PNC Financial Services Group Inc. (NYSE: PNC) Q4 2020 earnings call dated Jan. 15, 2021
Corporate Participants:
Bryan Gill — Director of Investor Relations
William S. Demchak — Chairman, President and Chief Executive Officer
Robert Q. Reilly — Executive Vice President and Chief Financial Officer
Analysts:
Betsy Graseck — Morgan Stanley — Analyst
Scott Siefers — Piper Sandler — Analyst
Ken Usdin — Jefferies — Analyst
Mike Mayo — Wells Fargo Securities, LLC — Analyst
Bill Carcache — Wolfe Research — Analyst
Gerard Cassidy — RBC Capital Markets — Analyst
Presentation:
Operator
Good morning, my name is Kathy and I will be your conference operator today. At this time, I would like to welcome everybody 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] As a reminder, this call is being recorded. I would now turn the call over to Director of Investor Relations, Mr. Bryan Gill. Sir, please go ahead.
Bryan Gill — Director of Investor Relations
Well, thank you, Kathy 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. The 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 January 15th, 2021 and PNC undertakes no obligation to update them. Now, I’d like to turn the call over to Bill.
William S. Demchak — Chairman, President and Chief Executive Officer
Thanks, Bryan. Good morning everybody. As you’ve seen this morning, we had a solid fourth quarter and full year 2020 amidst a challenging operating environment. Over the course of the year, we grew loans and deposits, delivered positive operating leverage, and executed well on all of our strategic priorities. Our balance sheet finished the year in a very strong position, record levels of capital and liquidity and significant credit reserves. In addition, we grew tangible book value per share of 17% year-over-year. While the economy improved modestly this quarter and we’re encouraged by the roll out of the vaccines, we continue to operate amidst the pandemic, a low rate environment, and weak loan demand. And before Rob walks you through the full details of our results, I wanted to share a few high-level observations.
First, the investments we’ve made over the years in talent and technology have allowed us to navigate this pandemic, the related economic crisis, and the widespread social unrest while supporting our stakeholders and coming out stronger as a company. In addition to taking the steps to help keep our employees and customers safe, we provided billions of dollars of credit to our clients. We granted $14.8 billion in loan modifications and registered more than 70,000 loans worth approximately $13 billion through the federal government’s first round of the Paycheck Protection Program. And our team is actively working with our clients right now through the second round of PPP. In response to the widespread social unrest and as part of our efforts to help address systemic racism, we committed $1 billion to advance social justice and economic empowerment among Black Americans and low and moderate income communities.
And as you are aware, in the second quarter of 2020, we sold our passive stake — passive equity stake in BlackRock. In November, announced our plan to redeploy those proceeds to acquire BBVA USA. Since that announcement, we spent a lot of time with BBVA’s employees and have become even more excited about our combination given their talent in high growth markets and the similarities in how we serve clients, manage risk, and support our communities. This transaction will create a leading national franchise, significantly accelerate our growth, and enhance our profitability. And finally, I’d like to close by thanking our employees for their steadfast commitment to our customers through a very challenging year. And with that, I’ll turn it over to Rob for a closer look at our results and then we’ll take your questions.
Robert Q. Reilly — Executive Vice President and Chief Financial Officer
Great, thanks, Bill and good morning everyone. As you’ve seen, we’ve reported fourth quarter net income of $1.5 billion or $3.26 per diluted common share resulting in full year 2020 net income from continuing operations of $3 billion or $6.36 per diluted common share. Our balance sheet is on Slide 4 and is presented on an average basis. During the quarter, lower utilization and soft loan demand drove a $7 billion or 3% decline in loans and low rates pressured investment securities, which declined $5 billion or 5%. Our cash balances at the Federal Reserve grew to $76 billion in the fourth quarter. Our elevated liquidity position is a result of continued deposit growth as well as lower loan and securities balances.
On the liability side, deposit balances averaged $359 billion and were up $9 billion or 3% linked quarter. Borrowed funds decreased $5 billion compared to the third quarter as we used our strong liquidity position to continue to reduce debt. Our tangible book value was $97.43 per common share as of December 31st, an increase of 2% linked quarter and 17% year-over-year. And as of December 31st, 2020, our CET1 ratio was estimated to be 12.1%.
In regard to capital return, our Board recently approved a quarterly cash dividend on common stock of $1.15 per share or $500 million and consistent with the fed mandate, we had no share repurchases during the fourth quarter. Our expectations for share repurchases in 2021 remains the same as we stated this past December, that is we’ll refrain from share repurchases excluding employee benefit-related purchases during the period leading up to our pending BBVA USA transaction close date, expected to be mid-summer 2021. Following the close, all else being equal and subject to CCAR 2021, we’d expect to resume share repurchases in the second half of the year.
Slide 5 shows our average loans and deposits in more detail. Average loan balances of $246 billion in the fourth quarter were down $7.3 billion or 3% compared to the third quarter. This decline included a $5.3 billion decrease in commercial loan balances, which was broad based reflecting lower loan utilization and softer loan production, partially offset by higher multi-family warehouse lending. In our C&IB segment, utilization rates are currently running at historic lows and approximately 2.5% below pre-pandemic levels as customers continue to maintain strong liquidity positions, evidenced by high levels of deposits. Consumer loans declined $2 billion and balances were lower across all consumer categories. Compared to the same period a year ago, total average loans grew 3% or $7 billion.
As the slide shows, the yield on our loan balances is 3.35%, a 3 basis point increase compared to the third quarter, reflecting higher PPP loan forgiveness and a shift in consumer loan mix. And we continue to reduce the rate paid on our interest bearing deposits to 8 basis points, a 4 basis point decline linked quarter. Average deposit balances of $359 billion, increased $9 billion or 3% as a result of enhanced liquidity of our customers as well as seasonal growth. Year-over-year, deposits increased $72 billion or 25% with strong growth in both interest bearing and non-interest bearing deposits. As a result, our loan to deposit ratio has declined to a low of 66% at the end of the fourth quarter compared to 83% in the same period in 2019.
As you can see on Slide 6, full year 2020 revenue was $16.9 billion, up slightly compared with 2019 driven by higher fee income. Expenses declined $277 million or 3% and remain well controlled. Our full year provision was $3.2 billion compared with $773 million [Phonetic] in 2019 reflecting the economic effects of the pandemic. Our effective tax rate from continuing operations was 12.4% for the full year 2020.
Now let’s discuss the key drivers of this performance in more detail. Turning to Slide 7, you can see our total revenue has grown consistently over the past several years driven by our broad based business mix. For the fourth quarter, net interest income of $2.4 billion was down $60 million or 2% from the third quarter, primarily due to lower loan and security balances and lower securities yields. Full year 2020 net interest income of $9.9 billion was down slightly by $19 million year-over-year as higher earning asset balances and lower rates paid on deposits were essentially offset by lower yields on earning assets. The fourth quarter net interest margin of 2.32% declined 7 basis points linked quarter. Notably, growth in fed cash balances represented a 9 basis point decline, which accounts for more than the total linked quarter decrease to net interest margin.
Both full year and linked quarter net interest margin reflected the impact of substantially higher fed cash balances. To size that impact, fourth quarter fed balances averaged $76 billion, exceeding our LCR requirement by approximately $55 billion. This level of excess liquidity represented 35 basis points of compression to our reported fourth quarter NIM. Fourth quarter non-interest income declined $13 million or 1% compared with the third quarter. Fee income of $1.5 billion, increased $151 million or 11% linked quarter primarily driven by growth in corporate service fees of $171 million or 36% due to higher merger and acquisition advisory activity.
Partially offsetting this growth was a decline in residential mortgage non-interest income of $38 million, reflecting a negative RMSR valuation adjustment and lower servicing fees. Other non-interest income of $293 million, decreased $164 million linked quarter. The decline was primarily driven by a negative $173 million Visa derivative adjustment related to the extension of the expected timing of the litigation resolution.
Importantly, we continue to execute on our strategies to grow our fee businesses across the franchise and those efforts helped to drive record fee income of $5.6 billion in 2020, an increase of $190 million or 4% compared to 2019. This growth was driven by higher corporate service fees primarily related to increased activity in our advisory businesses and treasury management as well as stronger residential mortgage non-interest income.
Partially offsetting this growth was a decline in both consumer services and service charges on deposits due to the impacts of the pandemic particularly in the second quarter as well as our ongoing efforts to simplify products and reduce transaction fees for our customers. Other non-interest income declined $109 million year-over-year or 8% reflecting lower private equity revenue and elevated 2019 gains on asset sales related to our asset management business partially offset by higher net securities gains.
Turning to Slide 8, our full year 2020 non-interest expenses were $10.3 billion, a decline of $277 million or 3% compared with 2019 as we responded to the crisis and we managed expenses down. Taking a look at the fourth quarter, expenses grew by $177 million or 7% linked quarter, primarily driven by an increase in personnel expense of $111 million due to higher incentive compensation associated with increased business activity. And in addition, other expenses were up $55 million due to seasonality and equipment impairments.
Importantly, we generated 3% positive operating leverage in 2020 and as a result, our efficiency ratio for the full year was 61% improving from 63% last year. While the current environment presents revenue challenges, we remain deliberate and disciplined around our expense management. We had 2020 goal of $300 million and cost savings through our continuous improvement program and we successfully completed actions to achieve that goal. Looking forward to 2021, our annual CIP goal will once again be $300 million.
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 in the COVID high impact categories declined in the fourth quarter to $17.2 billion as of December 31st compared to $18.3 billion at the end of the third quarter, largely driven by commercial and industrial pay downs. Within the C&I identified industries, non-performing loans remain relatively low representing less than 1% of loans outstanding and charge-offs have not been material.
That being said, we do expect to see further stress in these industries. The lower half of the slide presents the highly impacted commercial real estate and related loan categories. These industries are experiencing the most pressure and downgrades continue to occur. Our two largest charge-offs in the fourth quarter were related to loans in this category. Overall, for all of these COVID high impact loans, we remain well reserved and continue to carefully monitor and manage these exposures.
Moving to Slide 10, this is an update to our customer hardship relief. We continue to see a reduction in the number of consumers and small businesses requesting hardship assistance and importantly, loans under modification that present credit risk to PNC continue to decline. At the end of the year, we had $900 million of consumer and small business balances in some form of payment assistance with credit risk to PNC, down from $1.7 billion at September 30th.
On the commercial side, we’re also continuing to selectively grant loan modifications based on each individual borrower situation. Within our C&IB segment, less than $150 million of loan balances were in deferral as of December 31st. When combining consumer and commercial customers, loans receiving assistance and posing credit risk to PNC are approximately $1 billion, representing less than 0.5% [Phonetic] of total loans outstanding and as I previously mentioned, are appropriately reserved.
Our credit metrics are presented on Slide 11. Total delinquencies of $1.4 billion at December 31st increased $125 million or 10%. Consumer loan delinquencies increased $72 million primarily due to government insured mortgages that recently exited modification status and commercial loan delinquencies grew by $53 million. Non-performing loans increased $201 million or 10% compared to September 30th. This growth was almost entirely driven by $193 million increase in consumer loans and within that, $189 million related to residential real estate primarily as a result of borrowers exiting forbearance and deferring payments to the end of the term.
Net charge-offs for loans and leases were $229 million, up $74 million from the third quarter. Commercial net charge-offs increased by $71 million to $109 million driven by specific commercial real estate related borrowers and included certain portfolio management activities. Consumer net charge-offs were relatively stable at $120 million. Annualized net charge-offs to total loans in the fourth quarter was 37 basis points, an increase of only 2 basis points compared to the same period last year. As you can see, the allowance for credit losses to loans was 2.46% at quarter-end, down slightly from 2.58% 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 throughout the year. In the fourth quarter, reserves declined by $495 million. Economic and qualitative factors represented $398 million of the decline as improvement in our economic outlook was partially offset by increased reserves within our CRE portfolio. Correspondingly, our allowance for loan losses on our total commercial real estate portfolio have increased to 3.06% as of December 31st. The remaining $97 million of the decline in reserves was related to portfolio changes primarily driven by lower loan balances. Our year-end reserves of $5.9 billion have increased materially year-over-year and as I mentioned before, now represent 2.46% of loans.
Turning to Slide 13, I wanted to spend a few minutes reviewing our recently announced acquisition of BBVA USA with a focus on updates since the call in November. We expect this transaction to add significant value to our shareholders and we’re excited about the power of the combined franchises. We remain confident in our ability to achieve the financial objectives we laid out at the time we announced the deal, including the $900 million of expense saves through enhanced operational efficiencies. Through time, we do expect to generate additional meaningful revenue synergies, which will make the economics of the transaction even more compelling.
Since the announcement, we’ve continued to make steady progress towards completing the transaction. Notably, we’ve established cross-functional business teams to support the integration, submitted required regulatory applications, and confirmed the mapping of the technology migration. There’s a lot of hard work ahead, but based on our due diligence as well as the progress we’ve made to-date working alongside the BBVA USA team, we’re confident in our ability to execute and deliver on our objectives. This transaction will significantly accelerate our expansion efforts into attractive growth markets, is financially compelling, and leverages our technology and acquisition expertise.
In summary, PNC reported a strong fourth quarter and a successful 2020 and we’re well positioned for 2021 and beyond. During 2021, naturally, the biggest variable impacting the economy will be the duration of this pandemic and along with that, the efficacy of the government support plans as well as the vaccine distribution. Our current expectations are for real GDP to return to pre-recession levels by the end of the year and the fed funds rate to remain near zero throughout the duration of the year.
Looking ahead at the first quarter of 2021 compared to the fourth quarter of 2020, we expect total average loans to be stable to down modestly. Inside of that, PPP loans are expected to be up approximately $2 billion. We expect NII to be down approximately 1%, which includes the impact of two fewer days in the first quarter. Excluding the impact of PPP, net interest income is expected to decline approximately 3%. We expect total non-interest income to be down mid-single digits. Within that, other non-interest income is expected to be between $275 million and $325 million. We expect total non-interest expense to be down in the mid-single digit range. In regard to net charge-offs, we expect first quarter levels to be between $200 million and $250 million.
Looking at the full year 2021 guidance, we thought it would be helpful to provide our expectation for PNC’s standalone performance excluding any one-time costs related to the BBVA USA transaction. For the full year 2021 compared to the full year 2020 results, we expect average loan growth to be down in the low-single digit range. The significant increase in loan utilization during the beginning of the pandemic elevated average loan balances in 2020 as you know, which created a difficult backdrop for the full year average loan growth comparison.
However, we do expect to have loan growth throughout 2021 resulting in low-single digit spot growth for the year. We expect total revenue to be stable. We expect expenses to be stable. This represents — I’m sorry — I back that up, we expect revenues to be stable and this represents a current net interest income forecast of down modestly, but we acknowledge potential deposit growth and further rate steepening in excess of our current forecast, it is plausible and that’s relative to revenues. We expect our expenses to be stable and we expect our effective tax rate to be approximately 17%.
Regarding the pending acquisition of BBVA USA, as I mentioned, we recently filed the required applications and we’re still targeting a mid-year close, subject to regulatory approval. BBVA will not be releasing their results until later this month. Therefore, we will not be providing updates to the previously disclosed financial metrics and estimates related to BBVA USA at this time. However, in an effort to provide some context for the transaction in relation to our full year guidance, assuming we close mid-year and excluding integration costs, we expect the acquisition to be approximately $600 million accretive to PNC’s 2021 pre-provision net revenue and all of that is consistent with our original assumptions. And with that, Bill and I are ready to take your questions.
Bryan Gill — Director of Investor Relations
Okay, Kathy, could you please open up the line for questions.
Questions and Answers:
Operator
Thank you. [Operator Instructions] And our first question comes from line of Betsy Graseck with Morgan Stanley, please proceed.
Betsy Graseck — Morgan Stanley — Analyst
Hi, thanks and good morning.
William S. Demchak — Chairman, President and Chief Executive Officer
Hi, good morning, Betsy.
Betsy Graseck — Morgan Stanley — Analyst
Had a question on the outlook here for revenue full year are stable and obviously, that’s a standalone basis, right? I just wanted to understand how you get there and what’s going on given the fact that the guide for NII in 1Q is down and so could you talk through what you’re doing and how much of that is loan growth and yeah, thanks.
Robert Q. Reilly — Executive Vice President and Chief Financial Officer
Yeah, sure, I’m glad you asked that question because I included that in the forecast in terms of our guidance for the full year that we expect total revenues to be stable and inside that our current net interest income forecast is down modestly, but we do acknowledge potential for deposit growth and further rate steepening in excess of our current forecast. So there is potential upside there.
William S. Demchak — Chairman, President and Chief Executive Officer
And it’s offset by higher fees.
Robert Q. Reilly — Executive Vice President and Chief Financial Officer
In terms of total revenue — yeah, in terms of that. That’s right, that’s right. In regard to the NII, it’s tough. If you take a look in terms of the rate backdrop, we had headwinds all during 2020 and we expect that to continue through 2021. We will put more money to work on the securities balances and we do expect loan growth and there may be some room in terms on the liability side to reduce some of those costs. So that’s how we get to the NII component.
William S. Demchak — Chairman, President and Chief Executive Officer
Betsy, one of the internal debates that we’re having, so the forecast stays as the forecast stays, but one of the internal debates that there is no winner on is this basic notion that as the Fed continues the size of their balance sheet and grows it and we have loan growth towards the back end of 2021, that drives deposit growth, right? It’s a closed system and as that happens PNC benefits disproportionately at least has and I suspect will given some constraints on the largest banks on deposit growth, which in turn gives us NII. So we kind of say fine, call NII flat, but there is a macro variable in here that will hit the industry as a function of loan growth and what the Fed does, it’s going to drive this opportunity.
Betsy Graseck — Morgan Stanley — Analyst
Yeah, I get that, okay. Maybe you could speak a little bit to the loan growth and where that’s going to come from. That’s probably the biggest single debate point that we’re having with investors right now, you know, what will drive it to come back up?
William S. Demchak — Chairman, President and Chief Executive Officer
So Rob can jump in here, but a chunk of it simply comes back because utilizations are so low. So as the economy comes back [Speech Overlap] — yeah, as the economy comes back on, you just see utilization in the basic revolvers we have, but the other issue is the delevering of the consumer balances ought to pick up once the vaccine is widely distributed and people kind of go back to more normalized behavior. That remains to be seen, but I think those are the two biggest opportunity sets.
Robert Q. Reilly — Executive Vice President and Chief Financial Officer
And some consumer on the back end of the year. That’s [Speech Overlap] normalized.
Betsy Graseck — Morgan Stanley — Analyst
Okay, thank you.
Operator
And our next question comes from line of Scott Siefers with Piper Sandler, please proceed.
Scott Siefers — Piper Sandler — Analyst
Good morning, guys, thanks for taking the questions.
Robert Q. Reilly — Executive Vice President and Chief Financial Officer
Sure.
Scott Siefers — Piper Sandler — Analyst
Hey, Rob, in your response to the last question, you alluded to the possibility of potentially investing a little of the securities portfolio. I feel like you guys just have such a mass of money just sitting at the fed. So we’ve had this back up in higher rates, how much in your mind more attractive is it to potentially invest some of that stuff that’s just sort of sitting there earning virtually nothing at this point?
William S. Demchak — Chairman, President and Chief Executive Officer
Well, it’s more attractive than it was a couple of months ago. You would have seen right that the outright security balances declined just as we got into the low, low rates and the prepays. We have been or aggressively investing money off [Phonetic] recent, we’ll continue to do that. We have a lot to go as you point out. We don’t do it all at once and you should assume it will accelerate into a steepening curve and moderate into a flattening curve as you would expect, but we have an awful lot of money to put to work and then that issue compounds again if we get the deposit growth that at least I expect is going to happen across the industry given the macro factors.
Robert Q. Reilly — Executive Vice President and Chief Financial Officer
And that’s that piece that we talk about that could be potentially above our current forecast.
Scott Siefers — Piper Sandler — Analyst
Okay, perfect. Thank you. And then the second question, I know it’s not necessarily huge for me, but I think a lot of investors are trying to figure out what is this new round of PPP going to look like just sort of qualitatively, how are you guys thinking about your own participation and to the degree that any benefit is baked into the guidance for 2021, how does that end up looking quantitatively as well?
Robert Q. Reilly — Executive Vice President and Chief Financial Officer
Sure, I can answer that. So, particularly as it relates to the first quarter, so, we will participate in the second wave. We anticipate that the total balances, because the program is smaller, will be less than the first wave, but to just give you numbers, we finished 2020 with average balances under the first PPP program of $12.5 billion. We expect $2 billion of forgiveness in the first quarter. So that first wave would be about $10.5 billion and then for the second wave, we expect to originate approximately $4 billion in the first quarter. So that would take our total PPP in the first quarter to about $14.5 billion. So that’s how I sized it and that’s how I think it. Beyond that, we’ll have to see because the levels of forgiveness and how that goes is fluid.
Scott Siefers — Piper Sandler — Analyst
Okay, perfect. All right, thank you very much.
Robert Q. Reilly — Executive Vice President and Chief Financial Officer
Sure.
Operator
[Operator Instructions] And our next question comes from line of Ken Usdin with Jefferies, please proceed.
Ken Usdin — Jefferies — Analyst
Hey, thanks, good morning guys. If I can follow-up that last question, Rob, can you help us understand, I know there’s so many moving parts with part one and part two, you know, you had said, I think you had less forgiveness in the fourth quarter than you expected. Can you help us understand just like what the PPP benefit to NII was in ’20 and then how much are you expecting in ’21 or how much that informs that flat to slightly down NII?
Robert Q. Reilly — Executive Vice President and Chief Financial Officer
Yeah, I think it’s just probably best, Ken, to look at the 2021 first quarter and give you a number. Of that $14.5 billion that we expect to have in total PPP loans, the NII will be approximately $140 million. And inside that, $30 million — and these are approximate numbers, approximately $30 million represents the forgiveness of that $2 billion that we expect from program one.
Ken Usdin — Jefferies — Analyst
Got it and then there’ll be some moving parts with regards to like run rating versus forgiveness as we go through the year as well.
Robert Q. Reilly — Executive Vice President and Chief Financial Officer
Yeah, that’s right and we’ll keep you posted, but that’s my best thinking for the first quarter.
Ken Usdin — Jefferies — Analyst
Okay, great. And the second question is following on your BBVA second half PPNR comments, Rob. Just wondering, is that 600 [Phonetic] also inclusive of the initial saves you’re expecting this year or is that just like a what they are bringing over kind of on day one, because I think you did say you were expecting some saves to happen in the back half.
Robert Q. Reilly — Executive Vice President and Chief Financial Officer
Yeah, it’s that, Ken. There are some saves in the back half that are included in that number.
Ken Usdin — Jefferies — Analyst
Okay and is there anything changed with regards to your expected trajectory of the timing around when you think the saves would come in?
Robert Q. Reilly — Executive Vice President and Chief Financial Officer
No, no our original assumptions are holding.
Ken Usdin — Jefferies — Analyst
Okay, got it. Great, thanks very much, Rob.
Robert Q. Reilly — Executive Vice President and Chief Financial Officer
Sure.
Operator
[Operator Instructions] And I have a follow-up question from the line of Scott Siefers from Piper Sandler, please go ahead.
Scott Siefers — Piper Sandler — Analyst
Hey, guys, thank you for taking this one. I guess one of the questions I’ve gotten about you guys over the course of the last couple of months since the BBVA transaction was announced is just given the somewhat different credit profiles between legacy PNC and the BBVA franchise, how much of that loan book that you’ll carryover do you anticipate keeping and will there be some sort of a run off portfolio that sort of impairs what would eventually be a higher growth trajectory from that franchise or are we going to be sort of steady state and all the kind of stuff will get rationalized in the upfront mark?
William S. Demchak — Chairman, President and Chief Executive Officer
There is a lot embedded in that question, but there is parts of BBVA’s balance sheet that — and its more sectors, it’s not necessarily quote credit risk, but things we choose to focus on versus what we don’t. So there’s parts of their balance sheet that will run off over time. At the same time, because of — many specialties this presence will have in the market, we expect that we will grow balances in the new franchise. So you’re going to see both. Our base assumptions assume a run down, I don’t know when the trough is, Rob, but a run down in balance sheet for a short period of time before we sort of offset it with new growth.
Robert Q. Reilly — Executive Vice President and Chief Financial Officer
You know, at the beginning, 2022 and 2023. So there is some revenue reconfiguration along those lines, but of course, we’ll keep you up to speed. We don’t own the bank yet, so that will be something that once we close, we’ll be able to give you more color.
Scott Siefers — Piper Sandler — Analyst
Yeah, good. No, that makes sense and I appreciate sort of the early color there. So thank you.
Operator
And our next question comes from the line of Mike Mayo with Wells Fargo Security, please proceed.
Mike Mayo — Wells Fargo Securities, LLC — Analyst
Hi, you had positive operating leverage last year, your efficiency improved. Fourth quarter, it didn’t look as good though. Was there anything that’s unusual and also your guidance for next year is for flat operating leverage when I know you guys pride yourself in having positive operating leverage on a core basis. Thanks.
Robert Q. Reilly — Executive Vice President and Chief Financial Officer
Want me to answer that or —
William S. Demchak — Chairman, President and Chief Executive Officer
Hit him with the fourth quarter [Phonetic] —
Robert Q. Reilly — Executive Vice President and Chief Financial Officer
Well, the fourth quarter, those — most of those expenses that jumped as you saw were incentive compensation for much, much higher activity, particularly in our Harris Williams unit. So those are good expenses — in Harris Williams and activity goes up, that’s a good thing, but there is obviously expenses associated with that and then there are some seasonal things that we expect, but you’re right, for the full year, our expense management was successful, full positive operating leverage for the year, which was our objective and we did that. When you look at 2021, we’re going to fight for it. We’re not folding on that. We’ve got revenues stable and expenses stable. So it’s going to require tight expense management, but you know, we’re going to battle for it.
Mike Mayo — Wells Fargo Securities, LLC — Analyst
Okay and as far as BBVA, your loan loss reserve assumptions, might they have improved since — you had the Pfizer vaccine out, you didn’t have Moderna or J&J’s. Wouldn’t the outlook be a little bit better the same reasons you had reserve releases when you have a better outlook for BBVA. Thanks.
William S. Demchak — Chairman, President and Chief Executive Officer
We didn’t even actually have Pfizer out when those were put together. So, in theory, you’re right, Mike.
Robert Q. Reilly — Executive Vice President and Chief Financial Officer
Well, again, we don’t own the bank. They’re going to release their results.
William S. Demchak — Chairman, President and Chief Executive Officer
These are in our assumptions.
Robert Q. Reilly — Executive Vice President and Chief Financial Officer
But as in our assumptions, yeah, in our assumptions, all else being equal, yes, they’d be less [Phonetic].
Mike Mayo — Wells Fargo Securities, LLC — Analyst
Okay, I guess we’d just have to wait for BBVA’s results to come out and then we can hopefully get an update from you. Okay, thanks a lot.
Robert Q. Reilly — Executive Vice President and Chief Financial Officer
Sure.
Operator
[Operator Instructions] And our next question comes from line of Bill Carcache with Wolfe Research, please proceed.
Bill Carcache — Wolfe Research — Analyst
Thank you. Good morning Bill and Rob, I wanted to follow-up on your comments about investing more of the securities portfolio into curve steepening. Some of the dynamics around QE have led agency MBS spreads over treasuries to turn negative and you guys along with most other banks have a substantial portion of your securities portfolios invested in agency MBS. So it seems like the benefits of a steeper curve are being tempered somewhat by those dynamics. Can you give a little bit of color on where you are seeing the opportunity to invest on the securities side and then maybe on the lending side, if you could remind us what percentage of the loan portfolio is anchored to the short versus the long end of the interest rate complex and just frame how we think about the benefit to PNC of a steeper curve on the lending side as well?
William S. Demchak — Chairman, President and Chief Executive Officer
You’re way too far into the weeds, but you should assume that for now in terms of where current spreads against the mix of the portfolio we’d otherwise normally be buying, our reinvestment yield is about 80 basis points. How we get there I’m not going to go into detail —
Robert Q. Reilly — Executive Vice President and Chief Financial Officer
The front book.
William S. Demchak — Chairman, President and Chief Executive Officer
— but that’s — well, not our front book, that’s on average what we would be purchasing today. The fixed and floating component and the one and three-month LIBOR component of our loans, I don’t remember those numbers off the top.
Robert Q. Reilly — Executive Vice President and Chief Financial Officer
Yeah, I mean we’re short on the commercial loans, they tend to be three-year type commitments and on the consumer, it’s floating.
William S. Demchak — Chairman, President and Chief Executive Officer
The other thing that makes us somewhat unique is our entire debt stack is floating as well and you see that in our liability costs. That’s one of the reason our wholesale funding cost has dropped last time I looked, much more materially than most of our competitors.
Bill Carcache — Wolfe Research — Analyst
Got it and separately on expenses, some investors have expressed a little bit of concern that after so many years of you guys having the benefit of being able to reinvest a strong growth from BlackRock into the business, that the loss of that strong growth is going to make it more challenging to continue to invest at the same pace without hurting the efficiency ratio. Rob, I heard your CIP target sounds like they’re unchanged for the year, but I was hoping you guys could just broadly speak to that notion.
William S. Demchak — Chairman, President and Chief Executive Officer
I don’t fully understand it. I mean —
Robert Q. Reilly — Executive Vice President and Chief Financial Officer
It’s more driven by CIP rather than [Speech Overlap].
William S. Demchak — Chairman, President and Chief Executive Officer
I mean our investment capability obviously comes from just the firm growing and then recycling expenses, which we’ll continue to do. BlackRock’s growth through time in terms of revenue to us was helpful. Of course, as we go forward here, we’re — and assuming we close which is good assumption that BBVA acquisition, we have a whole new set of expenses in effect to recycle that gives rise to this investment —
Robert Q. Reilly — Executive Vice President and Chief Financial Officer
— and revenue streams. [Speech Overlap]. So it won’t slow down our investment —
William S. Demchak — Chairman, President and Chief Executive Officer
— at all, yeah.
Bill Carcache — Wolfe Research — Analyst
Okay, thanks, Bill. Thanks guys, that’s helpful. If I could squeeze one more in on credit. So, I had a question on how to think about the excess capital as it relates to Slide 12. So in the absence of the BBVA deal, one could make the case that, that 1.54% reserve rate on day one is the level that we should revert to once we get past COVID and so any level of reserves above that could be viewed as excess, but can you speak to the reasonableness of that thought process and then maybe frame for us how to think about the onboarding of BBVA on to this slide and what it would mean for your reserve rate and excess capital?
William S. Demchak — Chairman, President and Chief Executive Officer
I don’t think — look, our reserve as of today and presumably their reserve as of today is reflective of best expectations of the forward economy here. So they’ll release their results and you’ll be able to look at that and you now see ours. I don’t know how we —
Robert Q. Reilly — Executive Vice President and Chief Financial Officer
So there’s two parts to that question. One was the BBVA USA overlay and that’s to come when their results come out. The second question just is sort of what is the normal level of reserves under CECL. You know, 1.54% was our day one after CECL level. Were those normal times? Maybe and if so, that’s the normal level.
Bill Carcache — Wolfe Research — Analyst
Understood, thank you guys for taking my questions, appreciate it.
Robert Q. Reilly — Executive Vice President and Chief Financial Officer
Sure.
Operator
[Operator Instructions] And our next question comes from the line of Gerard Cassidy with RBC, please go ahead.
Gerard Cassidy — RBC Capital Markets — Analyst
Hi, Rob. Hi, Bill.
William S. Demchak — Chairman, President and Chief Executive Officer
Hey, Gerard.
Gerard Cassidy — RBC Capital Markets — Analyst
Can you guys share with us and I apologize if you addressed this already, I may have missed it. Obviously, prior to the BBVA transaction, you guys were growing organically in the commercial footprint around the country. Is that strategy still underway or has that been put on pause as you integrate the BBVA transaction?
Robert Q. Reilly — Executive Vice President and Chief Financial Officer
No, not on pause, Gerard. So, naturally in cases where the BBVA USA footprint was where we were going to go, that’s part of that transaction, but everything else holds in terms of opening offices both consumer and commercial throughout the country.
William S. Demchak — Chairman, President and Chief Executive Officer
The other thing Gerard is and going back to kind of the prior question on investments, we’re actually ramping up investments in those markets prior to close. So we’re not going to wait to close before we think about the totality of the products and services we want in a particular market. We’re going to have it ideally the day we close and then convert.
Gerard Cassidy — RBC Capital Markets — Analyst
Very good. You guys give very good detail on your non-performing assets and I noticed in Table 11 that you had some nice rise and return to performing status of non-accrual loans. Can you share with us any color on what success you had in bringing them back into performing status?
Robert Q. Reilly — Executive Vice President and Chief Financial Officer
I think just in general, Gerard, it’s just, some of these companies have adapted particularly on the commercial side, have adapted to the new economy and are actually performing well. Simple as that.
Gerard Cassidy — RBC Capital Markets — Analyst
Got it, okay, I appreciate it, Rob. Thank you.
Robert Q. Reilly — Executive Vice President and Chief Financial Officer
Sure.
Operator
There are no other questions at this time. I will turn the call back over to you, Mr. Gill.
Bryan Gill — Director of Investor Relations
Okay, well thank you all for your support of PNC and we look forward to working with you in 2021. Thank you.
William S. Demchak — Chairman, President and Chief Executive Officer
Thanks everybody.
Robert Q. Reilly — Executive Vice President and Chief Financial Officer
Thank you.
Operator
[Operator Closing Remarks]