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Fifth Third Bancorp (NASDAQ:FITB)
Q2 2020 Earnings Call
Jul 23, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Fifth Third Bancorp second-quarter 2020 earnings conference call. [Operator instructions]. I would now like to turn the call over to Chris Doll, director of investor relations.

Please go ahead.

Chris Doll -- Director of Investor Relations

Thank you, Denise. Good morning and thank you for joining us. Today, we'll be discussing our financial results for the second quarter of 2020. Please review the cautionary statements in the materials which can be found in our earnings release and presentation.

These materials contain reconciliation to non-GAAP measures along with information pertaining to the use of non-GAAP measures, as well as forward-looking statements about Fifth Thirds performance. We undertake no obligation to, and would not expect to update any such forward-looking statements after the date of this call. This morning, I'm joined by our president and CEO, Greg Carmichael; CFO Tayfun Tuzon, Chief Risk Officer James Leonard, and Chief Credit Officer Richard Stein. Following prepared remarks by Greg and Tayfun.

We will open the call for questions. We turn the call over now to Greg for his comments.

Greg Carmichael -- President and Chief Executive Officer

Thanks, Chris. And thank all of you for joining us this morning. I'll focus most my comments on the actions we have taken to navigate this challenging environment and provide some highlights on our strong financial performance this quarter. Tayfun, will then provide more details related to the quarterly financial results in his remarks.

In light of the ongoing challenges brought on by the pandemic, and the heightened civil unrest resulting from the inequities in our country, we continue to prioritize our actions for our customers, our communities, and our employees. We proactively made over three million calls to our customers since the onset of the pandemic to assess their financial situation. In total, we have processed over 150,000 loan deferral and forbearance requests. Since the rollout of our COVID-19 hardship programs of approximately 6% of total loans.

While the 35% of those in our consumer deferral or forbearance programs have made one or more payments. Consumer hardship relief requests including mortgage decline approximately 85% from the mid-April peak, to the last week of June. Beginning July 1st, we started methodically transitioning our customers from the COVID-19 hardship programs to a combination of short and long-term options. If the customer required further assistance, depending on the product type, and borrower circumstances.

This approach is consistent with our pre-COVID hardship programs. As of the end of last week, more than 50% of the consumer loan deferrals have transitioned off the COVID-19 programs, of which only 12% have requested additional hardship assistance. In total, consumers who have [Inaudible] COVID-19 programs and requested additional relief represent less than 0.5% of total consumer loans. The declining request, the high percentage of customers who have made a payment, in a small number of customers requesting additional assistance give us confidence and strength of the underlying credit quality of our consumer portfolio. In addition to providing hardship relief, we continue to support our customers through the Paycheck Protection Program. Due to the tremendous efforts by hundreds of Fifth Third employees, we have successfully originated $5.5 billion of loans, benefiting 38,000 small and mid-sized businesses which in turn helps approximately 500,000 employees of our PPP customers.

Looking ahead to client forgiveness request, but we are waiting for the clarity from the SBA, we have developed an alternate solution which should help simplify the forgiveness process. Ultimately, we estimate nearly 90% of PPP clients for request and qualify for forgiveness. Our top priority remains the health and safety of our customers and employees. But we have kept the proximity 99% of our branches open throughout the pandemic to serve our customers. We continue to monitor developments in select geographies, given the recent increase in COVID cases, and we will continue to follow the state and CDC guidelines to protect the safety of our employees and customers.

We continue to encourage customers to utilize our digital tools during the pandemic. As a result, we are seeing increased adoption raised with about 75% of all transactions now occurring through our digital channels. Now moving on to financial results. Our second quarter performance was strong.

Once again, our results highlight the strength of our franchise in our ability to navigate a dynamic environment, and mitigate the impact of lower rates to well diversified fee revenues, and continued expense discipline. We have now generated year over year of just a positive operating leverage in seven out of the past eight quarters, and grew tangible book value per share for five consecutive quarters. The group Common Equity Tier 1 capital. This quarter despite adding 12 reserves and paying nearly $200 million in common dividends.

Our CET1 ratio improved 35-basis-points to 9.7%. Additionally, our loan-to-core deposit ratio reached a historically low level of 72%, excluding PPP loans. Our strong capital equity ratios are indicative of our balance strength which will serve us well as we navigate this challenging environment. With respect to capital, we recently announced our indicative stressed capital buffer requirement from the 2020 CCAR exercise of 2.5%, which is a floor under the regulatory capital rules. Without the floor, we estimate our buffer would have been approximately 2.1% We also announced our intention to maintain our current common dividend per share, and continue the suspension of share repurchases through, at least year end.

We will continue to provide our board with the necessary information to make forward-looking, and data driven decisions about the sustainability of the dividend. In terms of credit quality, the net charge-off ratio of 44-basis-point this quarter was better than the low-end of our previous guidance range reflecting improvement in consumer, and relative stability in commercial. But we do not have perfect foresight with respect to the duration or severity of this downturn, we have consistently communicated through the cycle principles of disciplined client selection, conservative underwriting, and overall balance sheet management approach focused on long-term performance. Our economic visibility remains low or unwavering adherence to these principles in our balance sheet strength gives us confidence as we navigate this environment.

From a commercial client standpoint, we continue to focus on generating relationships. The clients who have more diversified and resilient balance sheets, as well as multiple sources of repayment. Even very successful keeping our client relationships, and as a result have generated record capital markets revenue in three of the last four quarters. We believe this composition toward larger relationships will serve us well as our clients navigate the pandemic.

In fact, corporate banking clients representing approximately 20% of our exposures successfully accessed the debt and equity capital markets since the onset of the pandemic to bolster their liquidity, including 20% in a COVID-19 high impact industries. We continue to believe we are well-positioned relatively appears in commercial real estate in the area where we have been deliberately underweight. We have focused predominantly on top-tier developers with a track record of resilience, and significantly lowered LTVs, compared to the last downturn. Our portfolio is well diversified by geography and property type, including virtually no land loans.

And as we have discussed before, we continued to get the low-end appears at a percentage of total capital. It is worth noting that across both of our portfolios in the consumer and commercial, we have focused on maintaining geographical diversification through several national businesses including indirect auto, the residential mortgage, in addition to C&I and CRE. Our credit risk is more diversified beyond our retail footprint with these national money businesses, which will be instrumental in delivering a differentiated credit performance, given the likelihood of an uneven economic recovery. In addition to our delivered positioning with respect to credit risk exposures, we have also spent many years preparing for a turn in the economic cycle by improving and diversifying both our key revenues in our loan portfolios which was evident in the second quarter results. Our PPNR increased 10% from a year-ago quarter, despite the continued headwinds from lower rates.

This reflects a record quarter in capital markets, strong mortgage origination revenue, pro-active liability management, and continued expense discipline. Our four key strategic priorities; leveraging technology solid our digital transformation, driving organic growth and profitability, expanding market share in key geographies, and maintaining a disciplined approach on expenses and client selection remain intact. Clearly, in this type of environment, we are putting the appropriate level focus improvisation on the initiatives within those four priorities which had the highest probability of driving long-term financial success. I'll turn it over to Tayfun to discuss our financial results, and outlook in more detail. I would like to once again thank our employees. I am very proud of the way you have responded in extraordinary ways to support our customers, our communities, and each other during these unprecedented times.

I will now turn it to Tayfun to discuss our second-quarter results and our current outlook.

Tayfun Tuzun -- Chief Financial Officer and Executive Vice President

Thank you Greg. Good morning, and thank you for joining us today. Before I begin my review over the quarter, let me also reiterate that we are very proud of our-- how our colleagues have responded to the many uncertainties that we face in navigating through the challenges, associated with the nature of this downturn. We do believe that the actions that we have taken so far, and those that we will be taking in the coming quarters will continue to display our strong desire to fulfill our role in reinvigorating the economy by maintaining, and leveraging our strength to support our clients in managing through this difficult period. The data and information that are available to us today continue to indicate low visibility regarding the direction of the economy.

Our discussion today, and our decisions during the second quarter collectively reflect our cautious approach behind our decisions on managing risk exposures in this uncertain period. As we commented during our first quarter earnings conference call, our economic assumptions based on Moody's economic scenarios which underlie our outlook, including the background scenarios reflected in our reserve build did not, and still do not assume a V shaped recovery. Our downside scenario assumes that GDP will remain below the end of 2019 levels until the second quarter of 2023, and the base case assumes that it does not recover until the second quarter of 2022. Also, our downside scenario assumes the unemployment rate will remain 12%, until the second quarter of 2021, and remain above 11% heading into 2022.

With the base case scenario assuming that after the current spike and recovery, the unemployment rate will worsen and peak at nearly 9.5% in the second quarter of 2021, before slowly recovering. This reflects our belief that the downturn will be prolonged and the recovery uneven. Turning to Slide 4. With respect to the second quarter, we were pleased with our overall financial performance despite the economic conditions.

We took advantage of favorable market conditions in mortgage and capital market, which helped us exceed our fee income projections. Credit performance remained relatively strong during the quarter. Charge-offs were better than our prior expectations, and the NPA ratio increased just 5-basis-point. sequentially.

Deposit growth significantly exceeded our expectations, although clearly a good portion of the inflows were related to the stimulus programs, we believe that we can leverage our clients demonstrated preference to bank with us for future revenue opportunities, and enhanced client interaction. We improved our regulatory capital and liquidity position during the quarter. Our CET1 ratio increased 35-basis-points to above 9.7%, despite the reserve build, and exceed the required minimum including the indicative stress capital buffer by over 270-basis-points. Our loan-to-core deposit ratio improved to 75-basis-point at 75%, as our short-term investments predominantly interest bearing cash where approximately $28 billion at quarter end. Our loan-to-core deposit ratio was 72%, excluding PPP loans. The combined hedge and investment portfolio unrealized gain position stands at $3.9 billion, reflecting the growing value associated with the long-term protection that these portfolios provide.

As a proof points, the sequential decline of our investment portfolio yield is about a third of the peer median decline. Reported results for the quarter included a -$0.07 impact from several notable items, including a charge related to the valuation of the Visa total return swap, certain real estate impairments including from our branch network, specific COVID related expenses, and the merger related charges, and a debt extinguishment charge. Second quarter pre-provision net revenue improved 4% from the prior quarter, and 10% from the prior year, as we generated positive operating leverage again despite the rate headwinds. Our adjusted efficiency ratio improved nearly 200-basis-points from last quarter, and improved nearly 100-basis-points from the year-ago quarter. Return metrics were impacted by our reserve build, but we continue to produce strong revenues while also generating efficiencies throughout the company.

Moving to Slide 5. Total average loans increased 7% sequentially, reflecting growth in C&I from increased line draws in PPP loans, as well as growth in construction and auto loans. Excluding PPP, total average loans increased 4% sequentially. Given the rather uneven line utilization trends during the quarter, the timing of PPP loans, we are also providing period end balanced performance.

End of period loans declined $3 billion sequentially or 3%, reflecting a repayment of line draws, as well as subdued borrower demands in both our commercial and consumer portfolios. Our commercial line utilization rate was 38% at quarter end, down 9% from mid-April, and essentially flat compared to the pre-pandemic rates. Line utilization so far this quarter has been stable. Commercial pipelines remain generally soft as you would expect, and our focus continues to be on our existing client base in this environment. Average commercial real estate loans increased 4% sequentially, reflecting draws on previous commitments.

Period and CRE loans were flat compared to the prior quarter. As we discussed many times before, we believe that our industry loan CRE balance as a percentage of risk based capital which is less than half of what it was during the last downturn, combined with the strong risk profile of our borrowers will benefit our future credit results given the likelihood that commercial real estate will be exposed rather severely during this downturn. Average total consumer loans decreased 1% from last quarter. Growth in auto was offset by declines in home equity and credit card. Auto production in the quarter was strong at $1.5 billion, rebounding nicely after the April slowdown, with healthy spreads and the same super-prime profile as before. Our average origination FICO scores were nearly 770 this quarter.

Most of the other consumer loan categories reflected the generally subdued borrower demand, and consumer spend levels due to both weak economic activity, and government stimulus, and other benefit programs. Moving on to Slide 6. Average core deposits increased 19% sequentially, the double-digit growth in all deposits captions except consumer CDs and foreign office deposits. Our growth so far is multiple points ahead of the peer banks.

Retracted deposit growth came from growth and every line of business and was very granular across product types and customer size. Growth in the initial months of the quarter reflected deposits from line draw proceeds, followed by growth from depositors will obtain funding to the PPP. Overall, the deposit performance reflects our strong, long standing client relationships, our customers desire to remain extremely liquid in this environment, and the lack of significant investment and growth opportunities. Average commercial transaction deposits increased 34%, and average consumer transaction deposits increased 8%.

Commercial growth was well diversified between corporate banking, and middle market clients. Average demand deposits represented 31% of total core deposits in the current quarter, compared to 29% in the prior quarter. As shown on Slide 7, we have continued to take proactive steps to mitigate the impact of lower rates which should provide additional support in the coming quarters. Compared to last quarter, we lowered our interest bearing core deposit rates 41-basis-points, while generating another record deposit growth, more than the high end of our previous rate guidance range, and sooner than we expected. As a result, our June interest bearing core deposit rate of 21-basis-points was below the floor of the previous rate cycle, with every product category meaningfully lower as we exited the second quarter. Our total core deposit costs including DDAs was just 19-basis-points in the second quarter, and 14-basis-points in June.

We expect third quarter interest bearing core deposits costs who'd benefit from our actions, and declined another 11-basis-points. This reflects a cumulative data in excess of 40-basis-point. In addition to the actions taken with respect to deposits, we also terminated $3 billion in FHLB advances, end of period wholesale borrowings declined 13% sequentially. As I mentioned earlier, our current loan-to-core deposit ratio was 72%, excluding PPP loans at the end of the second quarter, significantly below almost all peers. Our current expectation is that the liquidity environment will be slow to change.

We expect that our current loan-to-core deposit ratio will remain at, or around the current levels at least through the end of this year. Although we are aggressively lowering our deposit rates, we will maintain a strong preference to meet the needs of our clients which we believe will reward us in the long term. Ultimately, we believe that the strength of our deposit franchise will help lower and keep deposit costs below previous lows, while growing our client relationships. Turning to Slide 8. Net interest income decreased $30 million or 2%, compared to the prior quarter.

The NII performance reflects the impact of lower market rates on commercial loans, mortgage portfolio prepayments, and the decline in home equity and credit card balances. These impacts were partially offset by elevated average commercial revolving line of credit balances, and growth from lower yielding PPP loans, as well as continued focus on reducing deposit costs and the favorable impact of previously executed hedges. As you can see on this slide, the hat hedges added incremental $30 million to our second quarter NII, for a total contribution of $62 million during the quarter. Purchase accounting adjustments benefited our second quarter net interest margin by 04-basis-points this quarter. Our NIM decreased 53-basis-points sequentially.

Although not detrimental to our net interest income, elevated cash had a 29-basis-point incremental negative impact on our NIM, in addition to a 01-basis-point drag from PPP loans. Our period and short-term cash position increased by four and a half times from $6.3 billion at the end of March, to $28 billion at the end of June, with period in excess cash 18 times higher than our 2019 average. Excluding the impact of elevated cash positions and PPP loans, we estimate that our NIM would have been just about 3%. Our focus in this environment is on long-term NIM performance. As such, given the lack of attractive alternative investments, and the uncertainty on the timing of future deposit outflows, we expect to remain in this cash position longer than we anticipated in early June. We don't believe that it is in our best interest to deploy any portion of the cash reserves today.

We believe that there is more leverage in continuing to reduce our funding costs with the help of our strong liquidity position, but we will reevaluate our options at the market environment changes. In addition to the anticipated longer duration of our cash position, our expected NIM, and NII progression over the next two quarters also change compared to our earlier expectations as the PPP forgiveness period lengthen, which resulted in pushing out our expectations of the timing of the recognition of interest income to the fourth quarter and early next year. At this time, we anticipate forgiveness to commence in the fourth quarter with about 60% of the NII benefit to accrue in the fourth quarter ,and the rest during the first quarter of 202. We expect that our normalized NIM excluding the impact of elevated cash and PPP loans, is approximately 3%, and will remain there for the foreseeable future helped by our interest rate hedges, and investment portfolio composition. In our investment portfolio, we had a net discount accretion this quarter of $1 million, as opposed to multiple millions of dollars of premium amortization, some of our peers are experiencing.

As we have always stated, one needs to look at both the derivative portfolio where we took early actions with great entry points for a longer duration, as well as the structure of the investment portfolio to gauge the long-term NIM performance. The significant impact of our cash reserves and the PPP portfolio during the next few quarters will create some noise, but we anticipate a more stable environment past that. The third quarter NIM is expected to contract another 07-basis-points to 10-basis-points driven by the full-quarter impact of higher cash positions in PPP loans, with NIM expected to then recover in the fourth quarter. The third-quarter contraction is predominantly related to higher average cash balances on our balance sheet as the impact of lower rates is expected to be offset, by the continued benefits of our hedge portfolio and deposit rate reductions. Moving on to Slide 9.

We once again had a very strong quarter generating fee revenue to offset the pressure on interest income. The resilience in our fees continues to highlight the level of revenue diversification that we have achieved. Reported non-interest income decreased by 3% sequentially. Adjusted non-interest income of $670 million, exceeded the high end of our previous guidance range by approximately $20 million.

The strong performance was driven by another record in capital markets, as well as better than previously anticipated result in mortgage, and wealth and asset management. In our commercial business, the strong performance was led by capital markets revenue which increased nearly 20% from last quarter, and approximately 50% from the year ago quarter. Debt and equity capital markets both achieved record quarters, again reflecting our clients ability to access the market to bolster their liquidity positions. Mortgage banking origination fees and gains on loan sales were strong in the second quarter up nearly 20% reflecting improved margins. Originations are $3.4 billion, decreased 15% sequentially due to a temporary pause in the corresponding channel in May, as we waited for clarification from the agencies regarding loans for sale that entered the forbearance category. Mortgage originations excluding correspondent channel production increased 22%, compared to the prior quarter.

Our retail originations were up 37% versus last quarter. Asset management fees were down 4% reflecting the impact of equity market levels throughout the quarter. Total wealth asset management revenue decreased 10% from the prior quarter to a large extent reflecting that seasonal decline in tax preparation fees. Card and processing revenue decreased $4 million or 5%, resulting from lower credit and debit volume throughout the quarter, reflecting reduced customers spend, partially offset by lower rewards. As we look ahead to the third quarter, we expect low to mid-single digit growth in processing fees.

Deposit service charges decreased sequentially reflecting lower consumer and commercial fees which were impacted by the record growth in deposit balances, as well as hardship related fee waivers granted throughout the quarter. Given some of the trends that we have seen toward the end of the quarter, we expect double-digit growth in deposit fees in the third quarter. Moving on to Slide 10. Second quarter reported pre-tax expenses included COVID-19 related expenses of $12 million, merger related items of $9 million, and FHLB debt extinguishment charge of $6 million, and intangible amortization expense of $12 million.[Inaudible] shown in our materials, non-interest expense decreased over 5% sequentially, and decrease approximately 3.5% compared to a year ago.

Also, due to the mark-to-market nature of our non-qualified deferred compliance, our expenses include the impact of a $22 million expense, compared to a $26 million benefit of last quarter. Excluding this impact, our expenses declined $110 million or over 9% sequentially, driven by the declines from seasonal items, reduced marketing expense, and continued discipline managing expenses throughout the company. As we are diligently managing in period expenses, we are also assessing our longer term efficiency opportunities. We will continue to accelerate our investments in technology and automation, as we see permanent shifts in customer behavior and an increased need to reduce our dependence on manual processes in our operations. We are also very focused on improving the resiliency of our technology infrastructure to achieve a world class network structure as more and more customer interactions are shifting to the digital [Inaudible]We are also accelerating our implementation of [Inaudible] in our commercial business.

At the same time, we are very focused on working with an expense base that is more aligned with the muted revenue growth expectations over the next few years. We are sizing our target within that context and approaching this comprehensively, including opportunities in corporate real estate, vendor management, alignment of our sales capacity with market opportunities, the size of our retail branch network, and more efficient middle office and back-office operations. Some but not all of these actions will be based on environmental factors. We are performing a deeper, structural review of our business lines in middle office and back-office functions to identify opportunities that improve the profitability of our company. We plan to share the outcome of our review with you in the next couple of months when we finalize our findings and decisions.

As always, you can trust us to be prudent in managing our expenses with utmost flexibility. Slide 11 provides an update on our COVID-19 high impact portfolios. The amounts on this page represented approximately 11% of our total loans, and our down 9% from the last quarter excluding PPP loans. As you can see, the pay downs during the quarter reduced our balances relative to the first quarter in all sub-categories except for leisure, travel where we have a rather small overall exposures all to larger operators.

The total balances on this slide include approximately $1 billion, from our leverage loan portfolio which is now under $4 billion. The information on this slide lays out the reasons why we believe that our client selection in these portfolios has been very disciplined with a focus on larger companies that have access to capital and stress environments, and that we have the appropriate credit mitigants in place to limit the ultimate loss content in these portfolios. In addition on Slide 12, we give you a snapshot of our energy portfolio. This portfolio is less levered and carries a higher hedge position, than the portfolio during the last downturn in oil prices. As you can see, the leverage in this portfolio is two turns lower with a higher RBL balance, and approximately one third of the percentage exposure to Oilfield Services, compared to 2015.

Our ongoing stress tests indicate that the level of charge-offs in our energy portfolio under stress conditions would not meaningfully deviate from the rest of our commercial portfolio. Nearly 80% of the portfolio is in reserve base structures, and we recently reduced our overall RB borrowing base approximately 15%, as a result of the spring redetermination. On Slide 13. We provide an updated view of the consumer and mortgage portfolios.

The FICO scores clearly indicates the high credit quality of the portfolio with over 55% containing FICO scores of 750 or higher on a balance weighted basis. Approximately 90% of the consumer portfolio is secured, and as you can see by our FICO band distributions, our portfolio is heavily weighted in the high prime, super prime space. as we have previously discussed, we have taken proactive steps to enhance our underwriting standards specifically on minimum FICO scores and maximum LTV levels, in addition to increasing our efforts in collections. Turning to credit results on Slide 14.

Net charge-offs were flat sequentially. The consumer net charge-off ratio declined 14-basis-points this quarter following a 12-basis-point decline in the prior quarter, and commercial net charge-offs were relatively stable resulting in a total net charge-off ratio of 44-basis-points better than the low end of our previous expectations. NPAs continue to be well behaved at 65-basis-points, up just 03-basis-points since before the pandemic. The sequential increase was entirely in commercial, predominantly in the energy portfolio.

As I just mentioned, we are comfortable with the lost content in our energy portfolio. The consumer non-performing loans remain low. We added $355 million to our credit reserves this quarter, increasing our ACL ratio by 37-basis-points to 2.5%. The incremental reserve build this quarter reflected the continued deterioration in the macro economic outlook. The cumulative increase in our allowance for credit losses since the end of 2019, including the day one impact is now over $1.5 billion.

As a reference point, we compare our current reserve level with a nine quarter total loss estimates with the recent severe stress test runs, because of your stress test runs. Our current reserves stand over 60% of our company run losses, and nearly 40% of Fed losses. The [Inaudible] models that the Federal Reserve is utilizing still appeared to be heavily influenced by our credit results during the last downturn, which result in a wide gap between our expectations and the Feds. Slide 15 provides more information on the allocation of our allowance and the composition of the changes this quarter.

Higher levels of reserves in real estate based portfolios reflect the deteriorated outlook in the economic scenarios related to real estate valuations in future periods, including the impact of approximately $170 million in remaining discount, associated with the MB loan portfolio. Our ACL ratio was 2.64%. Additionally, excluding the $5 billion in PPP loans with virtually no associated credit reserves, the ACL ratio would be approximately 2.67%. Our thoughts on the need for future reserve build are similar to what you have heard from other banks. Our reserves reflect the current macroeconomic expectations embedded in the scenarios that we deploy in this exercise.

If the outlook does not further deteriorate there should not be a need to increase our reserve coverage beyond the current levels. Any further increases in the reserves would result from a higher likelihood of a more severe and prolonged double dip scenario. Turning to Slide 16. Our capital and liquidity position remained very strong during the quarter. Our CET1 ratio ended the quarter at over 9.7%, exceeding the first quarter level even as we built reserves.

Given the dynamics during the quarter, we are providing you CET1 reconciliation between net income, less weighted assets and the impact of dividends. As you can see dividend payouts constitute a very small portion of the change in CET1. It is important to note that our capital levels are now well above our targets. As you may recall our capital target in early 2019 was 9%. We raised that level closer to 9.5% about a year and a half ago, and we are now above the 9.5 % level.

As a reminder, we had no buybacks in the first or second quarter, and our decision to extend that to the end of this year has changed the trajectory of our capital ratios. Even with the build up in reserves, we are ahead of our capital plan, and we expect continued strong levels of PPP in PPNR to support our current capital levels. We will be resubmitting our stress test that sometime in the fall with the rest of the [Inaudible]. We have in very consistent in stating our view that given our very strong capital ratios, balance sheet strength, earnings power, and relatively modest peak over dividend payout ratio, we expect to fare well.

We believe that our performance in this downturn ultimately will prove the resiliency of our model. Despite the difference in projected loss rates between the two models that I just mentioned, we continued to show significant cushion in our forecast of capital ratios under stress conditions. Our tangible book value per share was $22.66 this quarter, up 13% year over year. At the end of the quarter, our unrealized pre-tax gain in our securities and hedge portfolios was approximately $3.9 billion which is not included in our regulatory capital ratios.

From a liquidity perspective, we have over$100 billion in total liquidity sources. Slide 17 provides a summary of our current outlook. Given the uncertain environment, we continue to provide only quarterly expectations until we have more long-term visibility on the economic outlook. For the third quarter, we expect a decline in total average loan balances in th 3.5% to 4% range on a quarter-over-quarter basis, with a 6% to 7% decline in commercial loans, and a 3% increase in consumer balances. The decline in commercial balances, as a result of the pay downs in commercial credit lines.

Net interest income and the expected decline approximately 3%, compared to last quarter, assuming no benefits from accelerated amortization of PPP fees. This decline is primarily attributable to the impact of line pay downs in our commercial business. as the impact of lower floating rate loans is fully offset by the hedges, as well as the funding rate benefits. We expect non-interest income to increase two plus percent sequentially, and expenses to increase about the same. Part of the expense increase is due to performance based comp related to mortgage, wealth and asset management, and leasing revenues that tend to result in higher dollar paths.

In addition, there are some accelerated expenses in I.T. that are related to our focus on automation. As I mentioned earlier, we are working on a broader expense reduction target that we will share with you in the coming months that is intended to reduce the pressure on our efficiency ratio resulting from the weak revenue environment, and we'll also include longer term structural targets. Total net charge offs are expected to be in the 50-basis-point to 55-basis-point range, continuing to reflect the widening gap between the near-term credit performance, and the anticipated deterioration in credit metrics beyond 2020.

In summary, our second-quarter results were strong, and continue to demonstrate the progress we've made over the past few years, improving our resiliency, diversifying our revenues, and proactively managing the balance sheet. With limited forecast visibility, we will continue to rely on the same principles; disciplined Client selection, conservative underwriting, and a focus on a long-term performance horizon which gives us confidence as we navigate this environment. We fully intend to preserve the optimal level of efficiency of our operations in this weak economic---weak revenue environment, while we maintain the investments that we believe are vital to preserve the earnings power, and the operational resiliency of our company. With that let me turn it over to Chris, to open the call up for Q and A.

Chris Dold -- Chief Zoological Officer

Thanks, Tayfun. [Operator instructions]. Denise, please open up the call for questions.

Questions & Answers:


Operator

[Operator instructions]. Your first question comes from Scott Siefers with Piper Sandler.

Scott Siefers -- Piper Sandler -- Analyst

Good morning guys. Thanks for taking the question.

Tayfun Tuzon -- Chief Financial Officer and Executive Vice President

Good morning.

Scott Siefers -- Piper Sandler -- Analyst

I just wanted to follow-up on the liquidity. You gave a ton of good detail so thank you for that. And I certainly understand of the nuance of the elevated cash balances why they'll stick around. But to a large degree, these are issues that affect everyone.

Would you say---is there anything unique about that amplifies the order of magnitude so much.

Tayfun Tuzon -- Chief Financial Officer and Executive Vice President

I think they had. We believe that if we've stayed very close to our clients during the past five, six months as we entered this period. Our our sales force has been in close contact. Our relationships are very strong across the board in both corporate banking, as well as middle-market banking.

They are clearly showing a preference to bank with us and to increase the size of their relationships. This is purely a function of their willingness to work with us because we are not offering any significant rates to them that they can't get with rival bank. We've lowered our deposit rates well below where we were in the first quarter. But I think the strength of our relationships and our salesforce coverage is enabling us to maintain that level [Inaudible].

I mean our liquidity levels are significantly higher. The 19% deposit growth, I think exceeds all of our peers and the increase in our liquidity position is significantly higher than others. I think it doesn't impact the NII. We reflected liquidity profile of the balance sheet, and it also gives us many opportunities in coming quarters to continue to deepen our relationships with our clients.

That's our perspective.

Scott Siefers -- Piper Sandler -- Analyst

Perfect. Thank you. And just as the follow up, you said an additional 07-basis-point to 10-basis-points of margin erosion in the third quarter based on the full quarter impact of the higher cash balances. And then I believe you said it would recover in the fourth quarter with the PPP forgiveness.

I know it can be tough to cut through the noise of what's on with margins these days, but the benefit of the PPP benefits in the fourth quarter. Would you expect the steady state margin to stabilize after the 3Q.

Tayfun Tuzon -- Chief Financial Officer and Executive Vice President

I don't want to give fourth quarter guidance at this point, but I think what you should rely on not just for Q4 but also beyond Q4. We believe that 3% level, and then once we are past the PPP and once we are past the impact of the higher cash balances is probably a good target for us.

Scott Siefers -- Piper Sandler -- Analyst

Thank you very much.

Operator

Your next question comes from Erika Najarian with Bank of America.

Erika Najarian -- Bank of America Merrill Lynch -- Analyst

Good morning. As we think about a pretty sizable reserve, and some of the PPP inputs and takes that you're expecting I guess, if the Fed rolls forward the dividend income tax beyond the third quarter. Are you confident that your GAAP level of pre-preferred earnings would be above that $27.00 run rate as calculated dividend by the Fed.

Tayfun Tuzon -- Chief Financial Officer and Executive Vice President

As everything that we look at today, as well as some of the outlet that we have in place gives us a lot of confidence that we will have plenty of room.

Erika Najarian -- Bank of America Merrill Lynch -- Analyst

Thank you. And the second question is I'm sure a lot of my peers are going to try to tease out this expense reduction announcement, but I'm wondering how will this initiative compare to NorthStar. And how conscious are you of incurring charges given the possibility that this income test could extend beyond third quarter on the dividend.

Tayfun Tuzon -- Chief Financial Officer and Executive Vice President

NorthStar was a combination of revenue actions, as well as expense actions. So we are talking here a focus on expenses only. And with respect to charges, it is way too early, and not necessarily all expense actions would accompany a charge associated with itself. I would not necessarily be too worried about that.

I'm not saying that there is not a charge associated with any of the expense actions but sides wise at this point I'm not too worried about got it.

Erika Najarian -- Bank of America Merrill Lynch -- Analyst

Thank you.

Operator

Your next question comes from Peter Winter with Wedbush Securities. .

Peter Winter -- Wedbush Securities -- Analyst

Good morning. I want to follow up on the expense initiative. And I'm just wondering is the thought to bring the expense base down going forward,or is the idea to hold expenses flat in a more challenging revenue environment.

Greg Carmichael -- President and Chief Executive Officer

This is Greg. First off our intent is obviously to look at the opportunities and problems and question we just asked about more so a lot in expense opportunity and others are very to NorthStar. And then we start to think about our branch transformation and opportunities optimize our branch network. Thinking about the opportunities around our vendor management, money that we spend in those areas and the attractive opportunities that [Inaudible].

Rightsizing our organization for the sales opportunities. There's a lot of opportunities out there in front of us. So our intent would be to continue invest in the critical aspects of our business that we've mentioned before the digitization of our platforms. Our Southeast expansion and so forth will continue to investments.

But over time, we would expect that one at a lower rate on expenses, and realities othe revenue opportunities are out there in the environment we expect to run at a lower level going forward.

Peter Winter -- Wedbush Securities -- Analyst

Just another question. You guys provided some really good color on the forbearance on the consumer side. I'm just wondering if you can give some updates on the commercial side about loan deferrals coming in for a second request. And what's happening there on the commercial side.

James Leonard -- Chief Risk Officer

Yes Peter, it's Jamie. Thanks for the question. On the commercial side, you saw in the presentation if you look at payment deferrals that 6% of the loan balances are in payment deferral. The vast majority over 80% of the payment deferrals we had.

We're 90 days in duration but because they started midway through the quarter not many of them have come off. So I don't want to give you too much of a false positive. But to date, we've not had any requests for the second 90-day deferral in the commercial book. I guess some additional color would be that about 75% of our commercial customers that were on deferral have made payments while in the deferral.

And then beyond the payment deferral information that we provided in terms of other types of forbearance, there's about 7% of the commercial book that's received a covenant waiver.

Peter Winter -- Wedbush Securities -- Analyst

Thanks Jamie.

Operator

Your next question comes from Mike Mayo with Wells Fargo Securities.

Mike Mayo -- Wells Fargo Securities -- Analyst

Hi. I guess I have one negative question and one positive question. I go to negative question first. Flattish charge off, kind of flattish problem loans just doesn't seem accurate.

And this is not unique to you. It's an industry question. I mean if you didn't have the forbearance, if you didn't have the government assistance, how much worse would charge offs an NPA be. It is a question because eventually these programs run off and then bankers have to be bankers again, and reality sets in.

So there's just a term for a general question. How bad would it be if you didn't have this other support and forbearance.

James Leonard -- Chief Risk Officer

So Mike, it's Jamie. On the commercial side, I think what you see is what you get. It's pretty straightforward and there was a slight uptick in the charge offs, but it was offset by the improvement. We saw on the consumer side, and I think the heart of your question is how good is the consumer in this environment given both the government support plus the support we've given customers that have requested it for the forbearance and payment deferrals.

So when you look at our portfolio on the consumer side, Tayfun mentioned a couple of items. If you exclude mortgage because those were six month, and you look at the non-mortgage loans, only 12% have reenrolled in additional hardship relief. And through last Friday we've had over half of our original deferrals, they've come off the program. So I think that's one good data point.

We initially expected that number to be as high as 30%. So the fact that we're experiencing 12%, it shows us both the government support plus the overall health of the consumer is perhaps a little bit better than we expected. The other data point I would point you to is for the third in particular, Moody's published a study July 7th and they evaluated the MSAs most impacted by COVID-19. They use a number of COVID-19 cases, population density tourism, global connectedness etc. and the national average weighted by GDP was point 0.31, and this was on a scale up to 2.0 where we're playing golf, so lower is better.

Our score for our consumer portfolio is 0.12. So we're 60% better than the national average. I think there's a lot of hard work going on in our consumer portfolio. We stop the 90-day offers at the end of June.

And really we're working to move to the top of the customer payment priority. And ultimately between the geographic diversification, we have the overall credit quality of the book you see in the FICO scores, plus our revamped hardship programs. We're getting a good view that the consumer is doing better. Infact so much so that the second half of 2020 we expect our consumer charge offs to be below the second half of 2019.

Mike Mayo -- Wells Fargo Securities -- Analyst

And then the other question with $3.9 billion of securities and derivatives gains. I mean to what degree do you expect. Would you try to bank some of those gains. And look at where rates are.

And then you'd have cushion for more charges for your NorthStar part 2 or more cushion for your dividends, or maybe do buybacks sooner because you were a little more unique saying "no buybacks including the fourth quarter." You went the extra step to be more conservative. Just wondering why you did that. And if you might want to bank some of those gains. Thanks.

James Leonard -- Chief Risk Officer

I will answer the question about the conservative stance. Look I think we all recognize that there's a lot of uncertainty and very low level of visibility under those circumstances. I think it's natural for us to be a bit more conservative. And with respect to the $3.9 billion gain, it gives us a lot of flexibility.

If there is a need, or if we view that the future outlook for rates changes in our perspective such that gain is better off harvested and deployed for other purposes. There are some accounting realities that both that still allow you to immediately recognize all of that gain. But it clearly provides a very significant pool of capital that we can deploy going forward. At this point given our view, we're very happy with the portfolios as they stand, and we will continue to harvest.

And we have a long goal maturity date, so we will benefit it. But as you stated Mike, it's a rich man's problem and it gives us a good amount of flexibility.

Mike Mayo -- Wells Fargo Securities -- Analyst

I thank you.

Operator

Your next question comes from Saul Martinez with UBS.

Saul Martinez -- UBS -- Analyst

Good morning. One thing I'm struggling with this quarter was it in banks in general. There's a very divergent performance in terms of---not as much with NIM. But [Inaudible]this quarter and also with regards to the outlook.

You guys have been more conservative I think than your peers in terms of managing rate risk via hedging, we measures our securities portfolio yet. Obviously, NII was under pressure this quarter. It's likely to be under pressure next quarter. So I'm asking how you think we should see this dynamic as it pertains to you.

Is this really simply a function of you guys just being much more conservative in terms of how you're managing your risk, and that's reflected in your balance sheet dynamics, and also you see that with your short-term investments and loan. Is it really just a function of how you're managing risk right now that's driving that, or is there something else that we should also be aware of that maybe more[Inaudible]

James Leonard -- Chief Risk Officer

Two comments, Saul. One is if you actually normalize the NIM progress from the first quarter into the second quarter with cash positions and the PPP across all banks, you're getting to a much tighter distribution. So if you get to how core NIm has behaved, that volatility goes down significantly. From our perspective, we have $28 billion in cash and we are choosing not to deploy any of that part just to show a higher NII outcome.

Others have done that. Everybody has their own risk profile and risk preferences. I think what needs to be really more instrumental as we look forward, it's a long game and our outlook that the normalized NIM once we pass through this PPP period and a more normalized level of cash is 3%. When you think about it, our NIM was 3% to 4% in the first quarter.

With verily short term rates are and where the yield curve is, a 24-basis-points movement between the first quarter NIM and our longer-term outlook on NIM is a pretty good performance. And ultimately again, this is just that we're talking about a few quarters here. So things are going to look a little bit choppy. But NIM is just an outcome, and we are at a strong preference in not going after NII boost in the short term that would put us into a riskier position in the long term.

Saul Martinez -- UBS -- Analyst

I mean I have a few follow up on a table that switch gears to a different topic. I actually want to ask you about your reserving and actually taking in the other direction. I think you've been ahead of the curve in terms of building reserves but what. When did you actually start to think about releasing reserves especially as charge offs start to move up.

You have reserved for those things that are charged off and presumably that your provisioning will reflect your reserves on your growth and any recalibration of reserves on the back with and reassess the losses there. But I'm curious, could we start to see reserve releases quicker than people expect as charge offs will move up, or do you think that there's a predisposition for reserves to be sticky and less reserve releases. And going forward, just because of the vast uncertainty in the macro environment. I'm just kind of curious how we see things in terms of reserve levels and credit normalized and we get a little bit more visibility on the map of the dynamics.

James Leonard -- Chief Risk Officer

Saul, setting aside the impact of loan balances on reserves clearly if the bond balances decline, there's going to be impact of that. Setting that aside for a moment. What we have so far observed is coming out of the first quarter into May and to June and now into July. There is more stability in the economic scenarios that are being provided by Moody's, as well as just overall market expectations.

My expectation is that banks will continue to watch that progress over the next quarter or two, because in order to be able to release reserves, you need to develop a confidence that the sustainability of the economic outlook. And if the level of sustainability is truly dependable, and if the economic indicators give us the confidence, the answer to your question is, yes. At one point, we will start releasing reserves. But I do believe that there are a few quarters early on that assuming that there is stability.

And we do need time in order to develop that level of confidence.

Saul Martinez -- UBS -- Analyst

Thank you very much.

Operator

Your next question comes from Matt O'Connor with Deutsche Bank.

Matt O'Connor -- Deutsche Bank -- Analyst

Good morning. I was wondering if you could just talk about the process of kind of credit risk management more like a granular basis like at the ground level. Obviously, it's been some time since the role of collectors was all that important. So just talk about how you're reallocating.

I would assume some of your resources from originating loans to collecting loans in anticipation of more work to do there.

Richard Stein -- Chief Credit Officer

Matt, it's Richard. If we think about portfolio management broadly the expectation is that the relationship managers and their portfolio managers that work with them are continuously reviewing the portfolio. Since the pandemic, we've increased the frequency of those portfolio reviews we've got specific targeted reviews around industry, and geography, and product. And from those outcomes we've seen some rerating and rating changes.

And as a result as things slide, we move---we start to leverage our special assets group. And there have been really helpful at helping us work through problem credits making sure that we can rehabilitate where appropriate. And what we're doing is we are absolutely reallocating resources from both the relationship management teams and our underwriting teams into special assets to increase the capacity there. And virtually, all of them I am confident side of the third.

And also what the people we've drafted have historical experiences and workouts and special assets. And so we're trying to leverage that expertise across the platform. But it's the frequency of the reviews, and making sure we've got continuity from a coverage standpoint from into that.

Matt O'Connor -- Deutsche Bank -- Analyst

Is it the plan that you should be able to continue to do it in-house reallocating or do you think you might need to staff up with some proper partnering like third parties.

Richard Stein -- Chief Credit Officer

We're not looking to partner with third parties. We believe we can cover with in-house research.

Matt O'Connor -- Deutsche Bank -- Analyst

Thank you.

Operator

Your next question comes from. Gerard Cassidy with RBC.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Good morning, Greg. Good morning Jamie. Tayfun or maybe Jamie. are the loan loss reserves that you have established, Tayfun you I'll need those two economic scenarios for the downside one in the base case. Are those reserves set to a mix of those scenarios where they set to the base case scenario and second.

What metrics are you looking at going forward to see if you need to increase those reserves because of the worsening in the economy.

James Leonard -- Chief Risk Officer

We do use three scenarios weighted with a baseline, and then using Moody's one upside scenario, one downside scenario that Tayfun outlined for you. The major economic variables would have the greatest impact on the reserve levels would be unemployment, GDP, HPI are the ones that have the biggest impact on the models. And as Tayfun mentioned, this quarter, the build of $355 million in the ACL. The vast majority of that build was driven by the deterioration in the outlook.

And then you had the net impact of loan portfolio decline, and migration, and ratings almost offsetting each other.

Gerard Cassidy -- RBC Capital Markets -- Analyst

And then moving over to the higher risk commercial portfolio that exposed to the COVID-19 issues, it fell 9% as you've showed us to $12.8 billion. When you look going forward, is that a momentum that you can continue having and drop that much in the quarter. And second, what percentage of charge offs are attributed to bringing that balance then.

James Leonard -- Chief Risk Officer

I would say in terms of the momentum going forward, the biggest improvement or biggest factor in the second quarter improvement was the pay down of the defensive draws we saw in the first quarter. And that drove a healthy portion of that decline. In terms of the charge-off composition this quarter, you had a decent amount of the growth driven by energy ,and leisure and entertainment. As we look ahead to the third quarter, I think you'll see a common theme with entertainment and leisure, perhaps some CRE.

And then obviously, energy as it completes its restructure. I would say it's a healthy portion of the charge our expectation is driven by that COVID-19 stressed portfolio. But again, we still feel good about our clients Selection and the fact that as Richard pointed out, it's a well managed portfolio, that's just in this environment. There will be losses but we think it will be manageable.

Operator

Your next question comes from Ken Zerbe with Morgan Stanley.

Ken Zerbe -- Morgan Stanley -- Analyst

I think you mentioned that some of the lower or the loan balances being lower and lower in our guidance for third quarters really driven by at least in part by further corporate line draw downs. How much of the extra fine draws in terms of balances. Do you still have outstanding, and I guess are you assuming that all those fully run off or normalize or the utilization normalizes by the end of 3Q. Thanks.

Tayfun Tuzon -- Chief Financial Officer and Executive Vice President

I think the guidance is based on average loan balances. So they really truly reflect what happened especially in the second half of May into June. So the second or third quarter guidance truly reflects that speedy paybacks. And so at the end of the second quarter it's been stable so far.

Utilization rate is basically back to where it was pre pandemic. But again, the the decline in average commercial balances is more of a function of what happened at the end of the second quarter, more so than the third quarter.

Ken Zerbe -- Morgan Stanley -- Analyst

Understood. Ok. Thanks. And I may have missed this but have you addressed or did you address like this commentary around serve X corporate line drives just the general sentiment around C&I borrowers.

Are you building in any expectation that C&I or other loan balances share declining in 3Q.

Tayfun Tuzon -- Chief Financial Officer and Executive Vice President

There's not a lot of customer demand for new loans can. The market is very muted at this point both for economic reasons, as well as for what's going on with the healthcare situation that limits interactions. So far we're not seeing a whole lot of activity from our clients.

Operator

Your next question comes from John Pancari with Evercore.

Unknown Speaker

I just want to go back to the discussion around the release. And I want to put some numbers around it correct me if I'm wrong. So you've got it to average loans down 3.5% to 4%. Let's say loans are declining.

Looks like around $4 billion of that commercial loans are coming down $5 billion. Consumer is going up by a billion dollars and you've guided to charge offs of around. It looks like it's around $150 million in 3Q of charge offs. So am I thinking about that in terms of provisioning in 3Q the main driver of provision will be the consumer new loan growth of a billion dollars.

And basically it is better than assume and apply that 3% reserve ratio on that billion dollars of new loan growth. And basically that would imply like $30 million to $40 million of provision in third quarter. Am I thinking about that right.

Tayfun Tuzon -- Chief Financial Officer and Executive Vice President

One needs to take into account what happens at the end of a period. So you just have to---obviously it's useful to look at the average loan guidance, but when we get to the end of the third quarter we will see where the balances are at that point. And if there are zero builds our reserve position will back the end of period balances, compared to-- and the movement will be compared to the end of period balances in the second quarter.

Unknown Speaker

Ok. But I just want to make sure it conceptually-Am I thinking about this correctly in terms of supervision and this is on off assuming that the macro doesn't get worse or any better. Is this assuming a [Inaudible].

Tayfun Tuzon -- Chief Financial Officer and Executive Vice President

The provision could go down clearly. I mean if loans continue to go down on the charge off state [Inaudible]. There is a path which would indicate that the provision number on our income statement and it will be lower. So that could happen.

Operator

Your next question comes from Ken Austin with Jefferies.

Amanda Larsen -- Jefferies -- Analyst

Can you talk about the accelerated pace of technology investment that you expect. What have you learned about your technology during the pandemic. Are you a structural [Inaudible] the technology not as efficient as you hoped or is it more about client facing technology and you feel limited in your ability to service your clients first [inaudible]. And then as an addendum, if there's any business acumen that you can touch on that may require better tack that would be helpful now.

Greg Carmichael -- President and Chief Executive Officer

First off, our strategy is to focus on investing in our technology platforms that will better serve our customers, the product distribution or service and capabilities hasn't changed. And I think we've made tremendous progress as evidenced by the fact that 25% of all of our transactions now both our digital channels. Using that technology to serve our clients in a much more efficient way. There's more opportunities in front of us and there's an opportunity to read platform or commercial loan system which we're going to do that.

A rejection system, we're going to that there's opportunities to continue to make the whole mortgage process a digital experience and that's rolling out as we speak. So we'll continue business opportunities addition to that there's tremendous opportunities I believe. We think about our back office to apply technologies, robotics, artificial intelligence in an environment, in a more aggressive way to take out long term cost. So we think about our expense base and how we're looking forward here.

And where we place our technology dollars to drive the best outcome for shareholders and serve our customers That's going to be the area of automation of our back office is going to be continued automation of our origination systems is going to be continue automation of our ability to distribute our products. In addition to that if you think about the environment we're operating and resiliency is extremely important. You always have to beyond this isn't 10 years ago, five years ago, we could afford to have your systems offline. You have to always be on for your customer.

So investments in our core infrastructure. We don't want to put new technology, new capabilities on old infrastructure so it's refurbishing or older infrastructure, pulling out new infrastructure, focusing once again serving our clients, and make us more efficient going forward in operations.

Amanda Larsen -- Jefferies -- Analyst

Great. And then can you talk about the outlook for consumer loan growth. Certainly some are positive on the consumer credit performance, where do you expect the 3% consumer Loan growth to come for in 3Q. Is that auto.

Is it all auto are usually leading and elsewhere.

Greg Carmichael -- President and Chief Executive Officer

No. Auto, obviously, we expect to see to have done a fantastic job. We thought before we were super prime borrowing space we expect to see growth in auto attractive spreads. In addition to that, we expect our mortgage business.

Also in our mortgage portfolio continue to expand as we go forward here. Card and so forth we don't expect to see much growth in those areas.

Operator

Your next question comes from Christopher Marinac, Janney Montgomery.

Christopher Marinac -- Janney Montgomery Scott -- Analyst

Good morning. Greg is there an update on the CFPB issue and is that possible to get resolved before the end of the year.

Greg Carmichael -- President and Chief Executive Officer

First off, I wish it was resolved and I do not have an update. It's a long process as we've stated. Through news channels we're very comfortable in our position here and you're willing to deal with that as we move forward here. But there is no update or potential get settled.

Sure there's always a potential can get settled. But at the end of the day, we want to make sure that the third is viewed appropriately, and the opportunity characterized. Our behavior in the actions that we took proactively is very very important to us. So no update at this point, but hopefully we could solve it.

Christopher Marinac -- Janney Montgomery Scott -- Analyst

Sounds good. Thank you very much for the feedback. I appreciate it.

Operator

Your next question comes from Brian Klock with Keefe, Bruyette & Woods.

Brian Klock -- Keefe, Bruyette & Woods -- Analyst

Thanks, for taking my question. One real quick follow up, I know that you guys talked about some of the elevated expenses from the better revenue production that came in some of your fee businesses. And you talked about some of the technology expand as well. I guess you're thinking about the guidance for the third quarter includes some acceleration of some automation, and tech expenses.

If we think about a normalized run rate is even before you think about the new initiatives on the expense savings that you're going to be reviewing. And do you think that a normal run rate I guess beyond the third quarter should be something that maybe back toward that one billion, 50 range where you [inaudible]before. That's way to think about it.

Tayfun Tuzon -- Chief Financial Officer and Executive Vice President

At this point given the fact that we are spending a lot of time on analyzing the expense base and looking for opportunities for efficiencies. I'd rather not get into the longer-term outlook for expenses, but it is clear that our intent is to lower our expense base from where it is today. So I will make that statement. And as Greg said, we continue to invest in areas where we believe we need to invest in to continue to grow our company.

But our intent is to do it in a way with the utmost efficiency and the rest of the company. So the focus of this study is going to be lowering the expense base that we are running today and taking it from there.

Brian Klock -- Keefe, Bruyette & Woods -- Analyst

Fair enough. Thanks for your time. Appreciate it.

operator

Your last question comes from Gerard Cassidy with RBC.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Thank you. I have a follow up. Jamie, can you tell us on the consumer portfolio where you guys mentioned and 53% of the deferrals and [Inaudible] the program. Where did they go.

Are they all back on accruing status or being in some workout separate from the COVID-19 release programs or they charge off.

James Leonard -- Chief Risk Officer

So of the loans, the consumer portfolio this was through last Friday, 53% exited 12% went into a new relief program and those programs, we've got a pretty good approach there where we offer a short-term program of six months that 50% of your normal payment, or we offer with certain eligibility criteria and proof of hardship and longer term loan modification. And so that's 12% of the group and of the remaining group. The vast majority 79% or so are making payments and are back on track. And so one of the earlier questions was, how do we feel about the portfolio and ultimately how much support is out there.

When we look at our roll rates and our delinquency rates on that core. But is very good which is why we're confident in our second half of the year outlook on[Inaudible].

Gerard Cassidy -- RBC Capital Markets -- Analyst

Great. And then just finally for Tayfun. This may be a naive question. Coming back to the cash balances, if you take out the money from the PPP loans and many fund into people's deposit accounts and you take out the line draws that were unusual because of the situation we're in today.

Where does all the cash coming from. Are companies seasonal just not spending on capital expenditures. And why is it such elevated cash balances excluding those two reasons that I mentioned.

Tayfun Tuzon -- Chief Financial Officer and Executive Vice President

I think Gerard clearly the inability to use the cash in the short term is one aspect of why these companies and it's both individuals as well as companies. So we expect that some of the natural run down is going to be based that they're going to have to spend that cash within their operating capital. The other one is it is very likely that they consult--some of our clients have consolidated their deposits into a smaller number of banks, and we have been a beneficiary of that because as we look at the distribution, the distribution is extremely granular which suggests that again, more of a relationship based direction in deposit flows than anything else.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Great. Thank you very much.

Operator

I would now like to turn the call back over to Chris Doll for closing remarks.

Chris Doll -- Director of Investor Relations

Thank you, Denise. And thank you all for your interest in Fifth Third. If you have any follow-up questions, please contact the IR Department, and we will be happy to assist you.

Operator

This concludes today's conference call, you may now disconnect.

Duration: 82 minutes

Call participants:

Chris Doll -- Director of Investor Relations

Greg Carmichael -- President and Chief Executive Officer

Tayfun Tuzun -- Chief Financial Officer and Executive Vice President

Chris Dold -- Chief Zoological Officer

Scott Siefers -- Piper Sandler -- Analyst

Tayfun Tuzon -- Chief Financial Officer and Executive Vice President

Erika Najarian -- Bank of America Merrill Lynch -- Analyst

Peter Winter -- Wedbush Securities -- Analyst

James Leonard -- Chief Risk Officer

Mike Mayo -- Wells Fargo Securities -- Analyst

Saul Martinez -- UBS -- Analyst

Matt O'Connor -- Deutsche Bank -- Analyst

Richard Stein -- Chief Credit Officer

Gerard Cassidy -- RBC Capital Markets -- Analyst

Ken Zerbe -- Morgan Stanley -- Analyst

Unknown Speaker

Amanda Larsen -- Jefferies -- Analyst

Christopher Marinac -- Janney Montgomery Scott -- Analyst

Brian Klock -- Keefe, Bruyette & Woods -- Analyst

operator

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