Good morning, and welcome to the Regions Financial Corporation's Quarterly Earnings Call. My name is Shelby, and I will be your operator for today's call. I would like to remind everyone that all participant phone lines have been placed on listen-only. At the end of the call, there will be a question-and-answer session. [Operator Instructions] I will now turn the call over to Dana Nolan to begin.

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.

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 impact so many people in our society, we remain focused on the things that we can control. We're 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 Region's 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 provisions 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 had fared better than other parts of the economy as evidenced by the fact that the unemployment rate in the majority of southeastern states had…

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. 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 pre-tax 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’s 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 accessed 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 tamper that perspective. With respect to PPP loans, it remains difficult to predict the timing of loan forgiveness. Currently, we anticipate forgiveness requests 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 decreased 1% reflecting declines across all categories except mortgage, which was up…

Thank you. The floor is now open for questions. [Operator Instructions] Your first question is from Betsy Graseck of Morgan Stanley.

Good morning, Betsy.

Hi, good morning. Thanks very much.

Good morning.

Hi. Okay, a couple questions, one, just on the outlook here for net charge-offs, you highlighted, you know, 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, you know, 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?

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 in all of our portfolios. You know, virtually 95% of our business services portfolio, we've had conversations with the first line and credit together; we've talked to customer-by-customer, et cetera; we've had ongoing discussions of – some of them are happening weekly, some of them monthly, some of them bi-weekly, et cetera. 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 – you know 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 hit 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, et cetera, early on, but still encouraged somewhat on that front.

Okay, that's helpful color. And 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 …

Yes, and Betsy, you know, 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're moving those charge-offs through the system.

Yes. Yes, exactly. Okay. A follow-up question just on the outlook for NII guide down 1.5 to 2.5 in 3Q Q-on-Q, could you just give in – 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 330s. You know, 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.

Yes, there's a lot in there. So, let me see if I can bullet 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 carry that we are getting, which is, you know, pretty low carry. Probably the biggest driver is 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 and 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%. You know, 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 close to the upper 30s this next quarter as we see prepayments increase. And then, you know, 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, I should also point out that, you know, the benefit from our hedge is in the first quarter were about $10 million. What we saw this quarter was about $60 million and the benefit we'll see in the third quarter assuming rates are in the third quarter and beyond all the way for 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 margins.

And so then, I know you don't have anything in your numbers for – you know 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, you know, kind of a one-off, is that how we should be thinking about it?

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. You know 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 – we don't know what the regime is going to be and when we get further guidance on that we’ll tell everybody and reforecast for you.

And David – this is, you know, Ronnie Smith, Betsy. 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 uses under PPP. So that 24 weeks has pushed that out a bit depending on which process the customers elect.

Okay. All right, thank you.

Thank you, Betsy.

Your next question is from Ken Usdin of Jefferies.

Hey, Ken.

Thanks. Hey, good morning, everyone. You know 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, you know, continuing to recommend the dividend, the back and forth between comfort on where your ratio sit, where do you think that CET1 can get back to? And then, put that in context of the – you know, the income constraint and how you think about that, too? Thanks.

Sure. So, I assume everybody's 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 – well, I think we'd all acknowledge 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% and we’re 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 you know, we couldn't pick the timing of when that particular transaction hit. We went to [8.9]. We're comfortable where we are, but dividend is not a capital adequacy issue. You can glean that from the DFAST analysis that came through. Now, we're 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 of the dividend limitation on the past four quarters, you know, based on our math, as we mentioned in the prepared remarks, we'll be recommending to our Board to sustain the dividend in 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 and 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'll make, you know, 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 can see, we feel good about sustaining the dividend.

Thank you, Ken.

Our next question is from Stephen Scouten of Piper Sandler.

Good morning, Stephen.

Hey, good morning. Yes, 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.

Barb, you want to speak to that?

Sure. Yes, so as we – when you talk about referrals in general, to begin with, 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, it’s 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 requests 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, that's – you know again, 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, you know, that are criticized within those, we've given a chart on Page 12 that doesn't give the criticized portion of the deferrals, but you can [intuit] from it that the criticized are large portion of those criticized percentages were – do include a deferral.

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

Yes, John. Just from a – just the numbers, if I step back into it, Stephen, we've – we have 2,000 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're seeing a very low request for a second deferral period. And we are using that 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 its 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's a lot more deferrals that need to mature as we continue to work with each of these clients.

Okay. Very, very helpful. And if I could ask David one clarifier on 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?

Yes. 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 hit us in the third quarter and going forward.

Great. Thanks for the color. I appreciate the time.

Thank you.

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

Good morning, Matt. Matt O’Connor : I know you guys touched on this a little bit, but coming back to credit, yes, today is an interesting day because, you know, your stock is getting hit because folks think you have worst credit because you reserve for more. Another company came out today and was taking some heat for maybe under reserving. So, you know, from an outside point of view, it's a little hard to tell, like who's being aggressive, who's maybe behind and I guess from your point of view, like, you know, 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’ve mentioned, has changed quite a bit in your markets, the last six weeks?

I’ll answer that? Matt O’Connor: Is that the pain that you went through in the last downturn? Is there anything else you could add on that? Thank you.

You know, it is, I think last quarter, we were criticized for potentially under reserving and this quarter there's questions about credit. And I think, you know, I can't speak to what other banks are doing. What I do know is what we're 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. We've considered companies, industries, their ability to repay, and we're 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, you know, it's our anticipation that the portfolio will, as David has described, perform consistent with in the future, at least next two quarters. Well, charge-offs will approximate [over the] current levels and we don't anticipate any significant additional provisioning if there are no changes in the economic environment and if our, you know, credit quality doesn't further deteriorate because of changes in the economic environment.

Yes, we’re trying to help everybody in 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, its 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's a lot of work that goes into ultimately determining what the allowance needs to be. We are risk grading. And Barb, you may want to chime in on this risk grading 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?

I think we've covered. The point I'd make is though that there is – it's hard to distinguish between deterioration of the credit portfolio and changes in the economic environment because one effectively [begets] the other.

Yes.

I think it visually represents what is just overall, you know, our assumptions based upon the current stress environment that we're in. Matt O’Connor: Alright, that was helpful. Thanks for coming through that again.

Your next question is from Peter Winter of Wedbush Securities.

Good morning, Peter.

Hi, good morning. Good morning. I was just wondering when I look at the DFAST results, it seemed like they won the strongest they should have been on PPNR. And is there anything that the Fed is missing or anything you can do to address that with the Fed, especially when it comes to a stressed capital buffer?

So Peter, we – you know, as we lay down 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 the third quarter, there's one more step up and you can see that in a 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 that last DFAST. As a matter of fact, our PPNR, which we believe should outperform our peer group, in that test it was in the middle of the peers, it was a median [part of] the peer group. So we're in – having discussions on 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'll have the knowledge [indiscernible] of our derivatives and how they come into to protect our PPNR in the stressful times, especially in the 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 until August 31. And then, on top of that, we'll have the fourth quarter stress test of some type.

Alright, thanks.

Thank you.

Your next question is from Jennifer Demba of SunTrust.

Good morning, Jennifer.

Good morning. Just a question on deposit service charges, they were $131 million in 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 the waivers are coming back in?

Yes, Jennifer, so, we tried to give a little bit of guidance. So let me roll it forward from the first quarter. If you recall, spin was down quite a bit on the consumer side and that we were concerned at that state at that level is going to cost us about $25 million a month between service charges and card and ATM fees. In our prepared comments, because of the spin 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 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 $10 million to $15 million per month from the pre-March numbers that you really ought to think through as you model.

Thanks so much.

Thank you.

Your next question is from Saul Martinez of UBS.

Good morning, Saul.

Hey, good morning. Hey, I wanted to go through the dividend math a little bit – in a little bit more detail and I know you guys said just based on your best estimates and realizing there's a lot of uncertainty here, you should be able to pay your dividend. But if the Fed does, you know, extend the dividend cap in the end of the fourth quarter, by my calculation, you guys would have to do about $260 million of net income for deferreds in the third quarter to keep your dividend at $0.16 a share. And, you know, if it's extended into next year, the math gets even more difficult as 2019 rolls off because then presumably that goes up to closer to 300. 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?

Yes, that's what we're saying.

All right. That's good. I’ll be respectful of the one question rule. So thank you.

Okay. Thanks, Saul.

Your next question is from Dave Rochester of Compass Point.

Hey, good morning, guys.

Good morning.

Hey, given all the work you guys have done, but the more at-risk book and those credits under stress, which drove, you know, a lot of these downgrades and the quantitative reserve bills you guys have here, was just wondering what the reserve ratio is that you have on that at-risk book? Or what you're seeing as the, you know, overall potential loss content there?

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

Great. All right, thanks, guys. Appreciate it.

Thank you.

Your next question is from Christopher Marinac of Janney Montgomery.

Good morning.

Thanks, good morning. Just want to follow up on some points that Bob was making earlier. So, given the changes on the business criticized, and the results of 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?

Yes, 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, you know, 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 closes everything down, there's going to be some more pain, but based on what we know today, and back to, you know, I'm really confident on it. As I said, we've gone through; we've had the discussions. They're not a [one and done] discussion. They are an ongoing discussion. We have these meetings set up with – I’ll use Ronnie’s 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 a criticized loan or a classified loan, an MPL or charge-off for that matter.

Yes, 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, 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.

Absolutely.

Great. Thanks for the additional color. I appreciate it.

Thank you.

Your next question is from Vivek Juneja of JPMorgan.

Vivek, good morning.

Hi, good 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 guide on for net charge-offs to remain at second quarter levels? So two elements to that, where are you expecting charge offs? Where’s the – you know 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 will at least match 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?

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. You know, and so, if we do that right and portfolio – the economy doesn't change, there's 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 the balance sheet date. So, right now, you know, 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 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, you know, even subsequent to closing the books, the economy hadn't degraded materially from [where we were when] we set the reserves. So, you know, we're feeling better about that going into the third quarter, which is different than going into the second. So, Barb, you want to answer the…

Yes, first part of 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.

Okay, thank you.

Thank you, Vivek.

Your next question is from Gerard Cassidy of RBC.

Good morning, Gerard.

Good morning, John. How are you?

Good, thank you.

I've got some questions on the forbearance part of this portfolio. Once a technical question on, are you accruing all the interest for those loans, even though the customers that may not be paying versus the ones that are paying? And then a 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 and more on how banks have to, you know, carry the higher capital levels against those loans? And the third part of the question is, once you go off forbearance, the Fed says, it ends let's say, second quarter of 2021 and you still got loans on forbearance, will they immediately start going into a non-performing status meaning, you know, being 30 days past due, or will you just immediately put them in a non-accrual because they're already in forbearance?

Georgia, this is David. I'll start with the first part. So loans go onto 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 and its contractual principal and interest, 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 nonaccrual we are in fact accruing interest on those. You want to talk about second part.

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?

Yeah, I don't see a cliff at that point in time, because what we're doing is, what the process we have in place right now is, we're taking all of that information we have in place today, the customers 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 and moved to a criticized reclassified 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 Cliff on any of that.

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

This David, I hate to pile on this, but it is important that people understand that. We are – because you are given leeway on forbearance from a regulatory standpoint. If we believe that needs to be rich graded 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.

Exactly.

Thank you.

Thank you, Gerard.

Your final question is from John Pancari of Evercore.

Good morning, John.

Hi, this is Rahul Patil on behalf of John. I just have one question on the efficiency ratio, I mean it is like 2Q 2020 the efficiency ratio was around adjusted basis of 57.7%, you know you talked about your willingness to look at expenses little bit closely if the revenue environment is a challenge. Can you talk about how you are thinking about the efficiency ratio going forward, you know what sort of level is reasonable, assuming that the current conditions kind of stayed 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.

Yes, so we still have that as our long-term goal to get our efficiency ratio down into the mid-50s and then when we get there we are going to be pushing it even harder. So, we have a little bit of volatility obviously in our revenue given changing rate environment, we'll have a little bit of pressure on NII as we've 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 good quarter to quarter, I think where we are right now is sustainable over time and perhaps working that way down over time as we as we continue to work on expenses and the benefits from further hedges that actually come into force and the third quarter will help us from a revenue standpoint.

Okay. [With no] further questions, we really appreciate your participation today. Thank you for your interest in our company. Have a good weekend.

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