PNC Financial Services Group, Inc. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. Comparisons are primarily with fiscal 2021. PNC is a diversified U.S. financial institution operating through Retail Banking, Corporate & Institutional Banking, and Asset Management Group. BBVA acquisition results were included for the full year in 2022; integration was reported complete by year-end.
Financial performance and position
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Total revenue | $21.1 billion | $19.2 billion | Up 10% |
| Net interest income | $13.0 billion | $10.6 billion | Up 22% |
| Noninterest income | $8.1 billion | $8.6 billion | Down 5% |
| Provision for credit losses | $477 million | $(779) million | Shifted from recapture to expense |
| Noninterest expense | $13.2 billion | $13.0 billion | Up 1% |
| Net income from continuing operations | $6.1 billion | $5.7 billion | Up 7% |
| Diluted EPS from continuing operations | $13.85 | $12.70 | Up 9% |
| Net interest margin (non-GAAP) | 2.65% | 2.29% | Up 36 basis points |
| Efficiency ratio | 62% | 68% | Improved |
Net income attributable to common shareholders was $5.7 billion. The 2022 effective tax rate was 18.2%, versus 18.1% in 2021.
- Cash flow: Net cash provided by operating activities was $9.1 billion; investing activities used $13.4 billion; financing activities provided $3.4 billion. Cash and due from banks decreased $961 million to $7.0 billion.
- Balance sheet: Assets were $557.3 billion, essentially unchanged. Loans increased 13% to $326.0 billion, while deposits declined 5% to $436.3 billion. Borrowed funds rose 91% to $58.7 billion.
- Credit: Nonperforming assets fell 19% to $2.0 billion; net charge-offs were $563 million, or 0.18% of average loans, versus $657 million, or 0.24%, in 2021. The allowance for credit losses related to loans was $5.4 billion, or 1.67% of loans, versus $5.5 billion, or 1.92%.
- Capital and liquidity: PNC’s Basel III CET1 ratio was 9.1% (8.9% fully implemented); PNC and PNC Bank were reported well capitalized. Parent-company available liquidity was $9.6 billion, and unused secured borrowing capacity was $67.2 billion. The filing reports $37.8 billion of cash and short-term investments and $44.2 billion of available-for-sale securities at year-end.
Material changes and unusual items
- Higher rates lifted net interest income and margin, but also increased deposit and borrowing costs. Noninterest income declined, mainly from lower capital markets and advisory revenue, private equity revenue, and mortgage activity; card and cash management revenue grew.
- Commercial loans grew 17%, reflecting new production and greater commitment utilization. Deposits fell amid inflationary pressure and competitive pricing, with a shift from noninterest-bearing to interest-bearing balances.
- PNC transferred $82.7 billion fair value of securities from available for sale to held to maturity. The transfer reduced future AOCI volatility; related pretax unrealized losses of $5.1 billion remained in AOCI and are to be amortized over the securities’ remaining lives.
- Shareholders’ equity fell 18% to $45.8 billion, primarily reflecting a $10.6 billion after-tax AOCI decline, common share repurchases, dividends, and preferred stock redemption. PNC returned $6.0 billion to shareholders in 2022.
- BBVA integration costs totaled $980 million, including $120 million of capitalized-item write-offs; PNC reported integration complete and no further costs anticipated.
Outlook, commentary, and risks
Management’s baseline outlook anticipated a mild recession beginning in the second half of 2023, with real GDP contracting about 1%, unemployment rising above 5% in the first half of 2024, and inflation returning toward 2% by early 2024. PNC expected one additional 25-basis-point federal funds rate increase in March 2023 and a 25-basis-point cut in early 2024.
- For full-year 2023 versus 2022, PNC expected period-end loans up 2%–4%, average loans up 6%–8%, revenue up 6%–8%, noninterest expense up 2%–4%, and an effective tax rate of about 18%.
- For first-quarter 2023 versus fourth-quarter 2022, management expected stable period-end loans, average loans up 1%–2%, net interest income down 1%–2%, fee income down 3%–5%, total revenue down about 3%, expenses down 2%–4%, and net loan charge-offs of about $200 million.
- Principal risks include recession and inflation, changing interest rates and deposit competition, borrower and commercial real estate credit quality (including office exposure), securities valuation and liquidity, regulatory capital and liquidity changes, cyber and third-party operational risks, climate-related exposures, and legal proceedings.
- Legal contingencies include ongoing Visa/Mastercard interchange litigation and USAA patent litigation. A jury awarded USAA approximately $218 million in one case and $4.3 million in another; post-trial motions and further proceedings remained pending. For disclosed matters where estimable, PNC said reasonably possible losses in excess of accruals were in aggregate less than $300 million, while cautioning this excludes some matters and is not a maximum exposure estimate.
PricewaterhouseCoopers LLP issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting; management and the auditor concluded controls were effective at year-end.
Important facts for investors to verify
- Whether deposit outflows, deposit pricing, and reliance on FHLB borrowings continue to affect funding costs and net interest income.
- Whether loan growth and the economic outlook drive higher provisions or deterioration in commercial real estate, consumer, or other credit metrics.
- The implications of the securities reclassification, unrealized losses, AOCI, and the fully implemented CET1 ratio for capital flexibility.
- Actual 2023 performance against management’s loan, revenue, expense, and credit-loss outlook, and any revisions to that outlook.
- Developments and potential financial effects of USAA patent litigation, interchange litigation, and other legal and regulatory matters.
- Execution of shareholder returns against regulatory capital requirements and the stress capital buffer.