Well, good morning and 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 January 18th, 2022, and PNC undertakes no obligation to update them. Now I'd like to turn the call over to Bill.
Thanks, Bryan, and good morning, everybody. As you've seen, we had a strong Q4 and full year for 2021. We successfully completed the conversion of BBVA USA early in the Q4 and have been running hard as one bank since then. The transaction continues to meet or exceed our deal projections, and Rob will give you some of those details. I'm especially pleased by our ability to announce, close, and convert a transaction of this size inside of 11 months. Challenges notwithstanding, we had the talent, the technology, and the strategy to accomplish this and to combine our organizations in a way that will provide growth opportunities for years to come.
The acquisition positions us with a coast-to-coast presence, and along with our continued organic growth strategies, including our recent expansion into Las Vegas, we now have a presence in all of the top 30 U.S. markets. We're excited about the opportunity this presents, and we are confident in our ability to generate growth by executing on our Main Street relationship-based model. That said, we recognize that we have a lot of work to do in building out the new and expansion markets, which will be our primary focus in 2022. BBVA obviously impacted our results for the full year, and Rob will walk you through the details. Excluding BBVA, we generated record revenue highlighted by strong non-interest income with broad-based contributions across our commercial and consumer businesses. We also maintained outstanding credit quality and a very strong capital position.
While we continue to opportunistically deploy some of our excess cash into higher yielding securities throughout the year, we remain well positioned with substantial excess liquidity to capitalize on a rising interest rate environment. Our reported results for the Q4 reflected the impact of almost $440 million of BBVA integration costs. Excluding these, we generated nearly $1.6 billion of net income and solid returns. Importantly, excluding the impact of PPP loan forgiveness, we saw decent underlying loan growth trends and some uptick in utilization rates, which is very encouraging, as Rob will discuss in more detail. Critical to our long-term success has been the quality and stability of our talent, and we pride ourselves of being an employer of choice.
Given the recent dynamics of the substantially increased competition for talent, in part due to the Great Resignation, we experienced greater wage pressure during the Q4, and I expect that to persist into the coming year. Naturally, we'll look to offset these increases with our continuous improvement efforts, which include driving further automation and rethinking core processes. We continue to invest in technology to enhance our capabilities in an increasingly digital world. Customers are looking to their financial providers to offer innovative tools that help them manage their money in ways that are faster, smarter, and more convenient.
Whether that be expanded use cases for Zelle, where transaction volumes are up 50%, or Low Cash Mode. For example, by providing account transparency and control, Low Cash Mode has substantially reduced customer overdraft fees and related complaints. I'll close by thanking our employees for their hard work and steadfast commitment to our customers and communities. Because of our employees, we had a remarkable year and are well positioned to serve all of our stakeholders in 2022 and beyond. With that, I'll turn it over to Rob for a closer look at our results, and then we'll take your questions.
Thanks, Bill, and good morning, everyone. Our balance sheet is on slide 5 and is presented on an average basis. Overall, year-over-year balance sheet growth was primarily driven by the acquisition of BBVA USA. Loans grew 18%, investment securities increased 49%, and deposits grew 26%. Looking at the linked quarter changes, loans for the Q4 were $289 billion, a decline of $2.4 billion or 1%. Excluding $4.7 billion of PPP forgiveness activity, loans grew $2.3 billion or 1%. I'll cover the drivers in more detail over the next few slides. Investment securities increased $7 billion or 6% as we maintained higher purchasing activity throughout much of the quarter. Accordingly, cash balances at the Federal Reserve declined by $5 billion.
On the liability side, deposit balances declined $1.6 billion as higher commercial and consumer deposits were offset by run-off deposits related to the strategic repricing of certain BBVA USA portfolios during the Q3, and that negatively impacted Q4 average balances. However, on a spot basis, total deposits as of December 31st increased $8 billion or 2%, reflecting the continued strong liquidity positions of our customers. At year-end, our tangible book value was $94.11 per common share, and our CET1 ratio was estimated to be 10.2%, which are both substantially above the pro forma levels we anticipated when we announced the deal. During the quarter, we returned approximately $1.1 billion of capital to shareholders via common dividends of $500 million and share repurchases of $600 million.
Given our strong capital ratios, we continue to be well positioned with significant capital flexibility going forward. Slide six shows our average loans and deposits in more detail. In the Q4, loans declined $2.4 billion as growth in commercial and consumer loans was more than offset by a decline in PPP loans of $4.7 billion. Excluding the impact of PPP, commercial loans grew by $2.2 billion or 1%, driven by growth in corporate banking and asset-based lending. During the Q4, we continued to see a slow and steady increase in utilization rates within our corporate and institutional banking business and along with that expanded pipelines. Taken together, these factors are driving our expectations for higher loan growth in 2022.
Consumer loans increased modestly linked quarter as higher residential real estate balances were mostly offset by lower home equity and auto loans. Finally, as I mentioned, PPP loans continued to decline due to forgiveness activity. As of December 31st, $3.4 billion of PPP loans remained on our balance sheet. Average deposits of $453 billion declined by $1.6 billion linked quarter for the reasons I previously mentioned. Overall, our rate paid on interest-bearing deposits remained stable at 4 basis points. Slide seven details the change in our average securities and Federal Reserve balances. As rates increased at the end of the Q3 and throughout the Q4, we continued to opportunistically add securities to our portfolio, primarily U.S. Treasuries.
As a result, securities balances averaged $128 billion in the Q4, an increase of $7.2 billion or 6% compared to the Q3 of 2021, and now represent 26% of interest earning assets. We continue to have substantial excess liquidity with Fed cash balances averaging $75 billion during the Q4, which we believe positions us well for a rising rate environment. As you can see on slide eight, Q4 2021 reported EPS was $2.86, which included pre-tax integration costs of $438 million. Excluding integration costs, adjusted EPS was $3.68. As expected, during the Q4, we incurred essentially half of our total anticipated deal integration costs, which reduced revenue by $47 million and increased expenses by $391 million.
Since the announcement of the acquisition, we've now incurred approximately 95% of the total $980 million expected integration costs, including $120 million of write-offs for capitalized items. Excluding the impact of integration costs, linked quarter revenue was down $31 million or 1%. Expenses increased $48 million or 1%, and pre-tax, pre-provision earnings declined $79 million or 4%. The Q4 provision recapture was $327 million, reflecting continued improvements in the economic environment. Net income, excluding pre-tax integration costs of $438 million, was $1.6 billion in the Q4. Now let's discuss the key drivers of this performance in more detail. Turning to slide nine, these charts illustrate our diversified business mix.
Total revenue for the Q4 of $5.1 billion decreased $70 million linked quarter, reflecting lower non-interest income. Net interest income of $2.9 billion was up slightly, primarily a result of higher securities balances. Net interest margin was stable at 2.27%. As I mentioned, integration costs reduced non-interest income by $47 million, which included $19 million of lease exit costs, $17 million of treasury management fee waivers, and $11 million of overdraft waivers. Q4 fee income, excluding integration costs, was $1.9 billion and declined $39 million or 2% linked quarter. Looking at the detail, asset management fees increased $3 million or 1%, primarily related to higher average equity markets. Consumer services grew $12 million or 2% due to higher brokerage and credit card revenue.
Corporate service fees increased $14 million or 2%, reflecting higher loan syndications activity as well as continued elevated corporate advisory activity. Residential mortgage non-interest income declined $46 million, driven by lower MSR valuation adjustments and loan sales revenue. Service charges on deposits decreased $22 million, primarily a result of converting BBVA USA customers to PNC's product and overdraft pricing structure. Other non-interest income excluding integration costs was stable linked quarter as the impact of a $1 million positive Visa derivative fair value adjustment in the Q4 compared to a negative adjustment of $169 million in the Q3 was offset by lower private equity revenue. Turning to slide 10, our Q4 expenses were up by $204 million or 6% linked quarter.
The growth was primarily driven by a $156 million increase in integration expenses. Excluding the impact of integration expenses of $391 million, non-interest expense increased $48 million or 1%. The growth was largely within personnel costs driven by higher employee benefits expense, an increase in our minimum hourly rate of pay, as well as elevated incentive compensation related to strong fee activity. We had a 2021 goal of $300 million in cost savings through our continuous improvement program, and we successfully completed actions to achieve that goal.
Looking forward to 2022, our annual CIP goal will once again be $300 million. Importantly, as of year-end 2021, we completed all of the actions that will drive $900 million of savings related to the BBVA USA acquisition, which we expect to be fully realized in 2022 and is reflected in our expense guidance that I will provide in a few minutes. Our credit metrics are presented on slide 11. Non-performing loans of $2.5 billion decreased $48 million or 2% compared to September 30th, and continue to represent less than 1% of total loans. Total delinquencies of $2 billion on December 31st increased $516 million or 35%.
Obviously, this was a large increase, for it was primarily driven by BBVA USA conversion-related administrative and operational delays, which we expect will largely be resolved within the H1 of 2022. Net charge-offs for loans and leases were $124 million, an increase of $43 million linked quarter. Commercial net charge-offs declined $5 million, offset by an increase of $48 million in consumer. Inside of the higher consumer net charge-offs, auto grew $28 million and other consumer increased $13 million, reflecting conversion-related impacts as well as seasonality. Our annualized net charge-offs to average loans continues to be low and in the Q4 was 17 basis points. During the Q4, our allowance for credit losses declined $471 million, reflecting continued improvements in the economic environment.
At quarter end, our reserves were $5.5 billion, representing 1.92% of loans. In summary, PNC reported a strong Q4, which concluded a successful 2021, and we're well positioned for 2022 as we continue to realize the potential of our coast-to-coast franchise. In regard to our view of the overall economy, we expect strong growth over the course of 2022, resulting in 3.5% GDP growth. We also expect four 25 basis point increases in the Fed funds rate in 2022, beginning in May, followed by additional increases in June, September, and December. Looking ahead, our full year guidance for 2022 includes the impact of 12 months of BBVA USA results compared to only 7 months in 2021.
Taking that into account, our outlook for full year 2022 compared to 2021 results is as follows. We expect average loan growth of approximately 10% and 5% on a spot basis. We expect total revenue growth to be 8%-10%. We expect expenses, excluding integration expense, to be up 4%-6%. To be clear here, this includes 5 additional months of BBVA USA operating expenses, which equates to a full year increase of approximately $500 million. We expect our effective tax rate to be approximately 18%.
Based on this guidance, we expect we will generate solid positive operating leverage in 2022. Looking ahead at the Q1 of 2022 compared to the recent Q4 2021 results, we expect average loan balances, excluding PPP, to be up approximately 1%-2%. We expect NII to be down approximately 1%-2%, reflecting 2 fewer days in the quarter and a decline of approximately $75 million in PPP related interest income.
We expect fee income to be down 4%-6% due to seasonally lower Q1 client activity as well as elevated Q4 fees in certain categories. We expect other non-interest income to be between $375 million and $425 million, excluding integration costs as well as net securities and Visa activity. Taking our guidance for all components of revenue into consideration, we expect total revenue to decline approximately 3%-5%. We expect total non-interest expense, excluding integration costs, to be down approximately 4%-6%. During the quarter, we expect to incur $30 million of integration expense. Finally, we expect Q1 net charge-offs to be between $100 million and $150 million. With that, Bill and I are ready to take your questions.
Thank you. We'll now begin the question and answer session. If you would like to register for a question, press the one followed by the four on your touchtone phone. You'll hear a three-tone prompt to acknowledge your request. If your question has been answered and you'd like to withdraw your registration, press the one followed by the three. As a reminder, this conference is being recorded. Thank you. Our first question comes from the line of Dave George with Baird. Please proceed with your question.
Hey, guys. Good morning. I had a question about capital and capital allocation. You obviously finished the year at 10.2 CET1, which is ahead of kind of your initial targets when you announced BBVA, and your stock is at 2.3, 2.4 of tangible book, and I know you've talked about taking the cash dividend payout up. Just kind of curious, Bill, how you're thinking about capital allocation in the new year, and then I've got one follow-up.
Well, you kind of answered your own question because we're consistent. You know, all else equal in this environment, you know, first focus on the potential of loan growth and using it the good way, a strong bias towards dividend, but we'll still be in the market to repurchase shares. I think you'll, you know, probably see us accelerate some of the things we're doing on the smaller side in terms of Product activity, you know, bolt-ons into TM and so forth. None of that, by the way, those acquisitions won't add up to much, but they've become an important part of just adding core capabilities as we go into a digitized world.
Okay. Thanks for that. A question on your guidance, in particular NII. I know you mentioned you've got 4 hikes in there. I assume you're just using the forward curve and the securities as a percentage of earning assets up to 26%. I know, Bill, you've talked about being 25%-30%. Do you expect continued liquidity deployment? Just kind of curious how much liquidity deployment is embedded in that number. Thanks.
Our economist expects 4 hikes. I actually think it's gonna be more aggressive than that, but I'm an outlier in our committee.
You're only one vote.
Yeah. Our forecast is, you know, at this point, pretty much on the forward curve at this point. I think the plan, Rob. I don't know if you want to talk to the plan, you know, we're gonna gradually add duration throughout the year. There wasn't any magic to it, and we didn't really build in Rob's guidance some assumption that we would go at it even more aggressively, you know, if rates reacted-
In the range that we have.
Yeah.
That 25%-30% range, Dave, is still the range that's in our guidance.
Yeah.
Okay. Thanks, folks. Appreciate it.
Sure.
Sure.
Thank you. Up next, we now have a question from the line of John Pancari with Evercore. Please proceed with your question.
Morning, guys.
Hey, morning, John.
The revenue guide for the full year of 8%-10%, I just wanted to see if you could help unpack that a little bit in terms of how you view the NII trajectory for the year, what type of growth we think is reasonable versus the trajectory on the fee income side of things, given some of the dynamics you flagged. Thanks.
Yeah. Sure, John. Full revenue, full-year revenue up 8%-10%. Break down those components, net interest income up low teens%. That does factor in the rate increases that we spoke about in the opening comments. Then on the fees, mid-single digits% year-over-year. Those two together gets you to the 8%-10%.
Got it. All right. Thanks. That's helpful. On the loan growth front, just given the 10% end-of-period loan growth expectation certainly, you know, implies an acceleration that you indicated that you're seeing. Could you give us a little more color on the growth trends that you think is achievable on the commercial side versus consumer? Maybe what would, you know, what are you expecting to be the biggest drivers of that acceleration as you look at the loan book?
Yeah. Sure. For the full year guide, it's 10% average, but probably a better indicator is the spot just because of the acquisition dynamics on the average number. Spot up from period end 5%. You know, we see a continuation of what we started to see in the Q4, which was some expanded utilization in the commercial book, picking up through 2022. A little bit less on the consumer side. You know, consumer customers are still pretty flush with cash. Loan demand there, certainly in the H1 of 2022, we expect to be softer than the commercial side.
Got it. That helps. Thanks. Yeah, I meant to say average on the growth.
Yeah.
All right. Appreciate the color. Thanks.
You bet.
Thank you. Now we have a question from the line of Erika Najarian with UBS. Please proceed with your question.
Hi. Good morning.
Morning, Erika.
I wanted to follow up on the questions on what's embedded in the NII guide. Rob, you answered the question on, you know, what you were assuming for liquidity deployment. You know, what are you assuming, in your NII guide about the trajectory of deposit beta? What do you think will actually happen?
Well, you know, in terms of our guidance, Erika, what we apply in terms of beta is what we've seen in past cycles, which generally speaking will be a lag on the front end. You know, my expectation of what we built into the guidance is that we will see some beta increase, but not until the end of 2022, and it'll probably be more of a factor in 2023, just because of the levels of liquidity and deposits that we have.
Got it. Okay. If I'm comparing it to your previous deposit data, in terms of, let's say, in 2015 to 2016 to 2017 actually, the first 100 basis points, your guidance assumes a slower ramp than that.
That's right. That's exactly right.
Got it. The second follow-up question is for Bill. You know, one of your peers, Jamie, had you know obviously given you know a guidance for higher expenses in 2022, pointing to accelerated investment spend. As we think about this 4%-6%, you know you know is it obviously some of this is the BBVA baseline. How did you front load some of the investment spend in 2022? In other words, as your investors start thinking about PNC's profitability in a more in a normalized rising rate environment, is 4%-6% an appropriate guidepost for future growth in expenses going past 2022?
No. I mean, to unpack the guide for next year, you know, I think the PNC legacy expenses are up, you know, maybe 1%.
The non-BBVA USA.
Yeah.
Yeah. All right.
Yeah. You know, did we pre-pack investment? You know, we've said all along that we've had a steady state and actually a fairly high level of investment in our core business. Then you'll remember in the guidance for BBVA that in the $900 million of cost saves, that was a netted number against investments we are going to make to build out those markets. Inside of everything you're seeing there actually has a lot of investment already built into it.
Of course, our continuous improvement of $300 million offsets investments, and that's something that we've been doing for a number of years.
Yeah.
Got it.
I also think we've had. It's worth noting we've had some debate internally on the continuous improvement number and can it be larger? Because I think we all see opportunities in the operating environment as we move forward with BBVA. The challenge is continuous improvement is something you know you can do, whereas right now we're still in the process of we know it's there, we just don't know where yet. You know, once we kind of lock it down and can track it shows up in continuous improvement.
Yeah. That won't stop us from going after it.
Exactly.
Got it. Thank you.
Thank you. We now have a question from the line of Betsy Graseck with Morgan Stanley. Please go ahead.
Hi. Good morning.
Hey, Betsy.
Okay, two questions. One, just on how we're thinking about the reinvestment in the securities portfolio as we think about the NII guide as well. Maybe you could give us a little sense of the you know pace that you're thinking about reinvesting. I mean, what's baked into your NII guide? Because as we know, the forward curve does suggest we're gonna be hitting two pretty soon. Do you wait for that, or do you start to leg in even at current rates?
We will, you know, leg in throughout the course. Remember, what's in our guide on securities doesn't dent our liquidity profile. What we have in our guide here is kind of steady deployment working towards, you know, the 25%-30%. You know, we'll add balances. It doesn't even dent the potential of what we could do with liquidity.
With the Fed cash balances.
Yeah.
Right.
Yeah.
You're still looking for that.
It's kind of a baseline budget, boring. The rates do this, we do the following. You know, if rates go beyond or even if we get to a place where we think, you know, rates have probably gone where they need to go, not as high as I think they'll go, you know, we could increase that, but that's not contemplated in the forecast that we have right now.
'Cause am I right in thinking your target range of securities to earning assets like 25%-30%, is that fair?
Yes.
That's right.
Okay. To follow up.
Remember inside of that mix, right? That's a big portfolio of securities. The big difference in the yield coming out of buying short-dated Treasuries, which has been kind of our recent trade versus going further out the curve and going back towards mortgages once you assume the extension risk is taken out. Massive difference in yields. It's some of it's notional of securities, some of it's what you're actually buying, and both of those will be driven by the speed and outlook for rates over time.
Right. What I'm hearing is baseline in the expectation but upside, as we approach, you know, kind of rates reflecting your view of full extension risk on the RMBS side.
Yeah, no. If my individual view is right, there's a lot of upside. The forecast that we've given you and what's kind of in our plan is, you know, steady state, follow the forwards and leg in over time.
Okay.
In simpler terms, the yields on the securities portfolio can change a lot.
Yeah.
Right. I got it. Okay. Separately, just thinking a little bit longer term, Bill, on the investments that you're doing. Could you just give us a little bit of color as to what are you looking for in these bolt-on acquisitions to enhance your digitization? What pieces of your digitization are you looking to improve? Also, is there a need for reinvestment in branches in the new geographies where, you know, maybe you would've had a slightly different, you know, skew to the branch mix? Just trying to understand a little more detail there, thanks.
Two very different questions. As you've seen, we've done a number of small things, Tempus probably being the most interesting one, where we bring in certain payment capabilities that lead to other opportunities. We see more and more of those. By the way, we're not unique at that. A lot of banks are playing in the space. They're not terribly expensive, but oftentimes you get modules of technology that can be sort of bought into and then scaled across your broader platforms. That's it.
I just think you're gonna see more of that as we continue to compete in a, you know, digital space for both the consumer and the corporate. You know, on the branch side, we have plans to, you know, as we always do, kind of build out selectively in the markets where we're under-penetrated. But at the same time, you'll see us continue our practice of consolidating the thicker markets. No real change there, and all that's in the numbers we've given you.
Okay. Thank you.
Yep.
Thank you. We now have a question from the line of Gerard Cassidy with RBC. Please go ahead with your question.
Hi, Rob. Hi, Bill.
Morning, Gerard.
Morning.
Can you guys give us a little color? I'm trying to figure out what we're gonna be talking about in the Q4 earnings call for 2022 in January of 2023. I think credit might be a subject that receives more attention then. Can you share with us your underwriting standards, how you compare them today to, let's say, at right at the start of the pandemic, and then comparing them to 2019, how they look compared to today?
Well, you got to separate something. Our credit box per se, right? The type of clients we lend to, the leverage they can have, all the things you would otherwise measure, we really don't change that over time. You know, having said that, of course, even inside of that box, companies are doing you know better or they are doing you know trending more poorly. I think we're gonna go into a period of time here as we go towards the end of the year where all else equal, there will be pressure on credit, not because we changed our underwriting standards, but because the upgrade downgrade ratio will change. You know, Rob and I were talking before the call.
If you actually look at our reserve ratio, particularly when you adjust it for credit cards, I can't think of a period of time where you're kind of going into, you know, rising rate environment, which is gonna help us, loan growth, which is gonna help us, and feeling, you know, healthy reserves when you compare where we are versus, I'll just call it that, versus the rest of the industry in terms of raw percentages against balance. You know our book through legacy performance.
So-
Resulting from the unique dynamics of the pandemic. It's an unusual setup.
Yeah. Very good. As a follow-up, you have some decent loan growth, Rob, that you pointed to for 2022.
Yep.
Within the commercial growth area, C&I, not real estate, but C&I.
Right.
Can you share with us or give us some more color? Are they coming from the newer markets that you guys have entered over the last five or six years, or are you seeing early traction with the BBVA customers? Maybe if you could dissect where some of that might come from in 2022.
Well, the new money out, right? So the new clients and new money that we are committing, whether it's drawn or not, has accelerated for the last bunch of months, and a lot of that is related to the newer markets we're in, including some big wins coming out of the BBVA markets. The utilization part, right? So the money's out, now is somebody borrowing more under what line is broad-based. If you just think about how many clients we have, you know, it's kind of distributed across everything.
Yeah. The other thing that I'd add to that, Gerard, is that the pipelines in our commercial book are strong, and in the new markets, they're up, you know, percentage-wise, significantly.
Very good. Thank you.
Thank you. We now have a question from the line of Mike Mayo with Wells Fargo Securities. Please go ahead.
Hi.
Go ahead.
Phil, you led off saying that BBVA has exceeded expectations. I don't think I heard any changes to, you know, expense savings or synergies or anything like that. Even if you can't quantify it, can you talk about what's going better or worse than expected?
Well, look, better than expected on the deal terms is largely-
The assumptions.
Yeah. It is largely the economy, right? The assumptions, you know, where we marked credit and looked at credit, turned out to be wildly conservative. You know, that's what we saw at that point. The you know, better than expected, if I look at it, I think, the teams that we've been able to deploy in the market, some of the talent that BBVA had, some of the talent we were able to hire, the amount of call volume that we're having in the new markets, with new products and old clients and with new products and people with new clients, all sort of wildly outpacing what we were able to do with RBC, you know, in our newer markets in the past, and then just wins, showing up with clients, early on.
That's kind of all on the business momentum side and continues to give us comfort on our ability to build out the markets. The credit is a lot better than we thought. You know, the expense guide, you know, we go out there and we say we take $900 million out, including investment, and we stick to that. To Rob's point, and you guys know this of us over time, it doesn't mean that we're gonna stop looking once we hit our expense guide. I guess I'd just leave it there.
Well, where you're leaving it, I guess, was really my question. Why not increase your expense savings target or quantify that? Is that because you're reinvesting it, or you're just being conservative, or you're just waiting longer?
I think the easiest way to answer that is, you know, when I was talking about continuous improvement a little while ago, Mike, we kind of know there's stuff there through some metrics and some thought process today. But until we can, you know, put an action plan together, quantify it, know how we're gonna measure it, I can't. You know, I'm not just gonna throw an expense guidance in there that probably is embedded, but I'm not sure.
I just think, this is Rob, Mike, it's premature. You know, we worked hard in 2021 to get that $900 million in savings-
Yeah.
into that $1.7 billion run rate. We gotta get going, and this is the getting going part.
I know part of your. You're in all top 30 U.S. markets now, and I know you want to expand. You did guide for, you said, solid positive operating leverage for the years. I get that. On the other hand, isn't it getting a lot more expensive to hire people to help with that expansion in the new markets?
It is, but we've largely hired them all. You need to understand, when we closed and then converted, we had basically the teams built out in all of these markets, Mike. So they're in our run rate.
I mean, how many people did you hire? I mean, 'cause these are a lot of new markets and stuff, right?
Yeah, a lot of people.
Hey, if the extension of your question is, do we expect to see wage pressure in 2022? We do.
Yeah.
that is built into our expense guides.
Okay. Fair enough. All right. Thank you.
Sure.
Thank you. As a reminder, to register for a question, press the one followed by the four. Up next, we have a question from the line of Bill Carcache with Wolfe Research. Please proceed with your question.
Thanks. Good morning, Bill and Rob. Following up on your deposit beta commentary, how are you thinking about the risk that balance sheet runoff, you know, the potential impact it could have in this cycle versus the last one, given that it's expected to, you know, play a bit bigger role versus when we exited the last tightening cycle?
It's a great question, and that's obviously gonna impact it. You know, in the extreme, if they shrink their balance sheet dramatically, it obviously would impact betas and make them higher. The offset to that, though, is you got to remember, with loan growth, you actually create deposits, right? If loan growth does pick up, bizarrely as the Fed is dropping their balance sheet, which isn't unlikely, that loan growth actually generates deposits if you think about just the leverage on the capital you hold for a loan, and the money goes everywhere else. I'm not sure I've iterated my way through exactly how that's gonna play out other than it feels like the combination of those two things should leave us extremely liquid, deposit-wise, you know, for the next several years.
Which is our base expectation.
Yeah.
We've got to keep an eye on it.
Yeah.
Yeah. Yeah. That makes sense. I guess, you know, I guess continuing on that thought process, Bill, do you feel PNC is perhaps a little bit less exposed than some of the larger banks that are primary dealers and more directly involved in the creation of those, you know, deposits under the QE process?
I don't think the system works that way. You know, if the Fed shrinks its balance sheet, you know, you will likely see corporate cash. I don't know that you can think through it that way. I think it transmits through the banking system, and I think it hits everybody, you know, largely the same as a function of their corporate and consumer mix. Corporates behave like corporates, and consumers behave like consumers.
Got it. Then lastly, I think you touched on this, but just to put a finer point on it, if the pipelines and strong loan growth trends that you're describing persist, I guess maybe if you could just comment on your willingness to, you know, or the extent to which that influences your willingness to take your securities portfolio as high as 30%. You know, I guess, you know, do you think your liquidity is sufficient to be able to do both, you know, fund that stronger loan growth and take it 30 or higher? Or yeah. I was just wondering how does that interaction work?
We have plenty of liquidity to do both.
Yep. Got it. Thank you for taking my questions.
Thank you.
Thank you. Thank you. We now have a question from the line of Ken Usdin with Jefferies. Please go ahead.
Hey, thanks. Good morning, guys. Just wanted to follow up. Rob, I think you had mentioned when you broke down the revenue guidance that you're looking at mid fees in the mid-single digits, and obviously that also includes the BBVA stub.
Yeah. That's right.
Last year you had a ridiculously great year for corporate services especially. I'm just wondering, underneath the surface, what do you see as being the underlying growth drivers, outside of the BBVA rollover?
Yeah, I would just say if you're taking a look at the full year, Ken, just going through the categories, you know, asset management, we would expect to continue to increase in that mid-single digit range. Consumer, higher than that, in part, you know, due to the addition of the BBVA franchise. But you hit it on corporate services. We had such elevated levels in 2021. Our expectations for 2022 are down a bit. Residential mortgage may be up a little bit and then service charges on deposits down, as we get the full year effect of reduced overdraft fees that we expect from Low Cash Mode. You put all that together, that's how you get to mid-single digits.
Okay. Got it. Same thing in terms of just how you're thinking about that other category. Is it still within the kind of zone you're thinking about for the Q1? Is that how you think about it for the full year?
That is. Yep.
Okay. One little cleanup just on securities yields, Rob. Last quarter, you had that negative impact from the BBVA-
We did.
Portfolio mark. Then this quarter, it was flat-ish even, I would think, with the absence of that. Can you kind of just walk us through what was the impact in the Q4, if any, and are you at the point where you're seeing better reinvestment yields?
Yeah, we're starting to. I, you know, I think investment yields was the story. On the premium amortization issue of the Q3, which was elevated, it went down in the Q4, but it's still elevated over what I would consider normal levels. You know, that worked against us a little bit as well.
Okay. Understood. All right. Thanks, Rob.
Sure.
Thank you. We now have a question from the line of John McDonald with Autonomous Research. Please go ahead, sir.
Hey, guys. One more on the expenses. It's pretty impressive, the expense guide for 2022. If I look at it relative to kind of the Q4 annualized, you know, it implies a-
Right
A quarterly run rate that's about 5% lower, Rob. I guess just kind of unpacking that, is the Q4 this year a little high because of, you know, the such strong capital markets revenues? And then, you know, how are you beating inflation and still getting costs to be 5% lower year-over-year when other banks are having a lot of inflationary pressures? That'd be helpful.
Yeah. No, you hit it. It's definitely on the wage side in the Q4. It just goes back, as we go into 2022, to what we were saying earlier in terms of how we laid out the year. We have the cost saves locked in for the BBVA side. We have investments on the non-BBVA side that are largely offset by our continuous improvement numbers. That's how we put it all together, and that's, you know, the plan.
Hey, John.
Okay.
Just 'cause I know all of our employees are listening. You know, this plan assumes that we are paying people competitively in a competitive-
Yeah.
market for talented people.
Yep.
You know, we just need to find the dollars elsewhere to be able to do that.
That's right.
Yeah.
Okay. Got it. Then one industry type question for you guys. You have a lot of reserves relative to peers, mix adjusted on every basis. But we've never seen, like, CECL working in a loan growth environment. Just kind of your guys' thoughts as loan growth starts to pick up for the industry. Could we start to see some growth math where you need to add provisions and add to reserves just for growth? Or is the 5% growth, like, contemplated in your reserves today? Or, you know, as loan growth picks up, do you have, you know, growth-driven provisioning?
Yeah. I can answer that one, John. That's complex. In some instances, I don't know if we know because we haven't run CECL through an environment like that.
Mm-hmm.
Academically speaking, you know, we will get to the point where we will need to grow reserves in concert with bigger balance sheets, bigger loan balances. You know, we're still in this place where we're running high in terms of percentage terms. You know, there's gonna be some offsetting factors that's my guess in 2022.
Yeah. Okay. Fair enough. Thanks.
Sure.
Thank you. I'll now turn the conference back to Mr. Demchak for your concluding remarks. Thank you, sir.
All right. No concluding remarks. I know you guys are busy. Thank you for dialing in. We got a lot of calls today. Look forward to talking to you in the Q1. Thanks.
Thank you.
Thank you. That does conclude the conference call for today. We thank you all for your participation and ask that you please disconnect your line. Thank you once again. Have a great day, everyone.