Fifth Third Bancorp
NASDAQ:FITB
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Fifth Third Bancorp
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Ladies and gentlemen, thank you for standing by and welcome to the Fifth Third Bancorp Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session [Operator Instructions].
I would now like to turn the call over to Chris Doll, Director of Investor Relations. Please go ahead.
Thank you, Denise. Good morning and thank you for joining us. Today we will be discussing our financial results for the second quarter of 2020. Please review the cautionary statements on our materials, which can be found in our earnings release and presentation. These materials contain reconciliations to non-GAAP measures, along with information pertaining to the use of non-GAAP measures as well as forward-looking statements about Fifth Third's 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 Tuzun; Chief Risk Officer, Jimmy Leonard and Chief Credit Officer, Richard Stein. Following prepared remarks by Greg and Tayfun, we will open the call for questions.
Let me turn the call over now to Greg for his comments.
Thanks, Chris, and thank all of you for joining us this morning.
I'll focus most of 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 to support our customers, our communities and our employees.
We proactively made over 3 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 hardship programs, or approximately 6% of total loans. More than 35% of those in our consumer deferral or forbearance programs have made one or more payments.
Consumer hardship relief requests, including mortgage, declined approximately 85% from the mid-April peak through last week of June. Beginning July 1st, we started methodically transitioning our customers from the COVID 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 programs, of which only 12% have requested additional hardship assistance. In total, consumers who have exited COVID 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 and a small number of customers requesting additional assistance, give us confidence in the 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 the client forgiveness request, where we are awaiting further clarity from the SBA, we have developed an automated solution, which should help simplify the forgiveness process. Ultimately, we estimate nearly 90% of PPP clients will request and qualify for forgiveness.
Our top priority remains the health and safety of our customers and employees. While we have kept approximately 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 going into pandemic. As a result, we are seeing increased adoption rates 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 and our ability to navigate the dynamic environment and mitigate the impact of lower rates through well diversified fee revenues and continued expense discipline. We have now generated year-over-year adjusted positive operating leverage in seven out of the past eight quarters and grew tangible book value per share for five consecutive quarters.
We grew common equity Tier 1 capital this quarter despite adding to our 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 and liquidity ratios are indicative of our balance sheet strength, which will serve us well as we navigate this challenging environment. With respect to capital, we recently announced our indicative stress 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 points this quarter was better than the low end of our previous guidance range, reflecting improvement in consumer and relative stability in commercial.
While we do not have perfect foresight with respect to the duration or severity of this downturn, we have consistently communicated our through-the-cycle principles of disciplined client selection, conservative underwriting and an overall balance sheet management approach focused on long-term performance. While economic visibility remains low, our unwavering adherence to these principles and our balance sheet strength gives us confidence as we navigate this environment.
From a commercial client standpoint, we continue to focus on generating relationships with clients who have more diversified and resilient balance sheets as well as multiple sources of repayment. We've been very successful keeping our client relationships. And as a result, have generated record capital markets revenue in three out of the last four quarters.
We believe this composition towards 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 the COVID high-impact industries.
We continue to believe we are well positioned relative to peers in commercial real estate, an area where we have been deliberately underweight. We have focused predominantly on top-tier developers with a track record of resilience and significantly lower 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 continue to get at the low end of peers as a percentage of total capital.
It is worth noting that across both of our portfolios in consumer and commercial, we have focused on maintaining geographical diversification through several national businesses, including indirect auto and residential mortgage in addition to C&I and CRE. Our credit risk is well diversified beyond our retail footprint through these national lending businesses, which will be instrumental in delivering a differentiated credit performance given the likelihood of an uneven economic recovery.
In addition to our deliberate 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 and 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, proactive liability management and continued expense discipline.
Our four key strategic priorities, leveraging technology to accelerate 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 of focus and prioritization on the initiatives within those four priorities, which had the highest probability of driving long-term financial success.
Before I 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.
With that, I'll turn it over to Tayfun to discuss our second quarter results and our current outlook.
Thank you, Greg. Good morning, and thank you for joining us today.
Before I begin my review of 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-shape 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 rates will remain near 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 in 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 markets, 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 points 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 exceeds 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 were approximately $28 billion at quarter end. Our loan to core deposit ratio was 72%, excluding PPP loans.
The combined hedge and investment portfolio on realized gain position stands at $3.9 billion, reflecting the growing value associated with the long-term protection that these portfolios provide. As a proof point, the sequential decline of our investment portfolio yield is about a third of the peer median decline.
Reported results for the quarter included a negative $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, MB 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 and 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 balance performance. End-of-period loans declined $3 billion sequentially or 3%, reflecting a repayment of line draws as well as subdued borrower demand 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-end 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 cards. 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 with double-digit growth in all deposit captions, except consumer CDs and foreign office deposits. Our growth, so far, is multiple points ahead of the peer banks. This record deposit growth came from growth in 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 who obtain funding through 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 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 deposit costs to benefit from our actions and decline another 11 basis points. This reflects a cumulative beta in excess of 40.
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 hedges added an incremental $30 million to our second quarter NII or a total contribution of $62 million during the quarter.
Purchase accounting adjustments benefited our second quarter net interest margin by 4 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 1 basis point drag from PPP loans.
Our period-end short-term cash position increased by 4.5 times from $6.3 billion at the end of March to $28 billion at the end of June, with period end 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 if 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 changed 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 2021.
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 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 7 to 10 basis points, driven by the full quarter impact of higher cash positions and 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 noninterest 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 results 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 of $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 and asset management revenue decreased 10% from the prior quarter, to a large extent, reflecting the seasonal decline in tax preparation fees.
Card and processing revenue decreased $4 million or 5%, resulting from lower credit and debit volumes throughout the quarter, reflecting reduced customer 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 towards 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 pretax expenses included COVID-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. Adjusting for these items and prior items shown in our materials, non-interest expense decreased over 5% sequentially and decreased approximately 3.5% compared to the year ago.
Also, due to the mark-to-market nature of our non-qualified deferred comp plans, our expenses include the impact of $22 million expense compared to a $26 million benefit 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 innovation 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 digital products. We are also accelerating our implementation of nCino 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 targets 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 and 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 high-impact portfolios. The amount on this page represent approximately 11% of our total loans and are down 9% from the last quarter, excluding PPP loans. As you can see, the paydowns during the quarter reduced our balances relative to the first quarter in all subcategories, 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 leveraged 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 in stressed 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 2 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 stressed conditions would not meaningfully deviate from the rest of our commercial portfolio. Nearly 80% of the portfolio is in reserve-based structures, and we recently reduced our overall RBL borrowing base approximately 15% as a result of the spring re-determination.
On Slide 13, we provide an updated view of the consumer and mortgage portfolios. The FICO scores clearly indicate 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 3 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 loss content in our energy portfolio. The consumer nonperforming 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 macroeconomic 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 within the recent severe stress test runs - CCAR severe stress test runs.
Our current reserves stand over - at over 60% of our Company run losses and nearly 40% of fed losses. The credit models that the Federal Reserve is utilizing still appear to be heavily influenced by our credit results during the last downturn, which results in a wide gap between our expectations and the fed's.
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 discounts 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 reserve, the ACL ratio would be approximately 2.76%.
Our thoughts on the need-for-future reserve builds are similar to what you've 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 reserves would result from a higher likelihood of a more severe and prolonged double dip scenario.
Turning to Slide 16. Our capital and liquidity positions 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 a CET1 reconciliation between net income, risk-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 1.5 years 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 buildup in reserves, we are ahead of our capital plan, and we expect continued strong levels of PPNR to support our current capital levels.
We will be resubmitting our stress test sometime in the fall with the rest of the CCAR banks. We have been very consistent in stating our view that given our very strong capital ratios, balance sheet strength, earnings power and relatively modest pre-COVID 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 continue to show significant cushion in our forecasted capital ratios under stressed 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 pretax 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 the 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 is a result of the paydowns in commercial credit lines.
Net interest income is expected to 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 paydowns 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 2 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 payouts. In addition, there are some accelerated expenses in IT 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 will also include longer-term structural targets. Total net charge-offs are expected to be in the 50 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&A.
Thanks Tayfun.
Before we start Q&A as a courtesy others, please limit yourself to one question and a follow-up and then return to the queue if you have time for additional questions. During the question-and-answer period, please provide your name and that of your Company to the operator.
Denise, please open the call for questions.
[Operator Instructions] Your first question comes from Scott Siefers with Piper Sandler. Your line is open.
Tayfun, just wanted to sort of follow-up on the liquidity. You gave a ton of good detail. So, thank you for that. And I certainly understand kind 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 Fifth Third that kind of amplifies the order of magnitude so much?
I think the - we believe we've stayed very close to our clients during the past five, six months as we entered this period and our sales force has been in close contact, and our relationships are very strong across the board in both corporate banking as well as middle market banking. And they are clearly showing a preference to bank with us and to increase the size of their relationships. I mean, 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 banks.
So 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 sales force coverage is enabling us to maintain this level of liquidity. And we - 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.
Look I mean I think it doesn't impact the NII. We reflect the 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.
And just as a follow-up to that, I think you said an additional 7 to 10 basis points of margin erosion in the third quarter based on, I guess, like 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 going on with margins these days, but ex the benefit of the PPP benefits in the fourth quarter, would you expect sort of the steady-state margin to stabilize after the 3Q?
Scott, I don't want to give fourth quarter guidance at this point. But I think what you should rely on is not just for Q4 but also beyond Q4, we believe that 3% level, the 3% NIM, once we are past the PPP and once we are past the impact of the higher cash balances, it's probably a good sort of target for us.
Your next question comes from Erika Najarian with Bank of America. Your line is open.
So as we think about a pretty sizable reserve, some of the PPNR puts and takes that you're expecting, I guess, if the fed rolls forward the dividend income test beyond the third quarter, are you confident that your GAAP level of pre-preferred earnings would be above that $0.27 run rate as calculated - dividend rate as calculated by the fed?
Erika, everything that we look at today as well as sort of the outlook that we have in place gives us a lot of confidence that we will have plenty of room.
And the second follow-up 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 North Star? And how conscious are you of incurring charges given the light - the possibility that this income test could extend beyond third quarter on the dividend?
So North Star 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 it. So I would not necessarily be too worried about that. I'm not saying that there's not a charge associated with any of the expense actions, but size-wise, at this point, I'm not too worried about it.
Your next question comes from Peter Winter with Wedbush Securities. Your line is open.
I wanted 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 just to kind of hold expenses flat in a more challenging revenue environment?
Peter, this is Greg. First off, our intent is obviously to look at the opportunities in front of us. And the question was just asked about North Star, a lot of the expense opportunities in front of us are very similar to North Star. If you think about our branch transformation and opportunities to optimize our branch network.
Thinking about the opportunities around our vendor management and the money that we spend in those areas and the attractive opportunities that sit there, rightsizing our organization for the sales opportunities. There are a lot of opportunities out there in front of us.
So our intent would be to continue to invest in the critical aspects of our business that we've mentioned before, the digitization of our platforms, our Southeast expansion and so forth. We want to continue those investments. But over time, we would expect to run at a lower rate on expenses. And the realities of the revenue opportunities that are out there in the environment, we expect to run at a lower level going forward.
And if I could - 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.
Yes, Peter. It's Jamie. Thanks for the question. On the commercial side, I think you saw on the presentation, if you look at payment deferrals, 6% of the loan balances are in payment deferral and the vast majority, over 80% of the payment deferrals we have were 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 request for the - a 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 forbearances, there's about 7% of the commercial book that's received a covenant waiver.
Your next question comes from Mike Mayo with Wells Fargo Securities. Your line is open.
I guess, I have one negative question and one positive question. So I'll go to the negative question first. I mean, flattish charge-offs, 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 a government assistance, how much worse would charge-offs and NPAs be? And it is a question because eventually, these programs run off and then bankers have to be bankers again and reality sets in. So we're - I mean, it's just in terms of a general question, how bad would it be if you didn't have this other support and forbearance?
Yes. 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 so 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 months, and you look at the non-mortgage loans, only 12% have re-enrolled 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% 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 Fifth Third, in particular, Moody's published a study July 7th, and they evaluated the MSAs most-impacted by COVID. They used number of COVID cases, population density, tourism, global connectedness, et cetera.
And the national average weighted by GDP was 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. And so I think there's a lot of hard work going on in our consumer portfolio. We stopped 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 I think 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, I think we're getting a good view that the consumer is doing better. And in fact, so much so that the second half of 2020, we expect our consumer charge-offs to be below the second half of 2019.
And then the other question was $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? When we look at where rates are, and then you have cushion for more charges for North Star part two or more cushion for your dividends? Or maybe you could do buy back 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.
I will answer the question about the conservative stance. Look, I mean, 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 flexibilities.
If there is a need or if we view that the future outlook for rates changes in our perspective such that, that gain is better off harvested and deployed for other purposes, there are some accounting realities that don't necessarily allow you to immediately recognize all of that gain.
But it clearly provides a very significant pool of, I would say, 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 maturity date so we were benefited, but as you stated, Mike, it's a rich man's problem, and it gives us a good amount of flexibility.
Your next question comes from Saul Martinez with UBS. Your line is open.
So one thing I'm struggling with this quarter with the banks in channel, it's just that there's a very divergent performance in terms of not just NIM, but the NII trajectory this quarter and also with regards to the outlook. And I mean you guys have been more conservative, I think, than your peers in terms of managing rate risk and the hedging, the way you manage your securities portfolio and yet - obviously, NII is under pressure this quarter, it's likely to be under pressure next quarter.
So I guess, I'm asking how you think we should see this dynamic as it pertains to you. Is this is 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, obviously, you see that in your short-term investments and loans? So is it really just a function of how you're managing risk right now that's driving that? And - or is there something else that we should also be aware of that maybe more idiosyncratic?
Two comments, Saul. So 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 3.24% in the first quarter.
So with where the short-term rates are and where the yield curve is, a 24 basis point movement between the first quarter NIM and our sort of longer-term outlook on NIM is a pretty good performance. And ultimately, again, this is just - we're talking about a few quarters here where things are going to look a little bit choppy, but NIM is just an outcome. And we have a strong preference in not going after NII boosts in the short-term that would put us into a riskier position in the long term.
Okay. I mean, I have a few follow-ups, but I'll table that and switch gears to a different topic. And I actually want to ask you about your reserving and actually taking in the other direction, because I think you've been ahead of the curve in terms of building reserves. But when would you actually start to think about releasing reserves? And I mean, especially as charge-offs start to move up, you have reserves for those, for the loans that are charged off. And you - presumably then, your provisioning will reflect reserves on new growth and any sort of recalibration of reserves on the back book as we reassess the losses there.
But I'm curious, is - should - could we start to see reserve releases quicker than people expect as charge-offs move up? Or do you think that there's sort of a predisposition for reserves to be sticky and less reserve releases going forward just because of the vast uncertainty in the macro environment. So I'm just kind of curious how we see things in terms of reserve levels as sort of credit normalizes, and we get a little bit more visibility on the macro dynamics.
So setting aside the impact of loan balances on reserves. Clearly, if the loan 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 - on the sustainability of the economic outlook.
And if that - if the level of sustainability is truly dependable and if the economic indicators should give us the confidence, the answer to your question is, yes. At one point, we will start releasing reserves. But I do believe that we are a few quarters early on that, assuming that there is stability. We do need time in order to develop that level of confidence.
Your next question comes from Matt O'Connor with Deutsche Bank. Your line is open.
I was wondering if you could just talk about the process of kind of credit risk management more on like a granular basis, like at the ground level. Obviously, there'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?
Matt, it's Richard. So 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 done specific targeted reviews around industry and geography and product. And from those outcomes, we've seen some re-rating 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 have come from inside of Fifth Third. And the people we've drafted have historical experience and workout in 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 end-to-end.
And is 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 - or partnering with like third parties?
We're not going to - we're not looking to partner with third parties. We believe we can cover with in-house resources.
Okay. All right, thank you.
Your next question comes from Gerard Cassidy with RBC. Your line is open.
Tayfun or maybe, Jamie, on the loan loss reserves that you have established, Tayfun you outlaid those two economic scenarios for us, the downside one and the base case. Are those reserves set to a mix of those scenarios? Or is it - are 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 a worsening in the economy?
Yes, Gerard, it's Jamie. 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 that 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 have the net impact of loan portfolio decline and migration and ratings almost offsetting each other.
Very good. And then moving over to the higher-risk commercial portfolio that's exposed to the COVID-19 issues, it fell 9%, as you showed us, to $12.8 billion. When you look going forward, is that a momentum that you can continue having a drop that much in a quarter? And second, what percentage of charge-offs are attributed to bringing that balance down?
Yes, I would say, in terms of the momentum going forward, the biggest improvement or biggest factor in the second quarter improvement was the paydown 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.
So I would say it's - a healthy portion of the charge-off expectation is driven by that COVID stress portfolio. But again, we still feel good about our client selection and the fact that, as Richard pointed out, it's a well-managed portfolio. It's just in this environment, there will be losses, but we think they'll be manageable.
Your next question comes from Ken Zerbe with Morgan Stanley. Your line is open.
I think you guys mentioned that some of the lower - the loan balances being lower and the lower NII guidance for third quarter is really driven by - at least in part, by further corporate line drawdowns. How much of the excess line drives, 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 line utilization normalizes by the end of 3Q? Thanks.
Yes, Ken. I think the guidance is based on average loan balances. So they really truly reflect what happened, especially sort of second half of May into June. So the second to third quarter guidance truly reflects that speedy paybacks at the end - towards 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 decline in average commercial balances is more a function of what happened at the end of the second quarter, more so than the third quarter.
And I may have missed this, but have you addressed or did you address like this commentary around sort of ex corporate line draws, just the general sentiment around C&I borrowers? Like are you building in any expectation that C&I or other loan balances actually are declining in 3Q? Thanks.
There's not a lot of customer demand for new loans, Ken. The market is very muted at this point, both for economic reasons as well as for what's going on with sort of the healthcare situation that limits interactions. But so far, we're not seeing a whole lot of activity from our clients.
Your next question comes from John Pancari with Evercore. Your line is open.
This is Rahul Patil on behalf of John. I just want to go back to the discussion around the reserve release. And I want to put some numbers around it so correct me if I'm wrong. So you've guided to average loans down 3.5%, 4%. Let's say, loans growth - loans are declining, looks like around $4 billion of that. Commercial loans are coming down, $5 billion. Consumer is going up by $1 billion. 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 this right, that in terms of provisioning in 3Q, the - really, the main driver of provision will be the consumer new loan growth of $1 billion. And basically, is it fair to then assume and apply that 3% reserve ratio on that $1 billion 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?
One needs to take into account what happens at the end of period. So you just have to - obviously, it's useful to look at the average loan guidance. But we will - 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 reflect the end-of-period balances compared to - and the movement will be compared to the end-of-period balances in the second quarter.
But I just want to make sure like conceptually, am I thinking about this correctly in terms of - with regards to provision, and this is also assuming that the macro doesn't get worse or doesn't get better. It's basically assuming a status quo.
Yes. The provision could go down, clearly. I mean, if loans continue to go down and the charge-offs stay flat, there is a path which would indicate that the provision number on our income statement will be lower, so that could happen.
Your next question comes from Ken Usdin with Jefferies. Your line is open.
This is Amanda Larsen, on for Ken. Can you talk about the accelerated pace of technology investments that you expect? What have you learned about your technology during the pandemic? Are your structural uses of 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 versus peers? And then as an addendum, if there's any business segment that you can touch on that may require like better tax, that would be helpful now. Thanks
Amanda, this is Greg. First off, we - our strategy and focus on investing in our technology platforms to better serve our customers through product distribution or servicing capabilities hasn't changed. And I think we've made tremendous progress as evidenced by the fact that 75% of all of our transactions now go through 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 replatform our commercial loan system, which we're going to do that. Origination system, we're going to do 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 to invest in those opportunities.
In addition to that, there's tremendous opportunities, I believe. When you think about our back office to apply technologies, robotics, artificial intelligence in that environment in a more aggressive way to take out long-term costs, so when we think about our expense base and how we're looking forward here, we'll replace our technology dollars to drive the best outcome for our shareholders and serve our customers. It's going to be the area of automation of our back office, it's going to be continued automation of our origination systems, and it's going to be continued automation of our ability to distribute our products.
In addition to that, when you think about the environment we're operating in, resiliency is extremely important. You always have to be on. This isn't 10 years ago, five years ago, where you can afford to have your systems offline. You have to always be on for your customers. So investments in our core infrastructure.
We don't want to put new technology, new capabilities on old infrastructure. So it's refurbishing our older infrastructure, pulling our new infrastructure, focused on, once again, serving our clients and making us more efficient going forward in operations.
And then can you talk about the outlook for consumer loan growth? You certainly sound more positive on the consumer credit performance. Where do you expect the 3% consumer loan growth to come for in 3Q? Is it auto - Is it all auto? Or are you believing in elsewhere?
No, auto, I think, obviously, we expect to see - the team's done a fantastic job. As we've talked before, we're a super prime borrower in that space. We expect to continue to see growth in auto and 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.
Your next question comes from Christopher Marinac with Janney Montgomery. Your line is open.
Thanks, good morning. Greg, is there an update on the CFPB issue? And is that possible to get resolved before the end of the year?
First off, I wish it was resolved, and I do not have an update. This is a loan cycle process. As we've stated through numerous channels, we're very comfortable in our position here and willing to deal with that as we move forward here. But there is no update. Is there potential to get settled? Sure. There's always a potential it could get settled. But at the end of the day, we want to make sure that Fifth Third is viewed appropriately and the opportunity to characterize our behavior and the actions that we took proactively, I think, is very, very important to us. So no update at this point. But hopefully, we could solve it.
Your next question comes from Brian Klock with Keefe, Bruyette, Woods. Your line is open.
Just 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've talked about some of the technology spend as well. I guess, just thinking about the guidance for the third quarter includes some acceleration of some automation and tech expenses. I mean, if we think about what 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 we think that a normal run rate, I guess, beyond the third quarter should be something that's maybe back towards that $1.50 billion range where you kind of were before? Is that the way to think about it?
Yes. I mean, 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 at 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.
Your last question comes from Gerard Cassidy with RBC. Your line is open.
I have a follow-up. Jamie, can you tell us, on the consumer portfolio where you guys mentioned, I think, 53% of the deferrals have exited the program. Where did they go? Are they all back on accruing status? Or are they in some sort of work out and is separate from the COVID relief programs? Or were they charged off?
Yes. So of the loans, the consumer portfolio, this was through last Friday, 53% exited, 12% went into a new relief program. And those programs, I think we've got a pretty good approach there where we offer a short-term program of six months at 50% of your normal payment or we offer with certain eligibility criteria and proof of hardship to longer-term loan modification. And so that's 12% of the group.
And of the remaining group, the vast, vast majority, I think the number is 79% or so are making payments and are back on track. And so one of the earlier questions was just how do we feel about the consumer loan portfolio and ultimately, how much support is out there? When we look at our growth rates and our delinquency rates on that core book, it is very good, which is why we're confident in our second half of the year outlook on consumer charge-offs.
And then just finally, Tayfun, this may be a naive question. Coming back to the cash balances, if you take out the money from the PPP loans that may have come into people's deposit accounts and you take out the line draws that were unusual because of the situation we're in today, where is all the cash coming from? Are companies just not spending on capital expenditures? And why is there such elevated cash balances, excluding those two reasons that I mentioned?
Yes, 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 rundown is going to be base that they're going to have to spend that cash within their operating capital.
The other one is, I think it is very likely that they - 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.
I'd now like to turn the call back over to Chris Doll for closing remarks.
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'll be happy to assist you.
This concludes today's conference call. You may now disconnect.