Good morning. My name is Regina and I will be your conference operator today. At this time, I would like to welcome everyone to the Wells Fargo Second Quarter 2017 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session [Operator Instructions]. I would now like to turn the call over to Jim Rowe, Director of Investor Relations. Mr. Rowe, you may begin.

Thank you, Regina, and good morning, everyone. Thank you for joining our call today where our CEO and President, Tim Sloan; and our CFO, John Shrewsberry, will discuss second quarter results and answer your questions. This call is being recorded. Before we get started, I would like to remind you that our second quarter earnings release and quarterly supplement are available on our website at wellsfargo.com. I would also like to caution you that we may make forward-looking statements during today’s call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings including the Form 8-K filed today containing our earnings release and quarterly supplement. Information about any non-GAAP financial measures referenced, including a reconciliation of those measures to GAAP measures, can also be found in our SEC filings, in the earnings release and in the quarterly supplement available on our website. I will now turn our call over to CEO and President, Tim Sloan.

Thank you, Jim. Good morning and thank you for joining us today. The benefit of our diversified business model once again resulted in strong financial performance. Our team members are committed to putting our customers first and helping them succeed financially, which is demonstrated each and every day all across our Company. Here are just a few examples. We continued to improve customer experience and loyalty scores in Retail Banking. Our debit card purchase and transaction volumes were industry leading. We had record client assets in Wealth and Investment Management, and we originate more ACH payments than any other financial institution. Let me briefly summarize our financial results in the second quarter. We generated earnings of $5.8 billion, up 5% from a year-ago and EPS of $1.07 a share, up 6%. We produced $22.2 billion of revenue with record net interest income, up 6% from a year-ago. Average earning assets grew 5% from a year-ago, average deposits were a record $1.3 trillion, up 5% from a year-ago. We had very strong credit results with the net charge-off rate declining to 27 basis points, the lowest level I’ve seen during my nearly 30 years at Wells Fargo reflecting our consistent risk management. Our efficiency ratio was 61.1% in the second quarter. While it improved from the first quarter, the efficiency ratio is still too high, operating at this level is just not acceptable and we are firmly committed to the goals we provided at Investor Day. As John will discuss later on the call, we are making progress on our ongoing expense initiatives which target $2 billion of expense saves by the end of 2018 that will support our investment in the business and an additional $2 billion of expense saves by the end of 2019 that is expected to go…

Thanks, Tim, and good morning, everyone. As Tim mentioned, we earned $5.8 billion in the second quarter, the 19th consecutive quarter of generating earnings greater than $5 billion. We believe this outcome reflects the benefit of our diversified business model during a period of continued modest economic growth and uncertainty regarding future interest rates. Tim described most of the year-over-year results that we show on Page 3. So I'll just highlight the decline of 82 million common shares outstanding over the past year, reflecting our strong capital return through a net share repurchases. Turning to Page 4, let me highlight a few notable balance sheet trends. Driven primarily by the expected decline in auto loans, which were down $2.5 billion from the first quarter, total loans declined $982 million from the prior quarter. As we've discussed previously, we've tightened credit underwriting standards in auto, which was reduced our origination volume down 17% from the first quarter. Cash and short-term investments declined $43.5 billion, reflecting a seasonal decline in deposits and the pay-down of wholesale funding. However, we still maintain strong liquidity levels and could deploy tens of billions of dollars and remain LCR compliant. Investment securities increased $2 million in the quarter, we had approximately $37 billion of gross purchases in the quarter, the majority of which were agency MBS. These purchases were largely offset by run-off in the sale of approximately $15 billion of lower yielding short duration securities. The $17.6 billion decrease in long-term debt was primarily driven by the prepayment of Federal Home Loan Bank advances. Turning to the income statement overview on Page 5, I'll describe revenue and expense trends later on the call. So let me just highlight that our effective tax rate in the second quarter was 27.7%. This included discrete tax benefits totaling…

[Operator Instructions] Our first question will come from the line of Betsy Graseck with Morgan Stanley. Please go ahead.

Good morning, Betsy.

Hi, good morning.

Good morning, Betsy.

I wanted to just kick-off on loan growth because while it was decent number relative to what we're seeing in the industry, the H8 was a little slower than what we're looking forward. So could you just give us a sense as to how you think that's going to be trajecting on a core level? And then was there anything on a non-core roll-off that was impacting the number?

Well, I think – Betsy that's one of the reasons why we wanted to provide some additional granularity in the slides in terms of where we're seeing loan growth. I think the loan growth trends continue to be good with the headwind that we're having just in terms of the absolute number being the run-off of the junior lien mortgage portfolio and then the impact from auto. But you saw in the first quarter or in the second quarter that we had some good growth in the C&I book, in Government and Institutional Banking, in Commercial Capital and Global Banking. Within the C&I book while real estate – commercial real estate construction activity was up, the more typical commercial real estate loans were down a little bit, primarily due to some of the competitive pressures that we're seeing out there. But I think our trends should continue and that is – our goal is to grow above the industry average. I think the important thing here and one of the reasons why we wanted to be really transparent is that we've got to do this. And one of the reasons why we've become the largest lender in the country is because of our consistent approach to how we manage risk. And we've seen cycles before; we'll see them again, but we will continue to be optimistic because loans are such an important product for our customers.

Okay. And then just separately to follow-up Tim on the decision to sell the insurance brokerage and then there was a small separate sale of a business, I think it was the shareholder services business that hit the tape the other day. I just wonder if you could give us a sense as to how you're thinking about the businesses that you want to retain, attract, invest in versus the ones that you are deciding to move away from because frankly, in conversations with investors, the insurance -- that was a bit of a surprise to people, thought was that it was good for CCAR and ROE, albeit had a higher expense ratio. So with that as a backdrop, maybe if you can give us your sense as to what we should be expecting from the team going forward?

Well, I think what you should expect from our team is continued strong performance, which is what we've delivered this quarter. I think in terms of businesses to that we've decided to sell, we’re continuing to look at all of our businesses. We have high expectations in terms of financial performance, and for those businesses that one, we don't believe are as core for the platform, but two, maybe can grow better in the hands of others, we’ve decided to exit those. I think the crop insurance business is a great example of that. It was actually bought by one of our customers and my understanding is they’re doing well, which is great. We’re happy about that. Likewise, the health benefit services business, which was a good business for us. The challenge there candidly was that the regulatory environment for that business got much more in terms of – became much more focused on medical regulations and we just thought that that was going to be a better chance to grow in the hands of somebody that's in that business full time; and again, we sold that to one of our customers. That's gone pretty well. And then likewise, on the insurance business, recall a couple – or three years ago, we sold the non-footprint offices in our commercial insurance brokerage business because there just wasn't much connection there with our existing business and as we looked at the insurance business, again it was performing fine, but candidly I think that that it might – we thought it might work better with others and we're very pleased with the buyer USI. They were the same firm that purchase the offices that we sold in 2014 and then again with shareowner services. So we're going to continue to look at all of our businesses. Those were all good businesses. I think other thing that is important is that all those buyers took care of our team. So we're trying to improve our results to all of you, and we're going to continue to look hard at our businesses and if something doesn't fit, then we'll move on.

Okay. Thanks.

Your next question comes from the line of Matt O'Connor with Deutsche Bank. Please go ahead.

Hey Matt.

Good morning. So a lot of good details on the expenses, the drivers of – with the $2 billion net will come from I think it's all very helpful and at the back half of the year commentary I think it’s positive. But are you able to give some visibility on where you think the absolute level of cost can be looking on a couple of years?

Well, for the reasons we've talked about before, it's tough to give an absolute number, because so much of our expense is driven by the business results that are happening in any given quarter because they are related to production levels, et cetera. So instead what we are focused on is what we're taking out and focus importantly on our 55% to 59% efficiency ratio because we're driving our businesses to outperform and incidentally that is part of the story that you mentioned in your question. But the things we're focusing on our lower efficiency ratio businesses and the things that probably don't fit as well as some of our higher efficiency ratio businesses not all. So I would think of it that way. What costs are we taking out because there is non-value added, and we're improving the Company and where we signaling that we're going to run the Company over time, 55% to 59% as opposed to a specific dollar, which reflects more assumptions and it's reasonable to make about what our business mix is at that time what our production levels are at that time.

Yes, I can appreciate, some moving pieces in the revenue side, I do think even a range might be helpful. Some of your competitors, Bank of America and JPMorgan, one would argue they've got more volatile revenue stream and you because of a bigger investment bank and JPMorgan gives us an annual expense target, Bank of America is a number out there, couple years out. So I think it's something we're considering. I think would be helpful for your stock, obviously the expense message overall is positive and I do think it's something that might be helpful?

Thank you.

Thank you.

Your next question comes from the line of John McDonald with Bernstein. Please go ahead.

Hi, following up on Matt's question on the expenses. John, can we go over that concept of the timing differences between the first $2 billion of expense saves that you're targeting for the end of 2018 and kind of the offsetting spending some of which is already occurring. Could you just explain that timing difference again? So we understand it.

Sure. So the first $2 billion should be fully in the run rate at the end of 2018, and the second $2 billion should be fully in the run rate at the end of 2019. The concept of the timing difference is, we have elevated expense today and we described some of the areas where that's occurring, some of that will abate naturally because programs run-off between now and the end of 2018 or at the end of 2019. So there isn't a nice stair-step that describes what rolls on and what rolls off. But we have higher expenses and this should be today in certain areas, and we've got these programs kicking in when we're describing them kicking in. Now it's certainly possible that – it's very likely actually that will begin to drip into the run rate, the first $2 billion before the end of 2018 and the second $2 billion before the end of 2019 that the last dollar of it should be in the run rate by the end of 2018 and the end of 2019. And then the complicated, I know you know this, but we've got a few other items that will be rolling off after 2018, FDIC insurance that sort of super premium there and some amortization of deposit intangibles that’s out there. We are also selling these businesses, which will have an impact on expenses. All of those things will be happening at about the same time, but we'll keep driving people back towards evidence of the $2 billion for 2018 and the $2 billion of 2019, so you can see where we're taking that cost out.

And because of that difference between the spending that you're doing to offset the first $2 billion and when you get the sales by next year, won't effectively some of that first $2 billion really be falling to the bottom line again 2018 because if the spending already happened, but now you are getting the savings?

Some of it will. That's because it's coming in before the last day of 2018 and there will be some ramp down in certain of the programs that we've got that have elevated expense today. But just for clarity sake to help people to understand how long it might take, we're describing it as the end of 2018 and the end of 2019.

And then to the question of longer term targets, understanding the challenge of an absolute dollar target, but maybe a target that's the gap between your revenue growth and expense growth over time? Is that something that you might aspire to having a gap between those two and operating leverage kind of target?

We certainly aspire to have consistent positive operating leverage. It depends on what's going on with the rates, well all that's happening because the business mix will make a big difference and what kind of leverage we get with so much leverage in a higher rate environment if there isn’t a lower rate environment, because you get extra revenue without actually having to put more labor into it. So there are assumptions that are embedded and what that would look like, but just to be perfectly clear in every business, in every way we're targeting to end up in a consistent positive operating leverage environment as a result of the moves that we're making.

Okay, that's fair. One quick follow-up. Is there any change in your loan growth outlook for the full-year? I think in Investor Day, you're kind of targeting low single-digit loan growth for the year in terms of low single-digits, any change there after the results this quarter?

I think we're still looking at that same target.

For the year? Okay.

Yes, for the year.

Okay, thanks.

Yes. Thanks, John.

Your next question comes from the line of Ken Usdin with Jefferies. Please go ahead.

Hey Ken.

Hey thanks. Thanks a lot. Good morning, guys. One more specific on just the expense trajectory. Can you help us understand on the insurance brokerage side and the sales of those businesses, is there any way to help us understand the magnitude of the revenue and expense related to those that go away. And are those expenses, specifically in the $2 billion?

So two things, one because we're still in the process of closing on those transactions, it’s not appropriate to talk too much about the results of the businesses, we will wait until that's done. But two things, one is both the businesses that have been announced and are being closed this year have very high efficiency ratios. So you would expect to see the efficiency ratio benefit at the margin. These aren't huge businesses, but at the margin from the outcome and we'll talk more about what they meant to Wells Fargo after they close. But no, they're not in the $2 billion. So specifically the list of things that we're doing to improve Wells Fargo isn't getting benefited by expenses going away from having sold the business.

That’s great. Thanks for that. Second thing, just on – as the loan mix – well as the earning asset mix is changed with slower loan growth and mixing a little bit more into securities and cash. Can you just help us through the dynamic of just net interest income and NIM trajectory from here? Thanks.

Yes, well, so there's a lot that's going to happen with NIM trajectory and I'd say the biggest drivers to look for – part of it is earning asset mix and the rate of growth in loans and of course what kind of loans we put on the books. But at least in the short to medium-term probably more impactful is what's going on with deposit pricing, because we have been outperforming the beta that we showed to you at our Investor Day by a reasonable amount, especially on the consumer and small business side of things. And so as we sit around and think about the next six to 12 months and what happens with rates and what happens with net interest income whether or not we continue to outperform our modeled expectations on deposit repricing is really one of the big drivers, obviously deposit growth, loan growth, deployment into securities all matter, but I would focus on deposit pricing in the near-term.

But you feel confident that NII can continue to grow from here?

We do. In fact, I think I mentioned sort of confirming that low-to-mid single digits NII – annual NII growth 2017 versus…

Okay, understood. Thanks John.

Your next question comes from the line of Erika Najarian with Bank of America. Please go ahead.

Hi, good morning.

Good morning, Erika.

I wanted to focus my line of questioning in terms of the revenue progress that’s underlying your goal to get back to your efficiency range and maybe it's good to just jump off from Ken’s line of questioning, you mentioned the betas are going to be a big swing factor, and I'm wondering how you're thinking about the sensitivity of outflow in beta as the Fed begins to reduce their balance sheet and how it would impact you specifically?

Sure. I mean I think our general assessment is if they start selling long duration assets, I know that there are people who believe that depositors will rush out of bank deposits and rush into mortgages in 10 years. I’m less confident that that is an expected behavior, but let's assume that deposits decreased by some percentage of the amount of shrinkage in the balance sheet. I don’t think we have any reason to believe that our impact on that would be any greater than our percentage of deposits overall, because we think that we're very competitive in our deposit franchises. We certainly are on product; service et cetera and we could be as competitive in prices as we choose to be depending on what the impact is on our business at that time. So the way we're thinking about it is we'll all wait and see what the impact – what happens to deposits in the aggregate. And then we'll react from a defensive position to the extent necessary to protect our deposit franchise as when and if the market begins to make moves in order to stem whatever tide of outflows there are at deposit side of the system.

Erika, just to reinforce John’s point, I think that's why it’s really important from our perspective to make sure that we're investing in our products and services convenience as John mentioned for our consumer customers that is – that when you are in an environment where it is uncertain, I mean the Fed has never had a balance sheet of this size. We've never been through a situation where they're talking about reducing a balance sheet. We can talk about history all day long, but since we've never been through that, nobody knows exactly what's going to happen. But what we do know is one thing and that is our customers’ value convenience, service, reliability. And to the extent that we can continue to invest in all of our products and services we can compete on much more than just price. And as John said, we're comfortable about our ability in any environment of maintaining and hopefully growing our deposits here.

Thank you. Moving on just to the other side of the balance sheet, one of your competitors gave a dollar number in terms of how much liquidity had been tied up with their Living Will process. And I'm wondering, especially given the treasury proposal, if you could share at least ballpark, how much liquidity is tied up there and just I guess wondering what the opportunity set for Wells Fargo could be, if reform does come to task given it seems like liquidity versus capital, it seems much more of the constraint?

Yes. There are big liquidity requirements as a result of resolution planning, but frankly, I don't think they get us to much different of a number than our LCR process. In fact LCR might actually take us to the requirements, plus our buffer we take us to a higher level than our resolution liquidity needs in our plan. So yes, there's a lot of liquidity on the books of the biggest banks. But it's for both of those reasons, and so if – in some way resolution planning was softened somehow. Frankly, I don't think for us, it would make that big of a difference, and I’ll leave with that.

And the final question just on the fee side, if you take out the gain on the PCI loans, the run rate is something like $9.4 billion and as we're looking forward to efficiency improvement for the second half of the year from the 61%. I'm wondering how we should think about the progression of fees in the second half.

Yes, well, I mean I go line by line. Probably the biggest swing item of course will be mortgage and what happens because now there is more price competition I think reflecting excess capacity and reflecting the different market that we're in. It's a little bit more of a free for all in the purchase market than it is in a refi market because of the way people source their mortgage loans and one versus the other. Then I’ll just go back to their service or they go out to the market in a purchase environment. So I think mortgage banking could be a little bit more volatile. I think volumes are good and our leading shares certainly help and our introduction of technology, there will be an incremental help, but that's a reasonable swing item. I think everything else right now is in line with our five-quarter averages. We had a record in card fees for the quarter. Trust and investment fees are very high with the WIM results and that reflects inflows, as well as the levels of asset prices that drive a lot of the outcomes there. Service charges are good. They did tick down a little bit. We have introduced these new capabilities for our customers to avoid overdraft expenses. So that’s – it would be a shame to lose that revenue, but it's good for our customers and we're happy to have done that. That feels like the right thing to do. And then insurance is likely to be in the run rate for the rest of the year. We probably won't close that until the end of the year. And then some of the market sensitive other items will reflect the markets that we're in. So there is the story behind each of them. Most of them are in line with the five-quarter averages and I'd say mortgage is probably the item to look at in terms of what's the size of the market, what the composition of the market and what's going on with margins that reflects competition.

Okay. Thanks for taking my question.

You bet.

Your next question comes from the line of Saul Martinez with UBS. Please go ahead.

Hello Saul.

Hi, good morning. Couple questions, first on the auto portfolio, it down $2.5 billion linked-quarter. Obviously you talked about tighter underwriting standards. But how should we think about that going forward in terms of the magnitude of declines in the second half and where we're ultimately in the size of the portfolio get to? Do you have a sense for that?

Yes, Saul, a good question. I think that you're likely to see a continued decline in the auto portfolio through the second half of this year and my bet is it will probably stabilize sometime in the first half of next year. I think during that entire time, it's reasonable to assume that’s the quality of the underlying customer, which is really key here, but the quality underlying customers measured by FICO score will continue to improve, I don’t know if it will continue to improve at the levels we've seen, but it will continue to be very strong. And then my guess is, that's where the business kind of stabilized sometime in the first half of next year.

Okay. In the decline is really related more to pricing and not getting targeted returns than anything you're seeing from a credit standpoint, is that fair to say?

No, no I think a year-ago, we look at the market and what we saw in the market was the following. And that was that – remember that majority of our originations are for our used car loans. And so we saw – we would became concerned about underlying values of the collateral because of production levels by the industry. The number of cars that were coming off leases, we got concerned by the risk return in terms of pricing as well as term and we took that all into consideration in terms of ramping down our originations in improving the underlying quality. And on the short-term we gave up loan growth and so the metrics are not as good. We gave maybe some short-term revenue. But over the long-term, this is how we think about credit. We're not targeting certain balance levels or anything like that, but we want to continue to underwrite in an appropriate way on a product-by-product basis.

In that business, we're also reorganizing the business itself. We’re collapsing lots of regional offices. More than 50 regional offices down into a number of much bigger centers and while that's going on, we’ve reduced the risk profile of the portfolio and what’s rolling into it. So that we can work through that reorganization with less inherent risk in the loan book and that's helpful. That’s – maybe [that’s in credit] to Wells Fargo when you're thinking about what this means for your auto loans in general.

Got it. Just adding to that, on the retail sales metrics, it seems like you kind of embedded them into the segment results or some of them into the segment results. But it seems like some of the forward-looking indicators, whether it's I guess branch banker interactions, credit card applications, don't seem to be there. And I'm just curious what the logic was there and is the trend that you have been showing which was a big step function down after the sales fraud issue and then kind of a stabilization, is that sort of what we're continuing to see in some of those forward-looking indicators?

Yes. Let me start and John jump in. I think that what we're trying to do is provide you with a reflection of how we’re measuring and running the business. So we changed for example, the incentive compensation plan in the first quarter. We talked about the results of that briefly. I think that we're seeing actually some very good results in terms of customer experience and a continued improvement in customer loyalty. I think the branch interactions are as reflective of what's going on in terms of customer choice moving more to mobile than anything else. And so when you think about our customer interactions what I would do is step back and not only look at branch interactions, but also look at the number of online and mobile interactions. We had a total of 1.9 billion interact customer interactions in the second quarter. And that's why it's important for example to make sure that we're investing in technologies. So a customer can open account on their mobile device set. And if they want to or they can come into one of our branches, that’s fine. But overall, I would say that we're seeing a slow, but steady return in an improvement in underlying retail business. We still have more work to do, that’s absolutely the case. Mary Mack and her team are absolutely focused on that, but we're making some progress.

As we announced at Investor Day, we’re changing our descriptions, our disclosures to as Tim said to emphasize what Mary thinks is important in running the business. And you can see the branch and ATM transactions and the digital transactions in the supplement, they are on Slide 20. And just specifically to your question in terms of us having a stabilization point based on some of the previous monthly disclosures, there’s nothing is changed about that, things are still stable, things are going well, we're opening more than we're closing et cetera. So this just represents the pivot toward how Mary is managing the business.

Got it. Very clear. Thank you very much.

Thank you.

Your next question comes from the line of John Pancari with Evercore ISI. Please go ahead.

Hey John.

Hey John.

Good morning. On the deposit side, the weakness in the deposit fees, I know you've flagged a few items, you flagged the new products introduced and you also mentioned the higher earnings credit rate. Can you give us any idea of how much those factors for each was a drag, so in other words can you just slice it up how much was attributable to the new products versus the ECR and then possibly the sales practice issue?

I would say it’s 50/50 between earnings credit rate and the changes that we made on overdraft. I don't – I’m not specifically attributing anything to what was going on in sales practices in particular.

Okay, all right. And then also on the deposit side, the decline in the deposit balances itself. Can you give us similar color around the drivers there, how much of that is at all tied to sales practice if at all or is just other factors that are impacting the…

Yes, I wouldn't attribute any of the decline in sales practices, I think again the second quarter tends to have a lot of seasonality in it particularly on the consumer and the wealth side because folks get their tax refunds and then they use them. And the tax refunds were delayed a bit this year and so I think there were probably three weeks to a month delayed and we talked about that in the first quarter. So actually I think that the deposit franchise on the consumer side and the wealth side performed better than what we had expected and better than last year.

So couple other items and we mentioned them earlier, but in WIM we had more customers shifting from cash into investments, so people actually moving out of cash and getting invested, so those would show up in assets under management on the WIM side. We also on any given quarter end we will have big dates for payroll, we’ll have big dates for escrow payments, we’ll have big dates for M&A, et cetera. And so just depending on what day of the week or what deals outstanding and what part of the cycle that occurs and those could be multi-billion dollar swing items at any point in time. So as a result, we tend to look at averages more often, and in Q2 we had a record average in deposit, so that reflects the whole business.

Yes. All right. That was the color I was looking for. And then separately on the commercial real estate side, on the lending side, I know you indicated that you're adopting a bit more of a conservative credit discipline there. Can you talk about what you're seeing? What's making you back off incrementally here? And what areas are you really stepping back from? Thanks.

Yes, I apologize if you took away from my earlier comment that we're adopting a more conservative time. We've always been a conservative commercial real estate lender that's why we become the largest commercial real estate lender because you got to be able to adapt through cycles. Having said that from time-to-time and again, this can be quarter-to-quarter or year-to-year there's a fair amount of competition in stabilized commercial real estate projects, I mean there's lots of liquidity out there. And so this quarter there just happen to be more transactions that we’ve looked at where we said, gosh, another risk return it just isn’t there, but I wouldn't describe it, and that's more based on underlying risk return in an individual transaction as opposed to stepping away from any region or any product type within CRE.

Okay, great. Thanks Tim.

Thank you.

Your next question comes from the line of Gerard Cassidy with RBC. Please go ahead.

Good morning, guys.

Good morning, Gerard.

Tim, can you share with us – obviously, you are centralizing a number of the processes as you guys have described and how do you ensure that you maintain the incentives or the entrepreneurial spirit, if you will, of your people in growing the business? Centralizing could kind of slow down the process for loan approvals and such? Can you share with us what you're doing to try to prevent that from happening?

Well, I think it’s a really good question. I mean when you think about the amount of change that's happening at the Company, there is no question, there can be impacts in terms of how we're interacting with our customers. And the way that you guard against that is that you talk about it a lot, you make sure that when you're – for example centralizing all of your – our HR functions that we've got the right service level understandings between our aligned folks and our HR folks were as we centralize some of our risk functions that we've got an understanding. And then you encourage folks to provide feedback. You ask our enterprise functions to think about themselves as service providers and their customers are the lines of business. And as you can imagine, you get feedback in terms of the decisions we made and things you've done. And in some places you might go little bit far, you get that feedback and then you make adjustments. But I think it's – making sure you've got a plan in place, making sure that you've got the right team in place, asking folks to provide a lot of feedback and then responding to that feedback. And so far, I think we're doing a good job, but it's something we talk about a lot Gerard.

And one thing I would add is that today the people who have been centralized are the same people who were serving or working in the business or for the business to be entrepreneurial and get things done. As you described, the tax will be what happens as the generation changes and we have new people.

Right.

We never were in the business that are in those centralized roles into they provide – how do we make sure that they provide the same level of support and service back to the business.

And John with that is there a time line? Is it we should know in two years or 18 months that you've been successful in keeping that entrepreneurial spirit or is it further out? And it just takes a while before…

I think the timeline is for ever…

Yes, the timeline is for ever, but just to be clear, like you're describing, one of the potential vulnerabilities, there is a list as long as your arm of the great things that come out of having pulled together people to provide a common service at a – in a more effective way, which creates better experiences. So the upside is huge. Not only to save money. That's a great plus. But for all of these things that our businesses we're doing for themselves. They weren't doing at it scale and now we can provide it scale with the best tools, the most highly trained people, the deepest bench. It's like, it's a benefit. So I’d encourage you to think about it that way to.

Sure. And you mentioned, if I heard correctly, that people now digitally can open up accounts online. What type of loan products can people apply for and get approved for? I'm sorry, through the mobile app? What type of loan products can people actually apply for through the mobile app? For example, quick and mortgage probably familiar with they have the Rocket Mortgage that you do through the phone. Are you guys there yet with that type of product or other loan products where consumers can actually apply and get approved for them through the mobile device?

So the short answer is, not enough. And that was one of the areas that we highlighted at Investor Day within our mortgage business. We're working on our own online capabilities. And right now, we're piloting it for our team members and so far the response for our team members who are taking mortgage has been very good. In fact has been much better than what our expectations were. And so our plan is to end to pilot that for non-team member customers later in the year and roll it out next year and we think it will be a step above anybody else in the market. On the small business side and you can – if you're a Wells Fargo customer, you can go online and you can open up or apply for a loan and will give an answer in 45 seconds or 60 seconds or something like that. We have more work to do from a credit card standpoint. But our goal over the next couple years is to make sure that on the consumer side, all of our products and services are available online and as many as possible on mobile, probably less likely mortgage is going to be on mobile, but we're going to improve the capabilities across the board.

Great, and then just finally shifting gears on the total loan portfolio, obviously year-over-year essentially flat, but one of the growth areas has been your commercial foreign loans? They're up over 10% year-over-year? Can you share with us where that growth is coming from? Grant that I know it's less than well below 10% of total loans, but where is the growth coming from? And second, where do you see that growing to? How big could that business be, since you're seeing some good growth there?

So Gerard, recall that within our Wholesale Banking business, we have a Global Financial Institutions business with offices located around the world and we have a real benefit given the quality of our balance sheet as also the quality of our products and services in terms of the relationships that we have with other financial institutions around the world. They'd like doing business with us. And so in the second quarter, we saw some growth. In the first quarter, we didn't see growth. In addition, when you think about what our international strategy is separate from the global financial institutions business. It's to help our customers when they want to do more business outside the U.S. or help non-U.S. customers do business here and we continue to see good benefit from that very focused strategy. We're not trying to be all things to all people, but gosh, if you look over the last five years or so, I think we've been growing those activities that are kind of mid double-digit rate. So I wouldn't say it's any region around the world in particular or any product set. But I think about it is over time in global financial institution and then in that very targeted global banking strategy

Great. Appreciate the color. Thank you.

You bet. Thank you.

Your next question comes from the line of Nancy Bush with NAB Research. Please go ahead.

Hey Nancy.

Good morning, guys. How are you?

Good.

Yes. Couple of questions. Back to the sales practices issue, I think you mentioned that you had preliminary court approval for the $142 million settlement. Could you just summarize for us what other suits issues, et cetera that have been publicly disclosed that are out there? Is there anything major that's still outstanding at this point?

Well, the $142 million settlement that was preliminary approved by the court. We believe addresses the other class action suits that are sales practices related. I think there are about 10 that are out there. So we have high expectations that ultimately that preliminary approval will become final approval after we execute on what we're being – we agreed to do, which of course we're going to do that. In terms of other activities out there, we have consent orders and plans that were for both OCC and the CFPB that we need to comply with and we're working very hard to be able to do that. And has been discussed, there's been – there is an investigation that's still going on by the Justice Department and we will continue to provide more disclosures in the disclosure of that in the 10-Q in the 10-K, but there's nothing really new that's different in the 10-Q as it relates to other legal matters for sales practices with the exception of the announcement of this preliminary approval from the court on this settlement.

The CFPB’s recent move on arbitration versus class action or versus lawsuits, I mean I'm assuming that will not be retroactive, I mean if you had a chance to sort of look at that and see if it's going to have any impact on what happens going forward?

Well, I think that lots of folks have had an opinion on this and not only in Washington, but also various business groups and so on. I'm not going to applying on the legality or illegality of what they're doing whether it's retroactive – I don't think it's retroactive. But I think there is a lot of concern about this decision and I think that my guess is that based on the feedback that we'll see legislative or administrative and legal action against it.

Okay. And just finally on the subject, there have been several large municipalities that have several relationships with Wells Fargo. I think New York City may have been the last one, you have to refresh me on that. But is there – I mean my understanding of this municipalities business, and it's primarily liquidity management, it tends not to be terribly profitable business et cetera, I mean obviously you don't want to lose it, but I'm just trying to see if there are any trends that we can sort of track to that right now and where to look on the income statement to see if there is an impact?

Sure. But overall, I think the punch line is there hasn't been a material impact to the Company for all the decisions made or some of the decisions made by some of our municipal customers. But you're right, there been some cities, some states who put us on a freeze or put us on probation or something for some period of time because they want to see that we're going to fulfill the obligations that we have related to sales practice and of course we're going to do that. And our expectation Nancy is that we're going to win all that business back. A great example is the State of California recently put us on probation and then we competed very hard and won some municipal business because we provided the best option for the citizens of California and for the state. The fact of the matter is that there's a lot of reporting on when politicians stand before a podium and talk about how they want to put us a freeze on Wells Fargo for a while. It doesn't get reported is the fact that most of our municipal and GIB customers are continuing to do business with. They love working with Wells Fargo. And in fact, one example of that is, you saw the growth and balances in the second quarter of $1.1 billion in our Government and Institutional Banking business. So that business continues to perform well, we're going to win all the business back and we're going to fulfill the obligations that we’ve and promises we've made all those customers.

One nuance to your question, Nancy, you mentioned it tends to be the portion of the business at least profitable. Most of these relationships are complex relationships where we're a credit provider. We're managing their cash because a very few institutions can manage liquidity and manage cash like we do. And then we might also be doing some investing for them or some bond placement for them or some risk management stuff for them and the ones that I've tracked since we’ve begun usually we've been sort as Tim describes it put the box for a year or for two years on bond underwritings. But it's – they go through a painstaking process to pick their partners on who provides credit and who manages their cash. And it takes years to switch those things, if they decided to and we have a tenancy not to want to do that. So the core underlying piece of the business tends to be actually quite good.

Okay. Thank you.

Yes, thank you.

Your next question comes from the line of Brian Kleinhanzl with KBW. Please go ahead.

Great, thanks. So I had a quick question, first I think an easier one on the oil and gas loan portfolio I know the reserve still at almost 8% for the overall portfolio, but given the slight pullback in the oil prices, could you give us kind of a little bit color on the portfolio today versus where it was [indiscernible], is there a actual number for oil prices per barrel that you kind of get more concerns about your oil book?

Also on your last question first, I wouldn't say there's an exact price. The production is migrated to the most efficient producers. So whatever that prices that would make people disturb, it's a lower price than what you might have thought a couple of years-ago. The portfolio overall is now about 1.3% of our total loan portfolio, $12.7 billion is down 10% year-over-year. We had $20 million of charge-offs in the portfolio this quarter, which is down $80 million from the prior quarter. Oil and gas not accruals or at $1.8 billion down called it $230 million linked-quarter, criticized assets are $4.5 billion down $0.5 billion linked-quarter and the remaining oil as you said is almost 8% outstanding. So I think we feel good about where we are. We got after this early, we built reserves against it to what we thought was the right level and then we're coming out the other side of it. We the whole it's of course more than keeping an eye on the price of crude, this is both an oil and gas business and we've got hundreds of professionals in market. We’re working with all of our customers all the time to help them manage down the risk and it doesn't feel like an area of concern in the resource prices, the neighborhood that we’re operating in.

Okay. And then on the primary consumer checking customers, I know there's still more opening and closing at this point in time, but the growth rate is still decelerating. So do you have a better handle on one that will actually start to inflect and see a better growth rate, I know you’ve done investments in the marketing spend picked up this year. I mean is it next quarter we should see that inflect. Is that the fourth quarter, can you some insight on the timing there?

Well, I think it's going to continue to occur over time and I think that that it's - I wouldn't say the inflections tomorrow or a week from tomorrow or next quarter I think our expectation is that we're going to continue to grow from the current levels and being - every quarter is a little bit different. But my encouragement of view is to look a year from now and see where we are.

Little more context on that metric because we've been pointing towards relying on that metric and increasingly over the last couple of years and in the early days of really emphasizing that metric, one of the things that we were working through is the conversion of customers who were Wells Fargo customers, but we're primary customers to a primary status by encouraging them to do that giving them reasons to do it, giving them capabilities et cetera, but a compelling value proposition. And so setting sales practices aside, we had been working through that stock of people who were already customers, but weren’t primary. So in any event even if we hadn't had sale practices issues that was going to slow down. Now we've got the sales practices issues to recover from and we also have the fact that we've converted as many or probably as many as are going to be converted from non-primary status. So it's really going to reflect taking business from other people and getting more than our fair share of new household formation or new bank customer formation as it happens over time.

Yes, perfect. Thanks.

You bet.

Your next question comes from the line of Marty Mosby with Vining Sparks. Please go ahead.

Hey Marty.

Hi, Marty.

Thanks for taking the questions. I want to talk about mortgage banking. It used to be a real powerhouse for Wells Fargo. And couple of years ago on Investor Day, we actually had a mortgage banking – talk about [indiscernible] finally turn the corner after we come out of this financial crisis. And here we have a seasonal quarter where you sort of seen an uptick and we actually had treasury rates falling, which should have been a better delivery quarter, but we have margins fell off. So just the innate trends and metrics of the business just don't think to be working the way that I’ve grown used to it in my history, so I was just interested to see how you think about the business and how do we get this thing turned around?

Well, Marty I might push back just a bit and that is that one of the decisions that we've made over the last few years is to make sure that we're building this business for the long-term and to eliminate any portions of the business that we would describe is providing additional amount of risk. So we got out of the wholesale funding or wholesale mortgage we've got out of reverse mortgages. We exited the direct FHA business because of the potential liabilities and so during the period that you're describing what we've been trying to do is really build the business for the long-term. We made most of – all those changes, and now as we look toward the future, we think it's really critical to make sure that we've got for example that online product that Gerard ask about, and which we're in process of and it will be rolling out next year. And our expectation is that we will continue to grow this business in the short term. As John mentioned what happened this quarter was just the mix between correspondent and direct shifted a little bit. But also remember in the background that because of the size of our servicing book in periods where there's a lot of refinance activity, we get a disproportionate amount of share relative to the rest of the industry proportionate for us. So I wouldn't throw in the towel on the mortgage business. There is huge opportunities here. There is huge opportunities to grow the first mortgage business. There is huge opportunities to grow the second mortgage business, and Franklin and team are very focused on that.

One more thing I’d add Marty that doesn't show up in the mortgage banking line item, but we're making non-conforming prime jumbo mortgage loans handover for our best customers and then they show up on our balance sheet. So they contribute to net interest income, but they don't flow through the mortgage banking line item in the same way. And so we think the business is the combination of those things, some of it’s shifted because of our emphasis on higher credit quality and that loan balance cutoff, puts those on our books. So there’s a variety of things, all de-risking. Last thing I’d say is that, as I mentioned for those loans that are on our books and we are the biggest mortgage lender, we had a net recovery in credit in the quarter. So we like the credit profile that we're putting on our books as well.

Got it. So really is that holding more on the balance sheet as well, like you were saying kind of retooling the business. So this should be the kind of basing of that and we should hopefully begin to see some improvement in the market and the business now being able to improve from here. So that hopefully will be what we'll see over the next couple years. And the other thing I want to ask you about was when I looked at your deposit rates, what would be your MMDA or kind of the savings, money market savings aligned where the majority of your deposits are, the rate has done really well had increased several basis points. But the line right above it, which is really the checking account has been going up almost with the Fed fund rate, so it's somewhat surprising that your checking account is going up faster than your savings account. So it has to be kind of an anomaly in that account. Is that just more corporate related? Is that how you kind of classify it? Or was just curious why that rate is moving up so fast?

Yes, that's more commercial and corporate-related. On the consumer side because of the service convenience that we can provide – as we've talked about in the past, we were trying not to compete on price, and that's what you're seeing across the rest of the industry. I think the growth that you're seeing is primarily on the commercial in the corporate side, particularly medium and larger corporate some financial institution were candidly, it’s much more price sensitive. It's still been increasing at less than the rise in short-term rates, but that's what explains it.

And the checking account just more is that more Treasury type of products in that, what you actually show interest-bearing checking is that first line on that supplement?

They’re indexed to a variety of things, but…

Right, got it. All right. Thanks. End of Q&A

And we have no further questions at this time.

Well, thank you very much for spending part of your morning. I know it's a very, very busy day. And I hope as you review our results and reflect on our comments today that you are as optimistic about the future of Wells Fargo as we are. So again, thank you for your time and have a good rest of the day.

Ladies and gentlemen, this does conclude today's call. Thank you all for joining. And you may now disconnect.