Jim Rowe - Director of IR John Stumpf - Chairman and CEO John Shrewsberry - CFO

Erika Najarian - Bank of America Mike Mayo - CLSA Bill Carcache - Nomura John McDonald - Sanford Bernstein Kevin Barker - Piper Jaffray Paul Miller - FBR Matt O'Connor - Deutsche Bank Brian Foran - Autonomous Ken Usdin - Jefferies Joe Morford - RBC Capital Markets John Pancari - Evercore Eric Wasserstrom - Guggenheim Securities Marty Mosby - Vining Sparks Nancy Bush - NAB Research Brian Kleinhanzl - KBW

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 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remark 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 the conference.

Thank you, Regina and good morning everyone. Thank you for joining our call today where our Chairman and CEO, John Stumpf; and our CFO, John Shrewsberry will discuss second quarter results and answer your questions. Please remember that 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'd 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’ll now turn the call over to our Chairman and CEO, John Stumpf.

Thank you Jim, good morning and thank you for joining us today. Our diversified business model and continued focus on meeting our customer's financial needs drove our performance in the second quarter, our 15th consecutive quarter of generating earnings greater than $5 billion. We produced strong performance during a period that has had - has included persistent low rates, market volatility and economic volatility, and we did it by focusing on the core building blocks of long-term shareholder value creation, that is growing relationships, loans, investments and deposits. Our loan and investment, and deposit balances are all at record levels and we've maintain our strong risk discipline. Let me highlight our results for the second quarter. We generated earnings of $5.6 billion and earnings per share of $1.01. We grew revenue compared with a year ago by 4%, with growth in both net interest income and non-interest income, and our pre-tax pre-provision profit grew 5%. We generated positive operating leverage, while we continued to make investments throughout our businesses. Average loans grew over $80 billion or 9% from a year ago. Average deposits increased $51.4 billion or 4% from year ago and we grew the primary - the number of primary consumer checking customers by 4.7%. Net charge offs remained near historical lows at 39 basis points annualized reflecting the benefit of our diversified loan portfolio and continued underwriting discipline. We returned $3.2 billion to our shareholders through common stock dividends and net share repurchases in the second quarter, the fourth consecutive quarter of returning more than $3 billion. We continue to increase stockholder’s equity which now exceeded $200 billion for the first time and we are pleased to have received a non-objection to our 2016 capital plan from the Federal Reserve. Incidentally, when the former Norwest, which when I came from and Wells Fargo merged 18 years ago, our total assets at the time were slightly less than $200 billion, now our stockholders’ equity exceeds that. Remarkable results over that period of time. Turning to the economic environment, Brexit has added to global economic uncertainty and could result in rates remaining lower for even longer than expected putting pressure on reinvestment opportunities. However, compared to our large bank peers, it should have a much lower direct impact on our long-term business drivers because as you know we are largely a US centric company and many indicators point to continued relative strength in the US economy. After a couple of lackluster quarters, we estimate real GDP grew at 2.5% rate in the second quarter, up from 1.1% in the first quarter. Most of the improvement came from consumers where drivers were broad-based. Spending on big ticket items was especially robust and sentiment survey showed that consumer confidence remains strong. Home sales continue to rise with the second quarter on pace set the strongest quarterly sales volume since 2007. Price appreciation remained steady at the 5% to 6% rate nationally and appreciation isn’t just restricted to coastal states, every state and 90% of all metro areas have experienced an increase during the past year. And job gains remains solid with 69 consecutive monthly increases, the longest on record including the strong June report released just last week. Before I conclude, I want to highlight the announce that we made earlier this week, Carrie Tolstedt, Head of Community Banking who has been with Wells Fargo for 27 years have decided to retire at year end. She and her team have built an extraordinary franchise one that meets the needs of millions of customers nationwide and has served investors very well for decades. Mary Mack who currently serves as President and Head of Wells Fargo Advisors will succeed Carrie effective July 31. Mary is a 32-year veteran of the financial services industry and has a diverse mix of experiences including retail banking, which will serve her well as she takes the reign of this key business. This transition highlights our commitment to stable long-range succession planning and our belief that our team members are our most valuable resource. I will now turn the call over to John Shrewsberry, our Chief Financial Officer, who will provide more details on our quarterly results. John?

Thank you John and good morning everyone. My comments will follow the presentation included in the quarterly supplement starting on page 2, then John and I will answer your questions. Our results in the second quarter were straightforward and demonstrated momentum across a variety of key business drivers. Compared with the first quarter, we had strong loan and deposit growth, we increased net interest income by growing earning assets. Many of our customer facing businesses generated strong fee growth. Our efficiency ratio improved. Credit quality remained solid and our capital position remained strong while we returned more capital to shareholders through common stock dividends and share repurchase. Our net payout ratio was 62% in the second quarter. On page 3, you can see the strong year-over-year growth John highlighted including increases in revenue, pre-tax, pre-provision profit, loans and deposits. While our earnings were down $161 million from a year ago, our results in the second quarter last year included a $350 million reserve release while this quarter we had a $150 million reserve build primarily due to loan growth in commercial, auto and the credit card portfolios. Turning to page 4, let me highlight a few balance sheet trends. With the expectation of rates remaining lower-for-longer, we grew our investment securities portfolio by $18.5 billion, with $38 billion of gross purchases in the second quarter significantly higher than the $5 billion repurchases last quarter and higher than the $26 billion of average quarterly purchases last year. We completed these purchases before the rate declined late in the quarter driven by the Brexit vote. We also added to duration as we've done in the past with interest rate swaps, the converted portion of our variable rate commercial loans to fixed rate, a $13 billion increase in swap notional from first quarter. Even with these actions we remain asset sensitive. Long-term debt increased $16 billion, with $24 billion of issuances including 10.7 - including $10.7 billion issued by the holding company, which we expect to be grandfathered as TLAC eligible. As we highlighted at Investor Day we expect that we will need to increase our portfolio of qualifying TLAC by approximately $50 billion in order to be compliant including a 100 basis point buffer which we plan to complete through measured issuance over the phase-in period of approximately five years. However this year we have a high level of debt maturing, so some of our eligible TLAC issuance will be used to offset these maturities. Turning to the income statement overview on page 5, revenue declined $33 million from the first quarter as growth in net interest income was offset by lower non-interest income. I will highlight the drivers of these trends throughout the call but let me discuss how the businesses we've sold and acquired impacted our results this quarter. As I mentioned at Investor Day for several years now we've been focused on reducing non-core businesses simplifying our organization and improving our risk profile. In the first quarter, we sold our crop insurance business and our results included a $381 million gain from that sale. While the impact to our ongoing earnings from selling this business is negligible, the sale did reduce insurance revenue and related insurance expense this quarter. In the second quarter, we sold our health benefit services business for $290 billion gain. The go forward effect from the sale of this business is not material to our financial results. Our results this quarter also reflected the acquisition of the GE Capital businesses that be completed in the first quarter, including the full quarter impact of the $26.7 billion of commercial and industrial loans and leases that closed on March 1. As we stated at Investor Day the quarterly benefit to net interest income from the GE Capital acquisition was approximately $300 million. Lease income also increased this quarter from the operating leases acquired along with corresponding higher operating lease expense. The acquisition of the Asia segment to GE Capital's commercial distribution finance business was completed on July 1 and the remaining international assets of approximately $2 billion are expected to close later this year. We are pleased with the overall integration of the GE Capital businesses and we still expect the GE Capital acquisition to be modestly accretive to our results this year. As shown on page 6, we had continued strong loan growth in the second quarter, up 8% from a year ago and 1% from the first quarter. Period end commercial loan balances grew $6.3 billion from first quarter, remember the GE Capital acquisition only impacted average loan growth this quarter. Consumer loans increased $3.6 billion linked quarter as growth in first mortgage loans, auto, credit card and securities-based lending was partially offset by declines in junior lean mortgages and seasonally lower student lending. Our total average loan yield was stable at 4.16% as the full quarter benefit from the GE Capital acquisition was offset by lower consumer yields. On page 7, we highlight our broad-based year-over-year loan growth. C&I loans were up $39 billion or 14% driven by the GE Capital acquisitions and broad-based organic growth. Commercial real estate loans grew $10.7 billion or 8% primarily in our real estate mortgage portfolio. Real estate one-to-four family first mortgage loans grew $9.3 billion or 3% with strong growth and high quality non-conforming mortgage loans. As a reminder, we sell our conforming mortgage loan originations to the agencies. This portfolio also reflected the continued run-off of the pick-a-pay portfolio. Auto loans were up $4.1 billion or 7% with origination volumes up 2% while we maintained our underwriting and pricing discipline. Credit card balances were up $3 billion or 10% reflecting new account openings and increases in active accounts. Other revolving credit and installment loans were up $2.1 billion or 6% with growth in securities-based lending, personal lines and loans and student loans. As highlighted on page 8, we had $1.2 trillion of average deposits in the second quarter, up $51.4 billion or 4% from a year ago. Consumer and small-business banking deposits increased 8% from a year ago and primary consumer checking customers grew 4.7% from a year ago. Our average deposit cost was 11 basis points, up 1 basis point from first quarter and 3 basis points from a year ago reflecting an increase in deposit pricing for certain wholesale banking customers. Page 9 highlights our revenue diversification. Our revenue continued to be relatively balanced between net interest and non-interest income while the drivers of non-interest income have varied, fee income was also 47% of revenue a year ago and last quarter. Market sensitive revenue which includes trading and gains on debt and equity securities can vary based on market conditions during the quarter. Our market sensitive results in the second quarter which included strong gains from trading and debt security gains was partially offset by lower equity gains. The sum was only $85 million higher than the five- quarter average. We grew net interest income $66 million from the first quarter, primarily driven by long growth including the full quarter benefit of the assets acquired from GE Capital. The benefit from loan growth was partially offset by reduced income at our investment securities portfolio reflecting accelerated prepayments primarily on our mortgage-backed securities. We also had higher interest expense from the long-term debt issuances that I highlighted earlier on the call and lower interest income from trading assets. The net interest margin declined 4 basis points from the first quarter primarily due to growth in long-term debt and deposits and reduced income from investment securities. All other balance sheet growth, mix changes and repricing was beneficial to the NIM. We grew net interest income in the second quarter by 4% from a year ago even with 11 basis point reduction in NIM. And we continue to believe that we can grow net interest income on a full-year basis in 2016 compared with 2015 in the current rate environment. While total non-interest income decreased $99 million from the first quarter, we had growth in many areas that reflect our focus on key business drivers including increases in service charges on deposit accounts, brokerage fees, trust and investment management, investment banking, card fees, gains on mortgage loan originations, trading gains on higher customer accommodation activity, and lease income reflecting the full quarter benefit from the GE Capital acquisition. Total mortgage banking revenue which includes both the gain on the sale from originations and servicing income declined $184 million from the first quarter. Production revenue increased $306 million or 41% reflecting higher originations. Origination volume was $63 billion, up 43% from the first quarter due to the seasonally stronger purchase market and increased refinancing due to lower rates. Applications were up 23% from first quarter and we ended the quarter with $47 billion application pipeline, up 21% from first quarter and up 24% from a year ago. Since Brexit and the related decrease in mortgage rates, we’ve seen refinance activity increase with our retail application volumes up approximately 15% to 20% in recent weeks and we currently expect origination volume to be somewhat higher in the third quarter compared with the second quarter. Our production margin on residential held for sale mortgage originations was 166 basis points in the second quarter, down 2 basis points from the first quarter. Releases of our mortgage loan repurchase liability increased $69 million from the first quarter, which also contributed to higher production revenue. Servicing income declined $490 million from the first quarter primarily driven by changes in MSR valuation adjustments which were positive last quarter and slightly negative in the second quarter. There MSR valuation adjustments are outside the scope of our hedging and vary over time as MSR valuation assumptions are updated. Overall, we’re pleased with our hedge results in the second quarter given the increased rate volatility late in the quarter. Servicing income also declined from higher quarterly unreimbursed servicing costs, primarily related to FHA loans. Other income declined $392 million from first quarter, the reduction was driven by a decline in hedge and effectiveness income from $379 million in the first quarter to $56 million in the second quarter. The decline also reflected the gain from the sale of the crop insurance business recognized last quarter and the gain on the sale of our health benefits services business in the second quarter with a net impact from these sales of $91 million lower other income compared with the first quarter. As shown on page 12, expenses declined $162 million from the first quarter, driven by lower personal expenses which are typically higher in the first quarter due to higher payroll taxes and 401(k) matching as well as annual equity awards to retirement eligible team members. Expenses also declined from lower operating losses, down $120 million from the first quarter on lower litigation expense. Insurance expenses declined $89 million reflecting the sale of the crop insurance business in the first quarter. Partially offsetting these declines was an increase of $186 million from outside professional services after typically lower expenses in the first quarter. Operating lease depreciation expense was up $117 million from the first quarter reflecting the full quarter impact of the leases acquired from GE Capital. As a reminder, beginning in the third quarter, we estimate that our total FDIC assessment will increase by approximately $100 million per quarter reflecting the temporary FDIC surcharge which became effective July 1. Our efficiency ratio was 58.1% in the second quarter and we currently expect to operate at the higher end of our targeted efficiency ratio range of 55% to 59% for the full-year 2016. While we’re already operating at one of the best efficiency ratios in the industry, we remain focused on managing expenses while actively reinvesting in the franchise for future growth. While total expenses have increased, we’ve reduced expenses in many categories even as we've grown the balance sheet by acquiring businesses and adding new customers. The increase in expenses is primarily been related to risk, compliance and technology spending reflected in higher personal expense, outside professional services and contract services. We’ve also continued to invest in innovation to better serve our customers. Let me give you just a few examples. During the second quarter, we launched the FastFlex Small Business Loan, an online fast decision loan that funded as soon as the next business day. This was an innovation we built in-house. In addition, we launched yourFirstMortgage, a new home loan program to help more qualified first-time homebuyers and low to moderate income consumers become homeowners. Early reaction to this program has been positive with over $1 billion of applications in the first 30 days. And wholesale banking, we introduced biometric authentication by piloting eyeprint image capture technology in our commercial electronic office mobile channel. This line highlights just a few examples that we’ve recently announced, we’re working on additional products and services within our innovation group that are scheduled to be released over the coming quarters that we believe will add tangible long-term value for our customers and shareholders. Turning to our business segment starting on page 14; community banking earned $3.2 billion in the second quarter, down 1% from a year ago and 4% from the first quarter. We remain focused on providing outstanding customer service and achieved record store customer loyalty scores during the second quarter and the highest year-to-date retail banking household retention in four years. We continually work to enhance customer satisfaction and transparency and ensure customers are receiving the right products to meet their financial needs. Because the key to our success is long lasting customer relationships built on trust. For example, an hour after opening a new deposit account, our customers are sent a customized welcome email including a summary of accounts in ways to get the full value from their accounts. We are also focused on using innovation to enhance our customer experience. Mobile banking is our most frequently used channel and we have 18 million mobile active users. Beginning August 1, our mobile customers will be able to make real-time person-to-person payment. P2P payments are not new to Wells Fargo with our customers conducted over $10 billion in P2P volume through our SurePay service in 2015. We were the number one debit card issuer by transaction volume which increased 9% from a year ago while dollar volume was $76.4 billion, up 8% from a year ago. Credit card purchase volume was $19.4 billion, up 10% from a year ago benefiting from 8% active account growth. Credit card penetration to retail banking households increased to 45.6%, up from 44.6% a year ago. Wholesale banking earned $2.1 billion in the second quarter, down 5% from a year ago and up 8% from the first quarter. The decline from a year ago was driven by higher provision expense related to the oil and gas portfolio. However charge offs for wholesale banking are still historically low with only 27 basis points of net charge offs annualized in the second quarter. Revenue grew 10% from a year ago and 5% linked quarter as net interest income and non-interest income both increased on a year-over-year and linked quarter basis. Loan growth remained strong driven by acquisitions and broad-based organic growth with average loans up $65.2 billion or 17% from a year ago, the seventh consecutive quarter of double-digit year-over-year growth. Spreads on new originations were slightly better than the existing portfolio. Average deposit balances declined $6.6 billion from a year ago, driven by lower international deposits from market volatility and our pricing discipline in the competitive rate environment. Wealth and investment management earned $584 million in the second quarter, stable from a year ago and up 14% from the first quarter. Our diversified revenue streams provided stability during a period of market volatility. Second-quarter revenue of $3.9 billion was up 2% linked quarter and down 1% year-over-year. Our Continued emphasis on meeting our client's financial needs through planned based relationships resulted in record high WIM client assets of $1.7 trillion, up 2% from a year ago with gross resulting from both existing client relationships as well as new client acquisitions. Net interest income was up 12% year-over-year driven by continued strong balance sheet growth. Average deposits were up 9% from a year ago and loans were up 12%, the 12th consecutive quarter of double-digit year-over-year loan growth. Loan growth was broad-based with strong client demand across a number of product offerings. We are very excited to welcome Kristi Mitchem who became the Head of Wells Fargo Asset Management on June 1. She has strong industry experience and will lead this business into the next phase of strategic expansion and growth. Turning to page 17, credit results continue to benefit from our diversified portfolio with only 39 basis points of annualized net charge offs. Net charge offs increased $38 million from the first quarter including an increase of $59 million from our oil and gas portfolio which was partially offset by $46 million of lower consumer real estate losses. Non-performing assets decreased $433 million from the first quarter as lower residential and commercial real estate non-accruals and foreclosed assets were partially offset by higher oil and gas non-accruals. As I mentioned earlier, we had $150 million reserve build during the quarter primarily related to long growth in the commercial, auto and credit card portfolios. Slide 18 highlights our oil and gas portfolio, while oil prices have risen from where they were a year ago there continues to be pressure in the oil and gas sector. We had $263 million of net charge offs in this portfolio in the second quarter, up $59 million from the first quarter with approximately 94% of losses from the E&P and services sector. Non-accrual loans were $2.6 billion, up $651 million from the first quarter on weaker financial performance, the run-off of borrower hedges and less sponsor support. Approximately 90% of non-accruals were current on interest in principle, most of the losses we’ve taken were from non-accruals that were current but we recorded losses based on our judgment of not being repaid in full. Our oil and gas loans outstanding declined 4% from the first quarter and were down 2% from a year ago. Oil and gas loans of $17.1 billion are less than 2% of total loans outstanding. Our oil and gas loan exposure which includes unfunded commitments and loans outstanding was also down 4% from first quarter and down 10% from a year ago, primarily driven by borrowing base reductions. We had no defensive draws in the second quarter. And as in every challenging cycle, we are also seeing opportunities and we originated new loans during the second quarter to well-qualified borrowers. Criticized loans which include non-accrual loans were down $1.7 billion or 17% from first quarter reflecting paydowns, borrowing base upgrades and net charge offs. And for the first time in the past six quarters we did not have a reserve build for oil and gas portfolio and reserve coverage was stable at 9.2% of total oil and gas loans outstanding. Our reserves declined from $1.7 billion to $1.6 billion reflecting the increase in energy prices with slower pace of deterioration in credit quality improved criticized asset levels and the smaller loan portfolio. Overall the performance of our oil and gas portfolio in the second quarter was consistent with our expectations and our experience of managing through many cycles will continue to benefit us and our customers as we move through the remainder of the cycle. Turning to page 19, our capital levels remain strong with our estimated common equity tier-1 ratio fully phased in at 10.6% in the second quarter, well above the regulatory minimum and buffers, and our internal buffer. We reduced our common shares outstanding by 27.4 million shares through share repurchases of 44.8 million. We also increased our common stock dividend in the second quarter to $0.38 per share. Our net payout ratio was 62% within our targeted range of 55% to 75%. In summary, our second quarter results demonstrated the benefit of our diversified business model, we had solid returns with a 1.2% ROA, 11.7% ROE and our return on tangible common equity was 14.15%. We’ve continued to benefit from executing on our vision with success in growing customers, loans and deposits. The headwinds from a flatter yield curve and a lower-for-longer rate environment creates challenges for all financial institutions but we will continue to focus on what we can control earning lifelong relationships with our customers which drive our long-term growth opportunities. John and I will now answer your questions.

[Operator Instructions] Our first question will come from the line of Erika Najarian with Bank of America. Please go ahead.

Just taking a step back John, I think you said in your prepared remarks that investors own this company given your ability to grow earnings regardless of what's happening in the market, is this flatter yield curve persists and we don't have - we don't see rehikes from the Fed, I'm wondering what you think are your strongest levers for supporting EPS growth from here? Is it continued balance sheet growth, is it even more disciplined expense management, is it growth and fees in businesses where you don't have scale yet, just trying to figure out, Wells always have as a reputation for pulling on levers to support EPS growth and I'm wondering as we look out over the next 12 months what you think are the most impactful ones are?

I think it's all of the above Erika, you mentioned in broad terms the likeliest sources, if rates are going to remain lower, we will work hard at earning asset growth. And the first call on our capital and liquidity is to serve customers, so we'll be looking for loan growth and we've had great success in organic loan growth in commercial categories as well as in consumer categories. So that would be job one. I think we’re seeing nice momentum across a variety of the fee streams that we have, I mentioned some of them in my remarks but there are many and we’ve - some of them were - our businesses where we already have complete scale and some of them are businesses that that we’re - where we’re under indexed and continuing to grow. So maybe the long-term opportunity is even bigger. I think we're working hard at expense discipline in this environment to accomplish all that we are trying to accomplish in compliance and risk management but innovate at the same time and stay within our range which we've managed to do. And as I also called out, we’re sort of - we’re comping over periods where we had been releasing excess allowance and now because our loan portfolio is growing, we’re building some allowance, so we’re muscling through that headwind but we’re accomplishing our goals.

Let me just drill down a little bit on the expense side Erika, we operate within our 55% to 59% range on the efficiency ratio, which is, you know that's either at close to or at the top of our industry surely for our large bank peers, we’ve spend a lot of money in the last couple of years around things like compliance and risk management and so forth. And as you build those, you spend more money, once you get into a rhythm there is an opportunity to get more eloquent, start to take some of those front end costs out and built it in as part of your process. John also mentioned that we continue to look to simplify our business to get more standard and frankly a lot of the investments we’re making on customer service and consumer convenience has a front-end cost component but a back end benefit. So those things are all on the table, we can even look at those and in a lower-for-longer environment pennies and nickels and dimes matter.

Got it. And as we think about balance sheet mix management near term, I'm wondering if, you know, I guess what it would take to may be extend even more aggressively extend duration and protect the margin near term or you're not going to manage your asset and liabilities based on sort of the market is thinking about the curve near term.

So it's a good question, and the things that we're balancing are - and readjusting constantly are expectation for what rates are going to do next and whether today is a better or worse entry point then waiting a quarter or waiting longer. We’re balancing the capital sensitivity and what happens when you meaningfully add duration at what might be a cyclically low point in rates, we’re saying we think it's going to be lower for longer but we have to sensitize ourselves to what happens if we get much more invested here and rates move up and that destroys capital. So that's a limiter in some sense. And then we've got our liquidity constraints of how we might deploy what we might use and what it means in terms of available liquidity. So it's a delicate balance going on all the time, but I would say that we’re relatively convinced that we may not be this low forever but like we said a year ago our expectation is lower-for-longer at the curve and we're going to keep putting money to work.

Your next question will come from the line of Mike Mayo with CLSA. Please go ahead.

This is going to be a very short-term specific question but it will save us work later today. So, you had a $290 million gain on the sale of the health benefits services that added I guess about $0.04, so if we strip out that $0.04 from your dollar one it would mean you fell short of consensus. Are there any other items and expenses are anywhere else that might have mitigated that gain, in other words, when you look at the results, do you think they met consensus and if so, what offset that $0.04 gain?

I don't create a detailed reconciliation back to the consensus versus our numbers. We’re looking at the total output every quarter we got a laundry list of things that might be seasonal that might be episodic, it could be gains from securities portfolio, we’ve been selling a handful of non-core businesses and some of them have given rise to gains. So there isn’t that type of reconciliation, I would look at those categories of revenue that come through and look at the multi-quarter, the five quarter average and think about how far above or below we are at any quarter versus that longer term average and model it or manage it that way.

Could you give us some of your laundry list?

Some of our laundry list?

Yes, like what we just…

But my laundry list is what you guys see back which are market sensitive items that you often call out as unreliably different from quarter to quarter, some of the mortgage activity which can be a little bit more episodic, mortgage hedging activity, this is what some analysts refer to as things that they have a hard time modeling, I mentioned gains on the sale of debt or equity securities. There are seasonal impacts on things like investment banking fees that happened at certain times, all of those things ebb and flow. And I would look at the longer term either calendar adjusted or multi-quarter averages and think about it that way.

All right, and then just one more follow-up then just, when you look at mortgage revenues this quarter, where they where you thought they’d be and what you expect going ahead, you said the mortgage pipeline is up quite a bit?

I’d say on the origination side where we expected them to be and as you heard, the pipeline is full, I think margins are in a good place and we anticipate having a good third quarter on the origination side. Our mortgage hedging results in the second quarter and the net economic impact of mortgage servicing was lower than for example the five quarter average, it was higher in the quarter before, so the difference is even more stark. But I think where - we think it is a great time to be the leader in the mortgage business right now because homes are selling and also because people are refinancing. So we are expecting good things.

Your next question will come from the line of Bill Carcache with Nomura. Please go ahead.

We've seen loan growth outpacing deposit growth for several quarters at both Wells Fargo and the industry in general. In the post LCR world where HQLA levels are a factor, how high do you think we can expect loan to deposit ratios to rise and with loan growth continuing at a healthy clip, can you envision a scenario where competition for deposits begins to heat up among banks and basically it causes them to start raising rates possibly even before the Fed as competition for deposit intensifies, can you speak to that?

Well, I suppose it could, I think we're probably in the - at the higher end of the range of loan to deposit ratios ourselves in the high 70s I guess at this point. And of course there are a lot of other sources of liquidity that are coming in as a result - at least for G-SIBs as a result of TLAC et cetera and some reliable sources if non-deposit wholesale funding that are part of a healthy liability management mix. So, funding never really seems to be a problem. We've imagined frankly since LCR was first proposed that people would be competing for deposits, especially smaller firms who have less of a value proposition for customers and they really have to pay for deposits in order to attract them. And it really hasn’t seem to come to pass. I don't know whether aggregate credit creation is outstripping aggregate deposit generation by so much that it's going to cause firms at the margin to raise prices, compete for deposits and drive up the cost for the rest of us, it could happen, we haven't seen it. What we’re seeing among assets is a lot more things changing hands, so a big part of our loan growth are loans coming out of GE and coming onto our books and loans coming off of other people's books and onto our books and as opposed to the aggregates being impacted in the way that you describe.

Bill, [indiscernible] I don't know this, but my guess is aggregate credit generation in the private sector, forget public debt for a second here, but I doubt that that’s growing faster than deposits. I look at the last seven, eight years here since our merger our Wachovia, the time of the merger we had something less than $800 billion of deposits, now we are over $1.2 trillion, we've grown deposits even after run-off of those high-priced CDs by $400 billion or $500 billion, we’re up maybe $100 billion on loans during that period of time, so deposits are far outstripped loans in fact, if you believe lower-for-longer there is going to be a hunger for earning assets. And while our quarter two might look different recently, if we look at, in our last year, the growth of $51 billion of deposits versus $80 billion of loans if you strip out some of the loans that we purchased, if you look on organic basis we’re still growing deposits faster. So it's - I would - I doubt, I don't see pressure from that perspective.

That's great colour, thank you. If I could ask a follow-up on the consumer credit side of your business. How do you think about the appropriate level of reserve coverage in auto and card, and do you think the current environment is supportive of a path where charge offs and reserves in those businesses can grow on-line with loans such that the consumer credit provision is not a headwind to your earnings growth.

It's a good question, and it will be different for every bank depending on what type of consumer credit they have on their books. As we mentioned, we added a little bit to our allowance this quarter and in part it was from consumer credit but that's based on the growth in the portfolio not because of any meaningful change in underlying behavior. My sense is that if those loans are priced properly for their risk and given the way that we provide for them as those portfolios grow that it shouldn't become too much of a headwind. Now we've said earlier that we are happy to provide more reserve more allowance when we’re growing our loan portfolio that’s because it was going to happen as we came out of the period of releases and are moving into a period of net provisioning and growth. But it's going to feel different for everybody based on the quality of the loans that they put on their books based on the pricing related to the quality of the loans they put on their books, so it's hard to generalize. I think we - I think we feel pretty good about it.

Your next question will come from the line of John McDonald with Sanford Bernstein. Please go ahead.

John just a follow up on the credit, the charge off rate was pretty stable quarter to quarter, just wondering underneath that are there any areas of credit portfolios were losses are still improving and some that are starting to normalize and do you have kind of short-term outlook on credit staying stable to benign?

If you set aside oil and gas for a moment from our aggregate results, I think our net charge offs were something like 28 basis points on the portfolio overall just for analytical purposes that's an interesting number that would suggest that they’ve continued to improve, obviously 39 basis points when considering oil and gas. I think it's a reasonable expectation that consumer credit performance normalizes somewhat so that we’ve had the best of times, it probably gets a little bit more average while things being equal. As Bill asked, I don't know if that makes it a real headwind, I think that means the expected case is probably a little bit lower ROI than the existing case for most people who have been benefiting from the best of times in credit but not so meaningfully that it causes us to want to curtail growth based on the way we approach the market, as I mentioned we are happy with our auto growth, we’ve maintained our pricing and our risk discipline.

And John, the 28 basis points John just mentioned to you, there is a lot of Johns here, but for this quarter ex-oil and gas is equal to what it was a year ago. So there is some movement within those categories but as you know housing is getting better everywhere and that hugely benefits us. So while there might be some more normalization in one part of the consumer, it might be offset by another part of the consumer.

Couple of callouts are on the consumer real estate side of things. In second mortgages, I think we're down below 50 basis points of charge-offs, which for home equity loans is, it can't get much better than that. And on one to four family first mortgage loans, I think we're in the 2 basis point charge-off range right now, which is something let’s celebrate when it's happening, but it doesn't feel like a permanent state of affairs.

Okay. And then a quick follow-up on net interest income. Assuming the rate environment doesn't change much, can you talk a little bit about the puts and takes for growing net interest income, maybe size up the degree of difficulty of growing that going forward? And then just on the liquidity cash on the balance sheet, when we look at that Fed funds sold like roughly 300 billion, is there any way for us to kind of get a sense of how much of that might be redeployable versus how much is needed to meet the requirements of LCR and other kind of regulatory needs to hold liquidity?

Yes. So there is not much limitation on the redeployment of that into HQLA, while still satisfying the liquidity coverage ratio. So it really gets back to the, when is the right time and how much at that time, if you’re, just for example, buying treasuries because of the capital implications that it creates by putting more AFS securities on the books. You're that much more exposed to a backup. So there is a trade-off there. For non-HQLA, the limitations are different because you are losing the benefit of that liquidity and we've continued to mention the ability to move out of cash or HQLA into risk assets, all things being equal, based on a snapshot as tens of billions of dollars of activity. You saw what we did last year when we, or earlier this year as we were sizing up taking GE assets on to our books. We actually went out and did a little bit of incremental funding in the marketplace to have that liquidity set aside and that we’re allowing that to run off, it was relatively short-term, but it makes sense for us to have ready access to something, some, call it, $200 billion worth of instant liquidity at any point in time. That said, given our size, given our risk profile and given our stress cases. Is that helpful?

Yeah. Thanks, John. And just the broader comment about just kind of degree of difficulty growing NII overall in this environment? Yeah. Thanks

Yes. Well, it is harder to grow net interest income in a lower rate environment than otherwise, which is obvious. The short end of the curve is one thing, but this move down in seven years and out, is just as hard and just as meaningful because of the redeployment. So it’s still our plan and our goal and what we’re telling you is that we intend to grow net interest income, even if there are no rate moves and we're doing it by adding -- by redeploying cash into HQLA and other earning assets, by looking everywhere for customers where we can make quality loans and those are the big items. So it's our plan, it's our effort, it's what we’re all working toward, but it’s harder.

And John, the biggest influence that Brexit had on our company was not on, frankly, a direct impact on the way we do business or customer strengthen like that, it really was the big move down in long-term rates.

One other thing to say is, it's a great time to be a borrower, it's a great time to be one of our customers. The mortgage business is one obvious place to look for the origination fee generation or gain generation, but across the board, I would expect more, everything is more affordable on a finance basis. So it helps.

Thanks.

Your next question comes from the line of Kevin Barker with Piper Jaffray. Please go ahead.

Thank you. In regards to your servicing results within the mortgage bank, were there any changes in the way you’ve hedged that asset this quarter or was there something just specific around the rate curve and the movement in the yield curve in the second quarter versus the first quarter that would have caused the hedging gains to be less than expected?

Yes. It's a good question. There wasn't really any change to the hedging approach and our hedging results, strictly speaking, accomplished what they were intended to. There were a handful of items that went, call it, in our favor in the first quarter that were negatives in the second quarter and some of them are just model inputs in terms of how the MSR valuation calculation works. Some of it obviously was just lower servicing fees, that's not a hedging outcome, but it contributed to the net servicing, net servicing benefits, things have speeded up. Of course, we’re getting more servicing calls away from us, even as we originated this pace, there is more servicing getting called away from us as others originate rapidly as well. So I would expect that to normalize and I would think about that also as something more along the lines of a multi-quarter average. One other item I’d point out is that the unreimbursed servicing costs was a net drag, an incremental net drag this quarter as well. And that's mostly around FHA activity.

In regards to the FHA activity, what is the headwind that you’re seeing from unreimbursed insurance claims this quarter or how would you look at it, like the run rate from that line item?

Well, I think we're talking about a couple of hundred million dollars of unreimbursed direct costs in the second quarter and the run rate is probably half of that, looking back over the last several quarters.

Okay. And then in regards to the introduction of your first mortgage, have you seen an incremental increase in your overall mortgage originations from the introduction of that product or would you expect that to accelerate on a go forward basis?

Well, so, there is an increase, all things being equal, on the agency side of things, but many of those borrowers might have been FHA eligible borrowers prior to the introduction of that program. So in some sense, we’re shifting origination from one program to another. It’s -- we think it’s a very high-quality program. It’s -- the way we've described it and constructed it, it's never worse for a customer, it's often better for a customer because it's got a different approach to MI. That's more borrower friendly. So there should be more availability for it and it should help grow originations over time. And as we mentioned, it's particularly valuable to us because it gives access to mortgage credit to low and middle income borrowers and first-time home buyers, who are people that we’re really trying to serve.

Okay, thank you very much.

Your next question will come from the line of Paul Miller with FBR. Please go ahead.

Yes. On the follow-up to Kevin's questions on your first mortgage, is this very similar to what FHA product, but outside of the FHA, [indiscernible] low FICO, low down payment type loans?

Well, it’s lower down payment. Actually, the first part of your question is, this is an agency program, this is a Wells Fargo and Fannie program. It is geared to serve the first-time homebuyer and the low and middle income homebuyer. So there is some overlap with people that the FHA might be serving as I mentioned, and it is built around a lower initial down payment to make it easier for those people to access credit. I wouldn't describe it as a predominantly as a lower FICO or lower credit quality, but more of structured for people who have lower down payment available.

And Paul, it really looks at those first-time homebuyers especially, so it really looks to serve that market. Many times have a lower down payment available.

And this product will be sold or ran by Fannie Mae guaranteed?

It's agency modest production, so it doesn't look any different in our books, it goes right into agency security. So there is no different risk profile on our books, and frankly one of the reasons that the program makes so much sense for us is because we have such a commercial relationship with Fannie in terms of knowing what our risks are, what their risks are and when those risks pass and that's very helpful.

Okay. And I don't know if you disclosed this or not, but do you guys know what you are recapture rate is on your refis right now on your book? You have one of the biggest books out there and there are MSR, are you able to recapture a lot of those refis?

So we do capture a lot of our refis, we don't think we've disclosed the capture rate. We probably do disclose our market share, both in origination and in servicing. I don't have them at my fingertips, but we’ll come back to you with the most recent specifics and that relationship will help you to, I mean, there is obviously other things going on there, because a lot of mortgage origination is not refi activity. But, it might be helpful.

Hey, guys. Thank you very much.

Paul, just one quick thing, we are recapturing less today as John mentioned because some products, we’re no longer in, so some of that refinances is refinancing away from us where we would have captured more in the past, some of the high-risk categories.

Your next question comes from the line of Matt O'Connor with Deutsche Bank. Please go ahead. Matt O'Connor: Good morning. To follow up on expenses, a lot of talk earlier about the investment spend, the risk, the compliance, obviously growth areas and then eventually getting the payback on that. As we think about just the pace of investment spend and that relationship of kind of getting it back on the other side, what inning are we in, in terms of still ramping on the investment and still waiting on the payoff?

Well, I’d say we’re in the middle innings of the investment. We’ve been doing it for a few years and we’ll be doing it for a few more years I’m sure, and we will always be innovating. But in some cases, we’re getting the payback. You saw at Investor Day, the moves that we made toward more of a paperless store and we talked about the specifics in terms of what the benefit is of taking paper, labor, storage, transportation out of stores. That’s happened, that’s in our run rate. A lot of the digital and mobile migration that we have of customer activity is taking personal interactions out of those types of transactions, it's taking paper out for sure. And those benefits feed right into the run rate as they happen. John was mentioning the initial investment and build to create some of these new programs and compliance and risk management for example and the fact that once they are highly effective and repeatable, then there is an opportunity to automate, to streamline, to learn from how we got there and to make them more efficient. I’d say those opportunities are, we’re always learning, but they’re probably a little bit more in the future. And then, who knows where we’ll be going with the increase in mobility, et cetera, my sense is, we’re just going to keep benefiting. Customers benefit on the one hand, but from an expense perspective, we will keep benefiting as well. I’d point out the P2P activity as another place where we're taking checks out, taking cash handling out, increasing customer service, but doing it at a lower cost to serve. So there is a lot of that. Matt O'Connor: Are you still at a point where you’re increasing overall investment spend or are you able to remix some of it so that it’s still at a high level, but not necessarily going up?

I think it’s still going up a little bit. We've been doing that while taking expense out of our standard run rate in order to accommodate it, while staying within our 55 to 59. So, and as the nature of mobile first and technological solutions first occurs, we’re always going to be spending at a high level. We’ll just keep at least for innovative types of activity. I think we will keep doing what we're doing, taking expense out of our business as usual. Matt O'Connor: And then just separately, you mentioned in the press release about the higher amortization on the mortgage bond book, which makes sense, given the sharp drop in the rate, but do you have the figures in terms of how much it was this quarter versus last and remind us how your strategy or approach there is, is there like a mark to marking or is there a smoothing effect, one of your peers has, what feels like a mark-to-market impact, they take their head upfront, some of the peers do that a little bit more, remind us how your approach is?

Yes. What I would point out is that we’re amortizing premiums on mortgage securities in particular that are highly prepayment sensitive and in this quarter, the net interest margin or net interest dollars negative impact of getting premium book value bonds called away at par was, I think the number is $100 million. I’m confirming, it’s $100 million. So that's one way of thinking about it. So we put a mortgage security on at a premium, we amortize that premium over an expected life and an expected CPR, things come in faster and we have to write off the remaining premium when it happens. This quarter, that impact was $100 million. Matt O'Connor: Do you have that for last quarter?

I don't think I do handy, but it wasn’t $100 million, so less. Matt O'Connor: Got it. Okay, thank you very much.

Your next question comes from the line of Brian Foran with Autonomous. Please go ahead.

Hi, how are you. Maybe just two quick ones on credit. First in auto lending, you mentioned the Mannheim is up a little bit, but severities are up a little bit as well. What’s driving that, I know it’s not a huge number, but what’s driving that disconnect?

Mannheim is up a little bit. It was up in each of the last few months and I think as we’ve said, there is an expectation that that can't go on forever, and that's part of why we would say that we expect future losses to be a little bit more normal in that business than what's been happening. Any change in severity is really just the change in the mix, the repo activity, the circumstances of what's been coming in. I don’t think there is a systematic reason for it.

Brian, I would just add that it's been a really strong new car sales the last couple of years. Some of those go out and lease programs and they come off leased. So our guess is that there will be more late-model used cars on the market, put pressure on Mannheim, but on the other hand, which could cost them normalization in losses. On the other hand, that's really where we play and where we have a lot of market expertise. So it’s a bit of an offset.

Thank you. And then on commercial real estate, I mean, I guess let’s think about both your commentary and data as well as like what the OCC is saying, et cetera, there is just kind of general concern around underwriting standards, but at the same time, the current data around loan growth is pretty good and on charge-offs, kind of bouncing between zero and net recovery. So it's about as good as it can get. How are you thinking about the commercial real estate cycle now? Is it just kind of pockets of concern or is there a concern that there is maybe a more broad-based turn on the horizon or how do you kind of think about the concerns around underwriting standards versus the very good numbers today?

Yes. So I would say that our underwriting approach to commercial real estate tends to be at the conservative end of the spectrum and we have a reputation often for better, sometimes customers to the [indiscernible] which helps us well through cycles as you are alluding to, this is a very cyclical business. It is regional and local, it is property type by property type. There are some areas and some property types where values have been elevated because people have been willing to accept really, really low returns on their invested capital. And that's, that creates one sort of outcome and then there are others whether it’s just a lot of supply that's coming on, has come on, has to be absorbed, that creates a different dynamic. We have seen that in some multi-family or luxury single-family from market to market and in that market, those dynamics have to play out where that gets absorbed at some clearing price. We’re taking the same approach that we always have. We’re sort of a relatively low loan to value lender. We look very hard at in place cash flow. We have a lot of incremental borrower guarantees and supplemental protections on our bigger commercial real estate types of financings and it's always been true. So I'm sure when the cycle turns, it will be either property types or geographies where they do better or worse, but we are not taking a big change, we're not seeing a big sea change, our originations have actually -- have been slower, certainly very slower before we bought the season's GE portfolio, the organic activity because of the competitive environment and because of the market circumstances caused us to slow down somewhat.

Thank you very much.

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

Thanks. Good morning. A question on the investment portfolio. John, you had mentioned that you had added a lot of securities this quarter before the rates changed and it looks like you did it mostly in the agency MBS and the held to maturity and I was just wondering given that it looks like that average yield was 190 or below, given that's where the averages are, how are you thinking about continuing to build the security's book versus potentially keeping more of your originated prediction where you can get free handle sale versus maybe 1.5 in the security’s books, so what's your trade-off on interest rate risk versus credit risk I guess, and does your philosophy change, given where we are in the environment at all?

Yes. It's a good question and it’s analysis that we conduct. As I mentioned earlier, we've been continuing to sell all of our confirming production. There are limited, but some benefits, limited liquidity attribution, but some benefit to agency mortgage securities, but less so or not so with loans. So that’s part of that determination. There is different risk profile for carrying loans on the books obviously versus guaranteed pass throughs, that's part of the analysis. We have a reasonably large allocation to single-family home loan real estate -- residential real estate today because of our jumbo portfolio, which we continue to want to make room for as we serve those customers going forward. So all those things sort of fit together in our risk appetite and have setting the ALCO considerations aside, but just from how much is enough and what type of risk do you need on your books, we’ve followed the path that we’ve followed, which isn't to say that if circumstances changed or persisted and the allocation opportunities look a little bit different, we wouldn't modify our conclusion, but that's where we've gotten thus far.

Okay. And then just second question on commercial real estate brokerage, just within the other fees category, it's been a good business for you historically. It looks like it's gotten a little softer, is that purposeful change in how you’re doing the business or is it just the environment, any color there will be great?

It’s cyclical, it's a great business for us. We’re the best frankly in that business and there is a lot of knock-on benefit in terms of the financing that we do, investment banking that we do for those customers, but it is cyclical and it'll follow patterns like the ones that we just talked about in terms of what's going on in different markets. That business is interesting, because it's got something for bullish times in commercial real estate, and it's got something for bearish times in commercial real estate, because the same team is involved in helping define liquidity for properties and financing for properties when things aren’t going well in markets and when investors are going the other way. So we like it, but it's a little bit harder to forecast, because it doesn't just trend up over time, it moves around, but it's been a great performer for the last couple of years.

So, there is no change in terms of how you are approaching it, it's just a little bit of an air pocket?

It's just the normal volatility and what's happening in that business, no change.

Okay, thanks a lot.

Your next question will come from the line of Joe Morford with RBC Capital Markets. Please go ahead.

Thanks. Good morning, everyone. The C&I growth seemed a bit softer this quarter, particularly relative to the pace you saw through much of last year. And is there anything to that, besides maybe some impact from energy and just how in general do you feel business owner confidence is these days, particularly given some of the uncertainties like Brexit and the upcoming election?

I'm not sure what would inspire marginal business owner confidence in this environment. I mean, it's about the same as it has been recently, probably a little bit less certainty, given what's going on around the world. But I don't think of that as having a meaningful impact on the quarter’s organic C&I loan growth. It’s competitive and we’re out there competing. There is some amount of capital formation around CapEx and expansion in other projects, not as much as there would be, if we were in a more vibrant overall economic environment. There is actually a little more happening in energy today than there was over the last several quarters, more capital being raised, more assets are changing here, just giving rise to some financing opportunities. So I would think of it more as a season or a short period of time to measure against.

Okay. And then you also talked earlier about being disciplined on expenses and getting paper and transactions out of the stores, but more broadly speaking, how are you currently thinking about the overall retail distribution network, particularly given the growth in mobile banking, considering moving more aggressively or transitioning to the smaller neighborhood stores, or perhaps maybe don't need as much density in certain markets, it can reduce the overall footprint. What's the update there?

Yes. Joe, I think that's an interesting question. We continue to look at that and we’re not oblivious to the changes going on as you suggest. The mobile offerings are fastest-growing channel now, 18 million of our 20 some million households now have used that and sometimes -- most times as their dominant channel. So we continue to think about that. Our philosophy has been or will continue to be, we want to serve customers when, where and how they want to be served. We don't want to drive them some place to our benefit. We want to provide for their benefit. That being said, that's a big area of, we continue to look at as we innovate and we see customers change their behaviors.

We’re going to make it easier for them to do business with us in other channels as well. And if they change their behavior, then we will react to that.

We’ll react to it and those could have some meaningful impacts on it.

Right. Okay, thanks so much.

Your next question will come from the line of John Pancari with Evercore. Please go ahead.

Good morning. I’ll try to be quick, given the length of the call here, but I'm going to beat the dead horse here on the expense topic, but I know and I appreciate the color you gave on the leverage that you can pull given what we’re seeing on the top line side here. Now, what I'm trying to just understand is, like, what do we need to see maybe it’s in terms of where rates go or overall top line pressure, for you to start to really pull those levers more aggressively and again, maybe it's around expenses, and also longer term, is the goal just to keep the efficiency ratio, are you okay with that high-end of that range, even through ’17, if this topline pressure persists from the curve, or do you at some point look to get to the middle of that range again? Thanks.

Here is how we look at expenses. We look at this company, in fact, on Wednesday, we had our 164th birthday and we look at this company from a long-term perspective, we've always been thoughtful about how we spend our shareholders money. We’re the stewards of your capital and their capital and surely a longer -- lower for longer scenario puts pressure on everything that we do, but we’re going to continue to make those investments that we believe are good long-term investments to help customers succeed financially. That being said, I do think we’re at a point in time where there are some opportunities that because of changing customer behaviors, so we will, but we’re not going to do something that's going to be short-term bright and long-term dull if you will, just because of pressure on the revenue side or the earnings side. Just assume that we’re going to continue to work really hard on making investments and also maturing systems, taking out costs that don't add value. In other words, think of maximizing or monetizing our scale.

Got it. Thanks, John. And then if rates, if we only see another 25 basis points next year and that's it, is it fair to assume that you are in that upper range still of the efficiency ratio?

I think we probably are. Yeah, which still is a world-class range and don't take for granted how hard one has to work to operate at 58% efficiency ratio. There is a lot that has to happen to stay there, while we’re spending the money that we’re spending to innovate and improve ourselves from a compliance risk management and other perspective.

Completely understood. All right, thank you.

Your next question will come from the line of Eric Wasserstrom with Guggenheim Securities. Please go ahead.

Thanks. One narrow question and perhaps one broader one. On your servicing income and I'm looking at the data on page 40 of the release, your servicing fees are down year-over-year by order of magnitude, something like 20%, but your servicing portfolio is only down about 3%. What's the dynamic there on the servicing income?

So there are older categories of loan products that are running off that might have different per pound fees associated with them, there is different categories of unreimbursed servicing expense that get netted against those servicing fees, and I mentioned, we are up $100 million I think in this quarter, which contributes to the delta between last year and this year, a quarter -- a year ago in this quarter. But the servicing book has been getting smaller, as we’ve walked away from higher risk activities, et cetera and focused more on today’s score agency mortgage origination. So that phenomena is something to grapple with when thinking about how that performs over the coming couple of years. As augmented by how successful we are, and on the origination side, and growing new servicing assets as well.

But does the pace of change, I guess does the pace of change, change at all, because of the presumably many of the legacy assets are now being refied away and newer assets may look more like legacy assets in terms of servicing rate?

Well, I think what changes is the cost to service because we’re working through the, we've had higher foreclosed and workout expenses over time. There is labor, there is extra compliance, there's a lot going on. The standards are still -- the new standards are as high as they've ever been, but the incidence will be going down over time. So my sense is that that should improve. There should be some scale there. And perhaps it's true also that the per pound revenue -- per loan revenue scales into today's run rate and with each new million dollars’ worth of servicing that we add to the book, it doesn't pay the same servicing revenue as the legacy billion dollars. But you will watch that move slowly over time.

And then if I can just step back for a moment, your earnings power for the past several years now has been running just above $4 and of course this current quarter, it’s sort of affirm that run rate and the consensus for next year is closer to $4.30 and I'm not asking to specifically forecast, but could you help us understand like what bridges that increase in earnings power, presumably rates might be some of it, but is there and the balance sheet continues to grow, but in the absence of rates, would that figure be achievable or are we more in a trend line?

Well, there is a lot of unknowns in that question and we’re not giving guidance on next year. But as was mentioned earlier by Erika in terms of what might happen or what has to happen, as we grow in the future, it will be earning asset growth, loans and investments, it will be how efficient we are on the expense side of things and then the whole spectrum of non-interest income generating possibilities. There is a lot of strength in the number of those line items. Yeah. The GE portfolio added, not just 40 odd billion dollars worth of loans, but over 200,000 commercial relationships, most of whom weren't meaningful relationships at Wells Fargo already. So it's doing more with customers and generating more lending opportunity, more non-interest income opportunity and executing along those lines. So lot of work.

But if you think about the way we do business and our operating model, it's a great model to have for this economic environment, really when you think about it, we are the real economy. We do have 90 different businesses. We serve customers broadly and deeply and I don't think I’d want any other model for this environment. Yeah.

Great. Thanks very much.

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

Thanks for taking the question. John, what I wanted to kind of drill down to is if you think about mortgage refinance, the way you’ve got the accounting setup where you recognized at close and the way that servicing valuations get hit almost instantaneously when rates fall, you typically have a pressure quarter when refinance kicks in, followed by more favorable outcomes as you move forward. So I just [Technical Difficulty] And then the only thing I was going to add and follow up is if you think about what you were just responding to the one thing that I think you left out was the fact that share repurchase will reduce the shares outstanding by about half of that growth that was just highlighted. So capital announcements has a big part of what would generate any incremental growth, as if net income was absolutely flat from this point forward.

We have been benefiting and we’ll continue to benefit from taking share repurchase as a result of our capital plan. It is a driver for people who are measuring in earnings per share. Thanks for pointing that out.

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

Good morning, guys. At least, I think it’s still mourning. Anyway, one larger question and two small ones. The commentary on the oil and gas portfolio and the trends there. It seems to be a little bit different than what we heard from JP Morgan Chase yesterday and US Bancorp earlier this morning where they seem to be a little less equivocal in the trends and it looks like you had a big addition to non-accruals, but you didn’t add to the reserve for the portfolio. Yesterday, James Dimon talked about the companies and their portfolio having greater access to other financing. That seemed to be your trends or commentary was a little different than that. Can you just, I mean are there differences in your oil and gas portfolio or you're just being cautious here?

I'd say both. There are probably differences. We have a big broad spectrum of upstream midstream and services companies that includes a lot of middle market companies, which our entire wholesale portfolio does. So the portfolios are probably different. We are generally cautious, however. I guess I’d point out that our criticized assets in some, in energy are down by $1.7 billion. Within that, we moved more into non-performing in the quarter, which we had expected to do in our outlook as we sat here a quarter ago, which is why our reserve didn’t have to go up in connection with that. I think we’re just a little -- it’s a little premature to declare victory because prices are hovering in crude in the 40s and who knows what the next couple of quarters brings and we don't want to get ahead of ourselves there. We’re performing great with 39 basis points of loss, all in with these levels, and so there is no point in declaring victory. We would agree, if I didn't mention, it was an oversight, there is a lot more access to capital among energy companies today, all forms, loans, high yield, high-grade and equity were busier in the second quarter than it have been in a while. There are more assets changing here, and things are freeing up a little bit and that's going to help with resolutions and we’ve captured the benefit of that in our analysis for what our exposures are, but it’s true and it was less true a couple of quarters ago.

And Nancy, the other thing, John mentioned, but I just want a reminder or say it again, even though we added to our non-accruals, we tend to be conservative. Over 90% of our non-accrual oil and gas customers are still current on principal and interest payments, think about that. I mean, that's…

Almost all the losses that we’ve taken are from loans that are still paying.

Okay. So we are sort of targeting back to the performing non-performing era of a couple of decades ago.

Yes.

I remember. Secondly, mortgage banking gain on sale, can you just give us the current margin and how that stacks up and if it’s strengthening, I mean if refi activity goes up, I'm assuming that gain on sale margin will strengthen, can you just affirm that or not?

Yes. So it was sort of 165, 166 in the quarter and about the same from the first quarter. I think you're right that the industry is probably going to have some capacity constraints at this level of application activity and that's probably, it’s at least supportive for levels that we are today. I don’t know if it moves up from here, but it feels supportive because people are working hard to accomplish the throughput that these applications create.

Okay. And just one final question, John Stumpf, you raised the dividend, what $0.02 I guess what last quarter, and you’re sort of at the 37% payout ratio, et cetera, et cetera. When would be the next regular dividend meeting where you would consider a more meaningful dividend increase and given that your stock is one of the highest yielding in the group, is that necessary at this point?

Well, we increased $0.05, right from $0.375 to $0.38 and I would remind as John did that and you just suggested that if you take $0.38 and divide that by $1.1, you get a number that is that we're proud about. We just went through our CCAR process and I hope you would agree and I know our investors appreciate the fact that we are shareholder friendly. We have -- of the big banks. We are a leader in returning capital. So dividends are important, speaks to the confidence of our -- of how we run the company and the earnings momentum that we have. On the other hand, buybacks are also important. So they’re both in there and the question you asked, we think about that a lot. So, and we will continue to put all of our emphasis on running a really great business and returning as much capital as we can and we should -- and people should think about the 55% to 75% range.

Thanks for the artful non-answer, John.

Our final question will come from the line of Brian Kleinhanzl with KBW. Please go ahead.

Great, thanks. Just a quick question. When you look at the balance sheet, when you look at the kind of, on the liability side of the balance sheet, if you look at it year-on-year, you’ve seen deposits up 60 billion, where most of the fundings come from short-term borrowings and long-term debt. So is there something changing in the depositor base or depositor is becoming more rate sensitive and that's why you’re not seeing the deposit growth that you once were, especially this quarter where it’s only been 4 billion on end of period for total deposits, just wondering if there is a change in the depositor.

Yes. If there is anything specific, I would say it’s among wholesale customers, I think retail deposits grew by 8% year-over-year and the total grew by 4% and the balance is coming from wholesale customers who are a little bit more price sensitive and in the wake of the 25 basis point move in December, there are some deposits that we paid a little bit more for in wholesale and some that we didn't, and some that have better liquidity value and some that have worse and this is how that’s shaken out. You pointed out that there has been some more wholesale funding on the liability side. We went out and put on some short-ish term, I think it shows up as long-term, because it's beyond the year, but short-ish term financing to make sure we had funding in place for the GES, as they came on, some of that will roll off, some of it might hang on too for a while. But it’s a mix. And then as you also pointed out, we are out there marching along the TLAC implementation path and we will be over the course of the next several years, and that will add to that portion of the liability stack.

Brian, we love all of our deposits and depositors, but if you look at as John mentioned, if you look at the most core of our core deposits, that would be retail and especially retail transaction deposits, savings accounts, checking accounts and if you look at our net primary, which where people live out of those accounts, you look at that growth and you look at the growth on the retail side, it's been world-class for us and that continues to march along.

Okay, great. Thanks.

Thank you. I know we ran over, but I want to thank all of you for joining us today and your interest in Wells Fargo and your questions. So, and also I want to thank all of our 265,000 plus team members for a great quarter. Thank you much. See you next quarter. Bye-bye.

Ladies and gentlemen, this concludes today's conference. Thank you all for joining. You may now disconnect.