Welcome to the M&T Bank fourth quarter and full year 2023 earnings conference call. All lines have been placed in a 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 question, we ask that you please pick up your handset to allow for optimal sound quality. Lastly, if you should require operator assistance, again, please press star 0. Please be advised that today's conference is being recorded, and I would now like to hand the conference over to Brian Klock, Head of Market and Investor Relations. Please go ahead.
Thank you, Michael, and good morning. I'd like to thank everyone for participating in M&T's fourth 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. Also, 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 is M&T's Senior Executive Vice President and CFO, Daryl Bible. Now I'd like to turn the call over to Daryl.
Thank you, Brian, and good morning, everyone. As you are here today on the call, 2023 marked a banner year for M&T Bank. On slide 3, I want to acknowledge that the keys to our success to what continues to drive performance remains our purpose, mission, and operating principles. Our focus on making a difference in people's lives and creating a positive impact in the communities we serve is core to how we operate. It is evident in how we show up for our communities in the moments of need, like in Vermont and Lewiston, Maine, where we continue to help those impacted by tragedies. It is why we are committed to supporting small businesses that are the backbone of local economies. And it dictates how our charitable foundation, which celebrated its thirtieth anniversary last year, continues to uplift our partners.
It is all done alongside our daily work of helping our customers achieve their financial goals. Turning to slide 4. We're excited to see how deeply we've embedded sustainability across the bank and into our products and services. I look forward to sharing more information on the impact of our businesses when we release our 2023 sustainability report in the spring. Now, let's turn to slide 6. As we reflect on 2023, there are several successes to highlight. We continue to realize the benefits from the People's United franchise and are pleased with the growth in New England, with M&T finishing as top SBA lender in Connecticut. C&I loans grew by over $5 billion, or 11% in 2023, aided by the growth in several specialty businesses brought over by People's United.
This C&I growth outpaced the reduction in CRE as we continue to optimize the way we serve these customers in the most capital-efficient manner possible. At the end of 2023, CRE loans represented approximately 25% of total loans. Our capital remains strong, with a CET1 ratio near 11%. We continue to leverage our strong capital and liquidity levels to grow new customer accounts and relationships. We also reduced asset sensitivity in 2023, while protecting shareholder capital and value. However, our work is not done. We continue to recognize the value created by the merger with People's United, while also bringing more capital-efficient, rate-neutral balance sheet that will produce stable and predictable revenue and earnings over the long term. Now, let's review the highlights for the full year. Results for the full year 2023 were strong.
We generated positive operating leverage, solid loan growth, improved expense control through the year, and growth in EPS and strong returns. Our pre-tax, pre-provision revenue, or PPNR, was $4.2 billion, up 22% from 2022, and we generated 3.9% positive operating leverage. Net charge-offs were 33 basis points, in line with our expectations and long-term average. GAAP net income was $2.7 billion. Diluted earnings per share were $15.79, up 37% from the prior year. As a reminder, 2022 results included merger charges, gain on sale of our insurance business, and a sizable contribution to our charitable foundation. While 2023 included gain on sale of the CIT business and the FDIC special assessment.
If you exclude these items, adjusted diluted earnings per share were $15.72 during 2023, up 11% compared to 2022. Our adjusted returns were also very strong, with return on assets of 1.33% and return on common equity of 11%. Turn to slide 7, which shows the results of the fourth quarter were also strong. PPNR declined modestly from the linked quarter to just over $1 billion. C&I consumer loan growth was strong. Expense control was evident as adjusted expenses declined 2% from the linked quarter and were down each consecutive quarter in 2023. Diluted GAAP earnings per common share were $2.74 for the fourth quarter. If you exclude the FDIC special assessment, adjusted diluted earnings per common share were $3.62.
On an adjusted basis, M&T's fourth quarter results produced an ROA and ROCE of 1.19% and 9.8%, respectively. Next, we will look a little deeper into the underlying trends that generated our fourth quarter results. Please turn to slide 8. Taxable equivalent net interest income was $1.7 billion in the fourth quarter, down 3% from linked quarter. This decline was driven by higher interest rates on customer deposit funding and changing deposit mix, partially offset by higher interest rates on earning assets. Net interest margin was 3.61%, down 18 basis points from the linked quarter.
The primary drivers of the decrease to the margin were an unfavorable deposit mix shift, contributing a negative 7 basis points, the impact of higher rates on customer deposit funding, net of the benefit from higher rates on earning assets, contributing negative 5 basis points, and a negative 6 basis points for carrying additional liquidity on the balance sheet. Turning to slide nine to look at the average balance sheet trends. Average investment securities were $27.5 billion, decreasing modestly during the fourth quarter. Average interest-bearing deposits at the Fed increased $3.5 billion to $30.2 billion due to our decision to have more liquidity on the balance sheet. This was mainly funded with strong deposit growth. Average loans increased slightly to $132.8 billion, and average deposits grew $2 billion to $164.7 billion.
Turn to slide 10 to talk about average loans. Average loans and leases increased slightly. Growth in C&I and consumer loans outpaced declines in CRE and residential mortgage loans. Growth in C&I loans were driven largely by dealer, fund banking, and corporate and institutional businesses. Loan yields increased 14 basis points to 6.33%, with higher yields across all loan categories. Of note, the consumer loan yield increased 26 basis points as we continued to benefit from higher yields on new originations compared to yields on runoff balances. Turning to slide 11, our liquidity remains strong. At the end of the fourth quarter, investment securities and cash, including cash out at the Fed, totaled $56.7 billion, representing 27% of total assets.
The duration of the investment securities portfolio at the end of 2023 was about 3.7 years, and the unrealized pre-tax loss and available for sale portfolio was only $251 million. Turning to slide 12. We continue to focus on growing customer deposits and we're pleased with our growth in average deposits. Average deposits total grew $2 billion. Approximately three quarters of that quarterly growth was from customer deposits. Average demand deposits declined $3.8 billion, reflecting a continued shift toward higher-yielding products such as sweeps, money market savings, and time deposits. The mix of average non-interest-bearing deposits was 30% of total deposits, compared to 33% sequentially. Excluding broker deposits, the non-interest-bearing deposit mix in the fourth quarter was 33%. Encouragingly, we saw the pace of deposit cost increases slow through the quarter. Continue on slide 13.
Non-interest income was $578 million, up 3% sequentially. The increase was largely driven by a strong quarter for commercial mortgage banking revenues, growth in trust income, and a small unrealized gain on certain equity securities. Other income also benefited from higher loan syndication fees. The decrease in rates towards the end of the quarter drove the increase in commercial mortgage banking revenues. Turning to slide 14. We continue to focus on controlling expenses. Non-interest expenses were $1.45 billion. Excluding the $197 million FDIC special assessment, non-interest expense were $1.25 billion, down 2% from linked quarter, and the adjusted efficiency ratio was 53.6%, largely unchanged from the third quarter.
The decrease was driven by reductions in other expenses as a result of losses associated with certain retail banking activities in the linked quarter and lower merchant discount and credit card fees. The decrease in other expenses was partially offset by higher professional and other services. Salary and benefits decreased modestly from the third quarter as a result of lower average headcount and seasonally lower benefit costs, partially offset by higher severance expense. Next, let's turn to slide 15 for credit. Full-year net charge-offs totaled 33 basis points, in line with our long-term historical average, and expectations were set out earlier in 2023. Net charge-offs for the quarter totaled $148 million, or 44 basis points, up 15 basis points over linked quarter.
This quarter's increase was largely driven by three office-related charge-offs located in New York City, Boston, and Washington, D.C., and two C&I charge-offs related to an online retailer and to an RV dealer. Nonaccrual loans have trended down each consecutive quarter since the first quarter of 2023. That trend continued in the fourth quarter, with nonaccrual loans declining $176 million from linked quarter to $2.2 billion. The nonaccrual ratio declined 15 basis points from the third quarter to 1.62%. The decline was primarily driven by the transfer of certain loans to accrual, commercial payoffs, and charge-offs on loans previously deemed nonaccrual. Since the end of 2022, we have increased the allowance over $200 million, and the allowance to loan ratio was 13 basis points, ending 2023 at 1.59%.
In the fourth quarter, we recorded a provision of $225 million compared to net charge-offs of $148 million. This resulted in an allowance build of $77 million this quarter and increased the allowance to loan ratio by 4 basis points. The current quarter build was primarily reflective of the commercial real estate values and higher interest rates, contributing to modest deterioration in the performance of loans to commercial borrowers, as well as loan growth in the C&I and consumer portfolios. Turning to slide 16. When we file our Form 10-K in a few weeks, we estimate that the level of criticized loans will be $12.6 billion, compared to $11.1 billion at the end of September.
We completed thorough reviews covering more than 60% of all CRE loans, including maturities in the next 12 months, construction loans, watch loans, and all criticized loans. The increase in criticized CRE loans was tied to these reviews and to 2024 maturities, where the prospect of continued higher rates could negatively impact performance of the portfolios or create shortfalls in debt service coverage, or require interest reserves for construction loans. The growth in criticized C&I loans was not tied to any specific review, but rather completion of an annual review cycle and our ongoing quarterly update upon receipt of interim financials. Generally, our reviews do not incorporate any benefit of the forward curve at potentially lower interest rates. The 10 largest downgrades accounted for half of the total C&I downgrades and represented a range of industries. Common themes include pressures from higher interest rates and labor costs.
During the fourth quarter, criticized non-owner-occupied C&I loans increased $663 million, accounting for 44% of the total increase in criticized loans. Criticized permanent CRE loans increased $441 million, representing 29% of the increase, and criticized construction loans increased $375 million. Turn to slide 17 and 18 for more details on the criticized loan portfolio. About 18% of the increase in criticized loans was driven by healthcare, 13% by multifamily, and 9% by retail CRE loans. Loan to values remain strong for these loan types, ranging from low 50% range for retail, mid 50% range for multifamily, and high 50% range for healthcare. To date, modifications at maturity have had sponsors generally support their loans through replenishment of reserves, loan paydowns, and enhanced recourse.
That is why our criticized has not led to growth in nonaccruals. Our conservative underwriting and strong client selection has been supportive of these assets. Reflective of the financial strength of the portfolio diversification of our CRE borrowers, 96% of criticized accrual loan balances and 53% of nonaccrual loans are paying as agreed. Turn to slide 19 for capital. M&T CET1 ratio at the end of 2023 was an estimated 10.98%, compared to 10.95% at the end of the third quarter. The increase was due in part to continued pause in repurchasing shares, combined with continued strong capital generation. At the end of December, the negative AOCI impact on CET1 ratio for available for sale securities and pension-related components would be approximately 20 basis points. Now turning to slide 20 for outlook. First, let's talk about the economic outlook.
We see so-called soft landing scenario as having the highest probability, but the possibility remains for mild recession brought on by lagged impact of rate hikes from last year. We are encouraged by the continued strong performance by the consumer as continued job gains, as well as wage growth above inflation, help drive consumer spending. Consumer spending has slowed enough to alleviate inflation pressure for many goods and services. We expect that to continue, continue in 2024. Inflation figures remain above the Fed target of 2%, chiefly because of rents and home prices. While the prices of many consumer goods have fallen and inflation for consumer services has slowed, we expect weakness seen in rent listings to play through to the official inflation data in 2024, helping to bring the headline inflation figures down.
Our outlook incorporates the forward curve that has multiple 25 basis point Fed cuts in 2024. With that backdrop, let's review our net interest income outlook. We expect taxable net interest income to be in the $6.7 billion-$6.8 billion range, and net interest margin in the 3.50%-3.59%. This outlook reflects the impact of higher deposit funding costs and the impact of different interest rate scenarios. As we have discussed, we continue to carry a high level of liquidity. Our current level of HQLA is about $46 billion, which is two-thirds in the cash and one-third in investment securities. In 2024, we started to shift some cash into securities. This, combined with other potential hedging actions, can help protect the downside risk for NII from lower rates, but may reduce NII in 2024.
We expect full year average loan and lease balances to be in the $135 billion-$136 billion range. We expect growth in C&I and consumer, but anticipate declines in CRE and residential mortgages. Average deposits are expected to be in the $163 billion-$165 billion range. We are focused at growing customer deposits at a reasonable cost. The level of broker deposits is expected to decline through the year. Turning to fees, we expect non-interest income to be in the $2.3 billion-$2.4 billion range. We expect solid fee income across many business lines. Lower rates will help drive stronger residential and commercial mortgage banking revenue. Trust income is expected to grow from current levels from higher valuations and increase in clients.
Turning to expenses, we anticipate non-interest expenses, including intangible amortization, to be in the $5.25 billion-$5.3 billion range. This outlook includes our typical first quarter seasonal salary and benefit increase, which is estimated to be $110 million. We also included the outlook to be approximately $53 million for intangible amortization. Our business lines are focused on holding their expenses flat while allowing us to continue to invest in the franchise and our key priorities. These priorities include growing the New England and Long Island markets, optimizing resources in both expense savings and revenue generation, transferring our systems and processes, making them more resilient and scalable, and continuing to build out our risk management.
Turning to credit, we expect net charge-offs for the full year to be near 40 basis points due to the ongoing credit cost normalization in the loan portfolio and resolution of some stress credits. We expect that the taxable equivalent rate to be 24.5% ±50 basis points. Finally, as it relates to capital, our capital, coupled with limited investment security marks, has been a clear differentiator for M&T. The strength of our balance sheet is extraordinary. We take our responsibility to manage our shareholders' capital very seriously, and will return more when it is appropriate to do that. Our businesses are performing very well, and we are growing new relationships each and every day. While every economic uncertainty is improving, our share repurchase remains on hold.
Our decision to resume share repurchases will consider the results of the 2024 internal and supervisory stress tests, including the Stress Capital Buffer, additional clarity on Basel III Endgame regulations, and continued stabilization and economic conditions as it relates to the probability of a mild recession. That said, we continue to use our capital for organic growth and growing new customer relationships. Buybacks have always been part of our core capital distribution strategy and will again in the future. In the meantime, our strong balance sheet will continue to differentiate us with our clients, communities, regulators, investors, and rating agencies. On slide 21, there is a summary of three enhancements we made to our financial reporting. First, we reclassified the substantial majority of owner-occupied loans and related interest income from CRE to C&I loans.
This better aligns with the classification with the underlying management and repayment source of the loans. Second, in the upcoming 10-K, we are changing our operating segments to reflect how management organizes its businesses to make operating decisions, allocate capital resources, and assess performance. Third, as certain categories have started to contribute more or less to our expense base, we opted to include printing, postage, and supplies and other costs and operations, and break out professional and other services as a distinct line item in the income statement. To conclude, on slide 22, our results underscore an optimistic investment thesis. While the economic uncertainty remains high, that is when M&T has historically outperformed peers. M&T has always been a purpose-driven organization with successful business model that benefits all stakeholders, including shareholders.
We have a long track record of credit outperformance through all economic cycles while growing in the markets we serve. We remain focused on shareholder returns and consistent dividend growth. Finally, we are a disciplined acquirer and prudent steward of shareholder capital. Our integration of People's United is complete, and we are confident in the ability to realize our potential post-merger. Now, let's open up the call to questions, before which Michael 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 telephone keypad now. You may remove yourself from the queue at any time by pressing star two. And once again, that is star one to ask a question. Our first question comes from Gerard Cassidy with RBC.
Hi, Daryl. How are you?
Doing good, Gerard, and you?
Good. Can you give us a flavor for when you guys look at the capital structure of M&T, as you're pointing out, it's quite strong, and we get beyond Basel III Endgame, and you see what your new stress capital buffer will potentially be. What do you see a comfortable level of CET1 on a longer-term basis once those two unknowns are known, and you can factor that into your thinking?
You know, I would say, you know, it depends, obviously, on the environment that you're in, and, you know, whether we're, you know, doing a transaction or not doing a transaction. But, you know, you typically would want to operate with a buffer of maybe 50-100 basis points over what's required from the regulations. And what we have there would probably be a way to probably peg it.
Okay, very good. And then, based on the experience of M&T, obviously, over a long period of time, you've guys put out in your investor decks that your credit losses, generally, are below peers. With the increases in your criticized loans, that you've shown today, the C&I and CRE, do you still feel comfortable that you guys can maintain that kind of long-term track record of being better than the peers on the credit losses?
Yeah. Yeah, I think, you know, it's a long history here at M&T. I mean, if you, if you look at it, you know, we have been a disciplined selection on client selection, sponsorship, and underwriting, you know, and our loss history is really low and kind of shows that. The future remains uncertain, but if you look at it, you know, it's, it's not a predictor of the past, and we're going to lean in on our client selection and underwriting approach has really not changed. LTVs are strong, and we have really good approach to our underwriting. You know, our largest sponsors that we have right now, you know, are supporting their credits. You know, they're putting money into credits, refinancing. And many of the charge-offs that we realized in 2023 came from what I would say, not long-term clients.
You know, they're more financial or institutional type money. But over the long term, we think that our client selection will win the day.
Then just quick, yeah.
Yeah, go ahead.
I was just saying, just quickly to follow up on that. Is it safe to assume that the criticized loans are more a reflection of market conditions rather than a change in underwriting standards two to three years ago that have led to these types of increases?
Yeah. If you look at where the increases came from, you know, multifamily, it's really more interest rate driven, is really what's driving that. They might have a little bit higher operating costs, but for the most part, their NOI business models are performing very well. So eventually, you know, over time, you know, I think that will cure itself, and do relatively well. If you look at construction, you know, construction overall is actually outperforming, you know, what's going on out there. There is, you know, stress in some of the takeouts right now, but as rates come down, I think agency takeouts will actually help in that sector. On the healthcare side, right now, it's really more of a reimbursement problem.
You know, while, you know, and costs are going up, it takes a while for them to get better reimbursement costs. So I think that will, you know, help over time. There's a lot of demand in that sector, and I think as costs level off, plus, there's an active takeout market through agencies like HUD from that perspective. You know, office, if you look at office, the one advantage we have in office is that we have a really good distribution of maturities. You know, over two-thirds of our maturities start in 2026 and beyond. So I think that's a positive. And the other property types we have, like retail and hotel, are generally stable to improving.
Very good. Thank you for the color.
Our next question comes from Manan Gosalia with Morgan Stanley.
Hi, good morning. Can you talk about the puts and takes on the NII guide? You know, I know you're asset sensitive with the buildup in liquidity and the skew to commercial. So, if we get you know, more or fewer rate cuts than what's in the forward curve, what happens with NII? And then, you know, I think you mentioned your you started the year putting some more or deploying some more of your cash into securities. Can you talk about what duration you're taking on there and what that would mean for the asset sensitivity?
Yeah. So the guide that we gave at $6.7 billion-$6.8 billion, I would say, you know, our three, you know, 25 basis point cut would be at the higher end of that range, so closer to $6.8 billion, I think, from that perspective. You know, if rates go maybe 5 cuts or 6 cuts, maybe you're towards maybe a lower end of that range. You know, we've decided that, you know, over the next couple of quarters, we're going to, you know, try to move as close as you can to a neutral position. You know, we started to put some money into securities, and we will continue to do some hedges, and interest rate swaps. We're gonna average in over time.
We're not gonna do it all at once and just kind of dollar average in, to get it more neutral so that we can produce stable and predictable earnings over time and not have impact on interest rates. So I think we feel pretty good about, you know, what we're seeing there. And, you know, from a deposit beta perspective, you know, I would tell you that, you know, deposit betas maybe are close to peaking, from that perspective. You know, maybe our net interest margin is close to bottoming out, maybe in the next quarter or two. So I feel actually pretty good that, you know, we'll be able to start to grow NII, maybe towards the second half of the year and definitely into 25.
Got it. And maybe just a couple of short questions on credit. I mean, I think you mentioned that the reviews on commercial real estate do not bake in the forward curve. So does that mean that if the forward curve plays through, that criticized assets should come down? Or, you know, as you scrub through the remaining 40% of the book, that could put some upward pressure there. And then, I'm sorry if I missed it, but did you give what your updated office reserves were? Because I know you built some reserves during this quarter.
Yeah. Yeah, let me take your first question first. So we really don't take into account the forward curve when we go through the reviews that we're doing. You know, a lot of the properties, like I said earlier, like multifamily, is more rate driven than anything else. Their business models are intact, so you have good NOI. I would say as rates fall, if rates go maybe 100 basis points or more, that could be, and probably will be, a positive impact for our credit costs. Now, it may not flow in as rates actually materialize. It'd have to come through when we're doing our next review. But that pressure, I think, would alleviate, and probably have an impact on the levels that you're seeing from that perspective.
You know, from an office perspective, you know, that part of the sector is a little bit different because it also has some structural challenges. So if you, if you look at that, you know, that's gonna probably play out more over time. It's gonna be when leases and vacancy rates kind of mature off. We're just blessed to have a longer time from a maturity perspective, which is great planning from the credit team. You know, the top risks that we have there are embedded in the ratings and reserves that we have. Evaluations that we have, I think, takes into account the risk. I think we're around, is it 4.4% right now? So I think we feel good at that.
And if you look at, you know, the real tell will be when leases mature, you know, and you have re-sizing risk, you know, what's gonna happen at that point? But we have a lot of time for that to play out. I will tell you, if you just look at the Signature transaction, there's a lot of money out on the sidelines that will definitely come in and play and be there. Right now, there's a difference between bid-ask spreads, but there is money that will come into the market at some point.
Great. Did you say the office reserve was 4.4%?
Yes.
Okay, so did the reserve build come somewhere else in the portfolio? Because I know you built reserves this quarter.
We did. I would say the reserve builds were mainly driven by the increase in criticized. If you look at our page that we have in the slide deck, the actual office criticized numbers actually fell. Our increases in criticized were in healthcare and multifamily and in hotel, and those are really the ones driving the increase. That was probably 2/3 of the increase. The other third was due to the loan growth that we had, which was C&I and consumer loans. So you can kind of see that, you know, the build wasn't that large for the increases that we had. We just really don't feel we have a lot of loss component because of the loan-to-value ratios that we have and the collateral that we have on those transactions.
Got it. Thank you.
Yep.
We have our next question from John Pancari with Evercore ISI.
Morning, John. Yep.
Just back to the reserve, I know you cited that it did account for, you know, current real estate valuations and changes there. What, and I know you gave us the LTVs, you cited a few of them. Are they refreshed LTVs? And if not, what type of valuation declines are you seeing as you work through the office portfolio specifically?
Yeah. So, so when we have done these reviews, I would say we have about 60% of the CRE portfolio that's been very thorough review. Obviously, we're picking the larger ones, the ones that are in larger cities that might have more risk from a valuation decline. We're seeing probably on average, about a 20% decrease in valuations. You know, our valuations are probably current within the last year or so, so we feel really good with that. You know, we continue to, you know, have reviews every quarter, you know, and continue to be very thorough in how we're looking at that. But I think the reserves we have today, I feel pretty good about.
Okay, thank you. One more just on that, if I could. The criticized scrub that you did, was that just that? Was that more of a scrub of the portfolio? It sounds like the way you described it, it was. And if so, do you expect less of an increase in criticized asset and related reserve build from this level?
You know, John, I would love to tell you that this is the peak of our criticized. You know, we have to finish up what we did. The majority of our construction loans, we have a little bit more construction loans to do this next quarter. And we're always subject to getting more information and, you know, as we get new financials and new vacancy information and all that. But I, I feel pretty good that we did a very thorough review of what we have out there. We really looked in all the spots that we thought, you know, we'd have the most risk and, and really took that into account. But I can't here tell you today that we're at the top. But at, at some point, hopefully, we will be able to say that.
Great. All right. Thanks, Daryl.
Yeah.
We have our next question from Ebrahim Poonawala with Bank of America.
Hey, good morning, Daryl.
Good morning.
So I guess just on this criticized nonaccrual on credit in general, given the work you've done, and sorry if I missed this, like, should we expect so far the growth in criticized has not reflected in or been sort of translated into nonaccruals? Should we expect that to change as you see some of your customers feel more pressured, given just the lagged impact of the rate cycle? Or could we still see nonaccrual trend lower? And then, what drives criticized lower from where we are today? Is it just time and maturity of these loans, or could we see a pretty decent decline over the coming quarters?
You know, I think, you know, the increase that we have today was basically a review of looking everything that we have out there. And I would tell you that, you know, interest rates probably drop was the biggest one. Labor cost was probably the next biggest increase. There was a little bit of increase in C&I as well. And in the C&I, there was nothing idiosyncratic there. It was a mixture of, you know, if you look at it, the largest, you know, 13 credits, seven different industries, so it's pretty diverse, from that perspective. So we, we feel pretty good, overall with, with where we stand. You know, only 6% of our criticized, you know, has gone into nonaccrual. That's kind of what our historical numbers have been.
You know, when Gerard asked the question, you know, we really feel good about our client selection. We're seeing our sponsors and clients really stand up and really support these credits. And we think that, you know, what we have in classified is the right direction. That doesn't mean a few may not flip into nonaccrual, but I think for the most part, you know, we don't really see a large period of losses. If we did, we would have had to put more in the reserves, and that's not what we're seeing or projecting.
Got it. I think it's maybe one question on capital. Another regional bank earlier this week talked about the need for scale for regional banks coming out of what happened last March. You all have been acquisitive from time to time, on a very deliberate way. Just talk to us in terms of, one, appetite to do bank deals if they come through over the next 12-18 months. And secondly, like, do you see the landscape becoming rich with deal opportunities as we move forward?
You know, M&T's always, you know, done acquisitions and have grown, you know, over the years. You know, our business model, you know, is really to stick to the, the regions that we're in and to really meet the needs of those communities, and, you know, we like to grow share in those markets. You know, so I, you know, whether you need scale or not, you know, I, I've been on both sides of that right now.
Mm-hmm.
I would tell you that it's, you know, it's not something you have to have. It's something if it makes sense. I mean, when you acquire somebody, you got to make sure it's a good cultural fit, first and foremost, that is critical. You have to really make sure that, you know, if you get synergies, that those come through, both on the expense and revenue sides. So, you know, we closed, you know, on People's. We've got all the cost synergies. We're in the midst of investing now more into New England and Long Island. So we're gonna continue to grow that. It usually takes, I would say, three to five years to really get the total performance, you know, from these acquisitions. So we still have a lot of work to do from that.
I'm sure down the road, you know, M&T is a favorite acquirer. Somebody might wanna sell to us at some point, but right now, we got a lot of work in front of us, and we're focused on really making that. It's one of our top four priorities right now, and we're, we're gonna do that and deliver that.
Excellent. Thank you, Daryl.
Yeah.
We have our next question from Frank Schiraldi with Piper Sandler.
Good morning.
Morning.
Daryl, Daryl, you mentioned, you know, the considerations for getting back to the buyback. Is it reasonable to think that maybe the last trigger or, or the last consideration is, is the stress test, is the CCAR? And so, you know, just wondering, is, is the second half of 2024, do you think the more likely scenario, for, for restarting repurchases?
You know, Frank, you know, I, I would love to be buying shares back, you know, especially at the level that we're trading at right now. I think it's a really good value. You know, right now, we, we just wanna make sure that we go through the stress tests, you know, we find out where our, our, our limits are. You know, we gotta make sure there's a lot of uncertainty out there, you know, and we just don't wanna go into recession. And if we do that, you know, probably would hold back for those purposes. But, you know, we're in the midst of, you know, really making a really strong bank. We're really changing it, you know, to be less reliant on-balance sheet commercial real estate, and really more driven through off-balance sheet products and services.
We're growing our other businesses, both on the balance sheet and in fees, and we're really excited about that. I promise you, we will do share repurchases. Can't tell you when that's gonna happen, but it is core to our strategy, and we will definitely do that when we think it's appropriate.
Okay. Then just a quick one, if I could, on the deposits. Non-interest bearing balances, just your thoughts on—you talked, I think, about deposit costs beginning to—betas beginning to stabilize. Any thoughts on the levels of non-interest bearing from here? Are you starting to see stabilization in balances around this, you know, 30% of total deposit number? And then, as part of that, can you just talk about how trust balances played into the linked quarter change in non-interest bearing, if at all?
Yeah, no, that's good questions. So we did see, you know, through the quarter, in the fourth quarter, that our DDA balances were starting to stabilize. You know, that's one of the biggest components of what's impacting non-interest income, is that migration from DDA into sweeps. You know, hopefully, that will kind of play out, you know, in the next quarter or two as that kind of stabilizes. I think when you look at the retail side of the chain, you know, we still grow our CD book. You know, that will probably continue until rates really start to fall. We didn't really see growth in CDs till we got over 3%, so we'll probably have to go down a little bit before that growth probably slows down a bit. But, you know, it's important that we price that correctly.
In our disclosures, we combine our retail CDs with our broker CDs. You know, and I did say in the prepared remarks that we probably plan to shrink our broker CDs over time. So that category will probably fall throughout the year, but it's probably driven more by non-clients. You know, from a trust perspective, it had a modest impact on it. I would say it wasn't that big of an impact from that. It was really, you know, just dropping in more in the commercial space, for the most part.
Okay. All right, great. Thank you.
You're welcome.
We have our next question from Erika Najarian with UBS.
Hi-
Hi.
Daryl. Just a, just a few follow-up questions, please. On Manan's line of questioning, you know, I'm wondering, what is your current assumption for downside beta for the first 100 basis points of cuts? And is there anything about this cycle where we can't look at historical precedents in terms of, you know, volume reaction, or, you know, cumulative beta reaction to the Fed easing?
Yeah. So, you know, if you look at, you know, our betas on a cumulative basis going up, you know, we're now, you know, in the low 50% range, but that includes the broker piece of that. So if you take that away, we're probably in the mid-40s. And on the downside, you know, I'd probably say early on, we'll start probably in the 40s on the way down as well. You know, and as it goes down, though, you won't be able to sustain that because while we increased a lot of our rates higher in the commercial area and our wealth area and some of our institutional areas, so those will come down as they went up. The retail side really did not come down, didn't go up as much, so it won't come down as much.
So, you know, after you go down 100 or 200 basis points, you are actually gonna have a declining beta impact, is probably what you're gonna see play out, depending on how much the Fed actually lowers rates. But I think early on, you're, you're gonna see something similar to that, you know, on the way down in the 40s, would be my best guess.
Got it. And a follow-up question on credit. How should we think about the progression of your ACL ratio from here? You know, you mentioned in the prepared remarks you'd already built up your reserve pretty significantly. You know, you know, as we think about normalization and the maturity walls you have in CRE, should we expect that your ACL ratios to continue to build from here? You know, how—I mean, this is sort of our first go at CECL with charge-offs actually going up.
You know, we feel really good where our reserve is right now. I can't promise you it's not gonna go up, but, you know, we've done a very thorough review of all of our, what we think are our higher risk type credits in the CRE space and the commercial space as well. So no promises that it can't go up anymore, but we feel really good where we are today and, and where we're reserved.
Thanks, Daryl. And our next question comes from Bill Carcache with Wolfe Research.
Thank you. Good morning, Daryl. Can you take us inside some of the discussions that you're having with your commercial clients? You know, how confident are you that the ingredients are in place for a re-acceleration in loan growth, if indeed the soft landing scenario plays out?
You know, if you look at what our clients have been saying, you know, for the most part, they've been more on the sidelines, you know, and really been leery of investing in their businesses. I think it's actually, I get kind of excited, you know, if the Fed just lowers rates just a little bit. I think the markets will get excited, and you're gonna have some things take off, and there'll be a lot more investment, which will help the lending side. I actually, Bill, get more excited on the fee side as well.
We saw, you know, a fair amount of activity just in December with the move that we had in the yield curve in Treasuries, you know, where there was a lot of pent-up demand, and we were able to do some placements in our commercial mortgage area, and you saw that flow through with some fee income. So I get kind of excited that if, if the Fed just lowers rates just a little bit, I think, you know, we're gonna have more momentum come through than, than what you're actually seeing maybe in, in the guide that we have.
That's really helpful. Thank you. And then following up on Erika's question on the reserve rate trajectory within CRE. Some have indicated that in this environment, they'd be more likely to maintain reserve rates and office CRE as charge-offs occur. Is it reasonable to expect that there would be a lag between when we see peak losses in CRE and when you actually start to release reserves?
You know, when we go through the analysis, I mean, it's a model, right? And it's based on our variables. So if you look at the variables we had this past quarter, the variables for, like, GDP and unemployment were basically unchanged. And they actually got a little bit better on CREPI and on HPI, so that actually helped in the reserve calculation. So we're using the macro variables, coupled with, you know, how we think that the credits are rated from a credit perspective, and it all comes together. So on a timing perspective, I think it's hard to say exactly when reserves will get adjusted. Right now, you know, we feel good with what we have, given what, you know, our risk is that we know right now on the credit side.
You know, over time, you know, probably there will be some reserves, but it releases, but you just don't know when that's gonna happen. All is model, more model driven.
Very helpful. Thanks, Daryl.
Yeah.
Our next question comes from Brian Foran with Autonomous.
Hi, guys. So one question going back to this beta on the way down that I sometimes get from investors, and I never have a very good answer, and you guys historically have been pretty good about thinking about normalized margins and drivers, so hopefully you can do better than me. You know, we all talk about deposit costs as the problem, but if I think about deposit margins over time, you know, and I know there's different ways to measure them, but, you know, relative to Fed funds, the, the spread between deposits and Fed funds is basically at an all-time high for you in the industry. It's a little less extreme relative to 2- and 5-year Treasuries, but it's still elevated.
Or even just more simplistically, like, your deposit costs today are still, you know, a little bit lower than they were in 2007, the last time the Fed was here. So I know a lot's changed over time, but just have you thought about that? Does it make sense that deposit margins, or liability margins, more broadly, are kind of higher than they have been historically? And where on your worry list is the idea that because they're pretty high to start with, you know, maybe as the Fed cuts, betas aren't 40% or 50%, they're 20% or 30%?
Yeah, I would say, I think it was Erika's question or, well, what I was saying, as rates fall, the beta will start to come down just because the consumer side did not go up as much. So I think we'll start off at a higher pace, but as that comes down, that will be less from that. You know, it is—if you look at it, I actually like the level of interest rates where we are today. I mean, we're, you know, in the low fives is where the Fed is.
You know, if we stay, you know, let's say, in the 4% range or maybe even as low as 3%, as long as we price our assets and deposits appropriately, you know, to getting back to basic business, and we get good spreads on that, there's no reason we can't have very healthy net interest margins, you know, for a very long period of time. It's all about, you know, pricing your assets and deposits correctly, making sure you're putting prepayment language in on your fixed loans and, you know, making sure you're pricing deposits appropriately. But it's, that's a great environment for banking and margins. I feel really good from that. You know, would we trend higher than where we are today? You know, probably over time, you know, but it really comes down to discipline.
You really work on the asset mix change at that time. You know, in times like that, when rates tend to be in that time period, economy seems to be going pretty well. So you probably have good loan growth out there and, you know, pretty decent deposit growth. So I actually get excited, you know, once rates come down a little bit and we can really operate the bank. Historically, I think we'll have good, really good returns.
And maybe as a follow-up, your predecessor had the theme of kicking off this whole deposit and margin worry cycle at the Barclays conference a couple of years ago. You know, I think at that time, the original message was the NIM was 4 or 4.1, and through the cycle, you thought 3.6-3.9 was a normalized range. You know, is that still the thinking? Like, we'll be at 3.5 or so in 2024, but normalized at some point in the future is 3.6-3.9?
I, I think that's, that's pretty much spot on, Brian. That's what I would say. You know, Darren did a great job in this role, and he also, you know, called exactly what our charge-offs were going to be in the beginning of the year, and they came in pretty much spot on. So, you know, he did a great job in this role. But when I look at it and see what's happening, I, if I call it right, you know, maybe we bottom the next quarter or two, and, and then it's just margin, then we can start growing from there. So I, I, I'm pretty much in that camp as well.
Appreciate it. Thank you.
Our next question comes from Steven Alexopoulos with J.P. Morgan.
Hey, good morning, Daryl.
Good morning.
Maybe to start—to actually start where you just ended. So that normalized NIM range, 3.6%-3.9%, if we think about your commentary, right, you want to move the balance sheet to a more neutral position. Is there any reason in whatever a normal curve looks like, we haven't seen one in a while, that you couldn't move to the upper end of that range? I think most would be disappointed if you were 3.6%. Like, why, why wouldn't you move to the very upper end of that range?
Steve, you know,
I'm not talking about next year, by the way.
I don't know.
I'm just talking about 2025, 2026. Like, is there, is there a reason that, you know, you're not going to be 3.75 margin bank?
You know, I feel really good about the way we are positioned. You know, what makes us so strong is, you know, we are really good at how we price our deposits, our assets, but what really makes it is that we are great at growing operating accounts, and that funding source is really, you know, starting to come back on and growing nicely. So we always have and probably will have a top-quartile net interest margin. So I feel really good about that. We may operate a little bit lower just because we're going to carry a little bit more liquidity. You know, right now we're carrying about $4 billion more liquidity, just because we increased our internal stress liquidity scenarios based upon some of the learnings that we had from earlier in the year, from that perspective.
So, you know, that cost us 6 basis points this quarter. Doesn't really impact NII a whole lot, but it impacts your margin just because you're treading water on assets and liabilities that don't make anything. But, you know, I feel really good in this rate environment. Managing a balance sheet, you know, and doing the right thing for our customers and for our communities, you know, is really what banking is all about, and I think we'll be able to execute and perform really well in that environment.
Got it. Okay. And just as a follow-up, so I know you've had 10 questions already on commercial real estate, but if we look at this deep dive you did, covering 60% of all commercial real estate loans, you know, one, what are you learning? I don't know if you're talking to building owners as you work through that process, but as these come due, you have $1 billion or so and criticized, you know, what's the expected workout? Will they put more equity in? What are you expecting? And then when you called out the 4.4% office reserve, is that a general reserve on the office portfolio, or are those specific credits coming due where you're anticipating losses? Thanks.
Yeah, I mean, the 4.4 is really a general amount. There could be a little bit of specific embedded in that, but it's the bulk of it is more of a general reserve from what we're seeing from that perspective. You know, we are seeing our clients, our sponsors, really step up and really support these credits. You know, we think that with charge-offs that we had this past year, you know, we're really more financial and institutional-oriented, but our sponsors, because they're long-term real estate owners of the property, I mean, they basically own properties where they want to own them in a certain block and city of where they have it. So it's really long-term oriented.
They tend to have very low tax bases in these properties, and they're going to support these credits, you know, over time. So that's really what we're seeing there. When we go through and look at, you know, whether we should, you know, grade it as criticized or not, you're seeing some pressure on the debt service coverage ratio. Once it falls under 1.1, it goes into the 11, which is a criticized camp. But the vast majority of what we have in criticized is between 1 and 1.1. Yeah, we have ones under 1 in that level, but the vast majority what we have there. So, you know, over time, I, I think, you know, those will cure and won't result in loss for the most part.
We did raise losses up a little bit, you know, for 2024. Some of that was really normalization on the consumer portfolio, you know, and then some of it is maybe working out a few more credits, you know, off. But for the most part, you know, what we haven't criticized is not materializing into losses.
Got it. That's terrific color. Thanks for taking my questions.
Yeah.
Our next question comes from Ken Usdin with Jefferies.
Thanks. Good morning, Daryl. First question on the securities book shrunk a little bit, but also the yield was flattish, let's call it. I'm just wondering how you could talk us through how you're thinking about both the size of the securities book going forward, and also, you know, what are you picking up on maturities as they're going back in, if we're starting to see this kind of, you know, flattish type of yield situation? Thanks.
Yeah. So we got a couple things going on there. So if you look at what we have right now, we're probably gonna take, you know, anywhere from $3 billion-$5 billion this year and move from cash into the securities book over time. You know, we're gonna really focus on non -convex type securities, so we don't have extension. So if we buy something at a duration of three years, it stays at a three years perspective. You know, yields that we're seeing right now are probably in the mid-4s, plus or minus. So I think that's going on pretty well. The other good benefit that we have is we have about $9 billion of U.S. Treasuries. Those U.S. Treasuries average a yield close to 2%.
So those are gonna reprice, and we're gonna put those back out in, you know, probably, you know, 2-, 3-, 4-year type duration or maturity Treasuries, and they're gonna reprice up over 200 basis points there. So I think that's a, that's a real positive. So we're seeing a nice uplift in the securities portfolio. The other thing to note, and I'll just switch over to the loan book, Ken, if you don't mind, is that on the consumer book, you know, you know, our auto didn't really grow, but the volume we put on in our auto lending was, like, 250 basis points higher than what it was rolling off at. If you look at the RV portfolio, and that did grow some this past quarter, that was also up a couple hundred basis points with a higher yield.
So we're from a reactivity perspective, our fixed portfolios are starting to really show and perform and have much higher yields.
Yeah, that's great. Actually, it was gonna be my follow-up on the loan side, is do you, do you have a broader way of helping us think through, the, either the proportion of that book that's fixed in reprices over the next year or two?
You know, I would say it's mainly in the consumer book, it's the book that's probably gonna reprice higher. From a C&I and CRE perspective, most of that is more floating because we're more like 60% floating, 40% fixed.
Right.
So if you look at it like that, you know, mortgage portfolio, you know, for the volume we put on in mortgage will be, you know, I think probably at attractive yields. There's not a lot of activity. You know, we're gonna originate and sell all conforming, so we generate fee income and not put it on the balance sheet. But we will support our clients in wealth. We will support our customers that we have for moderate and low-income housing, so there will be some volumes that go on in those portfolios. So that will reprice higher. That will just be a little bit slower because the volumes won't be as high.
Sorry, one more final one. Just, you mentioned earlier, the ongoing thought process of getting more of the production off balance sheet and kind of switching NII into fees. I'm just wondering where you are in that process and build out and infrastructure. And within that, do you have an idea of where you think that the right commercial real estate on balance sheet concentration of the loan book should be versus the current 25%? Thanks.
Yeah. So I, I would say our plans right now are to bring our CRE portfolio down probably another $3 billion. If you look in the last couple of years, we've been shrinking CRE about $3 billion a year. That gives us time to basically work with our clients and meet their needs with more off-balance sheet alternatives. So we're doing it at a measured pace, so we can do it and still meet the needs of our, of our good long-term clients, from that perspective. As far as what percentage we're gonna head for, I know it's gonna be lower than 25%. I can't tell you. You got a couple things going on: CRE shrinking and the other portfolio increasing.
So my guess is you'll probably see a drop a little bit faster than you might expect if we're successful with growing C&I and some of our consumer book.
Thanks, Darryl.
You're welcome.
We have our next question from Chris Spahr with Wells Fargo Securities.
Hi.
Good morning.
Daryl, this is about expenses and the efficiency ratio. I mean, this is going back a while ago, that you at one point, M&T had a 50%-55% efficiency target. I know that hasn't been updated in some time. I'm just wondering, what do you think given that the efficiency will creep higher in 2024, based on the guide, where do you think the efficiency will settle in with your normalized NIM?
Yeah, so you know, when you look at efficiency ratio, it's all about growing revenues faster than expenses. That's really what I kind of look at from that perspective. You know, we really have a challenging time in 2024 growing revenue so much just because we got net interest margin coming down some. You know, my hope is that it levels off in 2024 and starts to grow, you know, later in 2024, you know, so we can start in 2025 and start to have positive operating leverage from that perspective. I, I'd tell you, I'm very pleased with working with the leadership team that we have here at M&T. You know, we all agreed to come in, and all business lines, you know, came in with flat expenses, basically finding cost cuts to cover their merit increases, and they kind of did that in their own businesses.
So I think that was really well done from that perspective. We're guiding up, you know, a couple% just because we're making some investments in some really key projects, you know, like digital, like data. We have two transformations going on right now, one in finance, the other in commercial. You know, we're investing in our treasury management businesses. So we've got a lot of investments, but, you know, given our leadership team, I feel good that we'll be able to contain what growth we need there, and that we won't have , you know, the goal would be to have revenue grow faster than expenses, is really what we try to shoot for. And, you know, that will kind of drive, you know, good, positive operating leverage.
As a follow-up, do you think you can manage, like, a few% growth in expenses in 2025 and 2026, kind of just based on kind of your budgeting experience, notwithstanding, like, the, you know, comp activity or volume-driven rev expenses?
Yeah. I mean, when I look at the levers that we have on the expense side, you know, there's a lot of opportunities. You know, if you look at it, you know, our procurement and sourcing areas are continuing to get improve and get better in that area. I think we still have opportunities in our corporate real estate area to get more sq ft down over time. You know, we're really working with workforce management and really how to, you know, do our operations the most efficient way possible. I think our call centers have a lot of opportunity, you know, from automation perspective. You know, one of our themes that we have in 2024 is simplification, really trying to simplify what we are doing today.
In the transformations that are going on, you know, how we do this, we'll have less processes and much more simple way of getting things done and much more efficient ways of getting them done from that perspective. You know, for me, it always comes down to how we prioritize. You know, we're going to prioritize in the priorities that we have in this company, and I talked about those projects. You know, if we can focus on those and really not have any of the other investments kind of play out, you know, we can control expenses really well and continue to generate positive operating leverage as we get revenues to start to grow again.
Sorry, and one last, ticky-tack question. On Bayview, what is the, d o you have any estimate on what that would be for, for this year?
You know, we aren't 100% sure, but I would say 20 ± would be our best estimate right now.
Thank you.
That does conclude today's question and answer session. I will now turn the call back over to Brian Klock for closing remarks.
Thanks, Michael, and thanks, everyone, for participating in our call today. If there are any follow-up questions, you can call our investor relations department at 716-842-5138. Thank you again, and have a good day.
This does conclude today's program. Thank you for your participation. You may now disconnect.