Regions Financial Corp (RF) Q2 2020 Earnings Call Transcript

Regions Financial Corp  (NYSE: RF) Q2 2020 earnings call dated July 17, 2020

Corporate Participants:

Dana Nolan — Investor Relations

John M. Turner, Jr. — President and Chief Executive Officer

David J. Turner, Jr. — Senior Executive Vice President and Chief Financial Officer

Barbara Godin — Chief Credit Officer

Ronald G. Smith — Senior Executive Vice President, Head of Corporate Banking Group

Analysts:

Betsy Graseck — Morgan Stanley — Analyst

Ken Usdin — Jefferies — Analyst

Stephen Scouten — Piper Sandler — Analyst

Matt O’Connor — Deutsche Bank — Analyst

Peter Winter — Wedbush Securities — Analyst

Jennifer Demba — SunTrust — Analyst

Saul Martinez — UBS — Analyst

David Rochester — Compass Point Research — Analyst

Christopher Marinac — Janney Montgomery Scott — Analyst

Vivek Juneja — J.P. Morgan — Analyst

Gerard Cassidy — RBC Capital Markets — Analyst

Rahul Patil — Evercore ISI — Analyst

Presentation:

Operator

Good morning and welcome to the Regions Financial Corporation’s Quarterly Earnings Call. My name is Shelby and I’ll be your operator for today’s call. [Operator Instructions] I will now turn the call over to Dana Nolan to begin.

Dana Nolan — Investor Relations

Thank you, Shelby. Welcome to Regions second quarter 2020 earnings conference call. John Turner will provide some high level commentary and David Turner will take you through an overview of the quarter.

Earnings-related documents, including forward-looking statements are available under the Investor Relations section of our website. These disclosures cover our presentation materials, prepared comments, as well as the Q&A segment of today’s call. And with that I will turn the call over to John.

John M. Turner, Jr. — President and Chief Executive Officer

Thank you, Dana, and thank you all for joining our call today. Over the last four months, we’ve experienced tremendous disruption and uncertainty caused by both COVID- 19 and overt examples of social inequality. The impact on our customers, communities and associates has been profound and the resulting operating environment has been challenging. As our country works through the current health crisis and take steps to address the systemic racial injustices that impacts so many people in our society, we remain focused on the things that we can control. We are committed to supporting our associates, our communities and our customers through these difficult times by providing much needed capital, advice and guidance and financial support. It is incumbent on us to use our resources and expertise in ways that create positive change. Providing value to all stakeholders creates the foundation to deliver sustainable long term performance.

The disruptive and uncertain operating environment has presented both opportunities and challenges. In the second quarter, we delivered $646 million in adjusted pre-tax pre-provision income. This was Regions highest PPI in over 10 years and a reflection of our decade-long effort to optimize our balance sheet and improve risk adjusted returns, while making strategic investments, all to deliver sustainable performance and reduce variability in our revenue streams. However, while the core business performance was solid, it was more than offset by an elevated provision caused by further deterioration in the economic outlook and the resulting impact on risk ratings and credit quality.

Just a few weeks ago, while acknowledging that conditions were fragile, I said we were cautiously optimistic about the prospect for economic recovery in our footprint. The Southeast did fare better than other parts of the economy as evidenced by the fact that the unemployment rate in a majority of Southeastern states have been better than the national average and the number of small businesses that closed within the region because of the crisis was also below the national average. Most of the states where we operate and reopened, consumer deferral request have begun to taper off and consumer spend continue to increase toward more normal levels.

So clearly, there were some positive signs that we felt pretty good about. However, by the end of the quarter, certain areas in our footprint began experiencing an acceleration in COVID-19 cases and some states paused or reversed their reopening plans. The potential for a second wave of COVID-19 infections, coupled with uncertainty surrounding the extension or renewal of various aid programs, including the CARES Act, has impacted our view on the potential pace of the recovery. While we have experienced positive momentum over the latter part of the quarter, much uncertainty remains and our provisioning reflects that.

As a result of this environment, we recorded a second quarter credit-loss provision of $882 million. The provision reflects adverse conditions and significant uncertainty within the economic outlook, combined with downgrades in certain portfolios, particularly energy, restaurant, retail and hotel, as well as the impact of $182 million in net charge-offs. This quarter’s provision also includes $64 million related to the initial allowance for non-credit deteriorated loans acquired in the purchase of Ascentium Capital, which closed on April 1.

We are committed to assisting our customers through this difficult time. However, we have not modified our rigorous credit review process and have continued to make risk rating adjustments as necessary. In addition, all business loans granted a deferral have been reviewed and risk ratings have been adjusted in accordance with our existing policies. Based upon the work we’ve done in our assumptions around the economic outlook, we do not anticipate substantial reserve builds during the remainder of 2020.

We know the economy will continue to experience stress as we combat public health crisis. However, we’ve spent the decades strengthening our capital position and credit risk management framework, which have positioned us well to weather the economic downturn. In the most recent round of Supervisory Stress Tests conducted by the Federal Reserve, Regions exceeded all minimum capital levels. While we were pleased with our capital resiliency under stress, we believe our industry-leading hedging program, which became effective in 2020 will provide additional support to pre-provision net revenue.

With respect to our common stock dividend, the Federal Reserve has introduced an income test where the common dividend cannot exceed the average of the trailing four quarter’s net income. Management will recommend to the Board later next week that we maintain the dividend for the third quarter of 2020.

We are committed to effectively managing our capital strength and organic growth, generate sustainable long term value for our shareholders and continue lending activities to support customers and communities during the economic downturn. That being said, we must continue to focus on what we can control and remain committed to prudently managing expenses in the face of a challenging revenue environment. Thank you for your time and attention this morning. With that, I’ll now turn it over to David.

David J. Turner, Jr. — Senior Executive Vice President and Chief Financial Officer

Thank you, John. Let’s start with our quarterly highlights. Second quarter results reflected a net loss available to common shareholders of $237 million or $0.25 per share. Items impacting our results this quarter included a significant credit-loss provision, pandemic-related expenses, branch consolidation charges, expenses associated with the purchase of our equipment finance business, Ascentium Capital and a loss on early extinguishment of debt. Partially offsetting the negative adjustments was a favorable CVA associated with customer derivatives as credit spreads improved significantly during the quarter, as well as net interest income derived from newly originated Paycheck Protection Program loans. In total, the adjusted and additional selected items highlighted on the slide reduced our pretax results by approximately $692 million.

Let’s take a look at our results starting with the balance sheet. Adjusted average loans increased 11%. Loan growth was driven primarily by elevated commercial draw activity, the addition of $2 billion in loans related to our equipment finance acquisition, and $3 billion average impact from newly originated Paycheck Protection Program loans during the quarter. Looking ahead, our focus remains on client selectivity and full relationships with appropriate risk adjusted returns.

Commercial loan utilization levels normalized during the quarter as liquidity concerns have eased and corporate borrowers have access to the capital markets. In addition, corporate borrowers were generally feeling better about the economic outlook as the economy started to reopen, although the recent rise in COVID-19 cases may temper that perspective.

With respect to PPP loans, it remains difficult to predict the timing of loan forgiveness. Currently, we anticipate forgiveness request to begin in the third quarter and continue into the fourth. We will have a better idea around timing once the forgiveness process begins.

Adjusted average consumer loans increased 1% reflecting declines across all categories except mortgage, which was up 3%, reflective of historically low market interest rates.

And turning to deposits, deposit balances increased to record levels this quarter. Average deposits increased 16% while ending deposits increased 17% as many of our commercial customers had brought their excess deposits back to Regions, while also keeping their excess cash from line draws, PPP loans and other government stimulus in their deposit accounts. On an ending basis, Corporate segment deposits increased 30%, while Wealth and Consumer segment deposits increased 6% and 12%, respectively. These increases were partially offset by a decrease in wholesale broker deposits within the Other segment. Although commercial line utilization rates have normalized, Corporate customers are using cash held outside of the bank to pay down line draws which continues to support elevated deposit levels. We anticipate funds received through government stimulus and PPP will be spent by the end of the year and the remaining deposits will stay with us until interest rates begin to move higher.

Similarly, Consumer deposits have continued to increase primarily due to government stimulus programs, coupled with lower overall spend. The delay in the tax filing deadline until July is also a contributor. We anticipate Consumer balances to decline in the second half of the year as consumers make tax payments, increase spending commensurate with improvement in the economy and the current round of federal unemployment benefits expire at the end of July.

Let’s shift to net interest income and margin, which remain a strong story for Regions. Net interest income increased 5% linked quarter and as expected, net interest margin decreased 25 basis points to 3.19%. Net interest income remains a source of stability for Regions despite an extremely volatile market interest rate backdrop. Late quarter, our equipment finance acquisition elevated loan and deposit balances and our significant hedging program supported net interest income. The decline in net interest margin was mostly attributable to elevated liquidity, specifically, elevated cash levels at the Federal Reserve and higher low spread loan balances associated with PPP accounted for approximately 19 basis points of margin compression. Efforts to reduce these elevated cash levels are ongoing.

During the quarter, $7.4 billion of early extinguishment of FHLB advances and a $650 million bank debt tender directly reduced outstanding cash balances. The implications of liquidity on net interest margin are expected to abate over the remainder of the year. However, the impact remains uncertain, given the amount of liquidity in the system. Now, that most of our forward starting hedges have begun and given our ability to move deposit costs lower, our balance sheet was largely insulated from the decline in short-term rates this quarter. Loan hedges added approximately $60 million to net interest income and 19 basis points to the margin. The benefits from hedging will continue to increase as the majority of the remaining forward-starting hedges begin in the third quarter. Current estimates for the third and fourth quarters have hedging benefits approximating $95 million per quarter. Recall our hedges have roughly five-year tenures and a quarter end pre-tax market valuation of $1.9 billion, an important relative differentiator.

Total deposit costs were 14 basis points for the quarter, representing a linked quarter decline of 21 basis points. Regions continues to deliver industry-leading performance in this space exhibiting the strength of our deposit franchise. Over the coming quarters, we expect deposit cost to further decline to historical lows. Lower long term interest rates negatively impacted net interest income and net interest margin during the quarter. Premium amortization increased $7 million to $33 million attributable in part to an unusually low first quarter. Furthermore, the repricing of fixed rate loans and securities at lower market rates reduced net interest income and net interest margin by $8 million and 3 basis points respectively.

Looking ahead to the third quarter, let me start by saying uncertainty surrounding the timing of forgiveness for PPP loans may create volatility and net interest income across quarters given the impacts from fee acceleration. We currently anticipate NII to decline between 1.5% and 2.5% linked quarter, mostly from the normalization of line activity that was elevated in the second quarter. Excluding PPP and excess cash liquidity, our core net interest margin is expected to stabilize in the mid-to-high 3.30%.

Now let’s take a look at fee revenue and expense. Despite the challenging operating environment, adjusted non-interest income increased 18% quarter-over-quarter. Capital markets experienced a record quarter producing $95 million of income. Excluding favorable CVA, capital markets income totaled $61 million. Growth in capital markets was driven by record debt and equity underwriting, as well as record fees generated from the placement of permanent financing for real estate customers. In light of the current environment, it is reasonable to expect capital markets to generate quarterly revenue, excluding CVA, in the $40 million to $50 million range.

Mortgage income increased 21% driven primarily by record production volumes associated with the favorable rate environment. The Lower interest rates have contributed to a significant increase in year-over-year production. In fact, our full-year 2020 production is expected to exceed full year 2019 levels by 50%. Mortgage remains a core business for Regions and our strategic decision to add a significant number of mortgage bankers last year is paying off. Closed mortgage loans in the month of May represent the highest single month in our company’s history, and we continue to experience elevated application volumes throughout the quarter. In addition, mortgage servicing continues to be a strategic initiative. During the quarter, we initiated a new floor arrangement, allowing us to grow the servicing portfolio after experiencing several quarters of net decline. We expect mortgage to remain a strength in the consumer bank for the remainder of the year.

Wealth management revenue declined 6% driven primarily by lower investment services fee income, which has been negatively impacted by reduced branch activity. Service charges revenue and card & ATM fees decreased 26% and 4%, respectively driven by lower customer spend activity. Consumer debit card spend has improved across the second quarter. In fact, the month of June, transactions were up slightly year-over-year, while spend was up over 15% year-over-year. Consumer credit card spend has improved as well, although June transaction levels were approximately 6% below the prior year, while spend was down 4%. The current environment has led to reduced overdrafts and credit card balances are lower quarter-over-quarter.

Looking forward, if current spend levels persists, we estimate consumer service charges and card & ATM fees will be reduced by approximately $10 million to $15 million per month from pre-March levels. So despite elevated unemployment, consumers appear to be holding up well. They entered the pandemic in a position of strength and while spend levels are improving, customers continue to delever, while carefully managing their finances.

Wrapping up non-interest income, market values associated with certain employee benefit assets improved during the quarter resulting in a significant quarter-over-quarter benefit. While this increased non-interest income, it was fully offset by corresponding increase in salaries and employee benefits expense.

Let’s move on to non-interest expense. Adjusted non-interest expenses increased 9% compared to the prior quarter. Salaries and benefits increased 13% driven primarily by the liability impact associated with positive market value adjustments on employee benefit accounts. Elevated production-based incentives, temporary COVID pay increases, the addition of approximately 460 associates from our equipment finance acquisition, as well as our annual merit increases also contributed to the increase. Professional fees increased 56% driven primarily by legal fees associated with the completion of our acquisition. FDIC assessment increased 36% attributable primarily to the effects of unfavorable economic conditions, a higher assessment base and a reduction in unsecured bank debt. In addition, expenses associated with Visa Class B shares sold in a prior year increased to $9 million.

The company’s second quarter adjusted efficiency ratio was 57.7% and the effective tax rate was 18.3%. We continue to benefit from continuous improvement processes, as we have just completed over 50% of the current list of identified initiatives. For example, excluding our equipment finance acquisition, we have reduced total corporate space by almost 700,000 square feet or 5% since the second quarter of last year.

Through the pandemic, we have learned how to interact and communicate with customers and each other in new ways. We have seen a dramatic increase in digital adoption and continue to have success through increased calling efforts using video conferencing. Our video conferencing accounts have increased by 128% since mid-March and year-to-date, we have already surpassed the number of video conferencing sessions conducted in all of 2019. This is clear evidence our associates and customers are embracing alternatives to in-person meetings. In addition, year-over-year mobile deposits are up 36%. Deposit accounts opened digitally are up 29% and digital log-ins are up 24%.

Further, almost half of our new digital users in 2020 have come from customers 40 years and older. In fact, digital played a significant role in our ability to assist our customers in obtaining PPP loans during the pandemic. Approximately 80% of applications were submitted online and 97% were closed using e-signature. We’ve been actively reducing the size of our retail network for several years now. In fact, we consolidated 36 branches this quarter. Because of increased digital adoption and changing customer preferences, we expect branch consolidations to continue. Customers have an increasing desire for an omnichannel delivery model for their banking needs. So while we consolidate branches, we will continue to add new modern locations that are best suited to provide the advice and guidance our customers expect. Similarly, we are evaluating our digital and technology spend priorities to best leverage the digital momentum we are experiencing. This shift will allow us to focus on enhancing digital banking capabilities, further advancing our digital sales capabilities and leveraging e-signature to make banking easier for our customers.

We also believe there are additional opportunities where corporate space is concerned. Whether through increased use of hoteling, work-from-home or modified scheduling, we are confident, overall office square footage will continue to decline.

Our expense number this quarter has a bit of noise in it, and I want to spend a few minutes walking through. If you start with our adjusted total expenses of $898 million and back out unusual items we don’t adjust for, such as the expense associated with employee benefit accounts and total COVID-related expenses, you get back to our core quarterly run rate, inclusive of our equipment finance acquisition, in the $860 million to $870 million range. To be clear, we remain committed to making the investments needed to grow our business. However, our overall expense base must always be reflective of the revenue environment. So to the extent the revenue environment is challenged, we will look for additional efficiency opportunities.

So let’s move on to asset quality. The credit-loss provision for the quarter totaled $882 million. The provision reflects adverse conditions and significant uncertainty within the economic outlook, combined with downgrades in certain portfolios, as well as the impact of $182 million in net charge-offs. Portfolio level downgrades were made primarily within energy, restaurant, hotel and retail, while economic outlook uncertainty is centered primarily on the impact of unemployment and the benefits of government stimulus already enacted, and the potential for additional stimulus. This quarter’s provision also includes $64 million, establishing the initial allowance for the non-credit deteriorated small business loans acquired as part of our equipment finance acquisition, which closed on April 1. The resulting allowance for credit losses is 2.68% of total loans and 395% of total non-accrual loans. Importantly, excluding the fully guaranteed PPP loans, our allowance for credit losses increases to 2.82% of total loans.

Annualized net charge-offs were 80 basis points this quarter. The increase reflects charges taken within the energy and restaurant portfolios. Additionally, for the first time, our results now include charge-offs related to our recent equipment finance acquisition. These charge-offs contributed to a $24 million decline in total nonperforming loans. Total delinquencies and troubled debt restructured loans increased 6% and 5%, respectively. Business services criticized loans increased 67%. Despite our willingness to work with our customers during this difficult time, we are not relaxing our credit policies and continue to revise risk ratings as necessary. This approach, as well as specific portfolio level downgrades, led to a significant increase in criticized loans. We have executed a bottom-up approach to review all of our stressed business portfolios and feel this gives us good insight into potential loss and underlying stress over the second half of the year.

With respect to consumers, they entered the pandemic in good shape in relation to jobs, income, loan-to-values, etc. They have clearly benefited from the government stimulus and recent momentum in the jobs numbers has been positive. However, resurgence of COVID-19 cases has slowed summary openings and expectation of certain federal benefits ending in July create some downside risk. Based on the work we have completed and what we know today, we do not anticipate substantial reserve builds during the remainder of 2020. Additionally, we anticipate net charge-off levels for the remainder of the year to be consistent with the second quarter.

In addition, we’ve continued to refine our view of at-risk portfolios resulting from the pandemic. Through our engagement with customers and actual market observations gained through the quarter, we have a more informed view of which sectors can withstand operations in this new normal. As a result, the portion of our portfolio we consider to be at the highest risk of potential loss due to the pandemic declined from $12.4 billion at the end of last quarter to $8.4 billion at June 30. This amount includes loans acquired during the quarter from our equipment finance acquisition.

With respect to loan deferrals, we will have better insight in the next few weeks as the initial deferral periods expire. But we continue to see positive underlying trends. As of July 1, approximately 34% of clients have made mortgage payments, while in forbearance in the last 61 days. For home equity, payments, while in deferral, have been 36%. Credit card is at 56% and auto is at 41%. And approximately 25% of our corporate banking clients in deferral have made a payment in the last 61 days. While we have modeled second business loan deferral request at approximately 40%, early trends indicate requests are tracking at less than 10% for both commitments and relationships.

Let’s take a look at capital and liquidity. Our common equity Tier 1 ratio is estimated at 8.9%. In late June, we received notice that the company exceeded all minimum capital levels under the Supervisory Stress Test. Our preliminary stress capital buffer for the fourth quarter of 2020 through the third quarter of 2021 is currently estimated at 3%. This represents the amount of capital degradation under the supervisory’s severely adverse scenario and is inclusive of four quarters of planned common stock dividends. These results allow Regions to manage capital and support of lending activities and focus on appropriate shareholder returns. Our current capital plan reflects the previously announced suspension of share repurchases through the end of 2020.

With respect to the common stock dividend, management will recommend to the Board that the third quarter dividend remain at its current level. Looking ahead, we expect to maintain the dividend. However, future payout capacity will be dependent on earnings over the second half of the year and any constraints imposed by the Federal Reserve. Also, it is important to note that we have approximately $1 billion of pre-tax security gains and OCI, that are not included in our regulatory capital numbers, unlike advanced approach banks. We exclude OCI from our capital calculations, but nonetheless, it is available to absorb potential losses. As previously noted, we have an additional $1.9 billion of pre-tax gains on our cash flow hedges and OCI, which is also excluded from regulatory capital.

Terminating these hedges would not provide immediate recognition and income or capital as the gain would be deferred and amortized into income, therefore supporting capital over the remaining life of the derivatives. These transactions are hedges designed to protect net income in a low rate environment. We believe there is incremental value in leaving the hedges lives based on the current forward five-year LIBOR curve. However, we continue to evaluate and discuss decisioning points. This demonstrates significant additional loss absorbing capacity, which is not reflected in our regulatory capital levels.

With respect to liquidity, significant deposit growth during the quarter has contributed to historically elevated liquidity sources for the company. Deposits ended the quarter at record levels and contributed to a 10 percentage point decline in our loan to deposit ratio to 78%.

So in summary, our robust capital and liquidity planning processes, which are stressed internally, as well as externally by our regulators, are designed to ensure resilience and sustainability. This gives us confidence that we can continue to meet the needs of our customers and communities during this exceptional period of economic uncertainty. Despite the uncertain environment, we will remain focused on helping our customers, associates and communities navigate through this difficult time. We have a solid strategic plan and are committed to its continued execution. Rest assured, during this extraordinary time, Regions stands ready to help and support all stakeholders.

With that, we are happy to take your questions. Considering the current environment, we do ask that each of you ask only one question to allow for more questions and participants. We will now open the line for your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Your first question is from Betsy Graseck of Morgan Stanley.

John M. Turner, Jr. — President and Chief Executive Officer

Good morning, Betsy.

Betsy Graseck — Morgan Stanley — Analyst

Hi, good morning. Thanks very much.

David J. Turner, Jr. — Senior Executive Vice President and Chief Financial Officer

Good morning.

Betsy Graseck — Morgan Stanley — Analyst

Hi, hi. Okay. A couple of questions, one just on the outlook here for net charge-offs. You highlighted flat in 2H or so. And I guess I’m just trying to understand how you’re thinking about the trajectory from there. Is it that at this current run rate, you feel like you’re anticipating the near term impact on the portfolio or is it that you don’t expect an uptick in net charge-offs until things like stimulus roll off?

Barbara Godin — Chief Credit Officer

Hey, it’s Barb, and I’ll go ahead and respond to that, Betsy. It’s a couple of things. One is, we’ve done a deep dive on all of our portfolios, virtually 95% of our different services portfolio. We’ve had conversations with the first line and credit together. We’ve talked a customer by customer, etc., we’ve had ongoing discussions and some of them are happening weekly, some of them monthly, some of them biweekly, etc. So we really feel good about the information we have on which to look and say which customers may create an issue. But we also made a change in our thinking over the — since the last Great Recession, which is we don’t want to let problems age.

So if we see a problem out there and we think it might head towards a charge-off, we are actually moving it towards charge-off hoping we’ll get a recovery in due course. But that recovery is going to be much further out. So as we think about getting to — and that’s part of what’s in the second half thinking, as we get to the beginning of next year, what we anticipate is that on our business services side, the commercial part of the book, that those numbers will indeed come down. And consumer is a bit of the wild card, because you’re right, once the deferments roll off and the stimulus rolls off, how will they behave. But so far, I’m pretty encouraged by what I see relative to people asking for things like second deferrals, etc early on, but still encouraged somewhat on that front.

Betsy Graseck — Morgan Stanley — Analyst

Okay, that’s helpful color. I noticed, yes, the NCOs are up a little bit Q-on-Q more than what we’ve seen out of other institutions. So that reflects your more proactive stance, I guess, with moving people into the NPLs. Can you give us…

John M. Turner, Jr. — President and Chief Executive Officer

And Betsy, just to correlate that, you see a little decline in non-performing loans quarter-over-quarter which I think is again a reflection of the fact that we are moving those charge-offs through the system.

Betsy Graseck — Morgan Stanley — Analyst

Yeah, yeah, exactly. Okay. Follow-up question just on the outlook for NII guide down 1.5% to 2.5% for 3Q Q-on-Q. Could you just give us some color around the inputs to that with regard to what you’re thinking about for average earning asset growth versus the NIM? And then I know with the hedges, your core NIM is mid-to-high 3.30%. You’ve got some benefit from PPP at some point through the next couple of quarters as well. So you can give us some sense of the trajectory for the main pieces into 3Q and then as we look for PPP, how we should anticipate that flows through from here. Thanks.

David J. Turner, Jr. — Senior Executive Vice President and Chief Financial Officer

There was a lot in there, so let me see if I can boil it down. So, what we don’t know is what the regime is going to be on forgiveness of PPP, so we don’t have anything meaningful, really coming through other than the key area that we are getting, which is pretty low carry. Probably the biggest driver is a reduction in the loan book that we see. There were a lot of draws that happened in the late first quarter and in the second quarter. We saw about 80% of those be repaid by the end of the second quarter. But there’s still some more that are going to be coming through. And so I think it’s reflective of that continued decline in loans. The other is, so our deposits were up some 16%. A big part of that, we believe is also driven by the fact that the tax payment date was moved to July 15. And so we should expect a run-off of deposits in the quarter and therefore using some assets from that standpoint. So when you kind of add all that up, we’re going to have premium amortization in terms of prepayment. So we had talked about that being up in the $33 million range this quarter. That’s probably going to be closer to the upper 30s this next quarter as we see prepayments increase.

And then we’ve talked about the reinvestment of cash flows from fixed-rate loans and securities that have to go on the books at prevailing rates. That component of it cost us $8 billion this past quarter and that’s harder to hedge out. So we’re fully protected on the short-term moves. But we aren’t — we still have some exposure to the reinvestment piece. So you add all that up and that’s where that decline in the NII is coming from.

Betsy Graseck — Morgan Stanley — Analyst

Okay.

David J. Turner, Jr. — Senior Executive Vice President and Chief Financial Officer

Betsy, I should also point out that the benefit from our hedges in the first quarter were about $10 million. What we saw this quarter was about $60 million and the benefit we will see in the third quarter, assuming rates are in the third quarter and beyond, all the way through five years, is about $95 million. So the hedges, we’re very thankful that we have those, and that’s a big part of us keeping the stability of our NII and resulting core margin.

Betsy Graseck — Morgan Stanley — Analyst

And so then, I know you don’t have anything in your numbers for — or in your guidance obviously for PPP, but as those loans are forgiven you get a temporary uptick in your NII. And so you’re just going to treat that as kind of a one-off. Is that how we should be thinking of?

David J. Turner, Jr. — Senior Executive Vice President and Chief Financial Officer

Well, again, it depends on what the regime is. If we end up having an unusual bump in any given quarter, we’ll point that out so that investors understand that. If it comes in over time and it’s just kind of part of our business, maybe we wouldn’t, but right now it’s just so hard. We don’t know what the regime is going to be. And when we get further guidance on that, we’ll tell everybody and re-forecast for you.

Ronald G. Smith — Senior Executive Vice President, Head of Corporate Banking Group

And David — this is Ronnie Smith, Betsy. We — just to reiterate, there has been an extension from the initial eight-week period that businesses were able to count the funds that qualified for users under PPP so that 24 weeks has pushed that out a bit depending on which process the customers select.

Betsy Graseck — Morgan Stanley — Analyst

Perfect. All right, thank you.

John M. Turner, Jr. — President and Chief Executive Officer

Thank you, Betsy.

Operator

Your next question is from Ken Usdin of Jefferies.

John M. Turner, Jr. — President and Chief Executive Officer

Hey, Ken.

Ken Usdin — Jefferies — Analyst

Hey, good morning everyone. Obviously with the big reserve this quarter, the CET1 ratio slipped a little bit below the 9% zone where you talked about being comfortable and I just wanted to ask you to kind of flush that out vis-a-vis your other comments about continuing to recommend the dividend, the back and forth between comfort on where your ratio sit, where you think that CET1 can get back to and then put that in context of the income constraint and how you think about that too. Thanks.

David J. Turner, Jr. — Senior Executive Vice President and Chief Financial Officer

Sure. So, I assume everybody is looking at the Slide 18 where we have our waterfall and you could see the positive contribution generated from our core engine, our PPNR and then the impact of the dividend. So between those two is 50 basis points to the plus. We did have provision expense that drove that down, as well as our acquisition of Ascentium in the first quarter. So — but I think we had all acknowledged, we’re in some form of stress in the country and we’ve always said our mathematical calculation would lead us to desiring a common equity Tier 1 of 9%. We are holding a little excess capital to take advantage of opportunities which — one occurred, Ascentium. And so you should expect as you look at that waterfall chart — and again, we don’t expect to have a provision at the level we just had. So we can accrete that capital back pretty quickly, while we also have pretty robust reserves if you look at our coverage distress losses now. So we couldn’t pick the timing of when the transact — that particular transaction hit, we went to 8.9%. We’re comfortable where we are.

The dividend is not a capital adequacy issue. You can glean that from the DFAST analysis that came through. Now we are going through some form of a stress test in the fourth quarter and we’re not sure exactly what that regime is going to look like. What we do know is that we have, for the third quarter, the dividend limitation on the past four quarters based on our math. As I mentioned — we mentioned in the prepared remarks, we will be recommending to our Board to sustain the dividend in the third quarter. As we think about the fourth quarter and the first quarter of next year, we don’t know if that regime will continue. But we have to suspect that it might, and therefore, we gave you guidance that we believe our dividend is sustainable going out into the fourth quarter and into the first quarter based on our expectations of forecasted earnings.

That being said, the two caveats are, let’s see what the economy looks like when we prepare the financial statements for September 30, and we will make whatever adjustments are necessary and then whatever the Federal Reserve and supervisors may do in this fourth quarter analysis, we don’t know. So those are the two caveats. But based on what we could see, we feel good about sustaining the dividend.

John M. Turner, Jr. — President and Chief Executive Officer

Thank you, Ken.

Operator

Our next question is from Stephen Scouten of Piper Sandler.

John M. Turner, Jr. — President and Chief Executive Officer

Good morning, Stephen.

Stephen Scouten — Piper Sandler — Analyst

Hey, good morning. Yeah, I was wondering if you guys could give a little more color around the loan deferrals. I know you said your expectation for second deferrals are maybe 40%, you’re tracking under 10%. And I’m also kind of wondering how much of those may be deferred loans that are still performing were downgraded from a rating perspective because it feels like you guys are ahead of your peers in terms of changing risk ratings, but I want to see if you can frame that up for us a little bit.

John M. Turner, Jr. — President and Chief Executive Officer

Barb, you want to speak to that?

Barbara Godin — Chief Credit Officer

Sure. Yes. So as we talk about deferrals in general, to begin with, let me — I’ll start with consumer, work my way to business services really quick, Stephen. And so for consumer, what we saw is that deferral rate all in, in fact, for the company is about 6%. What I was looking at, in fact, earlier this morning is that, those numbers are in fact coming down and so far in consumer, we’ve had no request for second deferral yet. Mind you, it’s early, and some of the first deferrals are just rolling off, but it’s still a good encouraging early sign. For the business services portfolio, all in, it’s about 6% as well. And again, talking to our customers, given the benefit of these one by one conversations, we’ve heard very limited need for a second deferral. So again, very encouraging news from that front.

Relative to those that are deferred and the percent that are criticized within those, we’ve given a chart on Page 12. It doesn’t give the criticized portion of the deferrals, but you can intuit from it that we criticized a large portion of those criticized percentages were — do include a deferral.

John M. Turner, Jr. — President and Chief Executive Officer

Ronnie Smith, you want to talk about the wholesale book?

Ronald G. Smith — Senior Executive Vice President, Head of Corporate Banking Group

Yeah, John. Just from numbers, if I step back into it, Stephen, we have 2000 clients in the wholesale book that have requested deferral and out of that particular universe, we are seeing — and I think David said this in his opening comments, but we are seeing a very low request for a second deferral period. And we are using that though as a leading indicator to go in and provide a scrub on a name-by-name basis to appropriately assign risk ratings to those clients who had requested a deferral. We’re finding, as you can tell in the early returns, and I want to stress it’s early, less than 10% of those are requesting a second deferral period. And so that shows the strength of cash flows, liquidity that they have built up and so we feel good about where we are at this point. But there is a lot more deferrals that need to mature as we continue to work with each of these clients.

Stephen Scouten — Piper Sandler — Analyst

Okay. Very, very helpful. And if I could ask David one clarify around the expense guidance or information you gave, you said $860 million to $870 million is kind of a better longer term run rate. Maybe, when do you think you can get to that level and what level of kind of PPP-related expenses are within that number, if you have any guidance there?

David J. Turner, Jr. — Senior Executive Vice President and Chief Financial Officer

Yeah. So we think we can get there now. It’s just this past quarter I acknowledge there’s a lot of noise in our numbers, and that’s why we actually gave you a little better guidance to — what to expect going forward. We had some expenses that came through PPP. They weren’t particularly material in any of those that were related to loan originations or deferred as part of the fees that we get and would be amortized over the life of the loan. So I wouldn’t expect anything material, from that standpoint, to hit us in the third quarter and going forward.

Stephen Scouten — Piper Sandler — Analyst

Great, thanks for the color. Appreciate the time.

John M. Turner, Jr. — President and Chief Executive Officer

Thank you.

Operator

Your next question is from Matt O’Connor of Deutsche Bank.

John M. Turner, Jr. — President and Chief Executive Officer

Good morning, Matt.

Matt O’Connor — Deutsche Bank — Analyst

I know you guys touched on this a little bit, but coming back to credit, today is an interesting day because your stock is getting hit because folks think you have worst credit because you reserve for more. Another company came out today and have taken some hit for maybe under reserving. So from an outside point of view, it’s a little hard to tell like who is being aggressive, who may be behind. And I guess from your point of view, like, why do you think you are able to kind of be more aggressive than maybe some others? Is it the loan mix? Is it just the data that you have, as you mentioned, has changed quite a bit in your markets the last six weeks? Is it the pain that you lived through in the last downturn? Just anything else you could add on that. Thank you.

John M. Turner, Jr. — President and Chief Executive Officer

Yeah. It is — I think the last quarter we were criticized for potentially under reserving and this quarter, there is some questions about credit. And I think I can’t speak to what other banks are doing. What I do know is what we are doing. Over the last 10 years, we worked really hard to improve our credit risk management processes and as Ronnie and Barb described on the wholesale side of our business, we’ve been through the large majority, if not all of our portfolios — high-risk portfolios, large exposures. And we have risk-rated those credits, we think, appropriately and as a result, our allowance for credit losses reflects those risk ratings and we’ve considered companies, industries their ability to repay, and we are actively monitoring our portfolios and so have presented, what we believe to be an appropriate allowance, given the risk that’s currently in our portfolio based upon the economic assumptions we’re applying and expected life of loan losses.

And it’s our anticipation that the portfolio will, as David has described, perform consistent with in the future, at least, next two quarters while charge-offs will approximate or to current levels and we don’t anticipate any significant additional provisioning if there are no changes in the economic environment and if our credit quality doesn’t further deteriorate because of changes in the economic environment.

David J. Turner, Jr. — Senior Executive Vice President and Chief Financial Officer

Yeah, Matt, we’re trying to help everybody within our Page 19 showing the allowance waterfall and you can see the economic outlook component of $242 million that was added to the reserve. And that’s a reflection of — the primary driver for this is unemployment. So when we were at the first quarter, you know our expectation of unemployment was closer to 9%. Today it’s 13%. That’s a big delta. And the question is how quick is the recovery going to be? What’s the impact of stimulus? So there is a lot of work that goes into ultimately determining what the allowance needs to be. We are risk rating — and Barb you may want to chime in on this, risk rating relative to what we see in the book from the ground up process that was earlier described. And that’s the $382 million that you see in the middle of that page. And remember on top of that is the charge-off number of about $182 million. So if you add to that, it’s about $564 million of our $882 million provision. So Barb you want to talk about the risk rating?

John M. Turner, Jr. — President and Chief Executive Officer

I think we’ve covered that. The point I’d make is, though, that there is — it’s hard to distinguish between deterioration in the credit portfolio and changes in the economic environment, because one effectively begets the other. I think it’s — visually represents what is just overall, our assumptions based upon the current stressed environment that we’re in.

Matt O’Connor — Deutsche Bank — Analyst

All right. That was helpful. Thanks for going through that again.

Operator

Your next question is from Peter Winter of Wedbush Securities.

John M. Turner, Jr. — President and Chief Executive Officer

Good morning, Peter.

Peter Winter — Wedbush Securities — Analyst

Hi, good morning. Good morning. I was just wondering, when I look at the DFAST results, it seemed like they weren’t as strong as they should have been on PPNR. And is there anything that the Fed is missing or anything that you can do to address that with the Fed, especially when it comes to stress capital buffer?

David J. Turner, Jr. — Senior Executive Vice President and Chief Financial Officer

So, Peter, we — as we laid out in our prepared comments, we have a unique benefit of our forward-starting hedges that we had put in place a couple of years ago, but they didn’t become effective until the first quarter of this year for a piece of them. The second quarter had another piece and then in the third quarter there is one more step-up and you can see that in the chart that we put in the slide deck. Because that benefit wasn’t in our run rate, we don’t believe we got full benefit of that in our PPNR estimation in the last DFAST. As a matter of fact, our PPNR, which we believe should outperform our peer group in that test, so it was in the middle of the peer — it was a median part of the peer group, so we’re in a — having discussions on how to — how that can be reviewed by them differently. Obviously, we’re going to go through some form of a stress test this fourth quarter. They will have [Indecipherable] of our derivatives and how they come in to protect our PPNR in stressful time, especially in a low rate environment. So let’s see what happens as they continue to evaluate both the SCB. So it’s a preliminary SCB, the final won’t be out till August 31. And then on top of that we’ll have the fourth quarter stress test of some type.

Peter Winter — Wedbush Securities — Analyst

All right, thanks.

John M. Turner, Jr. — President and Chief Executive Officer

Thank you.

Operator

Your next question is from Jennifer Demba of SunTrust.

John M. Turner, Jr. — President and Chief Executive Officer

Good morning, Jennifer.

Jennifer Demba — SunTrust — Analyst

Good morning. Quick question on deposit service charges. They were $131 million in the second quarter, down from $178 million. What kind of run rate are we looking at for that line item in future quarters? And how much of fee waivers are coming back in?

David J. Turner, Jr. — Senior Executive Vice President and Chief Financial Officer

Yeah, Jennifer, so we tried to give a little bit of guidance. So let me roll it forward from the first quarter. If you recall spend was down quite a bit on the consumer side in that. We were concerned if that stayed at that level it’s going to cost us about $25 million a month between service charges and card & ATM fees. In our prepared comments, because of the spend coming back, in particular on debit card usage, that number is down to $10 million to $15 million per month at this current level. Now, in the month of June, we started to see that pick up a bit, but still not to the level that we had seen pre-crisis. A big driver of that is the amount of stimulus that’s still sitting in the deposit accounts of our customers. Therefore, you don’t have NSF fees, for instance, coming through and you don’t have credit card interchange coming through. So right now we’re guiding to a $10 million to $15 million per month from the pre-March numbers that you really ought to think through as you model.

Jennifer Demba — SunTrust — Analyst

Thanks so much.

John M. Turner, Jr. — President and Chief Executive Officer

Thank you.

Operator

Your next question is from Saul Martinez of UBS.

John M. Turner, Jr. — President and Chief Executive Officer

Good morning, Saul.

Saul Martinez — UBS — Analyst

Hey, good morning. Hey, I wanted to go through the dividend math a little bit — in a little bit more detail. And I think you guys said that based on your best estimates and realizing there is a lot of uncertainty here, you should be able to pay your dividend. But if the Fed does extend the dividend cap into the fourth quarter, by my calculation, you guys would have to do about $260 million of net income before preferreds in the third quarter to keep your dividend at $0.16 a share, and if it’s extended into next year’s math, it’s even more difficult as 2019 rolls off, because presumably that goes up closer to $300 million. So I guess — so what I want to get a better sense for is that, when you say that you’re confident in meeting your dividends, are you basically saying that you’re confident that you’ll be able to meet that kind of net income threshold over the next couple of quarters?

David J. Turner, Jr. — Senior Executive Vice President and Chief Financial Officer

Yeah. That’s what we’re saying.

Saul Martinez — UBS — Analyst

All right. That’s good. I’ll just — I’ll be respectful of the one question rule. And that’s — so, thank you.

David J. Turner, Jr. — Senior Executive Vice President and Chief Financial Officer

Okay.

John M. Turner, Jr. — President and Chief Executive Officer

Thanks, Saul.

Operator

Your next question is from Dave Rochester of Compass Point.

David Rochester — Compass Point Research — Analyst

Hey, good morning, guys.

John M. Turner, Jr. — President and Chief Executive Officer

Good morning.

David Rochester — Compass Point Research — Analyst

Given all the work you guys have done with the more at-risk book and those credits under stress, which drove a lot of these downgrades in the quantitative reserve build you guys have here, I was just wondering what the reserve ratio is that you have on that at-risk book or what you’re seeing as the overall potential loss content there?

Barbara Godin — Chief Credit Officer

Yeah. And this is, Barb. And right now, we would have a reserve ratio on that at-risk book of about little over 7%. And then if you look at some of the sub sectors, energy as an example was high risk segments that we point out at 10.5%. To give you a sense, restaurant over 7%. So we think we have a pretty healthy reserve on it.

David Rochester — Compass Point Research — Analyst

Great. All right, thanks guys. Appreciate it.

John M. Turner, Jr. — President and Chief Executive Officer

Thank you.

Operator

Your next question is from Christopher Marinac of Janney Montgomery Scott.

John M. Turner, Jr. — President and Chief Executive Officer

Good morning.

Christopher Marinac — Janney Montgomery Scott — Analyst

Good morning. I just wanted to follow-up on some points that Barb was making earlier. So given the changes on the business criticized and the reserve build this quarter, what has to change to see that further deteriorate? Do you feel like you’re ahead of that with the changes that you made this quarter?

Barbara Godin — Chief Credit Officer

Yeah, I would say we’re certainly on top of it. And, of course, the wild card as we all know is what’s going to happen in the economy. So our best view of the economy is what’s incorporated into what our thinking is. If all of a sudden we get a second wave that comes in and then closes everything down, there is going to be some more pain. But based on what we know today, I’m back to — yeah, I’m really confident on it. As I said, we’ve gone through. We’ve had the discussions. They are not a one and done discussion. They are an ongoing discussion. We have these meetings set up with Ronnie and team again, and we have them all in there. We have credit in there. We spend hours going through it. So again that gives back to — giving me that level of confidence that, there’s nothing that’s happening that we’re not talking about or seeing and, more importantly, reflecting in our thoughts around what are we going to call it criticized loan or a classified loan, an NPL or a charge-off, for that matter.

John M. Turner, Jr. — President and Chief Executive Officer

And I think the other caveat is we really — the level of federal government relief is unprecedented and it is very difficult for us to apply any sort of modeling to that. And so depending upon whether the relief is extended or not and what that looks like certainly is a factor as we look forward. But that of course would influence I think the economic conditions that we’re currently assuming as well. So it is an unusual time but as Barb said, we feel like we’re on top of our reserving and credit issues.

Barbara Godin — Chief Credit Officer

Certainly.

Christopher Marinac — Janney Montgomery Scott — Analyst

Great, thanks for the additional color, I appreciate it.

John M. Turner, Jr. — President and Chief Executive Officer

Thank you.

Operator

Your next question is from Vivek Juneja of J.P. Morgan.

John M. Turner, Jr. — President and Chief Executive Officer

Vivek, good morning.

Vivek Juneja — J.P. Morgan — Analyst

Hi, morning. Thank you. Just a couple of clarifications around credit. You mentioned — I think David mentioned no more reserve build. David, am I to presume that you’re — and at the same time you gave a guidance for net charge-offs to remain at second quarter levels, so two elements to that. Were you expecting charge-offs, where’s the — in your line of sight that you’ve given this guidance? You’re obviously expecting charge-offs in some categories, which are those? And then to your reserve point related to that, David, are you expecting provisions for at least net charge-offs? Are you — presuming reserves to loans are not going to start to come down, so you’re not starting to release reserves yet, right?

David J. Turner, Jr. — Senior Executive Vice President and Chief Financial Officer

Well, let me start with your back part of the question and Barb will answer the first part. So the way CECL works is we’re supposed to reserve for all losses in the portfolio at the balance sheet date based on all the factors that are — that we can observe, economic indicators and the like. And so if we do that right and portfolio — the economy doesn’t change, there is no degradation in the credit metrics, loans aren’t growing, then you wouldn’t expect to have provision. You can’t have provision necessarily equal to charge-offs. It’s kind of whatever it takes to get the reserve to the level it needs to be at, at the balance sheet date. So right now we think we have it all.

But as we did in the first quarter, the caveat we gave you then, we’re going to give it to you now. We don’t know what the economy is going to look like at September 30. But based on what we do know, even subsequent to closing of the books, economy hadn’t degraded materially from where we were when we set the reserve. So we’re feeling better about that going into the third quarter, which is different than going into the second. So Barb, do you want to answer the…

Barbara Godin — Chief Credit Officer

Yeah. Regarding the question, which is where are the charge-offs going to come from in our estimation based on the analysis that we’ve done, the conversations that we’ve had. Again, primarily from the two portfolios we’ve already talked about, energy and restaurant, we have to see the rest of that play out. There’s going to be some retail and some hotel that could impact as well. But, that’s generally what I would size it up to.

Vivek Juneja — J.P. Morgan — Analyst

Okay, thank you.

John M. Turner, Jr. — President and Chief Executive Officer

Thank you, Vivek.

Operator

Your next question is from Gerard Cassidy of RBC.

John M. Turner, Jr. — President and Chief Executive Officer

Good morning, Gerard.

Gerard Cassidy — RBC Capital Markets — Analyst

Good morning, John. How are you?

John M. Turner, Jr. — President and Chief Executive Officer

Good, thank you.

Gerard Cassidy — RBC Capital Markets — Analyst

I’ve got some questions on the forbearance part of the portfolio. One is a technical question on, are you accruing all the interest for those loans even customers that may not be paying versus the ones that are paying? And then the second part of the question is, have you had any conversations with the Fed on when they may go back to their more traditional stance on forbearance on how banks have to carry the higher capital levels against those loans? And then the third part of the question is, once you go off forbearance, the Fed says it ends, let’s say, second quarter of ’21, and you still got loans on forbearance, will they immediately start going into a non-performing status, meaning being 30 days past due or will you just immediately put them in non-accrual because they already have been in forbearance?

David J. Turner, Jr. — Senior Executive Vice President and Chief Financial Officer

Gerard, it’s David. I’ll start with the first part. So when loans go into forbearance, we still accrue interest unless that loan was already on non-accrual status or it had — it didn’t have the ability to pay all of its principal — net contractual principal and interest, in which case, any payments that we were to receive, we actually write down the principal balance. That’s our accounting policy. So for the most part, this type of forbearance that you’re seeing, you can see the performance where people are still making their payments, but even if they’re not and they’re not on non-accrual, we are, in fact, accruing interest on those. You want to talk about the second part?

John M. Turner, Jr. — President and Chief Executive Officer

The second part of the question is we have not had any conversations with the Fed about when they may change their guidance about how we work with customers in respect to the coronavirus. Their initial guidance gave examples, including six-month periods of forbearance as examples of how we might consider working with customers and we really haven’t had any guidance since then. The third part of your question I think was hypothetically what do we do if we get out nine months, 12 months and a customer still can’t pay. Barb, you want to talk about that?

Barbara Godin — Chief Credit Officer

Yeah, I don’t see a cliff at that point in time because what we’re doing is with the process we have in place right now is we’re taking all of that information we have in place today, if the customer is on deferral that’s but one input point. We’re looking at their cash flows. We’re looking at a lot of other things to make the determination on the risk rating, which is why you’re going to see customers who are paying that. We may have sitting in a non-performing loan category move to a criticized classified category. So we are making those risk rating changes not because of the deferral but, as I said, deferral is simply a point. So I don’t see a huge cliffs on any of them.

Ronald G. Smith — Senior Executive Vice President, Head of Corporate Banking Group

And Barb, we’re using the deferral as a leading indicator to go dig deeper, Gerard, into that relationship, not looking at trailing-12, but what the current information is today and what challenges that relationship is facing. So we are — to Barb’s point, we’re calling it as we see it today.

David J. Turner, Jr. — Senior Executive Vice President and Chief Financial Officer

Yeah. This is David. I hate to pile on this but it is — it’s important that people understand that we aren’t — because you are given leeway on forbearance from a regulatory standpoint, if we believe it needs to be risk rated in a certain way, we’re doing that. So that’s why you shouldn’t see a cliff effect regardless of what the Fed says about how we can treat loans or TDRs or anything. We’re calling that independent — independently.

Barbara Godin — Chief Credit Officer

Exactly.

Gerard Cassidy — RBC Capital Markets — Analyst

Thank you.

John M. Turner, Jr. — President and Chief Executive Officer

Thank you, Gerard.

Operator

Your final question is from John Pancari of Evercore.

John M. Turner, Jr. — President and Chief Executive Officer

Good morning, John.

Rahul Patil — Evercore ISI — Analyst

Hi. This is Rahul Patil on behalf of John. We’ve got one question on the efficiency ratio. I mean it’s like 2Q ’20, your efficiency ratio was around, adjusted basis of 57.7%. You talked about your willingness to look at expenses rather closely if the revenue environment is a challenge. Can you talk about how you’re thinking about the efficiency ratio going forward? What sort of level is reasonable, assuming that the current conditions kind of stay or persist through at least year-end? Because I know in the past you’ve talked about a mid-50%. I’m not sure if there is any update on that front.

David J. Turner, Jr. — Senior Executive Vice President and Chief Financial Officer

Yeah. So we still have that as our long term goal to get our efficiency ratio down into the mid-50%. And then when we get there, we’re going to be pushing it even harder. So we have a little bit of volatility, obviously, and revenue, given the changing rate environment will have a little bit of pressure on NII as we mentioned just a minute ago for the next quarter. But when you have challenges on revenue, then you have to go back and work on expenses and that’s part of our program. So while you may see that percentage change a bit any quarter-to-quarter, I think where we are right now is sustainable over time and perhaps working that way down over time as we continue to work on expenses and the benefits from further hedges that actually come into force in the third quarter will help us from a revenue standpoint.

John M. Turner, Jr. — President and Chief Executive Officer

Okay. Well, there are no further questions. We really appreciate your participation today. Thank you for your interest in our company. Have a good weekend.

Operator

[Operator Closing Remarks]