Oh, well, good morning. 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 are all available on our corporate website, pnc.com, under Investor Relations. These statements speak only as of January 18, 2023, and PNC undertakes no obligation to update them. Now I'd like to turn the call over to Bill.
Thanks, Bryan. Good morning, everybody. 2022 was a successful year for our company, and our strong performance during the year reflects the power of our Main Street bank model and our coast-to-coast franchise. For the full year, we reported $6.1 billion in net income or $13.85 per share. Inside of that, we grew loans and generated record revenue during a rapidly rising rate environment, while at the same time, we controlled expenses, resulting in substantial positive operating leverage for the full year 2022. Turning to our results for the Fourth Quarter, we generated $1.5 billion of net income or $3.47 per share. Growth in both net interest income and fee income contributed to a 4% increase in revenue.
Our expenses were up 6% this quarter, primarily due to increased compensation from elevated business activity, particularly in our advisory businesses. Rob's going to provide more detail on our fourth quarter expenses as well as our outlook in a few minutes. Average loans grew 3% during the quarter, driven by growth in both commercial and consumer. For the full year, average loans were up 15%, and we continue to grow our loan book in a disciplined manner. As we look ahead, we are operating our company with the expectation for a shallow recession in 2023. Accordingly, this outlook drove an increase in our loan loss provision in the quarter and a modest build in reserves under the CECL methodology. Importantly, as the credit environment continues to trend towards normalized levels, our overall credit quality metrics remain solid.
I'd add that with charge-offs having been so low, it's not surprising to see volatility quarter to quarter. We saw this in the fourth quarter with an outsized loss on one commercial credit, pushing us outside of our expected range. We continue to manage our liquidity levels to support growth. Our deposits remain relatively stable, and we've increased our wholesale borrowings to bolster liquidity. During the quarter, we returned $1.2 billion of capital to shareholders through share repurchases and dividends, bringing our total annual capital return to $6 billion. Our progress within the BBVA influence markets continues to exceed our expectations, and we see powerful growth opportunities across our lines of business in these new markets. We continue to generate new customer relationships, and we have been thrilled with the quality of bankers we've been able to hire.
In summary, it was a solid fourth quarter as we further built on our post-acquisition momentum, delivered for our customers and communities across the country, generated strong financial results for our shareholders, and put ourselves in a position of strength as we move into 2023. As always, I want to thank our employees for everything they do to make our success possible. With that, I'll turn it over to Rob to provide more details. Rob?
Thanks, Bill, and good morning, everyone. Our balance sheet is on slide 3, and it's presented on an average basis. Loans for the fourth quarter were $322 billion, an increase of $9 billion or 3% linked quarter. Investment securities grew $6 billion or 4%. Cash balances at the Federal Reserve totaled $30 billion and declined one and a half billion dollars during the quarter. Our average deposit balances were down 1%, while period end deposits remained essentially stable. Average borrowed funds increased $15 billion as we proactively bolstered our liquidity with Federal Home Loan Bank borrowings late in the third quarter. These are reflected in our fourth quarter average balances. On a spot basis, we increased our total borrowed funds by approximately $4 billion compared to September 30th.
The period end increase was driven by $2 billion of FHLB borrowings and $3 billion of senior debt, partially offset by lower subordinated debt. At year-end, our tangible book value was $72.12 per common share, an increase of 3% linked quarter. We remain well capitalized with an estimated CET1 ratio of 9.1% as of December 31, 2022. We continue to be well-positioned with capital flexibility. During the quarter, we returned $1.2 billion of capital to shareholders through approximately $600 million of common dividends and $600 million of share repurchases, or 3.8 million shares. Slide four shows our loans in more detail.
Compared to the same period a year ago, average loans have increased 11% or $33 billion, reflecting increased loan demand, as well as our ability to capitalize on opportunities in our expanded coast-to-coast franchise. During the fourth quarter, we delivered solid loan growth. Loan balances averaged $322 billion, an increase of $9 billion or 3% compared to the third quarter, reflecting growth in both commercial and consumer loans. On a spot basis, loans grew $11 billion or 3%. Commercial loans grew more than $9 billion at period end, driven by strong broad-based new production in both our corporate banking and asset-based lending businesses. Importantly, utilization rates within our C&IB portfolio remained stable linked quarter.
Consumer loans increased $1 billion compared to September 30th, driven by higher residential mortgage, home equity, and credit card balances, partially offset by lower auto loans. Loan yields of 4.75% increased 77 basis points compared to the third quarter, driven by higher interest rates. Slide five covers our deposits in more detail. Throughout 2022, deposit balances have declined modestly amidst a competitive pricing environment and inflationary pressures. Fourth quarter deposits averaged $435 billion and were generally stable linked quarter. Given the rising interest rate environment, we continue to see a shift in deposits from non-interest bearing into interest bearing. As a result, at December 31st, our deposit portfolio mix was 71% interest bearing and 29% non-interest bearing. Overall, our rate paid on interest-bearing deposits increased to 1.07% during the fourth quarter.
As of December 31st, our cumulative beta was 31%. Slide six details our securities portfolio. On an average basis, our fourth quarter securities of $143 billion grew $6 billion or 4%. The increase was largely driven by elevated purchase activity late in the third quarter, which included $3 billion of forward starting securities that settled in the fourth quarter. On a spot basis, securities were $139 billion and increased $3 billion or 2% linked quarter. The yield on our securities portfolio increased 26 basis points to 2.36%, driven by higher reinvestment yields as well as lower premium amortization. During the quarter, new purchase yields exceeded 4.75%.
At the end of the fourth quarter, our accumulated other comprehensive income improved to $10.2 billion, reflecting the accretion of unrealized losses on securities and swaps. We continue to estimate that approximately 5% of AOCI will accrete back per quarter going forward without taking into account the impact of rate changes. Turning to the income statement on slide seven. As you can see, fourth quarter 2022 reported net income was $1.5 billion, or $3.47 per share. Revenue was up $214 million or 4% compared with the third quarter. Expenses increased $194 million or 6%.
Provision was $408 million in the fourth quarter, reflecting the impact of a weaker economic outlook as well as continued loan growth, which resulted in a $172 million reserve build. Our effective tax rate was 17.7%. Turning to slide eight, we highlight our revenue trends. In 2022, total revenue was a record $21.1 billion and grew 10% or $2 billion compared to 2021. Within that, net interest income increased 22% due to both higher interest rates and strong loan growth. Non-interest income declined 5% as lower market sensitive fees more than offset strong card and cash management growth. Looking more closely at the fourth quarter, total revenue was $5.8 billion, an increase of 4% or $214 million linked quarter.
Net interest income of $3.7 billion was up $209 million or 6%. The benefit of higher yields on interest earning assets and increased loan balances was partially offset by higher funding costs. As a result, net interest margin increased 10 basis points to 2.92%. Fee income was $1.8 billion and increased $75 million or 4% linked quarter. Looking at the detail, asset management and brokerage fees decreased $12 million or 3%, reflecting the impact of lower average equity markets. Capital markets and advisory revenue grew $37 million or 12%, driven by higher merger and acquisition advisory fees, partially offset by lower loan syndication activity. Lending and deposit services increased $9 million or 3%, primarily due to higher loan commitment fees, reflecting our strong new loan production.
Residential and commercial mortgage revenue increased $41 million, driven by higher MSR valuation adjustments, partially offset by lower commercial mortgage banking activities. Other non-interest income declined $70 million linked quarter, reflecting a negative fourth quarter Visa fair value adjustment compared to a positive valuation adjustment in the third quarter, resulting in a change of $54 million. Turning to slide nine. Our fourth quarter expenses were up $194 million or 6% linked quarter. The growth was largely in personnel costs, which increased $138 million, reflecting higher variable compensation related to increased business activity. Fourth quarter personnel costs also included market impacts on long-term incentive compensation plans, as well as seasonally higher medical benefits. The remaining balance of the increase in expenses linked quarter included higher marketing spend as well as impairments on various assets and investments.
The majority of these impairments will lower our expenses going forward and are included in our expense guidance. As you know, we had a 2022 goal of $300 million in cost savings through our continuous improvement program, and we exceeded that goal. Looking forward to 2023, we will be increasing our annual CIP goal to $400 million. This program funds a significant portion of our ongoing business and technology investments. Our credit metrics are presented on slide 10. Non-Performing Loans of $2 billion decreased $83 million or 4% compared to September 30th, and continue to represent less than 1% of total loans.
Total delinquencies of $1.5 billion declined $136 million or 8% linked quarter. Net charge-offs for loans and leases were $224 million, an increase of $105 million linked quarter, driven in part by one large commercial loan credit. Our annualized net charge-offs to average loans was 28 basis points in the fourth quarter. Provision for the fourth quarter was $408 million compared to $241 million in the third quarter. The increase reflected the impact of a weaker economic outlook as well as continued loan growth. During the fourth quarter, our allowance for credit losses increased $172 million, and our reserves now total $5.4 billion, or 1.7% of total loans.
In summary, PNC reported a strong fourth quarter and full year 2022. In regard to our view of the overall economy, we're now expecting a mild recession in 2023, resulting in a 1% decline in real GDP. Our rate path assumption includes a 25 basis point increase in fed funds in both February and March. Following that, we expect the Fed to pause rate actions until December 2023, when we expect a 25 basis point cut. Looking ahead, our outlook for full year 2023 compared to 2022 results is as follows: We expect spot loan growth of 2%-4%, which equates to average loan growth of 6%-8%. Total revenue growth to be 6%-8%.
Inside of that, our expectation is for Net Interest Income to be up in the range of 11%-13% and non-interest income to be stable to up 1%. Expenses to be up between 2% and 4%. We expect our effective tax rate to be approximately 18%. Based on this guidance, we expect we'll generate solid positive operating leverage in 2023. Looking at first quarter of 2023 compared to fourth quarter of 2022, we expect spot loans to be stable, which equates to average loan growth of 1%-2%. Net Interest Income to be down 1%-2%, reflecting two fewer days in the quarter. Fee income to be down 3%-5% due to seasonally lower first quarter client activity.
Other non-interest income to be between $200 million-$250 million, excluding net securities and Visa activity. We expect total non-interest expense to be down 2%-4%, and we expect first quarter net charge-offs to be approximately $200 million. With that, Bill and I are ready to take your questions.
Thank you. If you would like to register for a question at this time, please press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and would like to withdraw your registration, please press the one followed by the three. If you're using a speakerphone, please lift your handset before entering your request. Once again, to register for a question, please press the one followed by the four. Our first question is from the line of John Pancari with Evercore. Please go ahead.
Morning.
Hey, good morning, John.
John.
On the manager stake on the side, I wanted to see if you can give us a little more thought around the deposit costs, potentially, you know, maybe if you can give us your updated thoughts on where the cumulative beta, I know you're, you know, in the 30%, just over 30% now, 31%, where that could trend to. What's your updated expectation there? Also maybe on the non-interest bearing mix. I know it's 29% of total deposits now. How do you expect that trending over the course of the next year? Thanks.
Why don't you go ahead? Go ahead. Sure. Why don't I, why don't I take the second one first in terms of the mix. You know, consistent with our expectations in a rising rate environment, we expect the mix to go more into interest-bearing, and we're seeing that. It's, you know, it's right on track. No big surprise there. We're right now at 29% non-interest bearing. I'd imagine that over the course of 2023 will go down a bit. You know, our previous low in previous cycles was around 25%. You know, I think that's a good way to sort of think about it. In terms of the betas, you're right. You know, we finished the year right on top of where we expected.
As you know, betas lagged past historical increases for most of 2022 for us and for the industry. You know, going forward, we expect maybe that lag to sort of compress a bit and we'll start tracking two historical rises, but nothing particularly unusual. Of course, we don't control that. That'll be an outcome.
John.
Hey, John, if you're trying to dig into, and I'd made a comment at Goldman that we thought our NII might track to an annualized fourth quarter. In our guide, we look a little light to that. All of that pressure, it's not coming from funding, it's coming from the spread on loans. Where we've been surprised, I've been surprised, is we just haven't seen spreads widen in corporate credit. I guess what I would say to you is there's this disconnect and something's going to give. Either corporate spreads are going to widen or our current scenario that we have forecasted for CECL is wrong. You know, right now we basically guide, you know, against kind of where spreads are.
Maybe we get some widening and we put in a, you know, this mild recession in CECL. We have a little bit of disconnect in the numbers, but they are what they are. Yeah. That, and that gets, of course, to our guidance for the full year in terms of NII. The upside would be to Bill's point, that loan spreads would widen as they should if we get into the economy that everybody's prepared for.
Yeah. That widening would provide upside to that 11%-13%.
Yeah.
Yeah. None of the, none of the change in kind of thought on NII is driven by any change in our assumption on betas or deposit growth. We had pretty healthy deposits this quarter. We think we can continue that. It's all on this. You know, we have an ability, particularly in the new markets, to grab a whole bunch of new clients, make new loans that are good credit loans, you know, kind of invest into this as we've done in our new markets for years, invest into client growth. The problem is the return right now struggles because we haven't seen spreads, you know, gap the way we've seen in the public markets, the way we might expect given the economy we're kind of forecasting.
Got it. Okay, thanks, Bill. Separately on the credit side, could you give us a little more color on the $100 million increase in charge-offs? What was the size of the commercial credit? What was the industry? Are you seeing any other developments related to that credit or other areas of your portfolio worth flagging just given the lumpiness and the size of that one issue? Thanks.
Yeah.
Go ahead, John. Let me jump in here, Rob. That one credit's been staring us in the face for a while. We've been working on it. It's a credit that both BBVA and PNC were in, so it shows up as outsized. We have big reserves against it. You know, as you've seen in our nonperformers and our delinquencies there, they're going down. This is kind of, you know, I don't know what you call this, something going through a snake, but we've been staring at it, and we charged it off, and that's showing the elevation this quarter. I wouldn't read into that.
Yeah, no underlying trend or anything problematic with the asset category.
What was that industry?
Telecommunications.
Okay. All right, thank you.
Sure.
Our next question is from the line of John McDonald with Autonomous Research. Please go ahead.
Hi, good morning. Rob, wanted to just follow up.
Hi, John.
On the NII, questions from John there. Can you just remind us where you are on kind of interest rate positioning, you know, that you building in small rate hikes in the beginning of the year, maybe cut later? How do rate hikes from here kind of impact you, and just a reminder of where you are on the swap book and how that's influencing, you know, NII today and how it rolls off would be helpful?
Well, sure. I'll try to cover some of that, then we can follow that up. I mean, definitely we're positioned to benefit from the two rate hikes that we expect, 25 basis points each in February and March. We do have a 25 basis point cut in December, but that won't play largely into the 2023 performance. We're positioned well against that, and we'll grow our NII. We're pointing to, you know, between 10%-13% in terms of that range year-over-year. I will say, and we jumped into this right away, forecasting for a full year in terms of guidance is always difficult. This year in particular, it's more difficult than most. You've heard that sentiment from some of our peers that have already reported.
Really difficult, because of all the uncertainties that we all know about. You know, we put out what we think we can achieve. That's Bill and I talked a little bit about maybe some upside to that in terms of loan spreads. You know, everything that we know now with all the uncertainties, that's where we're positioned. No big change in terms of our, you know, our rate management. In terms of the swaps, we've disclosed at around $40 billion or so, but of course, that's all, you know, part of how we manage the balance between our fixed and variable.
The simplest way to think about that, John, is we, through the course of the year, the DV01 or the sensitivity we have for our long positions has, if anything, decreased. You know, think about that in terms of both the securities book and the swap book. We remain largely asset sensitive, happy with that position. That, you know, over time changes with the mix of swaps and securities. The swaps themselves, it's kind of irrelevant to look at them separately, but they're very short, and they roll off in big bulk in, you know, couple of years.
Two and a half.
Yeah.
Yeah.
Okay, thanks. Rob, maybe as a follow-up, could you unpack a little bit of the outlook for the fee revenues that you gave for 2023, just some of the headwinds and tailwinds that are leading to that outcome on the non-interest income review?
Yeah, sure. Yeah, sure, John. you know, just in terms of the categories where, you know, where we expect to see growth, capital markets, we do expect mid-single digit growth, which is good and consistent with our expectations. Our steady eddy, card and cash management, you know, will probably be up, you know, high single digits. Those two will be offset by, you know, continuing headwinds in our asset management, given the equity markets, as well as lower mortgage production. you know, you put all that together, and that's how we get into our, you know, stable to up 1% for the full year.
Got it. Thank you.
Sure.
Our next question is from the line of Gerard Cassidy with RBC. Please go ahead.
Thank you. Hi, Rob. Hi, Bill.
Hey, good morning, Gerard. Gerard.
Bill.
Also known as, you know.
I've been called worse, Rob. Bill, coming back to your thoughts on, you know, the spreads that you guys just referenced on the commercial loan book relative to the CECL outlook. I'm glad you framed it that way because I think many of us are in that camp that you just described. In terms of the spreads, is there any capacity issues, meaning there's too much lending capacity which has kept these spreads maybe lower than normal?
I'm not sure what's going on, to be honest with you. I mean, you know, on the smaller end in certain retail categories, which really isn't our focus, there's just irrational competition in certain asset categories. In the larger corporate space, you know, where we have this opportunity to grow clients, particularly in the new market, then ultimately cross-sell, there just hasn't been, you know, any sort of gap the way you've seen in the public markets. There hasn't been any real change. You know, spreads aren't going down, but there hasn't been any change at all with respect to kind of the outlook in this economy. Until, and if, you know, there's real defaults and charge-offs, there probably won't be. One of these things is gonna give. I just don't know which one it is.
Very good. No, I noticed in your table 10 in the supplement, the inflows of nonperformers have been pretty steady.
Yeah.
No, excuse me, real evidence yet. Thank you for that. As a follow-up, can you just remind us your outlook for returning capital to shareholders in the upcoming year with dividends and share repurchases?
Yeah. Hey, Gerard. Just to finish up on that on the credit spot, to your point, in the supplement, the due nonperformers, but also you take a look at our NPAs and our delinquencies, which are down. The leading indicators are still, you know, very strong.
Agreed.
Yeah, on the share repurchases, a couple of things. One is, we are going to continue our share repurchase program into 2023. Secondly, it will be at a reduced rate relative to what we did in 2022, and likely to be less than what we did in the fourth quarter of 2022, which was $600 million. Couple things about that. One is, why lower? One is, given all the uncertainties that we're seeing, obviously we need to be smart and tactical in terms of our capital deployment as the year plays out. Secondly, and just logically, the rate of repurchases slows when your capital ratios go from 10% to 9%.
You know, we still have a lot of capital flexibility, but by definition, as we get closer to those operating guidelines, we slow the pace of repurchases. All that said, there's flexibility, as you know. With the Stress Capital Buffer, we're allowed a lot of flexibility around it and, you know, we plan to use that flexibility as circumstances present themselves.
Great. Thank you.
Our next question is from the line of Bill Carcache with Wolfe Research. Please go ahead.
Thank you. Good morning, Bill and Rob. Following up on your swaps commentary, could you speak broadly to how you're thinking about downside protection in this environment? Any color you can give on where you'd expect your NIM to settle if the Fed ultimately pushes the economy into, say, a mild recession, cuts rates, and Fed funds normalizes, say, somewhere in the 2.5%-3% level? That would be great.
I have to write all that down in terms of your assumptions there, Ray. I, you know, I would say in terms of NIM, because, you know, we obviously we get that question a lot. It's obviously an outcome, so we don't guide to it. We don't necessarily manage to it. I think when you just take a step back, you can see that we finished the quarter and finished the year at 2.92%. That's up from all of 2021, where we lived at 2.27%. You know, that 65 basis point jump or so, that's occurred. We don't expect those kinds of swings going forward.
Going forward, we're now probably, you know, more like 5 or 6 basis point swings off of these levels. And that's sort of the way that I think about it.
Got it. Separately, there's been some concern that we could see the mix of time deposits and non-interest-bearing deposits return not just to pre-COVID levels, but perhaps back to even pre-GFC levels in this environment. Can you speak to that risk both broadly at the industry level and more specifically as it relates to PNC?
I mean, look, we're in a bit of an unknown environment. We have the Fed going through QT. We have the Fed absorbing deposits through their reverse repo facility. We have, you know, at least in our case, the ability to grow loans. You could see a scenario where deposits get scarce. You know, we've priced some of that, you know, that's in our forward guide in terms of our best look on that. You can draw, you know, upside and downside to that. Kind of to Rob's point, this coming year, and the years after that, are harder to forecast and model than some of the stability we had pre-COVID. We're doing our best, and you've seen our best expectations.
Yeah, I think that's right. In regard to the mix between non-interest-bearing and interest-bearing so far, the shift that has occurred is perfectly consistent with what we've seen historically.
Yeah
C onsistent with our expectations.
Yeah, that's helpful, Bill and Rob, thank you. If I may squeeze in one last one. I wanted to dig in a little bit into your expectation for a weaker economic outlook and mild recession and sort of square that with your reserve rate, having been basically unchanged sequentially. It suggests that most of the reserve build was really growth driven. Maybe, you know, if the economic outlook does grow more challenging, consistent with that mild recession scenario, would it be reasonable to expect that your reserve rate could actually hold near current levels, or would it still likely drift a little bit higher from here? Any thoughts around that would help.
Yeah. A lot of moving pieces here, but start with the basic notion that we are fully reserved for the book that we hold today against a forecast that we more heavily weighted the recessionary forecast than we had in the third quarter. Remember, the charge-offs that we took this quarter, particularly the lumpier ones, we mentioned one, those were in a large way already reserved. Our build, right, is actually more than you think. The ratio ends up the same, but we have kind of lower Non-Performers inside of that total book as a percentage. Maybe think of it that way.
That makes sense.
You know, in terms of coming to that 1.7. Then I'd also, you know, just remind you of our, you know, wherever we sit today at 1.7, you know, both first day CECL to now or what we have now relative to others against the composition of our loan book, we've been at this in a fairly, you know, we think correctly, but nonetheless conservative process.
Approach
A pproach using CECL.
Super helpful. Thank you for taking my questions.
Sure.
Yep.
Our next question is from the line of Betsy Graseck with Morgan Stanley. Please go ahead.
Hey, good morning.
Good morning.
I wanted to talk a little bit about the expense side. I know you mentioned that, you know, there was a part of the expenses this quarter that was associated with, you know, revenue generating activities like capital markets. You know, that is a net positive to PPOP. Let's leave those expenses aside. I wanted to dig in more to the expenses that did not come with, you know, commensurate revenues and understand, what, you know, what the drivers were behind those increasing. Then talk a little bit about your outlook for 2023, off of what is, you know, now higher based on what people had been expecting coming into today.
Yeah, sure. I can start there. In regard to the fourth quarter expenses, the biggest driver of the increase was personnel expense. To your point inside of that, the variable comp associated with the higher business activity. In addition to that, we did have some medical expenses that we expect seasonally, but they came in a little bit higher than what we would have expected. Outside of that.
Explain why seasonal?
Seasonal. Well, sure. Well,
It's not a made up thing. You basically burn through your.
The deductibles. Yeah, the deductibles, and then the company takes over after that. And that happens, that happens seasonally. This season, it was a little bit higher than what we expected. Outside of that, you know, when you look at the marketing spend, that's sort of timing in terms of how that falls in the year. The impairments that we took on various investments and assets, which is part of your question, there wasn't anything singular that was stand out. It was.
Yeah, there was. We wrote off everything we had to do with crypto.
Well, that was part of it. That was part of it. Maybe Bill wants to answer these questions. I would say there wasn't anything singular. It was a handful of items that we took down in technology, and that shows up in our equipment expense. In occupancy, there were some facilities that we right-sized for our space needs going forward, that kind of thing. On the margin.
Just go ahead and talk about it so I make sure.
Okay. Yeah, sure. On the margin, I'm sorry, just going into Bill's giving me another question. I'd say on the margin going into 2023, those impairments reduce some of our expense rates, that sort of helps. You know, our guide is 2%-4% in all of 2023. That's how that all stays connected.
Betsy, it's kind of frustrating because none of the stuff in our expense line in the fourth quarter has anything to do with how we spend money. I mean, the comp with new business is great. Everything else was kind of, you know, we flushed a couple tech projects that didn't work out. We right-sized occupancy. You know, marketing went up a little bit. Then we get hit this quarter on charge-offs, which are, you know, I'm not going to call them artificially high. They are what they are, but they're kind of lumpy as a function of something that we've been staring at for a while that finally hits the books.
We're largely reserved to your other point.
Yeah. Yeah.
Okay. As I think about the guide into next year for total expenses up 2%-4%, that is really related more towards your revenues of 6%-8%.
Yep.
You know, this crypto thing, whatever, is a one-time, one and done.
Yeah. That's right. Yeah.
You're taking that down to zero.
Yes.
All right.
That is gone. That's it. That's why, and, you know, I said in my opening comments, we point to strong positive operating leverage in 2023.
Okay. All right. Separately, I know we talked a little bit earlier about the capital and the fact that, you know, your CET1 has been migrating down as you've been.
You know, you know, doing some nice lending, et cetera.
Right.
Just wanted to understand the RWA density. It looks like it's gone up a bit, and I just wanted to understand, is that just loan growth, or is there something else going on there? Is there some, you know, changes in how you think about RWA factors? I'm just wondering, you know, like what is the low on CET1 that you're willing to, you know, drive to as we think about, you know, demand for borrowing is still pretty robust.
Sure. Well, a couple things on that. I would say in terms of the RWA increase, it's entirely loan driven. You know, we've had a lot of loan growth in 2022, a lot in the fourth quarter with that 3% growth in average loans. That's the key driver of the RWA increase. Our CET ratio is at 9.1%. You know, we've talked about an operating guideline of between 8.5% and 9%. You know, we're still above our operating guidelines and, you know, that's a good place to be.
Okay, 8.5's the low. Really, that's how we should read it.
Yeah. Yep.
Yeah. Okay. All right. Thank you.
Sure.
Our next question is from the line of Ken Usdin with Jefferies. Please go ahead.
Thanks. Good morning. Was wondering if you guys could talk about the, you know, the still potential for the TLAC rules to come down to the category threes and how you would be thinking about either getting ahead of that or starting to issue or do you just have to wait for the final notice and then consider the phase-in period?
I mean, a lot of people talking about this, not a lot happening around it. Were it to happen it's, you know, by the way, we disagree with it, but let's walk down the path and say somehow down the road people suggest that this should happen and there'd be a phase-in period. You know, practically, as we look at the growth opportunity in our company, new clients, loan growth against, you know, what is likely to be a constrained ability to grow total deposits, right? You're gonna see our wholesale borrowings in an increase. In the course of our wholesale borrowings increase in the ordinary course of business, we're gonna fulfill all our parts of that TLAC requirement. All of that is in the numbers we're talking to you about. You know, it'll take more than next year.
In the way we think about how.
In terms of we normalize as we move
Yeah
T owards more normalized mix.
Yeah.
Uh-
Put in its simplest way to think about that maybe is our wholesale debt, you know, historically ran, I don't know, in the mid-
16 to 19
Y eah, mid-teens, I was gonna say. You know, we're running 5%. If we normalize, well, that's with home loan in there.
Yeah. Yeah.
As we normalize our borrowings through time, it's likely we're gonna get and fulfill that requirement without purposely trying to do it, just 'cause that's the way we and other people will be funding, you know, institutions.
Yeah. I just add to that's all. You know, we see it on our path. It's not particularly problematic, but there's a lot to be played out. We still don't think it's necessary. There's also, you know, a reasonable chance there'd be some tailoring to it, which would be reduced, you know, in our case.
Yep. As a follow-on to that, to your point about wholesale borrowings, funding loan growth incrementally, can you just talk about how you're thinking about the securities portfolio? I know you saw some growth this quarter. I know you're getting good front book, back book on it. The percentage of earning assets is still around 28%. How would you expect that to go vis-à-vis, you know, the use of wholesale borrowings to continue to support that growth as well? Thank you.
You know, look, you wouldn't purposely borrow wholesale and then invest in a security to hold in your securities book. Inside of all the requirements that we manage ourselves to, we also have liquidity requirements, LCR, and the, you know, the need to hold high-quality liquid assets. You know, the securities book will likely fade in terms of total percentage over time simply because of loan growth that we see and some of the roll down. That securities book is part of what we have in terms of cash and liquidity to satisfy LCR. It's, you know, we're not gonna say, "Hey, let's borrow some money to buy more treasuries," right? That isn't gonna happen. Practically, we use that book to hedge the value of our deposits.
We'll continue to do that. We'll continue to do that inside of the lens of LCR and other liquidity stresses that we, that we run.
Got it. Okay. Thank you, Bill.
As a reminder, if you would like to register for a question, please press the one followed by the four. Our next question is from the line of Mike Mayo with Wells Fargo Securities. Please go ahead.
Hi.
Hey, Mike.
Well, I guess in the category of no good deed goes unpunished, I mean, you did have positive operating leverage last year of 300 basis points. You're guiding for positive operating leverage this year between, I guess, 200 and 600 basis points. Your charge offs were below 30 basis points every quarter. You're buying back some shares. You know, your guidance from one month ago was off, and your results fell one-eighth below consensus. Don't stop giving your guidance or anything like that. You know, we're all subject to the uncertainties out there, just a little bit more about what's changed in the past month.
I guess unemployment, your end rate assumption, you're saying it's over 5%, maybe where that's going to, and I guess that drove some of the CECL-driven reserve, part of the reserves, the NII, and maybe your decision to lean into the securities purchases, maybe 'cause you think this is a relative, top on yields. Thanks.
Yeah. You're overcomplicating it. One thing changed from a month ago, and one thing only, and that was the spread we thought we'd earn on new business, right? We know, Mike, that we can go out and grow loans. Our ability to gain clients, you know, cross-sell those clients, we've never been more bullish on that. The process of doing that is not earning what we would otherwise expect in the moment, 'cause spreads have not widened, and of course, you take a full life of the loan reserve when you book that loan. That's the only thing that's really changed. The expenses this quarter are noise. You know, the guide for next year is tempered simply by that, you know, question of whether spreads are gonna rise on loans.
Maybe they will, or our CECL analysis will be wrong. We never guide on what our, you know, provision's gonna be. We talk about charge-offs. The charge-off this quarter we felt was a bit anomalous. Nothing's really changed other than the sweat factor of, hey, can I actually earn what I thought I was gonna earn on new loan production? That's it.
You're saying you're too conservative either on CECL reserves or your NII guide for the year, and,
Yeah. Well, I haven't given you a number on my CECL reserves.
Yeah.
Right? you know, we worsened our economic forecast. The simple soundbite is either spreads are gonna widen or our economic forecast is wrong. I think that's a fair statement.
There's an inconsistency there, right?
Yeah.
You give a by the way, if the CEO gig doesn't turn out, maybe you could become the economist 'cause this is such a detailed outlook in your release about what you expect the economy and interest rates and everything else. You.
Yeah.
You give a lot of detail.
Yeah. The You asked a question on the securities book. It's just, you know, we basically stayed pretty much in the same position all year. We get to reprice the book, and you see the income coming out of the securities book growing nicely. We haven't invested into it. It's a tough market to invest into if you are, you know, in effect, a deposit-funded institution, right? If you wanna go out and buy something today against your marginal cost of money, you're basically carrying flat to negative today on the theory that the Fed's gonna cut to what down the road? You gotta believe that the Fed's gonna go back into, you know, twos on Fed funds, which I just fundamentally don't believe.
I think kind of the market's just uninvestable at the moment, and I think that's gonna be figured out through the course of the year. There's upside if, you know, my view on that plays out in the way we'd run our securities book. At the moment, there's no. You know, choosing to go long in this environment, I think is a mistake.
One more clarification.
Yeah.
You are reserved for your existing book of business, assuming an unemployment rate of what level? I know it's above 5%...
5.1.
Could you be.
5 point, 5.1.
Yeah.
Got it.
Yeah.
All right. Thank you.
Sure.
Our next question is from the line of Ebrahim Poonawala with Bank of America. Please go ahead.
Good morning.
Good morning.
I guess, on the NII guide, I think we've spoken extensively about the spreads. Wanted to get how much of the inversion in the yield curve was a factor in impacting the NII outlook. Tied to that, like, with the 10-year sub 3.40% this morning, like, do you just not invest right now and wait for things to shake out? How do you think about balance sheet management in a world where maybe the 10-year is headed to 3%, not 4% next? Thanks.
Yeah. That impacts the NII guide a bit only, in terms of what our reinvestment yield is and will be when we, you know, when the existing security book rolls down. Right, you've seen the book yield on that, you know, rise from wherever to, what is it now? 2.60 something.
Oh, yeah, the total book. Yeah.
Yeah.
265.
You know, that continues to increase as we, you know, as things roll off, we're reinvesting with high fours, five handles on securities. You know, look, if the ten-year goes to 3%, you know, if you look at the five-year and five years, the implication of where long-term rates really have to head for that to be true, I just don't buy. I don't think we're gonna be an environment where the Fed is, you know, bouncing short-term funds around, you know, 1%, which I just don't think it's gonna happen. I think we will get inflation under control, but I think it's gonna be a struggle to get it under three long term, and I think front rates, you know, will stay higher.
They might cut and likely will cut from some 5% level. This assumption that they're gonna cut, and therefore, rates are gonna go back to two or one, I just think is absurd. Therefore, to me, you know, the back end of that curve is uninvestable. You're right. It could rally to there, you know. Good for the people who own it, just as long as it's not me.
Yeah. No, that's fair. Again, I'm not saying it makes sense, but it's the world we live in. I guess tied to that, I'm not sure if you gave explicit guidance in just terms of deposit growth outlook. I mean, still a lot of room when we look at the loan to deposit ratio. Just give us a thought around how you're thinking about letting additional sort of rate sensitive deposits run off, having a smaller balance sheet, creating more excess capital?
Look, there's obviously not... We could, in the near term, increase earnings by being less competitive with deposits and let deposits run off. We have the liquidity to do that. You know, we could increase our loan-to-deposit ratio. The challenge with that is in the course of doing that, you're damaging your long-term franchise. If you're losing deposits that are not core relationship deposits, then maybe that makes sense. If you're losing customers in the process of that runoff, that's a mistake. That's the, you know, that's the logic we use in figuring out how we price deposits and how we, you know, grow or maintain deposits.
That's fair. If I may, one last question, Bill. In terms of just the macro uncertainty, how do you assess, like, the difference between credit normalization and whether or not we are getting into some version of a recession? Like, can you conclusively think about that over the next few months, or we're not gonna know that until we are well into the depths of a downturn a few quarters from now?
We've given you our best forecast.
Yeah. Yeah.
I mean, look, it's, there's a lot of unknowns here. You know, technically, we could see ourselves heading into a full employment, quote, "recession" because you'll have stale GDP for a couple of quarters but, you know, unemployment not ticking up to, you know, high levels. I don't even know how to think about that environment in terms of what charge-offs might be. I mean, that's.
Well.
A really low charge-off environment.
Yeah. Well, just to your point in terms of what I said at the beginning, it's really difficult for the full year, particularly this year. We've put together what we think we can do.
Yeah.
That's fair. Thanks for taking my questions.
As a reminder, if you would like to register a question, please press the one followed by the four. Our next question is from the line of Matt O'Connor with Deutsche Bank. Please go ahead.
Morning.
Hey, Matt.
I'll begin if we could just circle back on some of the lumpy costs. I guess just in aggregate, like how much were the impairments? I think there was also, you had called out some lumpiness from the long term in terms of playing, which I think impacts both fees and comp. If you could just kind of flesh out the aggregate lumpy costs, that would be helpful. Thank you.
Yeah. Without. We don't have specific numbers. You can see 'em as they break down in terms of our impairments within the occupancy line and the equipment line. The long term was just the effect of a benefit in the third quarter, and then it swung against us in the fourth quarter. Not big numbers, but just the delta between the two quarters drove the increase.
Okay. Separately, I mean, I heard you earlier kind of reiterate the 8.5%-9% CET1 target over time. Just any thoughts on the regional banks kind of just below your size? It seems like they're all kind of building capital close to 10%. I don't know if it's, you know, pressure behind the scenes from rating agencies or regulators or just conservatism for where we are in the cycle. You know, any thoughts on a company your size, you know, being able to run 9% when, you know, the ones... Obviously, the banks that are bigger are running higher, but it's just been interesting to note that the ones below you, kind of $200 billion in assets, all seem to be building closer to 10%.
Do you want to answer that one?
I don't know that I have any thoughts on it.
Well, the only thing, the only thought that I have just reacting is, you know, the guidelines are typically drawn for all banks in terms of the Stress Capital Buffer. How they stress, you got to look at that. Then, you know, it's the relative capital levels to the stress levels as opposed to the absolute levels. No, that's just my reaction.
Okay. I guess the point is, like, you feel comfortable, with whatever kind of behind the scenes stuff is going on with the rating agencies, regulators, you know, the 9% and maybe drifting down a little bit over time. At 9%, you feel real comfortable with in the current environment.
Yes.
Yes. Yeah.
Okay. Thank you.
Our next question is from the line of Vivek Juneja with JP Morgan. Please go ahead.
Hi. Just a couple of quick ones. Any color on criticized assets, how they did, how those did in the quarter?
Yeah, relatively flat. Not a big change at all.
Okay. Bill, just not to beat a dead horse to death, but The whole sort of question on NII and swaps and protection. Given that you think of, you know, swaps and long and securities, you know, sort of synonymously in terms of expressing your view on rates, I would expect that you're gonna hold off, therefore, you know, even on the swap side in terms of adding protection yet until you see clearer signs of a lot more potential for rate cuts.
Yeah, I mean, it's strange to me, Vivek. You're a bit of a fixed income guy. This notion of protection, I mean, what a lot of banks are doing is they'll put on forward-starting swaps, and they'll not have to eat negative carry in the course of doing that. They'll hope sometime by the time those come due that there is a negative carry because there'll be a cut. You know, you effectively. I mean, everything's priced at the forward curve when they do that trade. It makes no sense to me. It's the same as choosing to invest at the moment at where the yield curve is. That's, quote, "my downside protection." You know, we can sell it. We can use options and sell away upside and buy some downside protection.
As a practical matter, we're not wildly out of bounds in terms of, you know, while we're asset sensitive, we're not wildly asset sensitive. It just doesn't feel like the moment when you're supposed to be long. Particularly if you have a view that rates in the go-forward decade are not gonna look like rates, you know, during the 2012 to 2020 era.
Right.
That's where we sit.
Okay. All right. Thanks.
There are no further questions on the line at this time. I'll turn the presentation back to Bryan Gill for any closing remarks.
Well, thank you all for joining the call today. If you have any other follow-ups, please reach out to the IR team. We'd be happy to help you out. Thank you.
Thanks, everybody.
Thank you.