Thank you, Allen, and good morning everyone. We had a number of significant items in the third quarter that impacted our results, which we highlight in slide two. We had $1.9 billion of operating losses, predominantly reflecting litigation accruals for a variety of matters, including a $1.6 billion discrete litigation accrual for previously disclosed retail sales practices matters that was not tax deductible and reduced EPS by $0.35 per share. We had a $1.1 billion gain from the sale of our Institutional Retirement and Trust business, which contributed $0.20 per share to EPS. We had gains of $302 million from the sales of $510 million of Pick-a-Pay PCI, and other PCI residential mortgage loans.
We had $244 million in mortgage servicing rights valuation adjustments driven predominantly by higher prepayment rate estimates on our MSRs. These valuation adjustments resulted in our mortgage banking revenue declining from the second quarter despite an increase in mortgage originations and higher production margins. We had a $105 million impairment of capitalized software reflecting reevaluation of software under development.
We also had a modest $50 million reserve build compared with the $150 million reserve release last quarter.
Finally, we partially redeemed our Series K Preferred Stock, which reduced diluted EPS by $0.05 per share as a result of elimination of purchase accounting discount recorded on these shares at the time of the Wachovia acquisition. This partial redemption will reduce the amount of our quarterly preferred stock dividends by approximately $23 million, starting in the fourth quarter.
While our financial results in the third quarter were impacted by these items, as Allen summarized and we highlight on slide three, we continue to have positive business momentum with strong customer activity.
We’ve reviewed some of our year-over-year results on page four. Compared with the third quarter of 2018, revenue was stable with an increase of $1 billion in non-interest income driven by the sale of our Institutional Retirement and Trust business, largely offset by a $947 million decline in net interest income.
Our expenses increased $1.4 billion from a year ago, driven by $1.3 billion of higher operating losses reflecting higher litigation accruals.
Our net charge-off rate remains near historic lows at 27 basis points. We had a $50 million reserve build in the third quarter compared with the $100 million reserve release a year ago.
We maintained strong capital levels even as we reduced common shares outstanding by 9% and increased our quarterly common stock dividend by 19% from a year ago. I will be highlighting most of the balance sheet drivers on page five throughout the call, so we will turn to page six.
Our effective income tax rate increased to 22.1% in the third quarter, reflecting a net discrete income tax expense of $443 million, predominantly related to the non-tax-deductible treatment of the $1.6 billion discrete litigation accrual. We currently expect the effective income tax rate for the fourth quarter to be approximately 17.5%, excluding the impact of any unanticipated discrete items.
Turning to page seven, average loans were up $10.3 billion from a year ago and increased $2.3 billion from the second quarter. This was the first time we had both year-over-year and linked quarter growth in average loans in nearly three years. Period-end loans increased $12.6 billion from a year ago with growth in C&I, first mortgage, credit card, and auto loans partially offset by declines in commercial real estate, junior lien mortgage, and other revolving credit and installment loans. We grew loans even as we sold or moved to held-for-sale a total $7.4 billion of consumer loans over the past year.
I will highlight the drivers of the linked quarter growth in loans starting on page nine. Commercial loans were stable linked quarter as growth in C&I loans and leased financing was largely offset by declines in commercial real estate loans. C&I loans were up $2 billion with broad based growth in corporate and investment banking and the purchases of CLOs in loan form in the credit investment portfolio.
These increases were partially offset by declines in commercial banking and lower government and institutional banking and middle market lending and in commercial capital driven by seasonally lower commercial distribution finance dealer floor plan loans. Commercial real estate loans declined $2.2 billion from the second quarter with declines in both commercial real estate mortgage and commercial real estate construction loans reflecting increased market liquidity, higher refinancing activity, and continued credit discipline. Leased financing increased $276 million from the second quarter, driven by growth in large ticket direct finance leases in equipment finance.
As we show on page 10, consumer loans increased $5 billion from the second quarter.
The first mortgage loan portfolio increased $4.2 billion from the prior quarter driven by $19.3 billion of originations held for investment and the purchase of $1 billion of loans as a result of our exercising service cleanup calls to terminate over 20 pre-2008 securitizations. This growth was partially offset by pay downs as well as sales of $510 million of PCI mortgage loans. Junior lien mortgage loans were down $1.2 billion from the second quarter as pay downs continue outpaces new originations. Credit card loans increased $809 million primarily due to seasonality.
Our auto portfolio continued to grow with balances up $1.1 billion from the second quarter.
Originations increased 9% to $6.9 billion.
We have been successfully regaining market share while maintaining our credit discipline.
Our market share growth reflects the benefit of the transformational changes we have made in the business including process improvements that have resulted in faster credit decision response times.
Turning to deposits on page 11, average deposits increased 2% from both a year ago and the second quarter. Average deposits increased $22.4 billion from the second quarter with growth in wholesale banking as well as retail banking deposits which continue to benefit from promotional rates and offers.
Our average deposit cost of 71 basis points increased 1 basis point from the second quarter, the lowest linked quarter increase since the fourth quarter of 2016.
The increase from the second quarter was driven by continued retail deposit campaign pricing for new deposits so that we begun lower promotional rates in terms in response to market conditions. The increase was also impacted by unfavorable deposit mix shifts.
On page 12, we provide details on period-end deposits which grew 3% from a year ago and 2% from the second quarter. Wholesale banking deposits were up $6.6 billion from the second quarter driven by seasonal growth in middle market and business banking as well as growth in our commercial real estate business. Consumer and small business banking deposits increased $11.9 billion from the second quarter driven by higher retail banking deposits including growth in high yield savings and CDs. Wealth and investment management deposits grew as clients reallocation of cash in the higher yielding liquid alternatives slowed during the quarter.
Mortgage escrow deposits grew $4.1 billion from the second quarter reflecting higher mortgage payoffs. These increases were partially offset by a $2.5 billion reduction in corporate Treasury deposits, the second consecutive quarter of declines. Net interest income declined $470 million from the second quarter primarily due to balance sheet re-pricing driven by the impact of the lower interest rate environment as well as $133 million of higher MBS premium amortization costs due to higher pre-payments.
We currently expect MBS premium amortization to continue to increase in the fourth quarter but at a slower pace.
We also had lower variable income and smaller positive impact from hedge ineffectiveness accounting results. These declines in net interest income were partially offset by favorable balance sheet growth and mix and the benefit of one additional day of the quarter.
As you can see on the chart on this page, rates have been volatile and the yield curve has flattened significantly over the past year.
Net interest income was down 8% in the third quarter and down 4% in the first nine months of 2019, compared with the same periods a year ago.
As we stated last month, we currently expect net interest income to decline approximately 6% for the full-year compared with 2018.
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 14, non-interest income increased $896 million for the second quarter driven by the gain from the sale of our institutional retirement and trust business.
Let me highlight a few of the other linked quarter trends. Trust and investment fees were down $9 million, growth and retail brokerage advisory fees, asset base fees in our asset management business and investment banking fees was offset by the decline in trust and investment fees as a result of the sale of our IRT business.
While we no longer recognize trust and investment fees from this business, we will continue to administer client assets for up to 24 months, and the buyer will pay us a fee for certain costs we incurred during this transition period.
This fee was $94 million in the third quarter and was recognized in other non-interest income. Mortgage banking revenue declined $292 million from the second quarter driven by a $419 million decline in servicing income primarily due to the valuation adjustments on our MSRs reflecting higher prepayment rate estimates. Partially offsetting this decline was $127 million increase in net gains on mortgage loan originations and sales activities. Mortgage originations increased $5 billion from the second quarter due to higher refi volumes from lower interest rates with refis increasing to 40% of originations in the third quarter. We ended the quarter with a $44 billion unclosed pipeline consistent with the second quarter and we currently expect fourth quarter originations to remain at a similar level to the third quarter.
Residential held for sale mortgage loan originations totaled $38 billion in the third quarter and the production margin on these originations increased to 121 basis points with higher margins in both retail and correspondent channels, driven by capacity constraints. We had $956 million of net gains from equity securities in the third quarter primarily due to realized and unrealized gains from our affiliated venture capital and private equity partnerships. These gains were partially offset by lower deferred comp plan investment results which are largely P&L neutral.
Turning to expenses on page 15, expenses increased from both the second quarter and a year ago, largely due to higher operating losses, primarily reflecting litigation accruals.
To explain the drivers we will start on page 16. Expenses increased $1.8 billion from the second quarter driven by a $1.7 billion increase in operating losses. The increase in compensation and benefits reflected higher salaries expense primarily driven by one additional day in the quarter, a change in staffing mix and higher severance expense partially offset by lower deferred comp expense.
Infrastructure expense increased due to higher equipment expense reflecting the $105 million impairment of capitalized software, predominantly in our wealth and investment management business as well as higher occupancy expense. These increases were partially offset by lower advertising and promotion, FDIC expense, as well as lower T&E expense.
As we show on page 17, expenses increased $1.4 billion from a year ago, driven by $1.3 billion of higher operating losses.
As we've previously discussed, investments and risk management including regulatory compliance and operational risk as well as data and technology have exceeded expectations and have offset the expense efficiency we've achieved in other areas. We currently expect our 2019 expenses to be approximately $53 billion, which is at the top end of our $52 to $53 billion target range. This excludes annual operating losses in excess of $600 million and also excludes deferred comp expense, which is largely P&L neutral and total $476 million through the first nine months of the year.
Turning to our Business segments starting on page 19, community banking earnings declined $2.1 billion from the second quarter, primarily driven by higher operating losses reflecting higher litigation accruals.
On page 20, we provide our community banking metrics.
We have 30.2 million digital active customers in the third quarter up 4% from a year ago, including 7% growth in mobile active customers. Primary consumer checking customers grew for the eighth consecutive quarter on a year-over-year basis.
Branch customer experience survey scores have increased for five consecutive quarters and reached their highest levels in more than three years in September. The continued improvement in these scores reflects the transformative change we've been making to provide a better customer experience. We've enhanced training and coaching for our team members in our branches including an increased focus on educating our customers about our industry leading digital capabilities.
On slide 21, teller and ATM transactions declined 6% from a year ago reflecting continued customer migration to digital channels. We've consolidated 130 branches in the first nine months of this year, including 52 branches in the third quarter.
We continue to have strong card usage with credit card purchase volume up 5% from a year ago and debit card purchase volume up 6% from a year ago. This was the eighth consecutive quarter of achieving at least 5% year-over-year growth in both debit and credit card purchase volume.
Turning to page 22, wholesale banking earnings declined $145 million from the second quarter, driven by lower net interest income reflecting the impact of the lower interest rate environment. We've expanded the key metrics that we provide for this business and as you can see we grew unfunded lending commitments on both a year-over-year in linked quarter basis. We're a large processor of commercial payments as evidenced by our ACH payment and commercial card spend and we grew our year-to-date market share and investment banking driven by higher market share in loans indications. We're also a market leader in high-grade issuances. We had record volume in the third quarter commensurate with the industry with September being particularly strong and the fourth highest month on record for the industry fueled by the rally and treasuries.
In general, our commercial customers continue to see moderate demand and no widespread issues related to trade uncertainty and interest rate changes. We'll continue to monitor business performance closely, but today, while our customers are cautious, the most common concern they identify their ability to hire enough qualified workers. Wealth and investment management earnings increased $678 million from the second quarter, driven by the gain on the sale of our institutional retirement and trust business.
Turning to page 24, we continue to have strong credit results with our net charge-off rate declining to 27 basis points in the third quarter.
All of our commercial and consumer real estate portfolios were in a net recovery position in the third quarter. Credit card net charge-offs have been relatively stable as we've been thoughtful in our efforts to generate new account growth, including the launch of our Propel American Express Card last year, and while auto and net charge-offs increased from the second quarter due to seasonality, they were down from a year ago even as we've grown originations by 45%. We're generating growth in originations, while maintaining our strong credit discipline with consistent loan de-value, payment to income, and FICO scores.
Non-accrual loans declined $377 million from the second quarter with lower non-accruals in both the commercial and consumer portfolios. Non-accrual loans were 58 basis points of total loans, their lowest level in over 10 years. We closely monitor our commercial portfolio for signs of weakness and credit quality indicators remains strong.
Our internal credit grades are at their strongest levels in two years and since third quarter of 2017 our criticized loan balances have declined 20% with broad-based improvement across all commercial asset classes.
We currently estimate that the impact of the adoption of CECL at the beginning of next year will be a reduction in our allowance of approximately $1.4 billion.
Just over half of the reduction reflects the expected decrease for commercial loans given their short contractual maturities exceeding the expected incremental allowance for consumer loans that have longer or indeterminate maturities.
As a reminder, we have a smaller credit card portfolio than our large bank peers which reduces the impact CECL adoption will have on our consumer loans. The remainder of the expected reduction in our allowance predominantly related to the increase in collateral value of residential mortgage loans, which were written down significantly below current recovery value during the last credit cycle. The ultimate affect 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 model's methodology and other key assumptions. Also, 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 25, CET1 ratio, fully phased-in, decreased to 11.6% driven by returning $9 billion to shareholders through common stock dividends and net share repurchases in the third quarter. This was up 50% from the $6 billion we returned last quarter.
As a reminder, similar to last year, our plan subject to market conditions and management discretion is to use approximately 65% of the gross repurchase capacity under our most recent capital plan in the second-half of 2019.
In summary, while we had a number of significant items that impacted our third quarter financial results, we had strong underlying business fundamentals, including growth in loans and deposits, increased customer activity, strong credit performance, and higher capital returns. I'm optimistic that our continued efforts to transform Wells Fargo and the fundamental strengths of our franchise will continue to position us well for success.
And Allen and I will now take your questions.