Good day, and welcome to the M&T Bank second quarter 2023 earnings conference call. All lines have been placed on listen-only mode, and 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 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. When posing your questions, we ask that you please pick up your handset to allow for optimal sound quality. Lastly, if you should need 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, Todd. Good morning, everyone. I'd like to thank everyone for participating in M&T's second 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 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 are included in today's earnings release materials and in the investor presentation, as well as our SEC filings and other investor materials. The presentation also includes non-GAAP financial measures, as identified in the earnings release and investor presentation. The appropriate reconciliations to GAAP are included in the appendix.
Joining me on the call this morning are M&T's Senior Executive Vice President and CFO, Daryl Bible, and Senior Executive Vice President and former CFO, Darren King. I'd like to turn the call over to Daryl Bible.
Thank you, Brian, and good morning, everyone. I would like to start by thanking Darren for his help with my transition. I'm very appreciative of his guidance and support. I'm also grateful for everyone across the bank that has welcomed me and helped me get up to speed quickly, including my incredibly talented finance team. Like me, I'm sure all of you are extremely happy that we now have an earnings presentation. Thank you to Investor Relations, Corporate Communication, and Corporate Reporting teams for making this a reality. I'm very excited about the work we are doing, and the transition has gone even smoother than I could have anticipated. I'm proud to be part of M&T's strong financial history, consistent operating philosophy, and conservative, community-focused banking principles. I'm even prouder to be part of a company that is tied to its purpose, to make a difference in people's lives.
I would like to thank our over 22,000 M&T colleagues for all their hard work each and every day. You are driven by the idea of delivering on our purpose and guided by our set of core values. It is because of you that M&T continues to make a difference in our customers' lives and continues to produce strong results for our shareholders. Please turn to slide three. Let's start with our purpose, mission, and operating principles. Our purpose is to make a difference in people's lives by focusing on communities we serve. Our purpose drives our operating principles. We believe in local scale, with 28 community-led regional presidents who make decisions about loans and community activities. This local scale has led us to superior credit performance, top deposit share, and higher operating and capital efficiency. Our performance is fueled by a relentless focus on customers, talent, and communities.
Moving to slide four. We deliver for customers. We have seasoned, talented, diverse board and new capabilities that provide solutions that make a meaningful difference to our customers. Please, let's turn to slide five. This slide showcases how we activate our purpose through our operating principles. When our customers and communities succeed, we all succeed. Our investment in enhancing customer experience and delivering impactful products have fueled organic growth. A significant milestone this year was a designation of over 119 multicultural banking branches across our footprint, with more to come in our expanded communities. These branches are community assets dedicated to the cultural fluency for our customers. We also believe in supporting small business owners who play a vital role in our communities.
Despite operating only in 12 states, we rank as the number six SBA lender in the country and rank highly in 10 of our 16 markets. Our commitment to supporting the communities we serve extends to affordable housing projects, with over $2.3 billion in financing and over 2,600 home loans for low and moderate income residents. Additionally, M&T Bank and our charitable foundation granted over $47 million to support our communities in 2022. Please turn to slide six. Here we highlight our commitment to the environment. We have invested over $230 million in renewable energy sector and significantly reduced our electricity consumption since 2019. Our ESG report will be published soon, but I encourage you to review this slide for some of the highlights. Turning to slide eight.
Our second quarter results reflect the strength of our core earnings power, balance sheet, and liquidity position. Adjusted to exclude the $225 million pre-tax gain from the sale of the Collective Investment Trust or CIT business in April. Second quarter revenues have grown $395 million, or 20% compared to last year's similar quarter. This translates to a 10% positive operating leverage year-over-year. On the same basis, pre-provision net revenues have increased 35% since last year's second quarter to $1.1 billion. Credit remains stable. Net charges increased in the second quarter, but year-to-date still remain below our historical long-term average. Net income for the quarter was $867 million, up 24% from linked quarter. Diluted GAAP earnings per share was $5.05 for the second quarter, up 26% sequentially.
Let's review our net operating results for the quarter on slide nine. M&T's net operating income for the second quarter, which excludes intangible amortization, was $879 million, up 23% from linked quarter. Diluted net operating earnings per share, common share, were $5.12 for the recent quarter, compared to $4.09 in this year's first quarter. Tangible book value per share increased 3% to $91.58. On slide 10, you will see that on a GAAP basis, M&T's second quarter results produced an annualized return on average assets and return on average common equity of 1.7% and 14.27% respectively. Results for the second quarter of this year included an after-tax $170 million gain on the sale of the CIT business in April.
Excluding this gain, adjusted GAAP earnings per share was $4.11, and adjusted return on average assets and average common shareholder equity was 1.39% and 11.6%. Let's look a little bit deeper into the underlying trends that generated our second quarter results. Please turn to slide 11. Taxable equivalent net interest income was $1.81 billion in the second quarter, slightly below linked quarter. This decline was driven by higher volumes of non-core funding and unfavorable mix change, caused by disintermediation, partially offset by higher interest rates and one additional day. Net interest margin for the past quarter was 3.91%, down 13 basis points from linked quarter.
The primary driver was the decrease to the margin, was partially impacted from the mix change to the higher cost funding, which we estimate reduced the margin by 18 basis points. Higher yields on earning assets, net of rates on deposit funding, benefited the margin by 4 basis points. Turning to slide 12. Capital levels remained strong, with a CET1 ratio to the end of the second quarter at 10.58%. Average earning assets increased $1.9 billion, or 1%, from the first quarter to the second quarter, due largely to the $1.5 billion growth in average loans and $1 billion increase in average investment securities. Turning to slide 13, we talk about the drivers on the loan growth.
The total average loans and leases for $133.5 billion during the second quarter, up $1.5 billion compared to the linked quarter. Looking at the loans by category on an average basis compared to the first quarter, commercial and industrial loans increased 5%- $44.5 billion. We continue to see in our dealer and specialty businesses, plus we are adding new customers as we grow market share in legacy and new markets. During the second quarter, average commercial real estate loans decreased 1%- $44.9 billion. The decline was driven largely by lower construction loan balances. Average residential real estate loans were $23.8 billion, essentially flat compared to the first quarter of this year. Average consumer loans were down 1%- $20.3 billion, driven by lower activity due to rising interest rates.
Turning to slide 14. Average investment securities increased to $28.6 billion during the second quarter, due to large parts to purchases late at the end of the first quarter. The duration of the investment securities book at the end of June is 3, or 3.9 years, and the unrealized pre-tax loss on the Available for Sale was only $441 million. At the end of June, cash and interest-bearing deposits at banks and the investment securities totaled $56.9 billion. Turning to slide 15. Deposit outflows during the second quarter on an average basis accounted to $2.1 billion or 1.3% in line with industry trends. Consistent with our experience, prior to rising rates, the increased competition for deposits and customer behavior is leading to a mix shift with the deposit base to higher cost deposits.
Comparing the second to first quarters, average demand deposits declined $5.7 billion, saving and interest-bearing checking deposits decreased $843 million, while time deposits increased $4.4 billion. Decline in average demand deposits resulted predominantly from a $1.1 billion decline in the corporate trust balances, due in part to lower capital markets activities. The movement to sweep products has customers seeking higher yields with $1.8 billion on balance sheet and $2.4 billion shifted off balance sheet sweep accounts during the second quarter. Average time deposit growth was driven by $2.3 billion in broker CDs and $2.1 billion growth consumer time deposits. We remain focused on growing and retaining deposits.
End of period deposits grew $3 billion or 1.9% from the end of the first quarter. The growth was largely driven by broker CD balances, which increased $4.1 billion compared to the end of the linked quarter. Since the end of May, our customer base for wholesale deposit balances has stabilized and started to grow, with an increase of $523 million, driven largely by growth in commercial and consumer deposits. Let's discuss non-interest income. Please turn to slide 16. Non-interest income totaled $803 million in the second quarter, compared to $587 million linked quarter. As noted earlier, the second quarter included a $225 million gain from the sale of our CIT business.
Recall that M&T normally receives an annual distribution from Bayview Lending Group during the first quarter of the year. This distribution was $20 million in this year's first quarter. Excluding these two items, second quarter non-interest income increased $11 million compared to the first quarter. Mortgage banking revenues were $107 million in the recent quarter, up 26% from linked quarter, driven by $18 million in additional servicing revenues, representing the full quarter impact of the bulk of the MSR purchase completed at the end of March. Service charges on deposits were $119 million, or up 5% compared to the first quarter.
Trust income of $172 million in the recent quarter declined from $194 million in the first quarter, due largely to $31 million in lower fee income resulting from the sale of the CIT business, partially offset by the impact of the seasonal tax preparation fees. Our revenue from operations, adjusting from the gain from the CIT sale and the distribution at Bayview Lending Group in this year's first quarter, were $137 million, down $2 million sequentially. Turning to slide 17 for expenses. Operating expenses, which exclude the amortization of intangible assets, were $1.28 billion in the second quarter of this year, down $64 million from the linked quarter. As is typical for M&T's first quarter results, operating expenses in the first quarter included approximately $99 million of seasonally higher compensation costs.
Excluding the seasonally higher compensation in the first quarter, operating expenses increased $35 million sequentially. That increase was due to $31 million in higher compensation and benefit costs, reflecting higher average headcount, the full impact of the annual merit increases and severance costs. $20 million in higher other operating expenses related to the bulk of the MSR purchase. These increases were partially offset by lower CIT-related expenses, including $22 million of lower sub-adviser expenses and lower advertising and marketing and deposit insurance expenses. Given the prospect of slowing revenue growth, we remain focused on diligently managing expenses. The efficiency ratio, which excludes the intangible amortization and merger-related expenses from the numerator, and the security gains and losses from the denominator, was 48.9% in the recent quarter, compared to 55.5% in 2023's first quarter.
Excluding the gain from the sale of the CIT business, the second quarter, the efficiency ratio was 53.4%. Next, let's turn to slide 18 for credit. The allowance for credit losses amounted to $2 billion at the end of the second quarter, up $23 million from the end of linked quarter. In the second quarter, we recorded a $150 million provision in credit losses, compared to $120 million in the first quarter. Net charge-offs were $127 million in the second quarter, compared to $70 million in this year's first quarter. The reserve build was largely due to anticipation of declining Commercial Real Estate values and loan growth.
At the end of the second quarter, non-accrual loans were $2.4 billion, a decrease of $122 million compared to the prior quarter and represent a 1.83% of loans, down 9 basis points sequentially. As noted, net charge-offs for the recent quarter amounted to $127 million. The increase in net charge-offs was driven by four large credits, three office buildings in New York City and Washington, D.C., and one large healthcare company operating in New York State. Annualized net charge-offs as a percentage of total loans were 38 basis points for the second quarter, compared to 22 basis points in the first quarter. This brings our year-to-date net charge-offs to 30 basis points, which is below our long-term average of 33 basis points. As we have noted previously, we expect net charge-offs to be lumpy on a quarter-to-quarter basis.
This is the result of unique nature of each property and borrower. In order to identify emerging issues that could lead to loan grade adjustments, we continue to perform ongoing rate risk, resizing risk, tenant sensitivities on commercial real estate portfolios on a quarterly basis. This work is reflected in our criticized loan portfolio. Loans 90 days past due, on which we continue to accrue interest, were $380 million at the end of the first quarter, compared to $407 million sequentially. In total, 43% of these loans, 90 days past due loans were guaranteed by the government or government-related entities. Turning to slide 19 for capital. M&T CET1 ratio at the end of June was an estimated 10.58%, compared to 10.16% at the end of the first quarter.
The increase was due, in part, to higher net income and in repurchasing shares in the second quarter. In June, tangible common shareholder equity totaled $15.2 billion, up 3% from the end of the prior quarter. Tangible book value per share accounted at $91.58, up 3% from the end of the first quarter. In late June, the Federal Reserve released results from the annual bank stress test. While this was an off year for Category IV banks, given the timing of the People's United acquisition, M&T participated in the stress test this year. Our preliminary stress test capital buffer, or STB, is estimated to be 4%. Using the STB, which is in effect from October 1, 2023 to September 30 of 2024, we'll be subject to 8.5% CET1 ratio.
Now turning to slide 20 for the outlook. As we look forward to the second quarter of this year, we believe we are well positioned to navigate through a challenging economic conditions. The rapidly changing interest rate expectations, combined with continued pressure on funding, affect our outlook for the full year of 2023. The 2023 outlook reflects the impact of the sale of the M&T Insurance Agency that closed in October of last year, and the sale of CIT business that closed in April of this year. Let's talk about net interest income outlook. We expect taxable equivalent net interest income to trend toward the lower end of the $7 billion-$7.2 billion range, which reflects a flat to modestly higher loan and deposit growth and incorporates 125 basis point hike in August of this year.
We noted on the first quarter call, a key driver of net interest income in 2023 will be the ability to efficiently fund earning assets. We expect continued intense competition for deposits in the face of industry-wide outflows. Full year average deposit balances are expected to be up low single digits compared to 2022. We continue to expect the deposit mix to shift towards higher cost of deposits, with declines expected in demand deposits and growth in time deposits and on-balance sheet sweeps. This is expected to translate to a through the cycle interest-bearing deposit beta through the fourth quarter of this year to the low to mid 40% range. This deposit beta excludes broker deposits. Let's discuss the outlook for average loan growth, which should be the main driver of earning asset growth.
We expect the full year average loans and leases balances during 2023 to be relatively stable. The mix of C&I, CRE, and consumer loans, inclusive of consumer real estate loans, is almost one-third each as of the end of June. We expect this trend to shift slightly to C&I growth, outpacing CRE. As we have seen over the past four quarters, higher levels of interest rates are expected to slow down the growth of our consumer loan books over the remainder of 2023. Turning to fees, we expect non-interest income to be in the range of $2.25 billion-$2.3 billion range.
This outlook for non-interest bearing reflects lower trust revenues, free floating from the sale of the CIT business in April, as well as the incremental income from the bulk purchase of residential mortgage servicing rights at the end of this year's first quarter. Remember, the outlook does not include the $225 million gains from the sale of the CIT business. Turning to expenses. We anticipate expenses, excluding intangible amortization, to trend near the higher end of $5 billion-$5.1 billion. This outlook for net operating expenses includes the impact of the previously mentioned sale of the CIT business and the bulk mortgage servicing purchase. Intangible amortization is expected to be in the $60 million-$65 million range. Turning to credit, we expect loan losses to be near 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 be affected by changes in the macro outlook and loan balances. For 2023, we expect taxable equivalent rate to be in the 25% range. Finally, as it relates to capital, this is a very clear differentiator for M&T. Our capital, coupled with our limited investment security marks, has been a clear strength during these turbulent times. M&T has proven to be a safe haven for our clients and communities. The strength of our balance sheet is extraordinary. We take our responsibilities to manage our shareholders' capital very seriously and will return more when it's appropriate to do that. Our businesses are performing very well, and we are growing new relationships each and every day.
Given the uncertainties related to the new capital rules that are coming out, we believe now is not the time to be repurchasing shares. That said, we are best positioned to use our capital for both organic and inorganic growth, along with buybacks in the future, which will always be part of our core capital distribution strategy. In the meantime, our strong balance sheet will continue to differentiate us with our clients, communities, regulators, investors, and rating agencies. To conclude on slide 21, our results underscore an optimistic investment thesis. Our economic uncertainty remains high. That is when M&T has historically outperformed its peers. M&T has always been a purpose-driven organization with a successful business model that benefits all stakeholders, including shareholders. We have a long track record of credit outperforming through all economic cycles, with more than 2x growth relative to peers.
Our strong shareholder returns include 15%-20% return on average tangible common equity and robust dividend growth. Finally, we are a disciplined inquirer and prudent steward of shareholder capital. Our integration of People's United is complete, and we are confident in our ability to realize our potential post-merger. Now, let's open up the call to questions, before which Todd will briefly review the instructions.
Thank you. At this time, if you would like to ask a question, please press the star and one on your touchtone phone. You may remove yourself at any time by pressing star two. Once again, if you would like to ask a question, please press star one. We'll take our first question from Manan Gosalia with Morgan Stanley.
Hey, good morning.
Morning.
I had a question on NII. You know, noticed you took your deposit balance guide up along with the deposit beta guide, but kept the NII guide the same. Can you talk about the puts and takes there? I guess the question is, why hold more liquidity, and hold more in interest-bearing deposits in an environment where you're not growing loans that much? Is it more a function of any upcoming LCR rules or anything the regulators are asking you to do?
Yeah, Manan, thank you for the question. You know, what I would tell you is that, you know, we start right now, each and every day, making sure we have really strong liquidity on our balance sheet, and we want to make sure that is a really good strength as we continue to move through these times. You know, our deposits, you know, we believe we are in great position to continue to grow and gain share in our markets that we're serving. We are aggressively going out and trying to get deposits from our clients and core customers out in, on these marketplaces. The beta guide did go up, it's really a mix of how much of funding we get from core versus broker deposits.
When the crisis first started in March, you know, we took down Federal Home Loan Bank advances. On this quarter, this past quarter, in the second quarter, you know, we accessed the broker CD market. We thought that was a good use. When we accessed the broker CD market, that automatically increased our deposit beta. If you look at our deposit beta this quarter, it was 40, but if you back out the broker CDs, it's worth 6 points, so it was down to 34%. The guide is that we gave, you know, going up to low to mid-40s, you know, is really excluding the broker deposits, because you don't know if we're going to issue more broker deposits. It's going to be a mix between Federal Home Loan Bank advances, broker deposits, and actually issuing debt in the marketplace.
It's a really mix, and it's really up to our treasury team to figure out what's best to do for our company. Right now, you know, having liquidity is really important, and really gaining share and serving our clients, we think is really important as well.
You took cash off this quarter, and it sounds like, you're going to keep it at a high level for some time?
Yes. Yeah, we're going to continue to keep really strong liquidity and continue to stay where it is. You know, it's one of the strengths that we have in the marketplace right now.
Got it. Okay. Then, just as a follow-up, you know, the debt markets seem to be opening up. Can you talk about how you're thinking about issuance for the remainder of the year? Just keeping in mind the possibility that TLAC rules could apply to banks of your asset size.
Yeah, w hen you look at the three sources that I just talked about, whether it's broker deposits, Federal Home Loan Bank advances or debt. Early on, when you're going into a crisis, it makes sense to access the Home Loan Bank first, because it's there available, and you get it really fast in size. Broker markets, I think, were a good use this past quarter. O ver time, you will see us, you know, issue unsecured debt and basically pay off some of the Home Loan Bank advances and probably some of the broker deposits over time. That's just normally how we would fund the bank overall. We start with really having really good core funding and making sure our core funding is growing and doing what it needs to from that perspective.
Great. Thanks so much.
Bye.
Thank you. We'll take our next question from Matt O'Connor, with Deutsche Bank.
All right, good morning. Just, I guess first, to follow up on the capital, obviously, strong, built quite a bit, and you talked about letting it continue to build as you wait for new, capital rules. I guess, how high are you willing to let it get? I think under kind of any rules, it seems like you have excess and obviously a good outcome from CCAR DFAST. I guess first question is, how high are you willing to, let it go? Maybe just kind of review the priorities in terms of, capital deployment, as you think about, you know, the next couple of years.
Yeah. Let me start with the capital deployment question. First and foremost, you know, we want to make sure we serve our clients and our communities, so organic growth is number one on how we deploy capital. You know, during turbulent times like this, we want to make sure that all of our customers and potential new customers that we want and want to join M&T, that we have the capital there to serve them. That's first and foremost where we start. Dividends, obviously, is the second. You know, second is dividend growth, and we have a long history of our dividend policy and keeping really strong dividends at M&T. Really value a strong dividend from that perspective.
You know, share buyback has always been part of our history of repurchasing shares, you know, and from time to time, we might do any acquisitions, if that makes sense, and it's a good shareholder value from that perspective. You know, long term, there's really not a change. Just right now, in these turbulent times, you know, we're keeping extra capital, and we think it's prudent to do that. You know, as we get more information from the rules that come out from the regulators. Right now, you know, we are doing really well. Our business is performing well. We're getting new clients in, you know, in the commercial area, business banking, wealth, corporate trust. I mean, our businesses are growing because we are strong. I think it's an advantage right now to have a lot of capital.
Just separately, last fall, you know, Darren threw out this kind of long-term NIM range. I think it was 3.6%-3.9%, that kind of spooked folks a little bit, but obviously, you guys were kind of ahead of the curve in messaging the overearning on deposits. You did get to the high end of that NIM range this quarter. Wondering if you still think that's kind of a good long-term range? You know, do you get below that range, at some point this cycle, if you had to guess? Thanks.
I want to give Darren a lot of credit. He was definitely ahead of the industry in talking about margin and the impact of margin. You know, he saw it coming, and I think he was a leader in telling people where everything was going. You know, it was really good guidance from that perspective. I would say that, you know, we will continue to have margin pressure, you know, just because of the cost of what we're seeing on the funding side. We're having disintermediation, you know, and if you look at it, our DDA was down $5.7 billion. We retained all the clients. You know, some of the balances went to on-balance sheet sweeps, some of them went into off-balance sheet sweeps.
If you look at our consumer book, you know, we are moving balances from non-maturity buckets to CDs. If you go back, you know, 20+ years and you look at the deposits that we had back then, you know, CDs were 20-plus% of our funding base. Right now, we're at 10%, and we're probably going to be in the mid-teens before it's all said and done. It really depends on how long rates stay higher, and that's just the normal mix of how we run our retail bank. I mean, it's the right thing to do. It's the right thing for our clients. It's the right thing for our bank. We can adjust our rate sensitivities with CDs on the books and manage that really well.
It's, you know, just basically learning things that when you ran banks 20 years ago, we're doing the same thing right now and doing it the same way. We feel really good about our businesses. You know, our margin pressure is going to continue to come down, and I think we've given you some guidance for this year. Don't really want to get into 2024 right now, until we get working on our plan, which will be later this quarter.
Okay. Thank you very much.
Yeah. Thanks, Matt.
Thank you. We'll take our next question from Steven Alexopoulos with JP Morgan.
Hey, good morning, everybody.
Morning, Steve.
Thank you for the earnings slide deck. I thought it was-.
You gotta thank the team.
Appreciate it.
Yeah, the team did a great job.
I want to start on the non-interest bearing deposits. When I look at the decline this quarter, it's still perplexing to me that this mix shift is not basically done by now, right? If you're a commercial customer, you have a treasury function, I'd imagine you've done the analysis, and you've already moved those balances, but you guys are now guiding, you expect more decline in DDA. When you look at your client base, can you walk us through why is this taking so long? I mean, it's been quite a few quarters, right? The two years have been above 3% or 4%. You know, what's still to happen to cause this mix shift?
Yeah, thank you for the question, Steven. First and foremost, you know, if you look at M&T, you know, you look at pre-COVID and going into COVID, M&T had one of the largest increases of surplus balances of all the banks out there, proportionately. We're starting at a really high strength. I think our DDA percentage of total deposits was 48%. Yeah, it was really high to start with. If you look at how we run this company, you know, as I learn about this company, I am just amazed at how well we are at getting primacy, getting the operating accounts. We are really good in the consumer business, in our business banking business, and commercial businesses. We lead with getting operating accounts, we have a disproportionate amount of operating accounts there.
That said, to answer your question, you know, it just means that we're going to continue to have mix shift changes. It does seem to be slowing down a bit. You know, we're still seeing some mix change happen, and it's going to continue to put a little bit pressure on funding. We're still serving our clients at the end of the day, and we're gaining new clients, too. I think all in all, you know, I think we're doing good. We still have a pretty high margin overall, if you look at others in the industry, even with this coming down. I think we feel really good at what we're doing and how we're executing.
Okay, that's helpful. Just a question on the reserve. What's the unemployment rate you're assuming in the total reserve? I know you increased the reserve a bit. You called out commercial real estate. What's the reserve on the commercial real estate portfolio? Thanks.
We're right around 4%. If you really look at the reserve, Steven, you know, there's four drivers there that we have, the one that really impacted our increase in our allowance was really the CREPI, the change in the Commercial Real Estate this quarter. That went from a -5%- 11%. The other three variables, you know, unemployment was around mid-4s. GDP was basically right around 1%, didn't change a whole lot. HPI was right, was mid-6s, didn't change a lot. What really drove the change was the CREPI on the allowance side.
Got it. I'm sorry, I missed it. What was the specific reserve now on commercial real estate loans?
Commercial Real Estate went, the macro variable value that we used in the model went from 6-1 1. If you look at the allowance, we increased more to office overall, and we had decreases in hotel and multifamily.
Got it. I'm still not following with the specific reserve that is on CREPI, but I can follow up with Brian after. Thanks.
Yeah, I didn't hear that that well.
Okay.
All right.
We'll take our next question from Gerard Cassidy with RBC.
Hi, Daryl.
Hey, Gerard.
Good luck with the new position for you. Ditto on the slide deck to you, Brian, and your colleagues. It was a very strong slide deck, so thank you. Daryl, can you share with us these proposals that we're hearing about for Basel III endgame may include, you know, banks as low as $100 billion in assets. When you guys talk about what could happen, I believe earlier this week, Bloomberg had a story that there may be higher risk-weighted asset assumptions for residential mortgages, which seem to be a new twist to these capital requirements. How are you guys approaching what could happen in terms of, you know, greater RWA increases for your organization and the capital needed to support them?
Yeah, thanks for the question, Gerard. You know, obviously, we are very eager to get these new rules and see what's out there and make comments. It's going to go through the normal process there, so it's going to take time, probably get most of these things implemented. You know, on your specific question of RWA and mortgages, you know, we'll wait and see how that comes out. You know, we are in the residential mortgage space. We exited the correspondent space last quarter, you know, so we're really just focusing on meeting the needs of our clients, the company. So we're basically selling all the conforming into the marketplace, and we're balance sheeting all of our wealth clients and clients that are low and moderate income, are the ones that really are going on the balance sheet.
You know, we're going to stay in our core businesses because we're serving our clients. You know, if it's a little bit higher, capital, the market will probably adjust and just raise pricing to accommodate for that, would be my best guess, from that. As far as the other changes out there's a lot of proposals there. You know, if it's like long-term debt or TLAC, we're waiting to see what that happens. M&T, really, we don't have a whole lot of debt outstanding. It, it's, something that, you know, we'll have to just manage. You know, it's probably going to be holding company.
If, if it's not a holding company and it allow bank, we'll probably end up with a mix of holding company and bank because you still want to have a strong parent company from a source of capital perspective there. We'll just optimize it. You know, with us using now Federal Home Loan Bank advances, broker deposits, I think we have, right now, an ability where we can pay those off, issue unsecured debt, and really not blow up the balance sheet from that and still have a really strong liquidity position from that. We're wait and see. You know, I think you know our, if the AOCI comes in, looks like that's coming in. You know, we're 55 basis points. That 55 basis points negative adjustment at the end of this quarter, you know, includes all three pieces.
It's the AFS securities, cash flow hedges, as well as pension. That's probably one of the lowest that we have in the industry, so it's not a real big impact for us. That's a strength as well.
Very good. As a follow-up question, you touched on, and I may have missed some of this, the charge-offs in the quarter about some lower values for commercial real estate. In a slide deck you guys put out earlier in the second quarter, you gave some very detailed information about your commercial real estate portfolio by location and loan-to-values. Can you share with us where is you know, is it the higher loan-to-values that were required to be written down, or are you actually seeing it in some of the lower loan-to-values, seeing some weakness as well? Second, on top of that, when you go through the portfolio, where are you in terms of, are you 50% through reviewing the portfolio, or 75%, or 20%?
Thank you for the question. On your first question, you know, CRE, you know, is really just, you have to look at it on a case-by-case basis just because of the unique quality and pieces of how it is. Each borrower has different, you know, implications. You have tenant things, you have to have market conditions, you know, interest rates. That is a case-by-case basis. You really go through the deep dives there. You know, on your question on portfolio review. Yeah, we are 50%+, 60%+ through it. You know, all the loans that we have in the criticized bucket is reviewed every quarter. We stress test those really well.
You know, if I look at, you know, what we're doing versus, you know, my prior places, I would say we're doing as much, if not more, than what I've seen done in our credit process. We're staying on top of this. Our teams are doing really well. Valuations are coming in, and, you know, we're doing the best we can with the information we have, but I would say we feel good at where we are, and we're just continuing to monitor where everything is.
Very good. Good luck again in your new role. Thank you.
Thanks, Gerard.
Thank you. We'll take our next question from Brent Erensel with Portales Partners.
Morning. Daryl, welcome to Western New York.
Thank you, Brent.
Specifically on the CRE, drilling down to the Manhattan real estate or New York City real estate, I was wondering, could you walk us through what you do? You said you were taking charge-offs there. Do you take possession? Do you restructure? What happens when you have a CRE Manhattan... I guess it's an office building. What do you do here in that situation?
Yeah. You know, so in New York City, New York City, you know, is a big marketplace, and every place is a little bit different. Right now, it seems like the downtown area might be a little weaker than the middle part of Manhattan. The charge-off that we took in Manhattan was in the downtown district there. I would say we do all the above. I mean, you know, we really work with our clients. You know, it really, for us, starts from a client perspective. Client is really, really important, client selection. In the CRE business, you know, we make loans in the larger cities like New York, D.C., Boston. In those markets, you know, I would say 75% of those are very long-term oriented clients, and really good clients.
Once you get outside of these major market cities, you know, it's almost all of our clients are really long-term oriented. You know, as far as which notes we would sell or whatever, it's probably more the financially oriented clients that we have, where they've had their returns and they aren't putting any more equity into the deals, is really how we would handle that.
To follow up on that, you've seen strong-handed borrowers, you know, some of these big names, just mailing in the keys. Are you experiencing that as well? Where your long-term, strong-handed CRE borrower is actually not so strong-handed after all.
You know, I would say what we're seeing right now is our long-term clients, it really comes down to client selection, but they're really holding in there. You have to look at their portfolios that they have, and they might have one troubled property, but they have a lot of others that are really performing well, and they move cash over to support and put equity into those transactions. We feel good about that. You know, we've been in this business for a long time. I get a lot of comfort when I look at Bob and his team. You know, there's a lot of gray hair there. They've been through this many, many times and give me a lot of confidence.
Like I said earlier, the processes we're using are as good or better than what I've seen in the past.
Thank you.
Yeah.
Thank you. We'll take our next question from Ken Usdin with Jefferies.
Thanks. good morning, everyone. Daryl-
Hey, Ken.
A couple of clarifications, if you don't mind. On the guide slide, you talk about mid-40s cumulative interest-bearing betas. I assume that's what's built into the low end of NII guide for the year. Because in your comments, you said low to mid, I would assume that if you ended up being in the low 40s, that would be kind of better. Just clarifying what's in the guide. I would assume it's the mid-40s that's on the slide.
Yeah, I think that's right, and that does exclude broker. We may pay off some of the broker deposits. It really depends if we access the unsecured market or not. I would say, if you look core, I think that's the right assumption to use, Ken.
That was going to be my follow-up, Daryl. Can you explain that? Broker deposit beta is completely outside of that mid-40s beta comment?
If you look this quarter, our beta on total interest-bearing deposits was 40%, and we issued $4 billion of broker deposits during the quarter. If we back out those broker deposits, you know, we were at 34% deposit beta. Our decision to issue, you know, broker deposits was one, versus looking at it from issuing, you know, doing Federal Home Loan Bank advances or doing unsecured debt. We chose that. As we move forward, the treasury team will basically do what's best for the company and what we need to do, and, you know, we'll probably use all three pieces, and when it actually goes into deposits, it impacts the deposit beta. We tried to give you, excluding the broker piece, what deposit beta is.
What Darren said the last several quarters on deposit betas, if you back out the broker, he's spot on, so where we're performing. I mean, the guide's there. We just kind of mixed it up by issuing these broker deposits.
Understood. Could you just tell us then, so of, I don't know, a great way to think about $103 billion of total interest-bearing deposits, just how much of that in aggregate is brokered?
I think our broker deposits are about $10 billion in total. I would say $8 billion of it is CDs and $2 billion of it money market.
Okay, I get it. That helps. Thanks a lot, Daryl.
Yep, you're welcome.
Thank you. Our next question comes from Ebrahim Poonawala with Bank of America.
Hey, Daryl. Good morning. Good morning. Just to follow up on Ken Usdin's question around brokers, so $10 billion at the end of the quarter, is there a target that the max that we should think about how much brokered deposits can get, either on a dollar basis or as a percentage of total deposits, that we should keep in mind when we're thinking about betas and the outlook there?
Yeah, probably just a few more billion from 10 is probably as high as we want to go there. We don't want to be outsized in the use of that. You know, like anything else, we want to be diversified and kind of use all of our funding tools. You know, just kind of you want to just make sure you use them all and you have access to all of them. I'd say a couple more billion is all we're going to use in the broker space, but you might actually see that come down if we issue more unsecured debt.
Got it. Just one follow-up on the CRE appraisals. I think if I heard you correctly, you said you're at 250%-260% of the portfolio. How hard is it to get a true appraisal on a CRE property right now? What I'm trying to get to is, what's the risk of being blindsided on reserve levels two or three quarters from now, where you need to take a lot more because of fair values? I'm just wondering, with the visibility on appraisals, how conservative are you being as a bank in kind of trying to put this, getting ahead of this issue?
Yeah, that's a great question. What I would tell you is there aren't a whole lot of sales in the marketplace right now, so you know, we don't have a lot of specs. When we do have them, we use them. You know, a lot of the valuations we're using, we use the discounted cash flow method. When we look at just a couple pieces of discounted cash flow method, when we're looking at properties and the property is vacant, we assume a three-year vacancy, you know, for it to get filled up. When something's coming due and it's turning over, we assume a 12-year vacancy or 12-months vacancy. From a cash flow perspective, we're factoring in free amenities to get people in leases.
All that cash flow, you know, adjust in the discounted cash flow model. It's really impacting the valuation that you have. Cap rates really haven't changed a whole lot. It's really the assumptions you're using on the cash that you're generating in these properties is really what's driving down the values.
Got it. Welcome to the new role. Good to hear you on this call again. Thanks.
Thank you. We'll take our next question from Frank Schiraldi with Piper Sandler.
Thanks. Good morning.
Good morning.
Daryl, I missed the, I know you talked about the, you know, back to sort of the non-interest-bearing mix shift. You talked about, you know, maybe a more normalized, I guess, sort of balance sheet, getting CD balances ultimately back into the mid-teens. Is the best way to think about non-interest-bearing shift from here is, you know, basically that, all comes at the cost of non-interest-bearing so that we could continue to see pretty significant shift at a non-interest-bearing? Because it seems like you could have some offsetting tailwinds from the trust business as well, right, as sort of that transactional volume maybe picks up or normalizes? Just wondering, best way to think about, you know, where non-interest-bearing balances could kind of migrate to.
I think those are all great questions. If you look at our non-interest-bearing and total deposits this quarter, we're at 35%. If you actually back out the broker deposits that you put in there, we were at 38%. That, here again, broker is kind of playing something with the numbers from that perspective. You know, we probably have that going down, though, by the end of the year, maybe 2% or 3% with a mix change that we have. I think from that, I corporate trust is definitely a great business for us. It's a business that's growing for us. As market activity increases in that sector, it will be a big contributor to our balances that we have on the non-interest-bearing side. That is a really important piece.
Right now, the activity just is down some, so there isn't a lot of market activity. You know, right now, we're just giving an outlook for a couple of quarters, but as market activity picks up, corporate trust will definitely be a big benefit for us in having that mix change.
Okay, great. Just on the other side of the balance sheet, you know, back to the loan growth outlook and, you know, again, I guess consumers continuing to slow and 4Q balances maybe being down overall. Just on the C&I side, should that growth decelerate here as the floor, you know, deal planning stabilizes? Ultimately, where do you think CRE kind of flushes out at or stabilizes in terms of the total loans?
You know, right now, if you look at our projections for total loans, it's relatively flat to maybe up slightly. If you look specifically at the commercial side, you know, C&I is growing. You know, this past quarter was really driven by dealers, you know, floor planning, as cars were getting on the lots. Some of our specialty businesses and fund or sponsor were kind of the growth areas there. As you move forward, I think, as you know, CRE, you know, we're going to serve our clients in CRE, but with the businesses that we have, some of it we will basically lend to them and sell it back out, so that's more fee business. You know, that overall business is going to become a smaller percentage of the balance sheet, and C&I will continue to be a larger percentage.
On the consumer side, you know, it's, I think, performing well. You know, we might do some asset sales or securitizations just to test the plumbing, you know, later this year. That's really impacting some of those balances if that actually happens.
Okay. All right, great. Thank you.
Thank you. We'll take our next question from Mike Mayo with Wells Fargo Securities.
Hey, Daryl.
How you doing, Mike?
Welcome to the North. Just big picture question. I mean, you know, you've been in the Midwest, U.S. Bancorp, and you've been in the South, BB&T and Truist, and now you're at M&T. Just how do you view M&T when you pull the lens back, having been on the inside at so many different firms and so much perspective over a few decades? You know, why did you choose to go to M&T? What do you see as the potential that's not unrealized, and what do you think that you can bring extra to the table, which you probably brought up when you spoke to management?
Yeah, Mike, thank you for the question. I would tell you, first and foremost, I am ecstatic to be here and to be part of the leadership team at M&T. I was actually my neighbor, Tracy, one of my peers, I walked into her office one evening, and I told her, I think it's better than I expected it to be. Just the reception of the people and the work ethic, you know, we run a really good company here, and it is really performing well. Just blessed to be on the team to try to continue that performance.
You know, it to me, it reminds me a lot of a bank that's, you know, getting larger, and as we get larger, you know, you have to adjust and to meet certain requirements and from regulations and basically actually running a larger company. For me, the big balance that we have to keep is the magic that happens out in the communities each and every day. You know, we empower our regional presidents and people to make decisions out in the field and really do a great job with client touch and how we serve clients, and we want to make sure that that stays intact. Running a larger company, we also have to have controls and processes in place, so we know what's going on, and we can manage the risk as we continue to get larger.
I think it's just a balancing act from that perspective, Mike. You know, I see, you know, a lot of opportunity where I think I can help us, you know, perform and get things in working better, potentially, as we kind of move forward just because we're a bigger company. I can't tell you how much, you know, the work ethic here, just how well we run the company and everything. We do a great job, and it really starts with the community and our serving our clients, and from that, it kind of all falls down.
You know, working for René, you know, somebody that I've really respected and known over the industry, you know, I would tell you it is, you know, just a dream come true for me and my career. I'm very blessed to be here, Mike.
Just one follow-up. You know, qualitatively, I think that makes sense, helping a bank manage through becoming bigger and all the regulatory and complexity that involves. If there was one quantitative metric where you say, you know what? Three years from now, or maybe it's five years from now, this financial measure should be better, and I'm going to take ownership of that, what would that one financial metric be, or maybe a couple?
You know, I would say, you know, we have a good, strong performance. If you look at our investor deck and you look at our, you know, investor thesis, our return on average time tangible common equity, you know, is 15%-20%, is pretty darn good to do that consistently. I think that's good. If you get well over 20, you're either growing too fast or taking more risks, so you have to be careful for some of that. I think that would be a really good target. You know, we are really focused, you know, by how we run the company to really, at the end of the day, give a great return to our shareholders. We are really prudent with how we manage our capital, you know, whether it's through buybacks, dividends are definitely key.
Acquisitions, the acquisitions we do, and you just look at the Peoples acquisition. I mean, we have great returns off that acquisition. I went through some of the metrics earlier in my prepared remarks, so that's going well. I would continue to see probably more acquisitions in our future over time. It's kind of in the pace of how we absorb it. When you do these acquisitions, it really takes us, you know, a good two, three, four years to get the performance up to the M&T standard. You know, just buying Peoples last year, you know, we probably don't expect Peoples' performance to really be at the M&T performance until we get, you know, a couple of years under our belt there. As we grow into that, you know, we could have potentially other opportunities to do more of that over time.
It's good, you know, and it will continue to change and evolve, you know, as the industry changes. You know, people here are fully dedicated to the mission. You know, everybody's 110% all in, and I'm just excited to be on the team.
All right. Thank you.
Yep.
Thank you. We'll take our next question from Erika Najarian with UBS.
Hey, just one last question. I'm sure everybody's hopping onto their 9:00 call. But Daryl, you know, could you give us a sense of how you think, if you are going to do $7 billion in NII, you know, how the cadence unfurls for the second half of the year? You know, more importantly, what's fourth quarter looks like? I s the $183 million impact on the down a 100 basis point scenario from your last Q, still sort of in the ballpark of your rate sensitivity to the downside?
Yeah, let me start with the sensitivity question, Erika. You know, as we continue to look at our hedging strategies, that we have in place and that we continue to operate on, we are becoming less and less asset sensitive. Right now, you know, if the Fed increases, you know, one or two more times, you know, we'll get a little benefit out of it. What I use, if you go up 25 basis points and over a 12-month period with that increase, our net interest margin is probably only going to increase 1 or 2 basis points because of that.
On the downside, we're getting less negatively impacted as we move forward, such that if you go down 25 basis points, you know, our deposit betas or not deposit betas, our net interest margin is only going to go down 3-5 basis points. It's getting tighter and, you know, over time, we just want to try to keep it as close to zero. I mean, it's a big balance sheet, so you can't be exact, but you want to be as close as you can, and you don't really want to take a whole lot of rate risk. Our treasury team is doing an awesome job in managing us through that.
As far as the guide goes, you know, right now with the funding pressures, if you look at what we have rolling off or what's rolling in, we'll probably have a little bit more pressure third quarter versus fourth quarter just because of the repricing that's occurring, you know, on the liability side. That said, as things kind of normalize, you know, we're starting to pick up spreads, you know, higher spreads on the asset side, and if things stabilize on the liability side, you know, you could actually start to stabilize margin, you know, probably in the mid-threes as you kind of embark, but we'll see how that goes maybe next quarter when we look at 2024 and beyond. Hopefully that helps.
No, that really helps. Thanks, Daryl, and look forward to working with you again.
Yeah. Thanks, Erika. Appreciate it.
Thank you. We'll take our last question from John Pancari with Evercore.
Good morning, congrats, Daryl, on the new role. Just a couple of very quick things from me. Just on that NIB non-interest-bearing mix of 34%, did you where you believe it could bottom? Could it be below that 30, you know, the, you're around currently the level that you were pre-pandemic? How much further below that could the non-interest-bearing mix migrate?
I said earlier in another question, John, you may have missed it, we, you know, because of the broker deposits that we put on, you know, just putting those broker deposits on dilutes our percentages, so you aren't comparing apples to apples from that perspective. You know, I would say we're going to go down probably 2% or 3%, you know, the rest of this year, it would be our best guess. It's, it's really, you know, serving clients to have higher rates. What I said earlier, you know, we started from a really high place because we got a lot of surplus deposits, and we really have huge focus to getting primacy on the operating accounts, and that basically gives us a lot to deal with.
I think at the end of the day, M&T will still have one of the highest percentages of non-interest bearing to total deposits of our peer group. I think it's just playing out, you know, with just a higher rate environment, and that will change if rates start to go down at some point.
Got it. All right. Thank you. Lastly, for me, on the deposit side, your outlook does imply modest growth in the second half of this year. You know, what is that primarily going to reflect? Is that although the incremental broker that you expect or, you know, maybe a little bit of color there?
Yeah, it's not, it's not broken. I mean, we really saw this quarter, in the middle of the quarter, start to stabilize and start to grow. you know, we're hopeful that, you know, we'll be able to get some growth out of our core businesses, whether it's retail, business banking, and commercial. maybe towards the end of the year, maybe we'll get higher activity out of the capital markets area and our corporate trust space as well, and wealth areas. you know, I'm hoping that all those business lines will continue to modestly grow throughout the year as we compete for deposits.
Okay, great. Thanks for taking my questions.
Yeah. Thanks, John.
Thank you. At this time, I'll turn the floor back over to Brian Klock for any additional or closing remarks.
Again, thank you all for participating today, and as always, clarification of any items on the call or news release if necessary, please contact our investor relations department at area code 716-842-5138. Thank you, and have a great day.
This does conclude today's M&T Bank second quarter 2023 earnings conference call. You may disconnect your line at this time and have a wonderful day.