Categories Earnings Call Transcripts, Finance

The PNC Financial Services Group, Inc. (PNC) Q4 2022 Earnings Call Transcript

PNC Earnings Call - Final Transcript

The PNC Financial Services Group, Inc. (NYSE: PNC) Q4 2022 earnings call dated Jan. 18, 2023

Corporate Participants:

Bryan K. Gill — Executive Vice President & Director, Investor Relations

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

Robert Q. Reilly — Chief Financial Officer

Analysts:

John Pancari — Evercore ISI — Analyst

John E. McDonald — Autonomous Research — Analyst

Gerard Cassidy — RBC Capital Markets — Analyst

Bill Carcache — Wolfe Research — Analyst

Betsy Graseck — Morgan Stanley — Analyst

Ken Usdin — Jefferies — Analyst

Mike Mayo — Wells Fargo Securities, LLC — Analyst

Ebrahim Poonawala — Bank of America Merrill Lynch — Analyst

Matt O’Connor — Deutsche Bank Equity Research — Analyst

Vivek Juneja — J.P. Morgan — Analyst

Presentation:

Bryan K. Gill — Executive Vice President & Director, Investor Relations

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.

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

Thanks, Brian. 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 is 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 remained solid. I’d add that with charge-offs having been so low, it’s not surprising to see volatility quarter-to-quarter. And 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 remained 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. We see powerful growth opportunities across our lines of business in these new markets. We continue to generate new customer relationships and we’ve 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.

And with that, I’ll turn it over to Rob to provide more details. Rob?

Robert Q. Reilly — Chief Financial Officer

Thanks, Bill, and good morning, everyone. Our balance sheet is on Slide 3 and is 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 $1.5 billion during the quarter. And 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. And 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 30. 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. And 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 4 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 and 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 30, driven by higher residential mortgage, home equity and credit card balances, partially offset by lower auto loans. And loan yields of 4.75% increased 77 basis points compared to the third quarter, driven by higher interest rates.

Slide 5 covers our deposits in more detail. Throughout 2022, deposit balances have declined modestly and missed the 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. And as a result, at December 31, 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. And as of December 31, our cumulative beta was 31%.

Slide 6 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. And 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. Importantly, 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 7. 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 to $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 $172 million reserve build. And our effective tax rate was 17.7%.

Turning to Slide 8, 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. And as a result, net interest margin increased 10 basis points to 2.92%. Fee income was $1.8 billion, an increase of $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 RMSR 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 9. 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 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 30 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% to 4%, which equates to average loan growth of 6% to 8%. Total revenue growth to be 6% to 8%. Inside of that, our expectation is for net interest income to be up in the range of 11% to 13% and non-interest income to be stable to up 1%. Expenses to be up between 2% and 4%. And 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 average loan growth of 1% to 2%. Net interest income to be down 1% to 2%, reflecting two fewer days in the quarter. Fee income to be down 3% to 5% due to seasonally lower first quarter client activity. Other non-interest income to be between $200 million and $250 million, excluding net securities and Visa activity. We expect total non-interest expense to be down 2% to 4%. And we expect first quarter net charge-offs to be approximately $200 million.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] And our first question is from the line of John Pancari with Evercore. Please go ahead.

John Pancari — Evercore ISI — Analyst

Good morning.

Robert Q. Reilly — Chief Financial Officer

Hey, good morning, John.

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

Hey, John.

John Pancari — Evercore ISI — Analyst

On the net interest income side, wanted to see if you can give us a little more thought around the deposit costs, potentially maybe if you can give us your updated thoughts on where the cumulative beta. I know you’re in the 30% or just over 30% now 31%, where that could trend to? What’s your updated expectation there? And then also maybe on the non-interest-bearing mix, I know it’s 29% of total deposits now. How do you expect that trend over the course of the next year? Thanks.

Robert Q. Reilly — Chief Financial Officer

Sure. Why don’t I take the second one first in terms of the mix. Consistent with our expectations in a rising rate environment, we expect the mix to go more into interest-bearing, and we’re seeing that. But 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 ’23, we will go down a bit. Our previous low in previous cycles was around 25%. So I think that’s a good way to sort of think about it.

In terms of the betas, you’re right. We finished the year right on top of where we expected. As you know, betas lagged past historical increases for most of ’22 for us and for the industry. And going forward, we expect maybe that lag could sort of compress a bit and we’ll start tracking to historical rises, but nothing particularly unusual. And of course, we don’t control that, that will be an outcome.

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

Hey, John. If you’re trying to dig into — I had made a comment at Goldman that we thought our NII might track to an annualized fourth quarter. And 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. So where we’ve been surprised, I’ve been surprised is we just haven’t seen spreads widened in corporate credit.

So I guess, what I would say to you is, something — there is this disconnect and something is going to give; either corporate spreads are going to widen or our current scenario that we have forecasted for CECL is wrong. So right now, we basically guide, I guess, kind of where spreads are. Maybe we get some widening and we put in this mild recession in CECL. So we have a little bit of disconnect in the numbers, but they are what they are.

Robert Q. Reilly — Chief Financial Officer

Yeah, and that gets of course to our guidance for the full year in terms of NII. So 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.

John Pancari — Evercore ISI — Analyst

So that widening would provide upside to that 11% to 13%?

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

Yeah. So none of the change in kind of thought on NII is driven by any change in our assumption on betas or deposit growth. We have pretty healthy deposits this quarter. We think we can continue that, it’s all on this. 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, 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 gap the way we’ve seen in the public markets, the way we might expect given the economy we’re kind of forecasting.

John Pancari — Evercore ISI — Analyst

Got it. Okay. Thanks, Bill. And then 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 were flagging just given the lumpiness and the size of that one issue? Thanks.

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

Yeah. I mean, you can jump in here, Rob. That one credit has 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. As you’ve seen in our non-performance and our delinquencies there, it’s going down. This is kind of, I don’t know what you call, is 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, but I wouldn’t read into that.

Robert Q. Reilly — Chief Financial Officer

No underlying trend or anything problematic with the asset category.

John Pancari — Evercore ISI — Analyst

What was that industry?

Robert Q. Reilly — Chief Financial Officer

Telecommunications.

John Pancari — Evercore ISI — Analyst

Okay. All right. Thank you.

Robert Q. Reilly — Chief Financial Officer

Sure.

Operator

Our next question is from the line of John McDonald with Autonomous Research. Please go ahead.

John E. McDonald — Autonomous Research — Analyst

Hi. Good morning. Rob, I wanted to just follow up on the NII question, sort of John there. Can you just remind us where you are on kind of interest rate positioning? Building in small rate hikes in the beginning of the year or 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 NII today and how it rolls off would be helpful?

Robert Q. Reilly — Chief Financial Officer

Well, sure. Let me — I’ll try to cover some of that and 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 in the ’23 performance. So we’re positioned well against that and we’ll grow our NII. We’re pointing to between 10% and 13% in terms of that range year-over-year. I will say, when 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.

So 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. But everything that we know now with all the uncertainties, that’s where we’re positioned. No big change in terms of our rate management, in terms of the swaps we’ve disclosed at around $40 billion or so. But of course, that’s all part of how we manage the balance between our fixed and variable.

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

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 as if anything, decreased. So think about that in terms of both the securities book and the swap book. So we remain largely asset-sensitive, happy with that position. I mean that 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 a couple of years.

Robert Q. Reilly — Chief Financial Officer

2.5.

John E. McDonald — Autonomous Research — Analyst

Okay, thanks. And 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?

Robert Q. Reilly — Chief Financial Officer

Yeah. Sure, John. So just in terms of the categories 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 Eddie, card and cash management will probably be up high-single-digits. And then those two will be offset by continuing headwinds in our asset management given the equity markets as well as lower mortgage production. So you put all that together and that’s how we get into our stable to up 1% for the full year.

John E. McDonald — Autonomous Research — Analyst

Got it. Thank you.

Robert Q. Reilly — Chief Financial Officer

Sure.

Operator

Our next question is from the line of Gerard Cassidy with RBC. Please go ahead.

Gerard Cassidy — RBC Capital Markets — Analyst

Thank you. Hi, Rob. Hi, Bill.

Robert Q. Reilly — Chief Financial Officer

Hey, good morning, Gerard — Gerald. Also known as.

Gerard Cassidy — RBC Capital Markets — Analyst

I’ve been called worse, Rob. Bill, coming back to your thoughts on the spreads that you guys just referenced on the commercial loan book relative to the CECL outlook, and I’m glad you framed it that way because I think many of us are in that camp that you just described. But in terms of the spreads, is there any capacity issues, meaning there’s too much lending capacity, which has kept the spreads maybe lower than normal?

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

I’m not sure what’s going on, to be honest with you. I mean there’s — 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 where we have this opportunity to grow clients, particularly in the new market and ultimately cross-sell, there just hasn’t been any sort of gap the way you’ve seen in the public markets. There hasn’t been any real change. Spreads aren’t going down, but there hasn’t been any change at all with respect to kind of the outlook in this economy. And until — and if there’s real defaults and charge-offs, there probably won’t be. So one of these things is going to give, I just don’t know which one it is.

Gerard Cassidy — RBC Capital Markets — Analyst

Very good. No, I noticed in your Table 10 in the supplement, the inflows of non-performance had been pretty steady. So there’s real — excuse me, real evidence yet. Thank you for that. And then 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?

Robert Q. Reilly — Chief Financial Officer

Yeah. Hey, Gerard. And just to finish up on that on the credit spot, to your point, in the supplement, that do non-performers, but also you take a look at our NPAs and our delinquencies, which are down. So the leading indicators are still very strong.

Gerard Cassidy — RBC Capital Markets — Analyst

Agreed.

Robert Q. Reilly — Chief Financial Officer

Yeah. On the share repurchases, a couple of things. One is, we are going to continue our share repurchase program into ’23. 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 ’22, which was $600 million.

A couple of 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. But secondly and just logically, the rate of repurchases slows when your capital ratios go from 10% to 9%. So 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. So with the stress capital buffer, we’re allowed a lot of flexibility around it. And we plan to use that flexibility as circumstances present themselves.

Gerard Cassidy — RBC Capital Markets — Analyst

Great. Thank you.

Operator

Our next question is from the line of Bill Carcache with Wolfe Research. Please go ahead.

Bill Carcache — Wolfe Research — Analyst

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% to 3% level, that would be great?

Robert Q. Reilly — Chief Financial Officer

I have to write all that down in terms of your assumptions there. I would say in terms of NIM, because 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 292 — 2.92%. That’s up from all of ’21 where we lived at 2.27%. So that 65 basis point jump or so, that’s occurred. We don’t expect those kinds of swings going forward. So going forward, we’re now probably more like 5 or 6 basis point swings off of these levels. And that’s sort of the way that I think about it.

Bill Carcache — Wolfe Research — Analyst

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?

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

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, at least in our case, the ability to grow loans. So you could see a scenario where deposits get scarce. We’ve priced some of that that’s in our forward guide. In terms of our best look on that, you can draw 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. So we’re doing our best and you’ve seen our best expectations.

Robert Q. Reilly — Chief Financial Officer

Yeah, I think that’s right. And 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 and consistent with our expectations.

Bill Carcache — Wolfe Research — Analyst

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. So it suggests that most of the reserve build was really growth driven. Maybe 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 your current levels or would it still likely drift a little bit higher from here? Any thoughts around that would help.

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

Yeah. So 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 just — we more heavily weighted the recessionary forecast than we had in the third quarter. And then remember, the charge-offs that we took this quarter, particularly the lumpier ones, we mentioned one. Those were in a large way already reserved. So our build, right, is actually more than you think. The ratio ends up the same, but we have kind of less — we have lower non-performers inside of that total book as a percentage, maybe think of it that way.

In terms of coming to that 17 [Phonetic]. And then I’d also just remind you of our — wherever we sit today at 17 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 — we think correctly, but nonetheless conservative process approach using CECL.

Bill Carcache — Wolfe Research — Analyst

Super helpful. Thank you for taking my questions.

Operator

Our next question is from the line of Betsy Graseck with Morgan Stanley. Please go ahead.

Betsy Graseck — Morgan Stanley — Analyst

Hey, good morning.

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

Good morning.

Betsy Graseck — Morgan Stanley — Analyst

I wanted to talk a little bit about the expense side. And I know you mentioned that there was a part of the expenses this quarter that was associated with revenue generating activities like capital markets, and so that is a net positive to PPOP. So let’s leave those expenses aside. I wanted to dig in more to the expenses that did not come with commensurate revenues and understand what the drivers were behind those increasing. And then talk a little bit about your outlook for 2023 off of what is now higher based on what people have been expecting coming into this today?

Robert Q. Reilly — Chief Financial Officer

Sure. I can start there. So in regard to the fourth quarter expenses, the biggest driver of the increase was personnel expense. And 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…

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

Explain why it’s seasonal.

Robert Q. Reilly — Chief Financial Officer

Seasonal. Well, sure. Well, essentially…

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

Not only that thing, and basically burn through your…

Robert Q. Reilly — Chief Financial Officer

The deductibles. Yeah, the deductibles and then like the company takes over after that. So — and that happens, that happens seasonally. This season, it was a little bit higher than what we expected. Outside of that, when you look at the marketing spend, that’s sort of timing in terms of how that falls in the year. But the impairments that we took on various investments and assets, which is part of your question, there wasn’t anything singular that would stand out. It was a…

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

Yeah, there was. We wrote off everything we had to do with crypto.

Robert Q. Reilly — Chief Financial Officer

Well, that was part of it. That was part of it. So maybe Bill wants to answer these questions. But I would say there wasn’t anything singular. There’s 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 rightsized for our space needs going forward, that kind of thing. So on the margin…

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

[Indecipherable]

Robert Q. Reilly — Chief Financial Officer

Okay. Yes, sure. And then on the margin, the — I’m sorry, just going into — Bill’s giving me another question, but I’d say on the margin going into ’23, those impairments reduced some of our expense rates, so that sort of helped. So our guide is 2% to 4% in all of ’23. That’s how that all stays connected.

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

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 — we flushed a couple tech projects that didn’t work out. We rightsized occupancy. Marketing went up a little bit. And then we get hit this quarter on charge-offs, which are — 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 and that finally hits the books.

Robert Q. Reilly — Chief Financial Officer

And we’re largely reserved to your other point.

Betsy Graseck — Morgan Stanley — Analyst

Okay. So as I think about the guide into next year for total expenses up 2% to 4%, that is really related more towards your revenues of 6% to 8% and this crypto thing, whatever is a one-time, one and done [Speech Overlap]

Robert Q. Reilly — Chief Financial Officer

And that’s why — and I said in my opening comments, we point to strong positive operating leverage in ’23.

Betsy Graseck — Morgan Stanley — Analyst

Okay. All right. And then separately, I know we talked a little bit earlier about the capital and the fact that your CET1 has been migrating down as you’ve been doing some nice lending, etc. 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 changes in how you think about RWA factors? And then I’m just wondering like how — what is the low on CET1 that you’re willing to drive to as we think about demand for borrowing is still pretty robust?

Robert Q. Reilly — Chief Financial Officer

Well, so a couple of things on that. I would say in terms of the RWA increase, it’s entirely loan driven. So we’ve had a lot of loan growth in ’22, a lot in the fourth quarter with that 3% growth in average loans. So that’s the key driver of the RWA increase. Our CET ratio is at 9.1%. We’ve talked about an operating guideline of between 8.5% and 9%. So we’re still above our operating guidelines and that’s a good place to be.

Betsy Graseck — Morgan Stanley — Analyst

Okay. So 8.5% the low, really that’s how we should read it.

Robert Q. Reilly — Chief Financial Officer

Yeah.

Betsy Graseck — Morgan Stanley — Analyst

Okay. All right. Thank you.

Robert Q. Reilly — Chief Financial Officer

Sure.

Operator

Our next question is from the line of Ken Usdin with Jefferies. Please go ahead.

Ken Usdin — Jefferies — Analyst

Thanks. Good morning. I was wondering if you guys could talk about the still potential for the TLAC rules that come down to the category 3s 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 a phase-in period?

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

I mean a lot of people talking about this, not a lot happening around it. Where it to happen, 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 would be a phase-in period. Practically, as we look the growth opportunity in our company, new clients’ loan growth against what it is likely to be a constrained ability to grow total deposits, right, you’re going to see our wholesale borrowings increase. And in the course of our wholesale borrowings increase in the ordinary course of business, we’re going to fulfill all our parts of that TLAC requirement. All of that is in the numbers we’re talking to you about, it will take more than next year. But in the way we think about [Speech Overlap]

Robert Q. Reilly — Chief Financial Officer

In terms of the normalized as we move towards more normalized mix.

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

Yes. So put — and the simplest way to think about that maybe is our wholesale debt historically ran, I don’t know, in the mid [Speech Overlap]

Robert Q. Reilly — Chief Financial Officer

16% to 19%.

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

Yeah, mid-teens, I was going to say, and we’re running 5%. So if we normalize, that’s what home loan in there. As we normalize our borrowings through time, it’s likely we’re going to get and fulfill that requirement without purposely trying to do it. Just because that’s the way we and other people will be funding institutions.

Robert Q. Reilly — Chief Financial Officer

Yeah. I’d just add to that, that’s — 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 and there’s also a reasonable chance there would be some tailoring to it, which would be reduced in our case.

Ken Usdin — Jefferies — Analyst

Yeah. And 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%. So how would you expect that to go vis-a-vis the use of wholesale borrowings to continue to support that growth as well?Thank you.

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

Look, you wouldn’t purposely borrow wholesale and then invest in a security to hold in your securities book. However, inside of all the requirements that we manage ourselves to, we also have liquidity requirements, LCR and the need to hold high quality liquid assets. So the securities book will likely fade in terms of total percentage over time simply because of loan growth that we see in some of the roll down. That securities book is part of what we have in terms of cash and liquidity to satisfy LCR. So it’s — we’re not going to say, hey, let’s borrow some money to buy more treasuries, right? That isn’t going to happen. But practically, we use that book to hedge the value of our deposits. We’ll continue to do that and we’ll continue to do that inside of the lens of LCR and other liquidity stresses that we run.

Ken Usdin — Jefferies — Analyst

Got it. Okay. Thank you, Bill.

Operator

[Operator Instructions] Our next question is from the line of Mike Mayo with Wells Fargo Securities. Please go ahead.

Mike Mayo — Wells Fargo Securities, LLC — Analyst

Hi.

Robert Q. Reilly — Chief Financial Officer

Hey, Mike.

Mike Mayo — Wells Fargo Securities, LLC — Analyst

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. Yet, your guidance from one month ago was off and your results fell one eighth [Phonetic] below consensus.

Now don’t stop giving your guidance or anything like that, and we’re all subject to the uncertainties out there. But just a little bit more about what’s changed in the past month. So 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 reserves, the NII and maybe your decision to lean into the securities purchases maybe because you think this is a relative top on yields? Thanks.

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

Yeah. So you’re overcomplicating it. One thing changed from a month ago and one thing only. And that was basically 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, 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 because 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 noised. The guide for next year is tempered simply by that question of whether spreads are going to rise on loans, maybe they will or our CECL analysis will be wrong. We haven’t — we never guide on what our provision is going to be. We talk about charge-offs and the charge-off this quarter we felt was a bit anomalous. So nothing has really changed other than the sweat factor of, hey, can I actually earn what I thought I was going to earn on new loan production. That’s it.

Mike Mayo — Wells Fargo Securities, LLC — Analyst

So you’re saying you’re too conservative either on CECL reserves or your NII guide for the year?

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

Yeah. Well, but I haven’t given you a number on my CECL reserves, right? So — but we put in — we worsened our economic forecast. And the simple soundbite is, either spreads are going to widen or our economic forecast is wrong. I think that’s a fair statement.

Robert Q. Reilly — Chief Financial Officer

So there’s an inconsistency there.

Mike Mayo — Wells Fargo Securities, LLC — Analyst

You give — by the way, the CEO gig doesn’t turn out maybe to come to the economists because this is such a detailed outlook in your release about what you expect the economy and interest rates and everything else. So you give a lot of detail.

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

Yeah. You asked a question on the securities book. It’s just — 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 in effect a deposit-funded institution, right? If you want to 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 is going to cut to what down the road. And you got to believe that the Fed is going to go back into 2s on Fed funds, which I just fundamentally don’t believe. So I think kind of the market is just uninvestable at the moment, and I think that’s going to be figured out through the course of the year. And so there’s upside if my view on that plays out in the way we run our securities book. But at the moment, there’s no choosing to go along in this environment I think is a mistake.

Mike Mayo — Wells Fargo Securities, LLC — Analyst

One more clarification. You are reserved for your existing book of business, assuming an unemployment rate of what level? I know it’s above 5%.

Robert Q. Reilly — Chief Financial Officer

5.1%.

Mike Mayo — Wells Fargo Securities, LLC — Analyst

Got it. All right. Thank you.

Operator

Our next question is from the line of Ebrahim Poonawala with Bank of America. Please go ahead.

Ebrahim Poonawala — Bank of America Merrill Lynch — Analyst

Good morning.

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

Good morning.

Ebrahim Poonawala — Bank of America Merrill Lynch — Analyst

On the NII guide, so I think you’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? And tied to that, like with the 10 years sub-340 this morning, like do you just not invest right now and wait for things to shake out or how do you think about balance sheet management in a world where maybe the 10 years headed to 3% not 4% next? Thanks.

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

Yeah. So that impacts the NII guide a bit only in terms of what our reinvestment yield is and will be when we — when the existing security book rolls down, right? So you’ve seen the book yield on that rise from wherever to what is now 260 something.

Robert Q. Reilly — Chief Financial Officer

Yeah, the total book.

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

Yeah. And that continues to increase as we — as things roll off, we’re reinvesting with high 4s, 5 handles on securities. Look, if the 10-year goes to 3%, 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 going to be in an environment where the Fed is bouncing short-term funds around 1%, which I just don’t think it’s going to happen. I think we’re going to — I think we will get inflation under control, but I think it’s going to be a struggle to get it under 3 long-term. And I think front rates will rise — will stay higher. They might cut and likely will cut from some 5% level. But this assumption that they’re going to cut, and therefore, rates are going to go back to 2 or 1, I just think is absurd. So therefore, to me, the back end of that curve is uninvestable. You’re right, it could rally to there. Good for the people who own it as long as it’s not me.

Ebrahim Poonawala — Bank of America Merrill Lynch — Analyst

Yeah. No, that’s fair. And again, I’m not saying it makes sense, but it’s the world we live in. And I guess tied to that, I’m not sure if you gave explicit guidance in just some of those 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?

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

Look, there’s obviously — 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. 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. So if you’re losing deposits that are not core relationship deposits then maybe that makes sense. But if you’re losing customers in the process of that run off, that’s a mistake. And that’s the logic we use in figuring out how we price deposits and how we grow or maintain deposits.

Ebrahim Poonawala — Bank of America Merrill Lynch — Analyst

That’s fair. And 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’re getting into some version of a recession? Like, can you conclusively think about that over the next few months or we’re not going to know that until we are well into the depth of a downturn a few quarters from now?

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

We’ve given you our best forecast. I mean, look, there’s a lot of unknowns here. Technically, we could see ourselves heading into a full employment recession because you’ll have stale GDP for a couple of quarters, but unemployment not ticking up to high levels. And I don’t even know how to think about that environment in terms of what charge-offs might be. I mean that’s probably really low charge-off environment.

Robert Q. Reilly — Chief Financial Officer

Well, it’s 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.

Ebrahim Poonawala — Bank of America Merrill Lynch — Analyst

That’s fair. Thanks for taking my questions.

Operator

[Operator Instructions] Our next question is from the line of Matt O’Connor with Deutsche Bank. Please go ahead.

Matt O’Connor — Deutsche Bank Equity Research — Analyst

Good morning.

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

Hey, Matt.

Matt O’Connor — Deutsche Bank Equity Research — Analyst

I was wondering if we could just circle back on some of the lumpy costs. I guess, just in aggregate, like how much were the impairment? And then I think there was also — you had called out some lumpiness from the long-term intensive plan, 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.

Robert Q. Reilly — Chief Financial Officer

Yeah. Without — we don’t have specific numbers. You can see them 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. So not big numbers, but just the delta between the two quarters drove the increase.

Matt O’Connor — Deutsche Bank Equity Research — Analyst

Okay. And then separately, I mean, I heard you earlier kind of reiterate the 8.5% to 9% CET1 target over time. And 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%. And I don’t know if it pressures behind the scenes from rating agencies or regulators or just conservatism for where we are in the cycle. But any thoughts on the company of your size being able to run 9% when 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%?

Robert Q. Reilly — Chief Financial Officer

Do you want to answer?

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

[Indecipherable]

Robert Q. Reilly — Chief Financial Officer

Well, the only thing — the only thoughts that I have just reacting is the guidelines are typically drawn for all banks in terms of the stress capital buffer. So how they stress, you got to look at that. And then it’s the relative capital levels to the stress levels as opposed to the absolute levels. But that’s just my reaction.

Matt O’Connor — Deutsche Bank Equity Research — Analyst

Okay. But I guess the point is like do you feel comfortable with whatever kind of behind the scene stuff that’s going on with the rating agencies, regulators, the 9% and maybe drifting down a little bit over time, but at 9% do you feel real comfortable within the current environment?

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

Yes.

Robert Q. Reilly — Chief Financial Officer

Yes.

Matt O’Connor — Deutsche Bank Equity Research — Analyst

Okay. Thank you.

Operator

Our next question is from the line of Vivek Juneja with J.P. Morgan. Please go ahead.

Vivek Juneja — J.P. Morgan — Analyst

Hi. Just a couple of quick ones. Any color on criticized assets, how they did — how those did in the quarter?

Robert Q. Reilly — Chief Financial Officer

Yeah, relatively flat, not a big change at all.

Vivek Juneja — J.P. Morgan — Analyst

Okay. And Bill, just not to beat a dead horse to death, but the whole set of question on NII and swaps and protection, given that you think of swaps and securities sort of synonymously in terms of expressing your view on rates. I would expect that you’re going to hold off, therefore, even on the swap side in terms of adding protection yet until you see clearer signs of a lot more potential for rate cuts?

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

Yeah. It’s — 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 will put on forward starting swaps and they will not have to eat negative carry in the course of doing that. And they will hope some time by the time those come due that there is a negative carry because there will be a cut.

So you effectively — I mean everything is 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 on where the yield curve is. That’s my downside protection. I can buy — 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 — while we’re asset sensitive, we’re not wildly asset sensitive. And 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 going to look like rates during the 2012 to 2020 year. So that’s where we sit.

Vivek Juneja — J.P. Morgan — Analyst

All right. Thanks.

Operator

And there are no further questions on the line at this time. I’ll turn the presentation back to Bryan Gill for any closing remarks.

Bryan K. Gill — Executive Vice President & Director, Investor Relations

Well, thank you all for joining the call today. If you have any other follow-ups, please reach out to the IR team, and we’ll be happy to help you out. Thank you.

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

Thanks, everybody.

Robert Q. Reilly — Chief Financial Officer

Thank you.

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