PNC Financial Services Group Inc. (PNC) Q3 2020 Earnings Call Transcript

PNC Financial Services Group Inc. (NYSE: PNC) Q3 2020 earnings call dated Oct. 14, 2020

Corporate Participants:

Bryan Gill — Director of Investor Relations

William S. Demchak — Chairman, President & Chief Executive Officer

Robert Q. Reilly — Chief Financial Officer

Analysts:

John Pancari — Evercore ISI — Analyst

Ken Usdin — Jefferies — Analyst

Erika Najarian — Bank of America Merrill Lynch — Analyst

Gerald Cassidy — RB Capital Markets — Analyst

Bill Carcache — Wolfe Research — Analyst

Mike Mayo — Wells Fargo — Analyst

Presentation:

Operator

Good morning, my name is Frank and I will be your conference operator today. At this time, I would like everyone — welcome everyone to The PNC Financial Services Group Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions].

I will now turn the call over to the Director of Investor Relations, Mr. Bryan Gill. Sir, please go ahead.

Bryan Gill — Director of Investor Relations

Well, thank you and good morning everyone. Welcome to today’s conference call for The PNC Financial Services Group. Participating on this call are PNC’s Chairman, President and CEO, Bill Demchak; and Rob Reilly, Executive Vice President and CFO.

Today’s presentation contains forward-looking information, cautionary statements about this information, as well as reconciliations of non-GAAP measures, are included in today’s earnings release materials, as well as our SEC filings and other investor materials. These materials are all available on our corporate website, pnc.com, under Investor Relations. These statements speak only as of October 14, 2020 and PNC undertakes no obligation to update them.

Now I’d like to turn the call over to Bill.

William S. Demchak — Chairman, President & Chief Executive Officer

Thanks Bryan, and good morning everybody. Hope everybody is safe and well. You’ve seen that, amidst continued uncertainty on many fronts, PNC delivered solid third quarter results. We grew revenue led by non-interest income, which included a bounceback in consumer fees on higher volumes. We managed expenses, which allowed us to generate positive operating leverage of over 4% in both the quarter and year-to-date period, and our provision for credit losses was substantially less than last quarter.

On the flip side, net interest income fell from the second quarter given the low interest rate environment, and weak loan demand. Despite growth in customers and commitments, our loans outstanding declined due to lower utilization rates, including the pay-off of commercial lines of credit that were drawn early in the pandemic. And while we continue to experience strong deposit growth, the current environment has made it more challenging to put those deposits to work.

While the provision and charge-offs were down quarter-on-quarter, non-performers continue to rise, especially in the high impact COVID areas that Rob is going to discuss in a little bit more detail. Notwithstanding these challenges, we feel that PNC is well positioned, with very strong capital, liquidity and loan loss reserves. Needless to say, there are several significant upcoming events, including the next round of stress tests, the election and PPP forgiveness, that may impact the industry and our borrowers, which underscores the importance of our strong position. We’re confident that the actions we’ve taken, position us to both support our clients and communities and take advantage of potential investment opportunities, if they arise, to enhance shareholder value.

I want to thank our employees, who despite the various challenges of the pandemic, continue to execute on our strategic priorities, including ongoing investments in our national expansion and digital offerings, all, while helping our customers navigate financial hardship and other challenges. During the quarter, we opened retail solution centers in Nashville, Houston, Denver, Boston, and Dallas, and filled out corporate teams in the recently opened Seattle and Portland markets. In 2021, we will continue our middle market expansion into San Antonio, Austin and San Diego. The ability to expose our model to these demographically attractive markets, continues to generate strong returns.

And with that, I’m going to turn it over to Rob, for a closer look at our third quarter results, and then we’ll be happy to take your questions.

Robert Q. Reilly — Chief Financial Officer

Great. Thanks Bill and good morning everyone. As you’ve seen, we’ve reported third quarter net income of $1.5 billion, or $3.39 per diluted common share. Our balance sheet is on slide 4, and is presented on an average basis. On the asset side, total loans declined $15 billion to $253 billion linked quarter. Investment securities of $91 billion, increased $2 billion or 2% linked quarter. But on a spot basis, declined $7 billion, primarily due to significant prepayment activity and maturities at quarter end.

Our cash balances at the Federal Reserve averaged $60 billion compared with $34 billion in the second quarter. The increase was a result of continued deposit growth and the full quarter impact of proceeds from the sale of our equity investment in BlackRock.

On the liability side, deposit balances averaged $350 billion and were up $15 billion or 5% linked quarter. Borrowed funds decreased $10 billion compared to the second quarter, as we used our strong liquidity position to reduce borrowings, primarily with the Federal Home Loan Bank. And our tangible book value was $95.71 per common share as of September 30, an increase of 2% linked quarter and 16% year-over-year.

As you can see on slide 5, our capital, reserve and liquidity positions remain strong. As of September 30, 2020, our CET1 ratio was estimated to be 11.7%. Our Board recently approved a quarterly cash dividend on common stock of $1.15 per share, and as you know the Fed has authorized dividends for the fourth quarter, again subject to amounts not exceeding the average of net income for the preceding four quarters. On this basis, our fourth quarter dividend is 26% of that rolling number. In regard to share repurchases and in accordance with the Federal Reserve’s directive, we’ll continue to suspend repurchases through the fourth quarter of 2020.

Our loan loss reserve levels are 2.58% up slightly from 2.55% at the end of June. And our liquidity coverage ratios continue to significantly exceed the regulatory minimum requirements, as we remain core-funded with a low cost deposit base.

Slide 6 shows our average loans and deposits in more detail. Average loan balances of $253 billion in the third quarter were down $15 billion or 6% compared to the second quarter. This decline reflected a $13.7 billion decrease in commercial loan balances, as new loan production was more than offset by broad-based lower utilization. In our C&IB segment, virtually all of the draw-downs that occurred in the first quarter has since paid back, and our utilization rates are currently running approximately 1%, below pre-pandemic levels.

Consumer loans declined approximately $1.3 billion across all categories, except for residential mortgage which increased. Compared to the same period a year ago, average loans grew 6% or $15 billion. As the slide shows, the yield on our loan balances is 3.32%, a 5 basis point decline in the second quarter, and the rate paid on our interest bearing deposits was 12 basis points, an 11 basis point decline linked quarter. Average deposit balances of $350 billion increased $15 billion or 5%. Commercial deposits grew, reflecting the enhanced liquidity positions of our customers, and consumer deposits also grew, primarily due to government stimulus and lower consumer spending. Year-over-year, deposits increased $71 billion or 26%.

As you can see on slide 7, third quarter total revenue was $4.3 billion, up $205 million linked quarter or 5%. Net interest income of $2.5 billion was down $43 million or 2% compared to the second quarter, as lower earning asset yields and a decline in loan balances more than offset the benefit of lower funding costs, and an extra day in the quarter. Our net interest margin decreased to 2.39% down 13 basis points linked quarter, reflecting the impact of higher balances held with the Federal Reserve Bank, which averaged $60 billion for the quarter. Fed cash balances in excess of our LCR requirements were approximately $40 billion, which represented 25 basis points of compression to our net interest margin.

Non-interest income of $1.8 billion increased $248 million or 16% linked quarter. Fee revenue of $1.3 billion increased $62 million or 5% compared to the second quarter. Asset management revenue increased $16 million or 8%, primarily due to higher average equity markets. Consumer services and service charges on deposits in total, increased by $100 million, due to higher consumer activity and a decrease in fee waivers. Corporate services declined $33 million or 6%, as higher treasury management product revenue, was more than offset by lower advisory related fees. Residential mortgage revenue declined $21 million or 13%, driven by both lower servicing fees and lower loan sales revenue.

Other non-interest income of $457 million, increased $186 million and included a positive valuation adjustment of private equity investments, compared with a negative valuation adjustment in the second quarter of a similar magnitude. The positive valuation adjustment was partially offset by lower capital markets related revenue.

Non-interest expense increased $16 million or less than 1% compared to the second quarter. Provision for credit losses was $52 million, a decrease of $2.4 billion, as the provision expense for our commercial portfolio was largely offset by a provision recapture in our consumer portfolio. And our effective tax rate was 9.8%. The lower rate was primarily related to increased tax credits during the quarter. For the fourth quarter, we expect our effective tax rate to be approximately 13%.

Turning to slide 8; during the third quarter, we generated positive operating leverage of 4% in both the year-over-year quarter and the year-to-date comparison. As a result, our efficiency ratio improved to 59% in the third quarter of 2020, compared to 62% for both the prior year third quarter and the nine months ended September 30, 2019. While the current environment presents revenue challenges from low rates and pandemic related pressures, we remain deliberate and disciplined around our expense management. As we previously stated, we have a goal to reduce costs by $300 million in 2020, through our continuous improvement program, and are confident we will achieve our full year target. As you know, this program funds a significant portion of our ongoing business and technology investments.

Slide 9, is an update regarding specific industries we’ve identified as most likely to be impacted by the effects of the pandemic. Our outstanding loan balances, as of September 30 to these industries were $18.3 billion or $16.4 billion, excluding PPP loans. These balances declined 7% compared to the second quarter, primarily due to paydowns. While we still haven’t experienced material charge-offs in these industries, we do expect to see charge-offs increase over time, should current economic trends continue.

Commercial and industrial loan balances in this category totaled $10.5 billion on September 30, declining approximately $1 billion or 9% compared to the prior quarter. Non-performing loans in these industries remained relatively low at 1% of loans outstanding, but we’re continuing to see downgrades, with the greatest threats continuing to be in leisure and recreation.

Looking at the lower half of the slide, commercial real estate loans in this category totaled $7.8 billion at the end of the third quarter, declining $300 million or 4% compared to the prior quarter. Non-performing loans increased approximately $180 million and downgrades continue to occur, primarily in retail and lodging. Correspondingly, our reserves on our total commercial real estate portfolio have increased to 2.17% from 1.33% in the second quarter.

Moving to slide 10; we have seen a significant reduction in the number of consumers and small businesses requesting hardship assistance. At the peak this summer, we had granted modifications to more than 300,000 consumer and small-business accounts, representing approximately $13.7 billion of loans. $6.9 billion of these loans were government guaranteed or investor-owned, which present very little credit risk to PNC. Of the remaining $6.8 billion of loans that did present credit risk, more than $5 billion have rolled off payment assistance, and 92% of those accounts are current, or less than 30 days past due. As a result, we had $1.7 billion of consumer and small business balances in some form of payment assistance, as of September 30. Of those balances, approximately 85% are secured and more than 60% of these accounts have made a payment in their last cycle.

On the commercial side, we’re also continuing to selectively grant loan modifications based on each individual borrower’s situation. Within our C&IB segment, approximately $700 million of loan balances were in deferral, as of September 30. When combining consumer and commercial customers, loans on deferral posing credit risk to PNC approximate 1% of total loan outstandings.

Our credit metrics are presented on slide 11. Net charge-offs for loans and leases were $155 million, down $81 million from the second quarter. Commercial net charge-offs were $38 million and consumer net charge-offs were $117 million, both down linked quarter. Annualized net charge-offs to total loans was 24 basis points. Total delinquencies of $1.2 billion at September 30, declined $72 million or 5%. Consumer loan delinquencies decreased $41 million and commercial loan delinquencies declined $31 million. Non-performing loans increased $209 million or 11% compared to June 30. The increase was primarily driven by commercial real estate borrowers, and the high impact of COVID-19 industries. As you can see, the allowance for credit losses to loans was 2.58% at quarter end, up slightly from last quarter. We believe that our reserves sufficiently reflect the life of loan losses in the current portfolio.

Slide 12 highlights the components of the change in our allowance for credit losses year-to-date, which have increased $3.4 billion since December 31, 2019. As a result, our allowance for credit losses to total loans was 2.58% and our allowance to non-performing loans was 276%. Our reserves have increased materially this year, due to the adoption of CECL, and significant changes in the macroeconomic outlook during the first half of the year. In the third quarter, portfolio changes, primarily driven by lower loan balances, reduced reserves by $158 million. In addition, our economic outlook improved modestly during the quarter, but this was offset by increased reserves for both commercial and consumer borrowers, adversely impacted by the pandemic. In total, this resulted in $150 million decline in our reserves to $6.4 billion.

In summary, PNC posted solid third quarter results and we believe our balance sheet is well positioned for this challenging environment. For the fourth quarter of 2020 compared to the third quarter of 2020, we expect average loans to decline low single digits. We expect net interest income to be stable. We expect core fee income to be stable. We expect other non-interest income to be between $275 million and $325 million, resulting in our expectation that total non-interest income will be down in the high single-digit range. We expect total non-interest expense to be up approximately 1%, and in regard to net charge-offs, we expect fourth quarter levels to be between $200 million and $250 million. Importantly, after taking all this into account, we’re on pace to deliver positive operating leverage between 3% and 4% for the full year of 2020.

And with that, Bill and I are ready to take your questions.

Questions and Answers:

Operator

Okay, thank you. [Operator Instructions]. Our first question comes from John Pancari with Evercore ISI. Please proceed.

John Pancari — Evercore ISI — Analyst

Good morning, guys.

William S. Demchak — Chairman, President & Chief Executive Officer

Hey, good morning John.

John Pancari — Evercore ISI — Analyst

On the loan loss reserve, it looks like you released reserves a bit in the quarter, although your ACL percentage increased given the loan balance decline, is it fair to assume that if we do see charge-offs continue to increase from here, like in the fourth quarter for example, that we would expect that you probably still will not match those charge-offs with provision and accordingly, continue to put up loan loss reserve releases?

Robert Q. Reilly — Chief Financial Officer

There is a lot of variables that kind of go into that answer John. But remember again, when we put up the second quarter reserve, the assumption based on our economic forecast in the model, so that was — that we covered all of the losses we knew about at that point in time. At the margin, the economy has gotten perhaps a little bit better on the forecast, and so we’re kind of — as charge-offs go up, we’re using in effective reserves that we provided for in the second quarter, so that all else equal, should continue, unless we have deterioration from our current forecast and what the economy is doing. But the general principle is, all else equal, as loans run down and charge-offs go through, that’s what we’ve reserved for.

William S. Demchak — Chairman, President & Chief Executive Officer

Yeah, that’s right.

John Pancari — Evercore ISI — Analyst

That’s helpful. Got it. And then on that same topic, the charge-off trajectory, just given what you expect in terms of the ongoing migration you saw, you indicated that the non-performers saw some pressure, when do you expect you’ll see the greatest pressure in charge-offs build, as this plays out? Are we looking more like the first half of next year is where we get the greatest upside pressure, in terms of loss content [Phonetic]?

William S. Demchak — Chairman, President & Chief Executive Officer

Again, it depends on, a lot of things, not the least of which is what fiscal stimulus they put out there, if any. But all else equal, it probably starts showing up in the second half of next year. You know, my own belief is, we’re probably going to see more pressure on COVID sensitive industries, real estate, earlier on and then consumers flow through, as we get into the back half of next year. But it all depends, the consumer number in my view is going to be highly dependent, on whether they provide more fiscal stimulus, which I think they absolutely need to do.

Robert Q. Reilly — Chief Financial Officer

Hey John, I would just add to that. I think it’s all speculation at this point, but mid 2021 feels right.

John Pancari — Evercore ISI — Analyst

Got it. That’s helpful. If I could just ask one more on the — just to ask the M&A question in a different way, Bill. If we get a Biden victory next month and the political environment, potentially could move more against big bank deals. How does that influence your appetite for a larger deal? Could you pursue smaller bank deals given that, or possibly just view buybacks more attractively? Just want to get your thoughts?

William S. Demchak — Chairman, President & Chief Executive Officer

All right. Look, you’re making a whole bunch of assumptions in there. The regulation, as I understand it as it’s written, then the laws. I understand, it’s written basically to the extent that we were to do a deal and not cause a systemic risk to the economy. Ultimately, it has to go through approval process be approved. They can delay it. They can hold hearings. They can do all sorts of different things, but basically it gets approved. So even in a change in administration, the assumption that somehow they either change laws — on this particular issue, even if they switch governors, the regulatory process is still the same. So I don’t know that that’s a real risk. I would say that, as we’ve always said, that the smaller deals aren’t off the table, but they require a fair amount of work, for less total return, in effect? Can we do a bunch of them? Yeah, we could do a bunch of them over time.

John Pancari — Evercore ISI — Analyst

Got it. Okay, that’s helpful, thank you.

Robert Q. Reilly — Chief Financial Officer

A lot of things to play out. I’d say, John, a lot of things to play out and — I mean, our thinking generally hasn’t changed.

John Pancari — Evercore ISI — Analyst

Right, right. Got it. All right, thank you.

Operator

Our next question comes from Ken Usdin with Jefferies. Please proceed.

Ken Usdin — Jefferies — Analyst

Hi, good morning, guys. Thanks for taking the question. Just a couple questions on NII. Nice to see that you guys are expecting NII to be stable sequentially and I am just wondering, if you can help us flush out like — what parts of the loan book are you still expecting to see come down and how is that being offset with other parts of the kind of earning asset statement in terms of being able to keep the NII stable? Thanks.

Robert Q. Reilly — Chief Financial Officer

Yeah, hey, Ken. Good morning. Yeah so when we take a look at the NII stable, there is obviously the earning asset side and the liability side. I think we’ve made a lot of — we’ve made up a lot of ground on the liability side. I think we can still do some more there. When we look at the fourth quarter in terms of loan balances, commercial, we still — we see being relatively flattish. And again, this all depends on what happens and consumer. We could see some uptick there, particularly if there is some stimulus. I think the other factor for us and for the industry in terms of the fourth quarter, will be the rate at which PPP loans are forgiven. We have an expectation built into our guidance, that about half of those — half of what we have will be forgiven, and that’s built into our guidance in the fourth quarter and then the other half in the first quarter of 2021. So that’s probably the biggest play, in terms of how NII and total loans.

William S. Demchak — Chairman, President & Chief Executive Officer

[Multiple Speakers] Rob, funding costs?

Robert Q. Reilly — Chief Financial Officer

I said that, yes, I said that, on the front end deal.

Ken Usdin — Jefferies — Analyst

Got it. And my follow-up…

Robert Q. Reilly — Chief Financial Officer

We got some more room there.

Ken Usdin — Jefferies — Analyst

Right. And my follow-up actually Rob, is on that PPP front. The C&I loan yields were actually stable, down 1 basis point. I was wondering if you can help us understand the contribution from PPP related interest income this quarter versus last? And again, how that plays through, in terms of the yields, and the forgiveness in fees and all that, it gets really tricky, right? Thanks.

Robert Q. Reilly — Chief Financial Officer

It does get a little tricky. I’d say a good number for us in terms of our guidance would be about $100 million in NII related to PPP forgiveness in the fourth quarter. So that will help you size it.

William S. Demchak — Chairman, President & Chief Executive Officer

But straight C&I loan spread I think were up…

Robert Q. Reilly — Chief Financial Officer

Spreads up, yields are down.

William S. Demchak — Chairman, President & Chief Executive Officer

Yields still grinding down, as we roll down in the lower LIBOR.

Robert Q. Reilly — Chief Financial Officer

That’s right. So about $100 million, Ken, on the PPP.

Ken Usdin — Jefferies — Analyst

Do you have just what that was in the third quarter versus the $100 million?

Robert Q. Reilly — Chief Financial Officer

Yeah, it was very — much smaller.

Ken Usdin — Jefferies — Analyst

Understood. Okay, thanks guys.

Robert Q. Reilly — Chief Financial Officer

Sure.

Operator

Our next question comes from Erika Najarian with Bank of America. Please proceed.

Erika Najarian — Bank of America Merrill Lynch — Analyst

Hi, good morning. Another firm that is going through this downturn solidly, JPMorgan, was essentially chomping at the bit, in terms of appetite for buybacks, once to Fed lifts its restrictions. And Bill, I’m wondering, given the amount of excess capital you’re sitting on, if the Fed does lifted its restrictions by the first quarter, second quarter of next year, how patient are you going to be, in terms of thinking about your inorganic opportunities, versus buying back your stock here at a narrower premium to tangible book than the stock usually enjoys?

William S. Demchak — Chairman, President & Chief Executive Officer

So, you should assume that we would otherwise be in the market. But you should also assume that we will be patient in looking at acquisitions through time. You know the environment, notwithstanding COVID, the environment for banks is going to be tough, going forward for all the obvious reasons. So we continue to think that there’s going to be a lot of opportunities out there. The other thing with respect to buybacks, I mean the only thing I think, you never know for certain, is trying to spend as much capital as we have, all in a big hurry, almost never works out and makes sense. So we will be in the market to a certain degree, but not enough that it changes our focus on the opportunities that we see in our expansion through acquisition.

Erika Najarian — Bank of America Merrill Lynch — Analyst

Got it.

Robert Q. Reilly — Chief Financial Officer

And it’s quite conceivable, we do both.

William S. Demchak — Chairman, President & Chief Executive Officer

Yeah.

Erika Najarian — Bank of America Merrill Lynch — Analyst

Yeah, got it. And as a follow-up question, this management team has always been ahead in terms of warning us about the excesses that were building up in the system pre-COVID. And I’m wondering, as we think about the charge-offs that were coming as a follow-up to John’s question, do you think that the current programs from the government and the Fed have effectively redefined cumulative credit losses lower for this cycle, or are we just kicking the realization down the road?

William S. Demchak — Chairman, President & Chief Executive Officer

Look, they’ve definitely helped. But with PPP effectively running out and with Cares Act having run out, we’re going to see an acceleration. We did a survey into small business and smaller commercial, and I think 60% of the respondents, if I’m remembering this right, basically said, if this continues for another year, they’ll be out of business.

Robert Q. Reilly — Chief Financial Officer

Alarming.

William S. Demchak — Chairman, President & Chief Executive Officer

Yeah. An incredible percentage. And a lot of those guys have gotten by, either through PPP or simply drawing on reserves, and operating at an unsustainable level and something’s got to give. My guess is, and that’s why we kind of talk about charge offs ramping up as we get into kind of the mid-back half of next year. My guess is, it’s still — there’s going to be a lot that’s going to show up.

Erika Najarian — Bank of America Merrill Lynch — Analyst

Got it. Thank you.

Robert Q. Reilly — Chief Financial Officer

And future fiscal support is a big variable.

William S. Demchak — Chairman, President & Chief Executive Officer

Yeah.

Operator

Our next question comes from Gerald Cassidy with RBC. Please proceed.

William S. Demchak — Chairman, President & Chief Executive Officer

Hi Gerald. Good morning Gerald.

Gerald Cassidy — RB Capital Markets — Analyst

Thank you. Bill, can you give us some thoughts? Obviously you guys pointed out that you have $60 billion up with the Federal Reserve, and clearly that’s weighing on your net interest margin like your peers, because of the influx in deposits. Can you kind of give us some color, if that level. If your customers just don’t start using their deposits, and is now heading into the second quarter of next year, is there anything you can do to shift that money out of there to get a higher yield, without taking too much interest rate risk?

William S. Demchak — Chairman, President & Chief Executive Officer

There is actually $70 billion there I think on a spot basis.

Gerald Cassidy — RB Capital Markets — Analyst

Okay.

William S. Demchak — Chairman, President & Chief Executive Officer

No, look, you’re seeing it, not just on the deposit side. But our utilization rate on credit is down 1.6% I think from the pre-COVID levels, the economy just isn’t running, right. So corporates are using less on their lines, they’re carrying less inventory. They’re doing less investment. They are holding more cash. I don’t know that that necessarily abates, particularly with the size of the Fed’s balance sheet, looking like it’s going to remain at least stable. In terms of redeployment, it’s hard to find something that you see in size that offers a good risk return.

We’re doing a lot of things at the margin, both on the lending side in some of the specialty finance areas, and even on the security side, that offer a lot of value, but they are not enough to dent that that amount of — that amount of cash.

Robert Q. Reilly — Chief Financial Officer

Substantially faster.

William S. Demchak — Chairman, President & Chief Executive Officer

Yeah, and trying to force that outcome, so we can just go out and buy $70 billion worth of 10 years at 70 basis points, and make a lot of money for some short period of time. It’s just — it’s a lousy risk-return trade off. So, we’ll be opportunistic. But my best guess is, we’re going to be sitting on a lot of cash for a pretty long period of time, as will the whole banking industry.

Gerald Cassidy — RB Capital Markets — Analyst

Very good. And then moving over to credit. Obviously, you guys have been through cycles before. Aside from what has caused this downcycle, we all know was quite unique. When you look at the commercial credits that you’ve been forced to write-down, or the commercial real estate that you have been forced to write down. Has there been many different or any differences between what you saw in the last cycle, or the 1990s cycle, in terms of write-downs, that has surprised you, or is it just very similar to the past downturns?

Bill Carcache — Wolfe Research — Analyst

No, it’s — I mean, you go all the way back. Most real estate problems historically came from projects. So office buildings that were built, that were never occupied. So, you can remember Boston, when you could see straight through downtown, because nobody was in it. That’s where the big losses historically have come from. This is an instance, where real estate is struggling, even though in theory, everything is leased up, right. But you have — if you think about retail, nobody is paying rent. So malls are getting killed and they were already on a decline.

Robert Q. Reilly — Chief Financial Officer

Hotels

William S. Demchak — Chairman, President & Chief Executive Officer

Hotels are obvious –a lot of things that, in a normal downturn, would have probably still cash flowed and been fine, are struggling from a cash flow basis. Interestingly in this one, versus the other ones that the loan-to-values for the asset is notwithstanding the lack of cash flow, still look pretty good. Yeah. So this is — real estate has come up with yet another way, to hurt the industry again.

Gerald Cassidy — RB Capital Markets — Analyst

Very good. Thank you for the color.

Operator

[Operator Instructions]. Our next question comes from Bill Carcache with Wolfe Research. Please proceed.

Bill Carcache — Wolfe Research — Analyst

Thanks. Good morning Bill and Rob.

Robert Q. Reilly — Chief Financial Officer

Hi, good morning.

Bill Carcache — Wolfe Research — Analyst

Bill, you said — in response to John Pancari’s earlier question that the consumer number will depend on whether there is more fiscal stimulus. Would you expect stimulus to be less beneficial on the commercial side?

William S. Demchak — Chairman, President & Chief Executive Officer

That is a fair question. It depends if they redo PPP in some form, that obviously helped out thousands and thousands and thousands of smaller business commercial borrowers and kept people employed. The consumer side, one of the things we’ve watched and have talked about before is, the extra $600 that came in from the CARES Act for unemployment benefits, allowed consumers to substantially build cash balances and pay down debt. Now that that has gone away, you’re basically seeing the balance excess they had in their DDA accounts decline, which is why I’m worried about consumers. But no look if they did – if they redid PPP, it would substantially affect the amount of small business commercial charge-offs we’ve had. Small business, I think you guys already know this, the small business commercial people who have less access to other forms of capital, are really getting hurt in this environment.

Bill Carcache — Wolfe Research — Analyst

Got it. That’s really helpful. I guess following up on your CRE comments, it seems like there may be greater willingness among banks to work with borrowers who are experiencing financial difficulties. But maybe there is a bit less patience for example with, some say CMBS conduits, setup by private equity companies, and then that raises the question of whether the likelihood of foreclosure is higher outside of the banking system? Do you think that’s the case? And if so, do you think it could result in growing pressure on commercial real estate prices? And then maybe sort of just to cap off like, how — can you share your thoughts on how an effective vaccine, by say mid 2021 would impact your view of the ultimate loss content within CRE? There’s a lot there, but just what are your thoughts on that?

William S. Demchak — Chairman, President & Chief Executive Officer

So at the margin, banks have always been more willing to work with borrowers than a contractual CMBS relationship, where the Midland were, as a fiduciary working on behalf of the various credit tranches. Having said that, we’ve actually been surprised by the turnover that we’ve seen in our special servicing portfolio in Midland. So we have actually seen a couple of things; one, that BPs buyers, being willing to work with borrowers, probably in a way they haven’t in past environments. And two, to the extent that they say no, take the asset. There is a lot of capital on the sidelines from traditional BP’s buyers, who are effectively writing it off in one fund and rebuying it on another one. So the turnover has been pretty high. They are — a bit to my surprise, there is a pretty active secondary market for real estate properties at the moment. Probably doesn’t carry through to all types. I imagine there is not a good bid for strip malls, but for other types of properties, there is…

Robert Q. Reilly — Chief Financial Officer

Well to your earlier point, the nature of this pandemic crises, and these loan-to-values.

William S. Demchak — Chairman, President & Chief Executive Officer

Yes.

Robert Q. Reilly — Chief Financial Officer

Sort of support that.

William S. Demchak — Chairman, President & Chief Executive Officer

Yes. The COVID vaccine — it has zero predictions, assumptions on when, if, how and whether it works and all the above. So I’ll just pass on that.

Robert Q. Reilly — Chief Financial Officer

We know what you know on that.

Bill Carcache — Wolfe Research — Analyst

That’s fair. Let me squeeze in one last one. Bill, can you share your thoughts around the direct neobanks, sort of the chimes and others out there, that operate exclusively online, without traditional branch networks in this sort of post-COVID environment? How you see their presence impacting the competitive environment over, say the next three to five years? And is there any potential benefit to deploying some of the BlackRock proceeds on a neobank, or are those sort of capabilities, things that you think you can build on your own?

William S. Demchak — Chairman, President & Chief Executive Officer

I’m trying to contain myself. I wish we had the opportunity to basically not have to make any money and grow customers by giving stuff away and running our back office on a third-party bank system, that’s written in COBOL from 50 years ago. But we don’t have that luxury. The tech capability of these guys, there is nothing that they have that we don’t have. Nothing that they have, that we can’t produce, if we wanted to have. Our platforms are much more modern than their platforms. They’re all running on third-party banks, which is a whole another issue that drives me insane. And they basically do free accounts, and no overdraft and simple simplification, they find very low balance customers, and I just don’t think long-term that model works. I think that the delivery, multiple delivery channel model, that includes real care centers and customer service, and we see that through our NPS scores, through ATM delivery networks, through branch delivery networks and through top-line digital is going to win.

Robert Q. Reilly — Chief Financial Officer

And VR technology.

William S. Demchak — Chairman, President & Chief Executive Officer

Yes. And without that — look it’s kind of cool, and they’re growing lots of customers. But like a lot of things, they’re are not making money at it and banking is a business that you ultimately need to make money at. Sorry, there’s my rant.

Bill Carcache — Wolfe Research — Analyst

That’s great.

Robert Q. Reilly — Chief Financial Officer

It’s a good question, good question.

Bill Carcache — Wolfe Research — Analyst

Appreciate it. Thank you.

Operator

Our next question comes from Mike Mayo with Wells Fargo. Please proceed.

Mike Mayo — Wells Fargo — Analyst

Hi.

William S. Demchak — Chairman, President & Chief Executive Officer

Hi Mike.

Robert Q. Reilly — Chief Financial Officer

Good morning Mike.

Mike Mayo — Wells Fargo — Analyst

So Bill, you certainly have been ahead in expressing concern about the way this COVID situation plays out? How do you feel just in the last three months? On the one hand you do see the fixed income market securities which have come in, I know you know that market? You have low lying utilizations, which means probably that firms aren’t quite ready to go bankrupt. You see your charge-off rate being exceptionally low? On the other hand, who knows, if we have the second wave, if it’s a W or how that plays out. So just what’s your temperature on the outlook over the next couple of years? And do you have seller remorse for selling BlackRock, or do you say, hey you know what, I feel even better today?

William S. Demchak — Chairman, President & Chief Executive Officer

Yeah. So a couple of things going into this. We look at the corporate side, notwithstanding utilization being down. Corporate America has levered four times today. We went into the crisis levered three times, which we all thought was high. None of that has changed. The one thing that gives me a little bit of comfort, certainly relative to my initial concerns on this environment, as I think we’ve defined the downside, Mike. So when we went into this, we really had no idea of what in fact, the downside could be. We didn’t know mortality rates. There were no real treatments for COVID. There was no vaccine. So all of the things — we didn’t know how to define the downside. So I think the best thing I can tell you is, I think we’ve defined the downside, is that we at this point, muddled along pretty much where we are in the economy.

And I think that plays out through time, and I think losses grind out through time. As we said, we think at this point, we’re reserved for that environment. Do I have seller’s remorse? I don’t, and not surprisingly, I’ve gotten that question. I think there is a lot of things that I regret in life with hindsight, and all else equal, I wish we were selling BlackRock today at $650 as opposed to when we sold them at the start of this thing. But I think with the information we have in our hands, it was the right decision, I hope that people and I know a number of our shareholders who bought BlackRock when we sold it, I hope you bought it, and rode that stock up. That was always your choice. We were always going to be left with this basic notion, that eventually we were going to have a tax burden that looks like it’s going to come to fruition.

Eventually, we were going to have regulatory pressure, eventually — not eventually, we already had a concentrated asset that was outside of our control, and I’d much rather deploy that capital into something that is within our control. So, I wouldn’t change the decision based on what we knew at the time and what our strategic direction is, and what I think the opportunity set is going forward. I still remain — I’m trying to find the right word here, but confident, that having capital in this coming environment is going to be incredibly valuable, and open up a lot of inorganic opportunities for us.

Robert Q. Reilly — Chief Financial Officer

Which — just to your point is, there is a lot of the game left to play.

William S. Demchak — Chairman, President & Chief Executive Officer

Yeah. Anybody who thought we’d have the S&P where it is today when we sold BlackRock, give me a call because I’ll invest some money with you. I just – that was, if I made a mistake and I’ve made many in my life, that was probably my one mistake.

Bryan Gill — Director of Investor Relations

Do we have any other questions?

Operator

There are no further questions at this time.

William S. Demchak — Chairman, President & Chief Executive Officer

All right well, thank you everybody. And we’ll see you again in the fourth quarter.

Robert Q. Reilly — Chief Financial Officer

Yes. Thank you.

Operator

[Operator Closing Remarks].