Welcome to the M&T Bank First Quarter 2023 Earnings Conference Call. All lines have been placed on listen-only mode. The floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star then the one on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star two. When posing your question, we ask that you please pick up your handset to allow for optimal sound quality. Lastly, if you should require operator assistance, please press star zero. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Brian Klock, Head of Markets and Investor Relations. Please go ahead.
Thank you, Shelby, and good morning. I'd like to thank everyone for participating in M&T's First Quarter 2023 Earnings Conference Call, both by telephone and through the webcast. If you have not read the earnings release we issued this morning, you may access it along with the financial tables and schedules by going to our website www.mtb.com. Once there, you can click on the Investor Relations link and then on the Events and Presentations link. Before we start, I'd like to mention that today's presentation may contain forward-looking information. Cautionary statements about this information, as well as reconciliations of non-GAAP financial measures, are included in today's earnings release materials, as well as our SEC filings and other investor materials. These materials are available on our investor relations webpage, and we encourage participants to refer to them for a complete discussion of forward-looking statements and risk factors.
These statements speak only as of the date made, and M&T undertakes no obligation to update them. Now I'd like to turn the call over to our Chief Financial Officer, Darren King.
Thank you, Brian. Good morning, everyone. Our first quarter results reflect the strength of our balance sheet and liquidity position, as well as the impact of our merger with People's United Bank. Compared to last year's first quarter, revenues have grown over $970 million or 67%, translating into 24% positive operating leverage year-over-year. Pre-provision net revenues have more than doubled since last year to $1.1 billion. Credit remains solid, with net charge-offs still below our long-term average. Capital levels remain strong, with the CET1 ratio estimated to end the first quarter at 10.15%.
During the quarter, we repurchased $600 million in common shares, which represented 2% of our outstanding common stock. The board approved an 8% or $0.10 per share increase in the quarterly common dividend to $1.30 per share. Tangible common equity per share increased 3% to $88.81 per share. In addition, April 1st marked the one-year anniversary of the closing of the People's United acquisition. We're pleased with the results of the largest acquisition in our company's history. The tangible book value dilution was only 4% and has been earned back already. Merger costs were less than anticipated at the time of announcement. Targeted expense synergies have largely been realized and are now in the run rate.
As a result of these, the above, the return on investment and EPS accretion have exceeded those expected at the time the deal was announced. Let's take a look at the first quarter results. Diluted GAAP earnings per common share were $4.01 for the first quarter of 2023, down 7% compared with $4.29 in the fourth quarter of 2022. Net income for the quarter was $702 million, 8% lower than the $765 million in the linked quarter. On a GAAP basis, M&T's first quarter results produced an annualized rate of return on average assets of 1.4% and an annualized rate of return on average common equity of 11.74%.
This compares with rates of 1.53% and 12.59%, respectively, in the previous quarter. Included in GAAP results were after-tax expenses from the amortization of intangible assets amounting to $13 million in the first quarter and $14 million in the sequential quarter, representing $0.08 per common share in both quarters. Pre-tax merger-related expenses of $45 million related to the People's United acquisition were included in the fourth quarter's GAAP results. These merger-related charges translate to $33 million after tax or $0.20 per common share. There were no merger-related expenses in this year's first quarter. In accordance with the SEC's guidelines, this morning's press release contains a reconciliation of GAAP and non-GAAP results, including tangible assets and equity.
Consistent with our long-term practice, M&T provides supplemental reporting of its results on a net operating or tangible basis from which we have only ever excluded the after-tax effect of amortization of intangible assets as well as any gains or expenses associated with mergers with mergers and acquisitions. We believe this information provides investors with a better picture of the long-term earnings power of the institution. M&T's net operating income for the first quarter, which excludes intangible amortization and the merger-related expenses, was $715 million, down 12% from the $812 million in the linked quarter. Diluted net operating earnings per common share were $4.09 for the recent quarter, compared with $4.57 in 2022's fourth quarter.
Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholders equity of 1.49% and 19% in the recent quarter. The comparable returns were 1.7% and 21.3% in the fourth quarter of 2022. As a reminder, GAAP and net operating earnings for the fourth quarter of 2022 were impacted by certain noteworthy events. This included a $136 million gain related to the sale of the M&T Insurance Agency, as well as a $135 million contribution to M&T's charitable foundation. These items collectively netted and did not materially impact net income. We'll take a deeper dive into the underlying trends that generated our first quarter results.
Taxable net interest income was $1.83 billion for the first quarter of 2023, slightly below the linked quarter. The $9 million decrease was driven largely by a $30 million in lower net interest income, reflecting the 2-day shorter calendar quarter, partially offset by $13 million positive impact from our hedging program and $8 million from higher average earning asset volumes, net of higher average interest-bearing liability volumes. The net interest margin for the past quarter was 4.04%, down two basis points from the 4.06% in the linked quarter. The primary driver of the decrease to the margin was the impact from a higher level of borrowing, which we estimate reduced the margin by 19 basis points.
This was partially offset by the impact from higher rates on earning assets, net of deposit funding, which we estimate added 18 basis points. All other factors had a negligible impact on the margin. Total average loans and leases were $132 billion during the quarter, up $2.6 billion or 2% compared to the linked quarter. Looking at the loans by category on an average basis compared to the fourth quarter, commercial and industrial loans and leases increased $2.4 billion or 6% to $42.4 billion, with $1.9 billion being broadly based and $453 million of growth in average dealer floorplan balances. During the first quarter, average commercial real estate loans decreased by $363 million or 1% to $45.3 billion.
The decline was driven largely by lower permanent mortgages as average construction loan balances were essentially flat. Residential real estate loans increased by $435 million or about 2% to $23.8 billion, due largely to the timing of the retention of originations throughout the prior quarter. End of period balances were essentially flat sequentially. Average consumer loans were up $144 million or about 1% to $20.5 billion. Recreational finance loan growth continues to be the main driver of increased balances, and these average loans grew $178 million or 2%.
Average earning assets, excluding interest-bearing cash on deposit at the Federal Reserve, increased $4.9 billion or 3% due to the $2.6 billion growth in average loans and $2.3 billion increase in average investment securities. Although average interest-bearing cash balances have decreased $777 million to $24.3 billion during the first quarter of this year, they came in higher than our initial projections. The sequential quarterly decline in cash reflects loan growth and the drop in deposit balances, partially offset by the proceeds from long-term borrowings issued during the quarter. Consistent with our expectations and normal seasonal outflows, deposits declined sequentially. However, the $1.9 billion or 1% sequential average decline was slightly better than our expectations at the January earnings call. We remain focused on growing and retaining deposits.
Our experience in prior rising rate environments reminds us to expect increased competition for deposits and changing customer behavior, leading to a mix shift within the deposit base. During the first quarter, average demand deposits declined $8.4 billion. Savings and interest-bearing checking deposits increased $1 billion and time deposits increased $5.4 billion. Average commercial deposits declined a net $2.4 billion as business owners shifted $6.3 billion out of operating demand deposit accounts and into both on and off balance sheet sweep accounts to earn a higher return on their excess balances, as well as to make distributions. Almost 2/3 of the decline in non-interest-bearing deposits was offset by movement into on-balance sheet sweep accounts. Where those average balances increased $3.8 billion during the first quarter of 2023.
Turning to consumer deposits, they declined a net $758 million in the first quarter as $2.5 billion in outflows were partially offset by a $1.7 billion increase in average time deposits. Lower levels of activity in the capital markets and seasonal factors also impacted average balances for the following lines of business. Trust fund demand balances declined $1.2 billion. Municipal deposits declined $789 million, and escrow deposits declined $684 million. Average brokered CDs increased $3.8 billion sequentially, due almost entirely from growth during the previous quarter. Turning to non-interest income. Non-interest income totaled $587 million in the first quarter compared with $682 million in the linked quarter.
M&T normally receives an annual distribution from the Bayview Lending Group during the first quarter of the year. This distribution was $20 million in 2023 and $30 million in last year's first quarter. As noted earlier, the fourth quarter of last year included a $136 million gain from the sale of the M&T Insurance Agency. Excluding these two items, non-interest income was up $21 million or 4% sequentially. Trust income of $194 million in the recent quarter was flat sequentially. Service charges on deposit accounts were $114 million compared to $106 million in the fourth quarter. The increase primarily reflects a full quarter of service charges on acquired customer deposit accounts after these fees were waived in October and November of last year.
Mortgage banking revenues were $85 million in the recent quarter, up 4% from the linked quarter. Revenues from our residential mortgage business were $55 million in the first quarter compared with $54 million in the prior quarter. Commercial mortgage banking revenues were $30 million in the first quarter compared to $28 million in the final quarter of 2022. Other revenue from operations, excluding the distribution from Bayview Lending Group in this year's first quarter and the gain from the sale of the M&T Insurance Agency in the sequential quarter, were $140 million, up $9 million sequentially. Turning to expenses. Operating expenses, which exclude the amortization of intangible assets and merger-related expenses, were $134 billion in the first quarter of this year, little changed from the fourth quarter of last year.
As is typical for M&T's first quarter results, operating expenses for the recent quarter included approximately a Gretzky of seasonally higher compensation costs relating to accelerated recognition of equity compensation expense for certain retirement-eligible employees. The HSA contribution, the impact of annual incentive compensation payouts on the 401(k) match and FICA payments, as well as the annual reset in FICA payments and unemployment insurance. Those same items amounted to an increase in salaries and benefits of approximately $74 million in last year's first quarter. As usual. Net charge-offs for the recent quarter amounted to $70 million, including amounts that reflect updated appraisals of non-accrual office loans. Annualized net charge-offs as a percentage of total loans were 22 basis points for the first quarter compared to 12 basis points in the fourth quarter.
Loans 90 days past due on which we continue to accrue interest were $407 million at the end of the recent quarter compared to $491 million sequentially. In total, 75% of these 90-day past due loans were guaranteed by government-related entities. Turning to capital. M&T's common equity Tier 1 ratio was an estimated 10.15% compared with 10.44% at the end of the fourth quarter. The decrease was due in part to growth in risk-weighted assets and the impact of the repurchase of $600 million in common shares, which represented 2% of our outstanding common stock. Tangible common equity totaled $14.7 billion, up slightly from the end of the prior quarter.
Tangible common equity per share amounted to $88.81 per share, up 3% from the end of the year. Turning to the outlook. As we look forward to the rest of this year, we believe we're well-positioned to navigate through the challenging economic conditions. However, the rapidly changing interest rate expectations, combined with continued pressure on funding, affect our outlook for the full year of 2023. As a reminder, the acquisition of People's United closed on April 1st, 2022, and thus the outlook for 2023 includes four quarters of operations and balances from the acquired company compared to only three quarters during 2022. Our 2023 outlook also reflects the sale of the M&T Insurance Agency that closed in October of last year.
Even though the sale of the Collective Investment Trust business is expected to close in the first half of this year, our outlook includes the full year of operations from this business. First, let's talk about net interest income outlook. The outlook for interest rates in the economy continues to change frequently. Since March 8th, the 10-year U.S. government bond yield has dropped 46 basis points, and the forward curve has changed meaningfully as well. We expect taxable net interest income to grow in the 20%-23% range when compared to the $5.86 billion during 2022. This range reflects different rates of deposit balance growth, deposit pricing, and loan growth. Consistent with the current forward curve, our forecast incorporates two 25 basis point cuts in the final quarter of this year.
As we noted on the first quarter call, a key driver of net interest income in 2023 will be the ability to efficiently fund earning asset growth. We expect continued intense competition for deposits in the face of industry-wide outflows. Full year average total deposit balances are expected to be down low single digits compared to the $158.5 billion average during 2022. During the first quarter, we issued $3.5 billion in senior debt and will utilize a combination of FHLB funding and senior debt over the course of this year as needed to ensure that we can continue to meet the loan demands of our customers. We continue to expect the deposit mix to shift toward higher cost deposits, with declines expected in demand deposits and growth in time and on-balance sheet sweep.
This is expected to translate to a through the cycle interest-bearing deposit beta in the high 30 to low 40% range. Taking all of these factors into account, we anticipate the net interest margin to be slightly below 4% for the full year of 2023 and to continue to migrate towards the long-term range we have been discussing for the past couple of quarters. Next, let's discuss the drivers of earning asset growth. We currently plan to grow the securities portfolio by $2 billion compared to the $28 billion dollar balance at the end of March of this year, with the addition of longer duration mortgage-backed securities throughout the year.
Looking at average loans, we expect average loan and lease balances during 2023 to grow in the 10%-12% range when compared to the 2022 full year average of $119.3 billion. We anticipate growth to continue in the second quarter and then for average balances to be flat to slightly down over the second half of the year. This implies total average loan and lease balances in the fourth quarter of 2023 to be up 1%-3% from the $129.4 billion average during the fourth quarter of 2022. The mix of C&I, CRE, and consumer loans, inclusive of consumer real estate, is almost 1/3 each as of the end of March.
We expect this trend to shift slightly as C&I growth outpaces CRE. As we have seen over the past three quarters, higher levels of interest rates are expected to slow down the growth in our consumer loan book in 2023. After these average loans grew 2% in the first quarter, we expect the indirect portfolio to be relatively flat over the remainder of the year. Turning to fees. Excluding the $136 million gain on the sale of the M&T Insurance Agency in the fourth quarter of 2022, as well as securities losses, net interest income, sorry, non-interest income was $2.23 billion in 2022. We expect 2023 non-interest income growth to be in the 7%-9% range compared to the $2.23 billion in 2022.
This outlook for non-interest income includes the impact of a bulk purchase of residential mortgage servicing rights that we completed at the end of this year's first quarter. Turning to expenses. We anticipate expenses excluding merger-related costs, the charitable contribution, and intangible amortization to be up 11%-13% when compared to the $4.52 billion during 2022. Recall that approximately half of this increase reflects the next quarter of People's United expenses. This outlook for net operating expenses includes the impact of the previously noted mortgage servicing rights purchase. We do not anticipate incurring any material merger-related costs in 2023, and intangible amortization is expected to be in the $60 million-$65 million range during 2023.
Turning to credit. We expect credit losses to migrate towards M&T's long-term average of 33 basis points, although the quarterly cadence could be lumpy. Provision expense over the year will follow the CECL methodology and will be affected by changes in the macroeconomic outlook as well as loan balances. For 2023, we expect the taxable equivalent tax rate to be in the 25% range. Turning to capital. M&T's common equity tier one ratio of 10.15% at March 31st, 2023, comfortably exceeds the required regulatory minimum threshold, which takes into account our stress capital buffer or SCB. We believe the current level of core capital exceeds that needed to safely run the company and to support lending in our communities. We plan to return excess capital to shareholders at a measured pace over the long term.
In the near term, we plan to maintain a CE Tier 1 ratio slightly above the current level until the current economic uncertainty abates. With that, let's open up the call to questions before which Shelby will briefly review the instructions.
Thank you. If you would like to ask a question, please press star then the number one on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star two. To get as many questions as possible, we ask that you please limit yourself to one and one follow-up. We'll take our first question from Ebrahim Poonawala from Bank of America.
Hey, good morning.
Good morning.
I guess, just wanted to go back to the deposit beta and the NII guidance, so high 30s to low 40s deposit beta. If you can unpack that a little bit in terms of how has your view around deposit pricing behavior changed today relative to January, and that could be because Fed funds is at 5%, events of the last 1 month post SVB. Just give us a flavor of commercial versus retail. Are you seeing differences, and has one changed a lot more than the other? Would appreciate any color there.
Sure, Ebrahim. You know, the deposit betas are largely moving consistent with how we thought they would. You know, when we think about the cumulative through the cycle beta, we really haven't changed our thought process there. What happens is from quarter to quarter, you might see the pace at which we get from where we are today to that terminal cumulative beta shifts a little bit depending on the competition. Obviously the first quarter, there was a lot of disruption going on in the market. Generally the most elastic deposits are the commercial and the wealth deposits. When we look underneath the hood there, we see that the betas of the commercial deposits are in the mid-60s to low 70s.
You know, that would be higher in commercial if we add in, you know, small business, that comes down a little bit because those deposits tend to be a little bit less price sensitive. When you get in the consumer space, you know, you're in kind of the mid-teens deposit beta so far. With that number, that includes the impact of time deposits. If we didn't include the impact of time deposits on those consumer deposit betas, they'd be pretty low. We tend to include the time when we think about the beta because we see time for consumers as a substitute product in rising rates for money market savings and savings accounts.
You know, we try to think about the all-in funding cost, which includes time deposits, which is why we include those. you know, when we look at the quarter, and we look at the decline, you know, for me, a couple things kind of jump out. You know, first is that the decline in deposits this first quarter versus last year's first quarter are almost identical. given that last year was kind of a more normal year and this year had a lot of activity going on, for those numbers to be about the same when you look at as That gave us a lot of, w e felt really good about that.
The other thing is just a little bit about, you know, there's a normal seasonal decline that happens in the first quarter as commercial customers tend to make their distributions to principals to pay taxes. Underneath, you know, the surface, it's important to keep in mind that there are a couple of things that affected deposit flows for us this quarter. One was trust demand balances were down about $1.2 billion, right? About 20% of those balances were trust demand balances, which move with economic activity. Another $700 million odd dollars was escrow. With mortgage rates moving, there's less activity, and so a little bit less action in the escrow accounts.
You know, outside of that, I see it as very typical seasonal decline in commercial balances offset by folks moving, commercial folks in particular, moving some of their balances into on balance sheet sweep or interest-bearing. We kind of look at those two categories together as one. When rates go down, we see deposits flow into non-interest bearing. When rates go up, there's a different mix of interest-bearing and non-interest bearing. Nothing that we're seeing that's outside of our history or our expectations. Hopefully that I said a lot, gives you a little color.
No, it was a lot, and thank you so much. Just on a separate question, I think you mentioned you provided some, made some reserves against office CRE. Obviously, a lot of focus there. Give us a perspective of, is there a pool within your office CRE book that you view or within the CRE book at higher risk, and how do you frame the loss content if some of these buildings end up in foreclosure and you had to have a distressed sale around that? Is it easy to handicap that right now? Just your thought process in managing that portfolio.
Sure. you know, office obviously is getting a lot of attention in the world, we've been focused on it for quite some time. you know, when we go through it and we look at what we think the loss content is, it's a little bit tricky to estimate right now, only because there hasn't been a lot of asset sales. I think in talking to our team, prior to the call, they suggested that there were four properties that sold nationwide outside of Manhattan and three in Manhattan in the first quarter.
That's not a lot of activity to get a market price. Everything that's happening is everyone's looking at cash flows and NOIs. when you think about the cash flows as we think about our clients, it's o ne of the things that's really important to keep in mind is about two-thirds of our clients in real estate in general have put on fixed floating to fixed swaps on their loans.
The impact of the interest rate increases hasn't really affected their ability to carry the loan. Then we start looking at what's coming due. You worry about maturities and the ability to for folks to refi and the pace at which those loans might come due. When I look forward, when we look forward into the next couple of quarters, in aggregate, we have about $200 million of office maturing each quarter for the next two. It actually drops down in the fourth quarter.
When we look at the LTVs of what's maturing, you know, we're in the neighborhood of 80% of those maturing loans have an LTV of 60% or less. Again, it's important to keep in mind that not all of those LTVs are calculated off of brand-new appraisals. Some of them will be a little bit dated. But when you look at some of the protections in place, there's a bunch of room there. That's not to suggest that there will be no losses. You know, as you could see in our results for the quarter, we did take some partial charge-offs on a couple of office properties as we did get new appraisals on things that were troubled.
There is still room there. I think, you know, for us, we keep looking at what's the pace at which the loans are maturing. I think what you'll see, you know, certainly for M&T, and I would expect, although I don't know other people's portfolios, that the office story is one that will play itself out over multiple quarters, if not multiple years, because of the maturities, because of the fact that most people will hedge if they got a floating rate note. A lot of the leases are still not maturing because office leases tend to be longer dated than residential. You know, when we look at our office leases, the numbers, something in the neighborhood of 75% don't come due until after 2024.
You know, I guess the long-winded way of saying it's a concern. We're watching it. You know, our portfolio is pretty broadly spread across our footprint. I t will play itself out over the next several quarters.
That's great color. Thank you so much.
We'll take our next question from Manan Gosalia with Morgan Stanley.
Hey, good morning.
Morning.
Just on the, on the deposit side, you know, it's not surprising that deposits ended the quarter below the average. Can you talk a little bit about the trajectory of deposits in the second half of March? You know, how much, you know, I guess, how much the deposit balance, balances changed through, you know, from, Feb 28th through, you know, the impact from SVB through quarter end? You know, even if you have what's been happening quarter to date, this quarter?
Sure. you know, I guess I would just caution on drawing cause and effect that, you know, the numbers are the numbers, whether the decline that happened in March was specifically attributable to the SVB or Signature challenges is difficult to say just because there's normal activity that happens in the first quarter, right? As we mentioned, the trust demand balances move based on capital markets, not in, you know, an activity, not necessarily because of an exogenous event. roughly when you look at the decline in total deposits over the quarter was about 60% happened before March and 40% happened in March.
A little bit heavier March, but as you get into that March timeframe, that's when we got our distribution from Bayview, which is when distributions often get paid right in front of taxes for commercial clients. You know, when we look at the effect on the bank of the changes that happened, what we tended to see was we opened up more accounts in our business and middle market space than we would typically in a month. We saw balances come onto our balance sheet as people sought to diversify. There were some cases where that went the other way. Net we were flat to slightly up from what our expectations were given all the activity that was happening in the marketplace.
From our perspective, we were in line with what we thought for the quarter and pleased with how the client base and our teams reacted to everything that was going on in the world in the month of March.
Got it. I guess, you know, how confident are you at this stage that deposit balances have stabilized? You know, to the extent, you know, we noticed that the CDs essentially doubled on a Q-on-Q basis. You know, how confident are you that, A, the deposit balances have stabilized, and then, B, you know, given that you've kept your deposit beta assumptions, you know, what would cause you to increase your deposit rates as we, as we went through the middle of the year? Maybe if you have it, what were your spot deposit rates as of March 31st? Thanks.
I'll start with I don't have the spot deposit rates in front of me, and we can follow up with that. In terms of the stability of deposits, again, keep in mind that the action that we're seeing right now is really in non-interest bearing, and that's really being driven by commercial deposits. When we look at consumer balances outside of some outflow in January, and when I say that, I mean non-interest bearing, they've been relatively stable through February and March. When you look in the consumer space, what you're seeing is shift between interest-bearing categories. We're seeing movement from savings and money market into time, which is pretty typical during rising rates.
The net is, you know, some small outflow in DDA, which again is pretty standard in the first quarter of the year. In the commercial space, you know, outside of the normal seasonal activity, what will happen is deposits, non-interest bearing deposits will start to stabilize as customers get down to the level of deposits they need to keep in their operational accounts to make payroll, to pay accounts payable and the like. Excess will not necessarily leave the balance sheet. It will just shift into some form of interest bearing. It could be interest checking, or it could be a non-balance sheet sweep. There will be some decline, and there always is for M&T in these environments.
You know, when we look through the past, we see that when rates have gone down to zero, we tend to have an increase of about four or five percentage points in the percentage of our deposit base that sits in non-interest bearing. As rates rise, that goes back the other direction. That's just exactly what we're seeing now and what's happening. Over time, you know, if you went all the way back into, you know, pre-Global Financial Crisis for banks, not just for M&T, but for the industry, you know, non-interest bearing deposits were in the kind of 20% range of total deposits, you know, and they peaked at 45% for us and about 30% for the industry.
You know, that was the last time Fed funds was anywhere near the rates that they are today. You know, on the flip side, time deposits, were a huge percentage of total deposits in the industry in that time period, you know, upwards of 25%- 30%. They've come all the way down into the 5%-10% range. I give you that as context to say that what's gonna happen, what we think will happen is you'll continue to see some outflow of deposits, but it will stabilize as rates start to stop increasing. What you'll see is less movement out and more movement across categories. Again, for consumers, we think that will be from interest products like money market and savings into time.
For commercial customers, it will be from non-interest bearing DDA into interest-bearing things like sweep and commercial checking. You know, for us, for the rest of the year, we think things start to stabilize as we get into the second quarter and second half, and the build back in commercial checking balances will start in anticipation of next year's first quarter. It's a cycle that it follows itself very predictably every year.
Great. Thanks so much. Very helpful.
We'll take our next question from John Pancari with Evercore.
Morning.
Morning, John. How you doing?
All right. Wanna see if you can give us a little more color on the updated loan growth guidance, the 10%-12%. Where are you seeing some of the, you know, the better trends coming from? Because looks like it was upwardly revised from where you had expected it coming out of last quarter. Thanks.
Yep. John, keep in mind that 10%-12% includes four quarters of People's this year in the averages versus three quarters last year, right? Some of that is in there. I think we noted in the outlook that if you look based on the average balances in just the fourth quarter of last year, we're more in the 1%-3% range. If you look at that, a lot of that's happened already in the first quarter. Based on, you know, where the first quarter loan balances ended, just the averaging effect of that should carry a little bit of growth through the second quarter. We expect things to kind of flatten out a little bit as we go through the back half of the year.
That's just the math that gets the average into that range. Really, you know, I think the challenge that you're seeing is pipelines have been robust, but they're starting to slow down a little bit, and we're managing them to focus our liquidity on our best customers and our relationship customers. Then in some instances, you know, in some of the consumer space, as it is, indirect and RecFi, with rates going up, you're seeing a little less demand from the clients and therefore a little bit of a slowdown that will keep balances flat to slightly down in that space, just as the duration of that portfolio is pretty short.
You need to continue to originate new to keep it flat, or to grow it. You know, within the, within the commercial world, you know, there's not a lot of activity that's really happening in CRE. There's not a lot of new construction. What we would expect is you see for us and for the industry, as loans mature, a lot of capital and liquidity is devoted to those clients and keeping them around. In the C&I space, you know, we've seen fairly broad-based growth, whether it's by geography or by industry type. You know, we did note that the dealer floor plan balances have grown. They're still maybe half of their long-term average, which is better than they were.
There's some upside there. Obviously, as you get a slowdown in indirect, you'll likely see an uptick in the dealer floor plan balances. You know, those are kind of the spaces where we're seeing activity, and how we expect the rest of the year to play itself out.
Got it. All right. Thanks, Darren. Just secondly, back to the office portfolio.
Yep.
A few things around that. Of what percentage of the office book is criticized? I believe last quarter you indicated about 20% of it was criticized. In that 60% LTV that you mentioned for what is maturing coming up, do you have some granularity on what the refreshed LTVs look like as part of that? Then lastly, did you add to the commercial real estate reserve this quarter?
Okay. A lot in there. Let me try and make sure I get it all.
I'm sorry.
The office criticized is still right around 20%. It's up slightly, but not up dramatically. You know, and the hotel criticized continues to come down. It's important to keep that in mind because as we talk about the CRE increase that you're asking about, there's an offset within the whole CRE allowance, right? We've seen some improvement in hotel and retail, offset by some decline in office. We did add to the CRE allowance in the quarter. If you think about dollar amount, it's probably half to two-thirds of the $50 million provision was allocated towards the CRE portfolio. The rest was, you know, would be driven by growth in other portfolios.
You know, when you, when you look at the LTVs, what we've seen in the ones that we have updated so far is we're seeing somewhere between a 15% and 20% decline in some of the updated values of the properties that we've reappraised. You know, that's why you didn't hear me talk much about 80% or 70% LTVs because those ones are getting closer perhaps to where these properties might reappraise. But, you know, 60% LTVs and sub 50% LTVs would seem to still have a lot of cushion before you're into any material loss content. You know, when we, when we look at that, we feel good about where we are.
It doesn't mean that we were taking our eye off the ball, but we feel good about where we are. You know, again, just to give a little more color on New York City office. Next quarter, this quarter we're in right now, there's five loans that are maturing with a principal balance of $30 million.
Got it. All right. Thank you, Darren.
We'll take our next question from Dave Rochester with Compass Point.
Hey, good morning, guys.
Morning.
On capital buyback going forward, it sounds like you're pretty much saying no buyback for 2Q, or is that too strong a statement? Or is the thought just that you'll wait to get your CCAR results and then hope that the market is more stable at that point and go from there?
Yeah, I think that zero is a strong statement. You know, when we look through the quarter, and what we see with the pace of risk-weighted asset growth, you know, we see the potential actually for kind of a trifecta in that we should see a little bit of risk-weighted asset growth. You know, as rates are rising and liquidity is constrained, we think that we'll start to see some increased margin and profitability of new lending activity, which usually happens at this point in the cycle. We'll deploy capital to those opportunities first.
You know, we do anticipate closing the sale of the CIT business in this quarter, which will create a gain, which will help with our capital ratios, which should allow us to be in the market and repurchase some shares. At the same time, maintain this kind of capital level that gives us a really nice cushion, you know, given the uncertainty in the market and while we wait for the SCB. You know, from our perspective, if we run a little light for a quarter, it doesn't mean that the capital's gone. It just means it comes back a little bit later in the year. You know, we think we're in a position here which is nice, where we can actually do all three.
We can grow risk-weighted assets, we can return capital, and we can grow the capital ratios all at the same time.
Got it. Very helpful. As a follow-up, you mentioned your outlook on hotel, retail and multifamily properties improved. Was just wondering if you could unpack that a little bit and just talk about what you're seeing that drives that improved outlook there. You'd mentioned, I guess, office properties that as you kind of are redoing these LTVs are coming down maybe 15%-20%, if I heard that right. Is that how much you're actually marking these as well? The NPAs that you have and the marks that you took this quarter, is that roughly the magnitude or is it less just given that, you know, 15%-20% really doesn't cut into a lot of those properties if those LTVs are that low? Thanks.
Sure. Yeah. I can't write fast enough to keep up with all the questions that you got. If I miss one, just let me know. In hotel and retail, hotel in particular, we saw that portfolio peak at kind of 80% criticized back in the pandemic. What you're seeing is the return to travel, a lot of capacity that came out of the system during those times and occupancy rates and RevPAR is really strong. The NOIs on hotels are really strong, and that's why you're seeing those come out of criticized, and the asset values are holding up. Multifamily also continues to be strong.
I did not make a comment about multifamily values, but multifamily has been very strong. When you look at rent increases over the last 24 months, they've been very strong. In fact, rents in multifamily appreciated faster than interest rates did. They should be well covered, you know, to handle moving interest rates. Retail, you know, kind of played itself out largely through the pandemic. As the economy opened up, you know, we've typically seen retail sales of physical retail pretty darn close to where it was pre-pandemic when looking at volume between in person and online. Those have performed very well. When you think about what was the last question?
In terms of the marks on the office.
The marks on the. Yeah.
Yeah. When you look at where some of these are reappraising, the appraisals are coming down and affecting the LTV. We would only put it into the allowance if we have something that is criticized or not performing and we're worried about it, and we think that it would affect the recoverable value. We take that in and we'll put that through the allowance and ultimately through charge-off.
Great. Thank you.
We'll take our next question from Bill Carcache with Wolfe Research.
Thank you. Good morning, Darren. Could you address how you're thinking about the risk of tougher regulations following the SVB fallout and Barr's recent testimony, including in areas like TLAC and the elimination of the AOCI opt-out? You know, how could we see this, as we see this play out, how could we see it affect, your appetite for buybacks and RWA growth?
Sure. I guess a couple thoughts, Bill. On the OCI piece, we've had that in mind for the last three years. All the discussions we've had over the prior number of years about putting the cash to work and the impact that that might have in the securities portfolio on AOCI and our capital. We were looking at both the CET1 ratio as well as the tangible common equity ratio. It was really the latter one that got us gave us a little bit of agita in debating how fast and how much to put into securities.
From an OCI perspective, if that comes to pass and that goes into our capital ratios, you know, at the end of the quarter, we had about $1.3 billion in total marks across the AFS and HTM portfolios. About $350 million was pre-tax, the AFS mark. $264 million after tax. It's maybe 20 basis points of CET1. Then, you know, if you look at the, at the total, you know, you're maybe slightly below that, call it 80-ish basis points of CET1 if you had to put both through. When we talk a little bit about our thoughts on capital and where we're kind of managing the CET1 ratio for the next little while, it's giving ourselves some cushion as these things play themselves out.
From that perspective, it won't surprise me if that's a change that happens, but I think we're well covered and well prepared should that play itself out. You know, when it comes to TLAC, that's really a longer-term change. You know, I think when you look at what's happening in the industry right now, most organizations have been increasing their use of wholesale funding and bank notes, which ultimately will help with TLAC as it plays itself out. You know, then there's always the question of how Basel IV and those regulations come to pass and what the final proposals look like.
You know, we're trying to be mindful that those are changes that could come and not do something today that would put us in a place where we would have to raise equity or issue TLAC at a suboptimal time.
That's helpful, Darren. Thank you. If I can follow up on your deposit remixing commentary earlier?
Yeah.
What's the non-interest bearing mix that's implicit in your high 30% to low 40% beta expectation? You know, following up on, you know, the commentary about that non-interest bearing mix, you know, perhaps, you know, declining to pre-GFC levels that you mentioned, how are you thinking about that risk? What would that mean for betas?
I'll try and unpack that for you. You know, I give the comment about where rates were and where deposit or where balance sheets were pre-GFC to give context, right? Most of the time when we talk about deposit betas in these industry forums, the point of reference tends to be the last rising rate environment, which was the 16 to 19 period, where Fed funds only got to about 2.25%. Given where Fed funds are today, and we'll see how long they stay there, it's important to keep in mind what balance sheet looks like what bank balance sheets looked like back in that time period. We might not get all the way back there.
We probably won't get all the way back there, depending on how long rates stay at this level. Although it does look like they'll stay there longer than the last time rates rose. When we look at the deposit mix and where things stabilize, we tend to look at and think about demand deposits in conjunction with interest checking and on balance sheet sweep. What we've been seeing is, you know, some decline in those balances over time as deposit balances come out of the system with the Fed's quantitative tightening that they're doing. What we think we'll see, which is included in that outlook, is we'll see a continued shift from demand, particularly commercial clients, commercial and small business, from non-interest bearing into interest checking and sweep.
That over time, you know, you see those balances look maybe closer to 50/50 from where they are today, in those particular categories. You know, there'll still be non-interest deposits on the consumer side. Those you won't see as much movement into interest-bearing products because they don't tend to switch categories like that. Those are some of the factors that are implicit in those deposit betas. You know, really, the question to me is twofold. Where do Fed funds ultimately end up, and how long does it stay there?
That's very helpful. Thanks, Darren.
Hey, Shelby, this is Brian. We're going to go for another 10 minutes, and we've got a bunch of analysts in the queue, so maybe we can limit it to just one question for the analysts that are still there.
Absolutely. As a reminder, just star one to ask a question, and please limit yourself to 1 question. We'll take our next question from Matt O'Connor with Deutsche Bank.
Hey, guys. Thanks for fitting me in here. Darren, I wanted to circle back on the comment about NIM being below 4% for the full year and then trending to kind of that longer term average. I guess first, just confirm, is it still, I think, 3.6%-3.9%, the long-term average that you've talked about?
That is correct.
In terms of, I guess like the timing of getting there and, you know, what are some of the, besides the obvious, like if rates go to zero, it'll be the low end. Like, what are some of the kind of puts and takes like the 3.6% versus 3.9%? Lastly, just to weave in, like any thoughts on the jumping off point for the end of this year? Thanks.
Yeah. Matt, the biggest driver of the change in our posture and thoughts on NIM has really been the shift in funding sources, right? If you look at the work that we did in the first quarter, the $3.5 billion that we issued, we had talked about issuing wholesale over the course of the year. The markets were very receptive when we went out in January, we pulled forward a bunch of that funding, which had a big impact. We talked about 19 basis points on the NIM.
Where we stand today, when you look at our asset sensitivity, you can see we're kind of plus or minus 2%, which is where we try to run the bank. We'll see when we go through and we look at those factors and expectations that Fed funds is starting to top out and likely based on the forward curve, we see a decline in the end of the year. That's why you start to see that deposit or that margin start to come back down.
You know, but as I mentioned, with our asset sensitivity where it is, it's not gonna drop precipitously because of the things that we've done with some of the forward-starting swaps, with the securities portfolio build, with the mix of fixed rate assets on the balance sheet and what have you. So it will start to grind down into that range. Given, you know, over the long run, the reason we've talked about that range is because we expect over the long run that things quote-unquote "normalize." What we mean by that is that the mix of deposits on the balance sheet looks more like what you would see in a normal rate environment. It's not extreme, like where we had 45% of the deposits in non-interest bearing. That's not normal.
As that changes, the margin comes down. We'll see a mix of the time deposits and what the rates are on time deposits, and that will affect the margin. We'll look at what percentage of the balance sheet sits in cash and securities, and as those start to normalize, you'll see an improvement in the margin. It's the shift in all of those categories that became very extreme through the pandemic, that as they start to come back into what we would consider normal ranges, that's why we think that 360-390 is a normal long-term range for our bank and our balance sheet, just kind of based on history. We'll start to see that migration happen.
You know, we started to see it obviously this quarter and at the end of last year. It will continue through 2023. How fast we get there, it seems like things are moving pretty quickly right now, just given quantitative tightening and how balances are shifting around the industry. As we get to the end of the year and the jumping off point for the margin, you probably migrating towards the 360 range, you know, for the last quarter of the year. You know, there's a lot of factors that can get us there, between now and then. That would be kind of the low end of where I think we would end the year.
For the whole year, you know, we're in the ballpark of, you know, high threes, just based on that trajectory. As we go through the year, and the balances, the deposit balances reprice, you see, some migration down, but it starts to level off as we get towards the back half of the year, and you operate in that range, through most of 2024 would be our expectation right now. You know, keep in mind, there's a lot of assumptions that go into that, not the least of which is what the forward curve looks like.
Okay. That was a lot of detail. Just to summarize, you think you get to the kind of lower end of the 3.6-3.9 range by the end of the year, that's kind of relatively stable for next year with all the caveats that you have highlighted.
Yeah, I would just alter that slightly and say that the bottom end of the range, you probably don't see until you know, the first half of next year, you know, that 360 to 390. You're slowly moving down as we go through the year. As we get towards the end of the year, the rate of decline slows, and you kind of stabilize and hold flattish as we go through 2024.
Okay. That was helpful. Thanks so much.
We'll take our next question from Ken Usdin with Jefferies.
Hey, Darren, how's it going? Just a quick one on the fee guide going to 7.9% from 5%-7% growth. Is the entirety of that just the MSR add that you mentioned you did at the end of the quarter?
Pretty much, yep.
Okay. if I could just squeak in the same one in on the cost side. Do you, in terms of like the expected sale of the corporate trust business.
Yeah.
You gave us the revenue number in the press release. Do you have an approximate idea of like when that's gonna close so we can just kind of think about taking out the fees and the expenses relative, you know, relative to that as the course of the year goes on?
Yeah, sure. We expect it to close this quarter. You know, for safety for you guys, I would assume that it's out of the run rate for the second half of the year. You know, you've got the revenue. The expenses are not quite the same as revenue, but they're not far off, which is one of the reasons why we're contemplating this move.
Okay. Got it. Right. You were pretty clear that is, that the rest of the cost guide is inclusive of the MSR, any cost related to the MSR adds.
That's correct. Right. In the guide, we have both the full year of the CIT business right now just to try and keep it apples to apples year-over-year, as well as to let you know that we made that MSR purchase. Other than that, you know, there were a few things that were kind of pulled forward in this quarter, you know, some advertising expense, some of the items, costs related to that divestiture, that won't repeat themselves to try and, you know, just give you guys a little bit of color as to why we still feel good about the full year guide.
Got it. Thank you.
We'll take our next question from Gerard Cassidy with RBC Capital Markets.
Hi, Darren.
Morning, Gerard.
We're gonna miss you. Congratulations on your run as CFO. I guess, what, you started in 2016, so I know, you've got a heavy hitter replacing you, but good luck in the new role.
Thank you. I appreciate it. It's been a run. There's a lot that we've seen. You know, we lost Bob and Mark. We went through a pandemic. We bought the largest bank and, you know, went through a couple bank failures. It's been an eventful time.
It sure has. To help you in your new role, your spot rate on your MyChoice Money Market account is three basis points for under $10,000 in the account. Over $10,000, it jumps to 2.96%.
I'm just trying to help out the new CFO so that he has good numbers to report, you know. They will be chastising me about why balances are leaving, but don't forget, that's the offer rate, not the portfolio rate, but I appreciate that.
Oh, God, yes. No, no, I know. Absolutely. Here's my question. Speaking of deposit rates, can you share with us, and then you alluded to this in some of your answers, if the Fed reaches its terminal rate on Fed funds in June, let's say at 5%, 5.5%, and does not cut, even though I know you're looking at the forward curve, that includes two cuts in the fourth quarter. Say they don't cut until maybe the first half of 2024. When does your deposit betas go flat after reaching the terminal rate? Second, if they go flat 60 days afterwards or whatever that you think the number would be, do you then benefit from reinvesting the cash flows off of the securities portfolio into a higher rate environment, assuming the Fed doesn't cut the Fed funds rate?
When you start seeing a slowdown in deposit repricing, you know, history has been it's typically 1 to 2 quarters after the Fed stops. You know, I would expect even if the Fed stopped in the summer and cut in the fourth quarter, you wouldn't see a change in deposit betas in all likelihood until sometime in next year. If you get into the space where they stop and then hold and it goes into 2024, the same thing would be true in terms of you'd see deposit betas go up for a quarter or 2 after and then start to level off.
You know, in all of these things, in the pricing and the ultimate beta, there's a couple of factors to keep in mind, right? We've always talk about it in terms of where Fed funds is. As we look at the bank and the balance sheet, there's a bunch of trade-offs that are being made, right? For interest-bearing deposits, there's a cost that is borne that you need to offer to the customers. There's other alternatives that you can look at to meet those funding needs. It's brokered money market, it's brokered CD, it's wholesale funding, right? Our preference is if we're gonna give rate, we'd rather give it to our customers than to the capital markets. At the end of the day, you're always making those trade-offs.
Then it's the mix shift that happens. You know, for our clients, you know, as they are a reflection of the economy, just as any bank's clients are, consumers are gonna keep some amount of money in their checking account that they're comfortable with. Every person has their own number, but they won't go below it unless they, you know, they're in dire circumstances. Businesses are the same way. So there's a certain amount of deposits that are gonna be on each bank's balance sheet, and then within each category, you know, the market's pretty perfect. We can't pay, you know, materially less for money market savings in Buffalo than our competitors can. The same thing is true for time and the other categories.
There's a natural governor in the market that gets all of these different deposit categories to their normal what I would call their normal pricing, right? What kind of differentiates one bank from the next is their mix. Our advantage has always been that we tend to focus on operating accounts, whether it's consumers or commercial customers, and we have a slightly higher mix of those in our funding, which ultimately helps our cost of funds. Those will be the things that will determine where we end up, and how big our beta is, you know, perhaps compared to others. You know, we think the betas continue after Fed funds stops for a little bit.
The terminal amount is as much a function of your mix of deposits as how high the absolute number goes.
Very good. Congratulations, and we'll talk to you in the future in your new role. Thanks.
Thanks, Gerard.
We'll take our next question from Steven Alexopoulos with JP Morgan.
Hey, Darren. Thanks for squeezing me in.
Morning, Steven.
I'm curious, you know, in the aftermath of SVB, which was obviously all over the news, what are you hearing now from your large deposit customers, right? Are they looking to diversify? Did you guys lose balances to larger banks? Has the storm now passed? Just any color you could provide how this is impacting a bank like yours would be really helpful. Thanks.
Yeah. No, happy to. You know, the long story short was that the change was a positive for us for adding clients and adding accounts. We're helpful that we were able to serve as a source of strength and to help some of these folks out when these changes happened. We were, you know, I would say a net slightly positive, as a result of all the disruption that happened in these various markets. You know, for our clients, when we look at particular our commercial clients and the average tenure, you know, they're 20-25 year relationships, so they know us well, and they tend to worry a little bit less.
That said, there were, you know, some people who chose to move some money into some of the money funds, for diversification for rates as well as some of their comfort level. We didn't lose a ton, to be honest with you, to the larger organizations. What I would say is in some of those shifts, we were a recipient of balances as much as, you know, we saw an outflow. When you add in some of the accounts that we opened, during the crisis, the net was a slight positive. For us, it was. It wasn't the big shift in balances that many were anticipating.
More, I would say, as much a continuation of the trend that we've been talking about of as quantitative tightening happens, as rates are moving up and the rates paid on the money funds always moves faster than the deposit accounts on a balance sheet. That normal migration is happening, and over time, we expect it will come back as those other rates start to match what you can get in the funds.
Great. Thanks for taking my question.
We'll take our last question from Brian Foran with Autonomous Research.
I guess just quickly on lending. It sounds like any underwriting changes on your end are only marginal, if I got that comment about focusing liquidity on our best customers, right? I just wanted to confirm that. Then just more broadly, you know, definitely appreciate the point that the rollover in commercial real estate in particular is fairly slow. You know, do you think some of your peers will change underwriting more significantly, you know, as people worry about a credit crunch in lending and CRE in particular? Do you think that's a valid concern, or do you think that's overblown right now?
You know, I can't speak to what others will do. You know, I think there's a big difference between the banks and the, and the REITs and the CMBS and how they underwrite and how they've underwritten, and how they think about things. You know, for us, in particular, we don't move our credit standards very much at all. I think we've talked about this for a while, that we've, you know, we've had 2 chief credit officers since 1983. Our viewpoint on underwriting is pretty consistent, and we try to be the same through good times and bad, right? 'Cause what our clients value is consistency and knowing what they need to have, in terms of a profile of the loan, for us to, to be there.
I think for us and the, and the industry, as you look at what's maturing, you know, There's a question of how many alternative sources of funds are available for those loans, particularly in the real estate space. As loans mature, one of the questions will be, is there another bank or a fund or someone out there who is ready to take that loan on? Which, you know, obviously will be a function of the debt service coverage and the, and the loan to value. What likely happens, though, as prices are challenged in the short term is you'll see some sponsors will have the ability to put in some extra equity, which will help with the underwriting. You might see some, you know, A note, B note structures.
You might see some outside private equity money come in the form of preferreds or mezz debt to help with some of those shortfalls. I think what's typical within real estate is it's nuanced, right? It's hard to give a blanket statement about what will happen. It's more client by client and property by property that you work through these things. You know, like I said, for us, we preserve our capital and our liquidity for our best customers, and many of these ones, particularly in real estate, have been around for a long time. Like we're in the second or third generation of supporting them, and we'll continue to do that.
You know, there's always opportunity when these, this kind of disruption occurs and, you know, we'll be paying close attention to that as well.
I appreciate all that. Thank you very much.
It appears that we have no further questions at this time. I will now turn the program back over to Brian Klock for closing remarks.
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