposit mix shifts as customers allocated more balances to higher yielding categories, and retail banking deposit campaign pricing for new deposits. We provide an update on our deposit betas and expectations on page 12.
Our deposit beta reflects current market conditions, including repricing lags from prior Fed Funds rate increases and deposit campaigns for new retail deposits, which have resulted in a greater percentage of higher yielding promotional deposit balances. These drivers are reflected in the cumulative one year beta increasing to 57%, up from 43% last quarter. It's important to note that the deposit beta calculation can produce higher short-term betas in periods when Fed Funds stabilizes or declines, even if the pace of increases and deposit pricing slows.
The cumulative beta since the start of the cycle in the fourth quarter of 2015 was 38% as of the end of the second quarter. If the Fed Funds rate remains at current levels, we expect our cumulative through the cycle beta to continue to trend upward albeit at the lower end of our previously guided range of 45% to 55%.
On page 13, we provide details on period end deposits, which increased $24.4 billion from the first quarter. Wholesale banking deposits were up $37.4 billion from the first quarter with growth in corporate and investment banking, commercial real estate and corporate trust and also included an elevated level of large short-term deposit inflows.
Consumer and small business banking deposits declined $12 billion driven by lower wealth and investment management deposits from the seasonality of tax payments, as well as clients continuing to reallocate cash into higher yielding liquid alternatives. Retail deposits also declined, as growth in CDs and high yield savings was more than offset by typical tax related seasonality.
Net interest income decreased $216 million from the first quarter, driven by balance sheet mix and repricing including the impact of higher deposit costs and lower interest rate environment, as well as $73 million from increased premium amortization costs from higher MBS prepayments. We currently expect MBS premium amortization to increase in the third quarter. These declines in net interest income were partially offset by one additional day in the quarter and higher variable income.
Net interest income was down 4% in the second quarter and down 2% in the first half of 2019, compared with the same periods a year ago. Last quarter, we said we expected net interest income to decline 2% to 5% this year compared with 2018. And if the rate environment we're in today persists, we would expect to be near the low end of the range or near 5%.
As always net interest income will be influenced by a number of factors, including loan growth, pricing spreads, the level of rates and the slope of the yield curve.
Turning to page 15, noninterest income increased $191 million from the first quarter, with broad base growth including higher trust and investment fees, other income, service charges on deposit accounts, card fees and mortgage banking. I'll highlight some of the drivers of these increases in more detail.
Deposit service charges increased $112 million from our first quarter that had higher fee waivers.
We expected deposit service charges to increase now that the customer friendly changes we've made, which meaningfully reduce these fees are fully on the run rate. These changes continue to benefit our customers. And in the second quarter, we send an average of more than 38 million zero balance and customer specific alerts a month and helped over 1 million customers avoid overdraft charges through overdraft rewind. The increase in deposit service charges in the second quarter also reflected higher treasury management fees in wholesale banking.
Trust and investment fees increased $195 million from the first quarter, primarily due to higher asset base fees on retail brokerage advisory assets, reflecting higher market valuations at March 31st, and higher investment banking fees from increases in debt and equity underwriting.
Mortgage banking revenue increased $50 million from the first quarter, as lower servicing income primarily due to the impact of lower interest rates, including higher loan payoffs was offset by higher mortgage origination fees. Mortgage originations increased $20 billion from the first quarter due to typically higher seasonality and higher refi volumes from lower interest rates. Applications in the second quarter increased $26 billion from the first quarter. We ended the quarter with a $44 billion unclosed pipeline the highest pipeline since the third quarter of 2016. And we expect originations to increase in the third quarter.
Residential held for sale mortgage loan originations totaled $33 billion in the second quarter, and the production margin on these originations declined to 98 basis points, down 7 basis points due to sales execution timing. Margin started to widen later in the quarter and we currently expect the production margin in the third quarter to increase modestly.
Turning to expenses on page 16, expenses declined 3% from the first quarter and 4% from a year ago. I'll explain the drivers starting on page 17. Expenses were down $467 million, from the first quarter, driven by seasonality lower personnel expenses. The decline in compensation and benefits reflected $676 million in seasonally lower personnel expense and $243 million in lower deferred compensation expense, which is P&L neutral, partially offset by the full quarter impact from salary increases, as well as one additional payroll day.
Revenue related expenses increased $260 million from higher commission and incentive compensation expense, primarily in home lending, WIM and wholesale banking.
Third-party services increased $212 million from higher outside professional services and contracts services expense.
Finally, running the business discretionary expense increased $105 million, primarily driven by higher advertising and promotion expense.
As we show on page 18, expenses were down $533 million from a year ago, driven by lower operating losses, core deposit and other intangibles amortization and FDIC expense.
While our expenses declined in this quarter as Allen stated, they're still too high, and we're working hard to deliver on our 2019 expense target.
Since the beginning of 2018, we’ve realized billions of dollars of expense savings through our efficiency initiatives including reducing FTEs by approximately 18,000 through attrition and displacement.
However, during this period, we've also added approximately the same number of FTE in risk compliance and technology, resulting in our total FTE being relatively stable.
We currently expect our 2019 expenses to be near the high end of our target range, as investments in risk management, including data and technology have exceeded expectations and are anticipated to continue. Also, revenue related expenses are higher, given the strength in mortgage banking due to lower rate environment, as well as strength in capital markets.
Just to be clear, we won't forego revenue opportunities to hit an expense target.
Finally, our deferred comp expense was $471 million in the first half of 2019, compared with $57 million for the same period a year ago. Since this expense is subject to market fluctuations and is P&L neutral, we're excluding the deferred comp expense from the calculation of our expense target.
As a reminder, the full year impact of deferred comp expense last year was a $242 million reduction in expenses and we achieved our expense target even with this benefit.
Turning to our business segments starting on page 20, community banking earnings increased $324 million from the first quarter, driven by seasonally lower personnel expense.
On page 21, we provide our community banking metrics.
We have $30 million digital active customers in the second quarter, up 4% from a year ago, including 8% growth in mobile active customers. Primary consumer checking customers grew for the seventh consecutive quarter on a year-over-year basis.
New consumer checking customers acquired through the digital channel were up 45% from a year ago and 48% of new general purpose credit card accounts were originated through the digital channel in the second quarter.
We already highlighted our brand survey scores, which reached their highest levels in more than three years in June. The recent improvement in our scores has been partially driven by an increased focus by our branch based team members on educating our customers about our industry leading digital capability.
On page 22, we highlight the decline in teller and ATM transactions, down 7% from a year ago, reflecting continued customer migration to digital channels, and we consolidated 38 branches in the second quarter. We had strong card usage with both credit and debit card purchase volume up 6% from a year ago.
During the second quarter we were recognized for the third year in a row as the number one debit card issuer in Nielsen's annual rankings.
Turning to page 23, wholesale banking earnings increased $19 million from the first quarter, driven by lower provision for credit losses. Wealth and investment management earnings increased $25 million from the first quarter, driven by seasonally lower personnel expense and higher asset based fees. The sale of our Institutional Retirement and Trust business, which closed on July 1st, did not impact second quarter results but will be reflected in our third quarter performance.
Turning to page 25, we continue to have strong credit results with our net charge-off rate declining to 28 basis points in the second quarter, and net charge-offs down $42 million from the first quarter, driven by lower consumer losses. Non-accrual loans declined $983 million from the first quarter with lower non-accruals in both the commercial and consumer portfolios. Consumer non-accruals included a $373 million decline from the reclassification of $1.8 billion of first mortgage loans to held for sale.
Last quarter, I provided our initial CECL expectation, which we've updated based on the composition of our loan portfolio as of June 30st. We currently estimate that the impact of the adoption of CECL will be an approximate $1.5 billion reduction in our allowance, including recoveries related to residential mortgage loans that were previously written down during the last cycle and are below their current recovery value.
The change from the estimate we provided last quarter primarily reflects a reduction in our expected recoveries on loans previously written down due to the designation of $1.8 billion of residential mortgage loans to held for sale, as well as additional refinements to our assumptions and changes in our portfolio composition during the quarter.
The ultimate effective of CECL will depend on the size and composition of our loan portfolio, the portfolio’s credit quality and economic conditions at the time of adoption, as well as any refinements to our models, methodology or other key assumptions.
As a reminder, as the industry experiences credit cycles, we anticipate more volatility under a lifetime reserving approach versus the incurred loss approach.
Turning to capital on page 26, our CET1 ratio fully phased in increased to 12% as continued strong capital returns and modest RWA growth were more than offset by the capital generation from earnings and unrealized gains in OCI.
Our 2019 capital plan, which includes up to $23.1 billion of gross common stock repurchases, reflects our goal of reducing our CET1 ratio toward our current internal target of 10% over the next two years.
As a reminder, our target may increase modestly to 10.25% to 10.5% due to the implementation of distress capital buffer and CECL.
Similar to last year, our current plan subject to market conditions and management discretion is to use approximately 65% of the gross repurchase capacity during the second half of this year, with the remainder use in the first two quarters of 2020.
In summary, our second quarter results reflected increased customer activity, strong credit performance and higher capital returns.
Our expenses are too high and while we're working hard to execute on our expense initiatives, we also have higher ongoing investment spend. I'm confident that the investments we're making to transform Wells Fargo and meet regulatory expectations will benefit all of our stakeholders including our customers, our team members, our shareholders and our regulators.
And we’ll now take your questions.