Darren J. King
Executive Vice President, Chief Financial Officer at M&T Bank
Thank you, Brian, and good morning everyone. As we reflect on the past quarter, it was an eventful one. First off, we were pleased to have closed the acquisition of People's United Financial on April 1 and to welcome our new colleagues, customers and shareholders to the M&T family. We're excited to turn our complete focus to successfully integrating People's United, of course, not losing sight of the tenants that define M&T, delivering superior customer service, offering rewarding careers for our colleagues, engaging in the communities we call home and providing top quartile long-term returns to shareholders. We plan on completing the systems conversion in the third quarter of this year.
Subsequent to our January earnings call, the outlook for interest rates has changed materially. Low levels of unemployment and continued supply chain disruptions exacerbated by the situation in Ukraine, have pushed inflation to levels not seen since the early 1980s. Interest rates began to rise even before the Federal Reserve raised its Fed Funds target in late March and the forward curve anticipates additional hikes coming more quickly than we anticipated in January. The changing rate environment created an opportunity for us to deploy excess cash into investment securities at a faster pace than we previously outlined and to restart our interest rate hedging program. While we are beginning to see the tailwinds from rising interest rates positively impacting our net interest income, those same higher rates have prompted headwinds to our mortgage banking business, both for origination volumes and for gain on sale margins. We expect these headwinds to persist. Despite these macro challenges credit quality remained strong and expense growth has been well managed. We're well positioned for the future and excited about the opportunity to integrate the People's United franchise as well as to deploy our excess cash and excess capital.
Now let's review our results for the first quarter. Diluted GAAP earnings per common share were $2.62 for the first quarter of 2022, compared to $3.37 in the fourth quarter of 2021. Net income for the quarter was $362 million compared with $458 million in the linked quarter. On a GAAP basis, M&T's first quarter results produced an annualized rate of return on assets just shy of 1% at 0.97% and an annualized return on average common equity of 8.55%. This compares with rates of 1.15% and 10.91% respectively in the previous quarter. Included in GAAP results in the recent quarter were after tax expenses from the amortization of intangible assets amounting to $1 million or $0.01 per common share, down slightly from the prior quarter. Also included in this quarter's results were merger-related expenses of $17 million related to the People's United acquisition. This amounted to $13 million after tax or $0.10 per common share.
Consistent with our long-term practice, M&T provides supplemental reporting of its results on a net operating or tangible basis from which we have only ever excluded the after-tax effect of amortization of intangible assets as well as any gains or expenses associated with mergers and acquisitions. M&T's net operating income for the first quarter, which excludes intangible amortization and the merger-related expenses was $376 million compared with $475 million in the linked quarter.
Diluted net operating earnings per common share were $2.73 for the recent quarter compared with $3.50 in 2021s fourth quarter. Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholders' equity of 1.04% and 12.44% for the recent quarter. The comparable returns were 1.23% and 15.98% in the fourth quarter of 2021.
In accordance with the SEC's guidelines, this morning's press release contains a reconciliation of GAAP and non-GAAP results, including tangible assets and equity. Included in the recent quarters GAAP and net operating results was a $30 million distribution from Bayview Lending Group. This amounted to $23 million after-tax effect and $0.17 per common share. We received a late distribution in the fourth quarter of 2020 as well as the fourth quarter of 2021.
Next we'll look a little deeper into the underlying trends that generated these results. Taxable equivalent net interest income was $907 million in the first quarter of 2022, a decrease of $30 million or 3% from the linked quarter. The primary drivers of the decline were $20 million in lower interest income and fees from PPP loans as well as a $16 million reduction of interest accrued on earning assets, reflecting the two days shorter calendar quarter. Those factors were partially offset by higher rates on interest earning assets and cash interest received on non-accrual loans. The net interest margin for the past quarter was 2.65%, up 7 basis points from 2.58% in the linked quarter. The primary driver of the increase to the margin was a reduced level of cash held on deposit with the Federal Reserve, which we estimate boosted the margin by 10 basis points. That was partially offset by a 4 basis point decline resulting from the lower income from PPP loans.
Rising interest rates had a modest 1 basis point benefit to the margin as the Fed action on the Fed Funds target came relatively late in the quarter. All other factors including day count and interest received on non-accrual loans had a negligible impact on the margin. Compared with the fourth quarter of 2021, average interest earning assets decreased by some 4% or $5.8 billion, reflecting a $5.6 billion decline in money market placements, including cash on deposit at the Fed, partially offset by a $920 million increase in investment securities. Average loans outstanding decreased by about 1% compared with the previous quarter.
Looking at the loans by category, on an average basis compared with the linked quarter, commercial and industrial loans increased by $976 million or about 4%. That figure includes a decrease of approximately $780 million in PPP loans. That decrease was more than offset by $361 million growth in dealer floorplan balances and a $1.4 billion increase in all other C&I loans. Commercial real estate loans declined by 5% compared with the fourth quarter. Three factors contributed to that decline; elevated payoff activity was the primary driver, including several criticized and non-accrual loans assumed by other lenders. The quarter also saw construction loans converted into permanent off balance sheet financing often facilitated by our M&T Realty Capital Corporation subsidiary. And finally, new origination activity remained subdued compared to prior years.
Real estate loans declined by residential real estate loans, excuse me, declined by 3%, consistent with our expectations. The change reflects new loans originated and retained for investment, which were more than offset by normal runoff combined with the sale of Ginnie Mae buyouts as they became eligible for re-pooling into new RMBS.
Consumer loans were up nearly 1%. Activity was consistent with recent quarters where growth in indirect auto and recreational finance loans has been outpacing declines in home equity lines and loans. On an end-of-period basis, PPP loans amounted to just $592 million. Average core customer deposits, which exclude CDs over $250,000 decreased about 5% or some $6 billion compared with the fourth quarter. That figure was roughly evenly divided between non-interest bearing and interest checking. Trust demand deposits drove the decline in demand deposits, following lower levels of capital markets activity compared with the fourth quarter. The decline in interest checking reflects our ongoing program to manage deposit pricing downward, while our liquidity profile remains strong. Some higher cost escrow deposits were moved off our balance sheet to other institutions willing to pay higher rates.
Turning to noninterest income. Noninterest income totaled $541 million in the first quarter compared with $579 million in the linked quarter. As noted M&T received a $30 million distribution from Bayview Lending Group in each of the past two quarters. Mortgage banking revenues were $109 million in the recent quarter compared with $139 million in the linked quarter. Revenues from our Residential Mortgage Banking business were $76 million in the first quarter compared with $91 million in the prior quarter. Residential mortgage loans originated for sale were $161 million in the recent quarter compared with $191 million in the fourth quarter. Both figures reflect our decision to retain a substantial majority of mortgage originations for investment on our balance sheet. The primary driver of the linked quarter revenue decline is the higher interest rate environment has pressured gain on sale margins for loans previously purchased from Ginnie Mae servicing pools and which have become eligible for resale or re-pooling. Although these loans typically have higher rates with the new originations that difference has been narrowing. Residential gain on sale totaled $14 million in the recent quarter compared with $26 million in the prior quarter.
Commercial Banking revenues were $33 million in the first quarter, reflecting a decline from $49 million in the linked quarter. That figure was $32 million in the year ago quarter. As a reminder, the commercial mortgage banking business tends to show seasonal swings. Revenues totaled $66 million in the first half of 2021 compared with $99 million in the second half, which also included an elevated level of prepayment fees. Trust income was $169 million in the recent quarter, little change from the previous quarter, but up 8% from the year ago quarter. Service charges on deposit accounts were $102 million compared with $105 million in the fourth quarter. That decline primarily reflects seasonal factors. The previously announced repricing of our consumer checking products did not have a significant impact on the first quarter, but we expect foregone revenues from the program to reach a run rate of $15 million per quarter by the second half of the year.
Turning to expenses. Operating expenses for the first quarter, which exclude the amortization of intangible assets and merger related expenses were $941 million. The comparable figures were $904 million in the linked quarter and $907 million in the year ago quarter. As is typical for M&T's first quarter results, operating expenses for the recent quarter, which included approximately $74 million of seasonally higher compensation costs relating to the accelerated recognition of equity compensation expense for certain retirement eligible employees, like Don MacLeod. Also, it reflects the HSA contribution, the impact of annual incentive compensation payouts on the 401(K) match and FICA payments as well as the annual reset in FICA payments and unemployment insurance. Those same items amounted to an increase in salaries and benefits of approximately $69 million in last year's first quarter. As usual, we expect those seasonal factors to decline significantly as we enter the second quarter.
Aside from these seasonal factors that flow through salaries and benefits, operating expenses declined by $38 million compared with the fourth quarter. Lower professional services costs as well as lower pension-related costs drove that decline. The efficiency ratio, which excludes intangible amortization and merger-related expenses from the numerator and securities gains or losses from the denominator, was 64.9% in the recent quarter compared with 59.7% in 2021s fourth quarter and 60.3% in the first quarter of 2021. Those ratios in the first quarters of 2021 and 2022 each reflect the seasonally elevated compensation expenses.
Next, let's turn to credit. Despite the challenges of the pandemic and its variance, supply chain disruptions, labor shortages and persistent inflation, credit is stable to improving. The allowance for credit losses amounted to $1.5 billion at the end of the first quarter, little change from the end of 2021. We recorded a provision for credit losses of $10 million in the first quarter, which was partially offset by just $7 million of net charge-offs.
As the COVID-19 pandemic eases, forecasted economic indicators continue to show improvement from the prior period, but inflation remains persistently high with upward pressure from energy prices and constrained supply chains, which have been impacted by Russia's invasion of Ukraine. The first quarter's baseline macroeconomic forecast consider these developments, although there was little difference in the forecast from the prior quarter for those indicators that have a significant impact on our CECL modeling results, including the unemployment rate, GDP growth and residential and consumer real estate values. The result of these considerations is an allowance for credit losses that is consistent with our prior estimate.
Non-accrual loans increased very slightly amounting to $2.1 billion that equaled 2.3% of loans at the end of March, up slightly from 2.2% at the end of last year. When we file our first quarter 10-Q in a few weeks we expect to report a modest decline in criticized loans. As noted net charge-offs for the recent quarter amounted to $7 million. Annualized net charge-offs as a percentage of total loans were just 3 basis points for the first quarter, which we believe is an all-time low. That figure was 13 basis points in the fourth quarter. Loans 90 days past due on which we continue to accrue interest were $777 million at the end of the recent quarter. In total, 89% of these 90 days past due loans were guaranteed by government-related entities.
Turning to capital. M&T's Common Equity Tier 1 ratio was an estimated 11.6% compared with 11.4% at the end of the fourth quarter. This ratio reflects earnings, net of dividends, combined with a slight reduction in risk-weighted assets. Tangible common equity totaled $11.5 billion down just 0.3% from the end of the prior quarter. Tangible common equity per share amounted to $89.33, down $0.47 or 1.5 percentage point from the end of the fourth quarter. This very moderate decline reflects our patience in deploying excess liquidity into long duration investments until the interest rate outlook became clear. As previously announced, we expect to resume the repurchase of M&T common shares shortly, starting with the $800 million buyback program recently re-authorized by our Board.
Now turning to the outlook. On April 1, we closed the People's United acquisition. That development, combined with the rapid change in interest rate expectations have had a material impact on our outlook for full year 2022. The information that follows, reflects the combined balance sheet, a more recent forward curve and includes three quarters of operations from People's United. First let's talk about our outlook for the balance sheet. Excluding the impact of acquisition accounting adjustments at closing, we acquired $63 billion in total assets, including investment securities totaling $12 billion, cash placed at the federal reserve totaling $9 billion, loans of $36 billion and other assets of $6 billion. Deposits totaled $53 billion, borrowings and other liabilities totaled about $1 billion each and equity totaled $7.5 billion. The purchase consideration was approximately $8.4 billion. With the increase in rates, the deal is now expected to be slightly dilutive to tangible book value per share, however, this also means that future earnings will benefit from additional acquisition accounting accretion.
Let's go into a little more detail on our outlook for growth in the combined balance sheet. First, the interest earning cash position at the beginning of the second quarter totaled just over $45 billion. We expect these balances to decline to slightly under $30 billion by the end of 2022, due to a combination of growth in the securities portfolio, loan growth as well as a reduction in wholesale funding. Investment securities for the combined company totaled $21 billion at the beginning of the second quarter and we expect to grow the portfolio by $2 billion per quarter. This cadence could accelerate or slow depending on market conditions. We started this quarter with $40 billion in C&I loans including just over $800 million in PPP loans. The CRE, residential mortgage and consumer loan portfolios are $46 billion, $22 billion and $20 billion respectively.
In order to provide more details on our outlook for loan growth, let's first look at our expectations for spot or end of period loan growth from the beginning of the second quarter through the end of 2022. Total combined loans are expected to grow in the 3% to 5% range from the beginning of the second quarter. Excluding PPP and Ginnie Mae buyout loan balances total combined loans are expected to grow in the 4% to 6% range. The outlook for C&I loan growth excluding PPP loans is in that same 4% to 6% range with solid growth in dealer floor plan balances. PPP loans are expected to continue to pay down over the course of the year and not have a material impact on loan growth. For CRE loans, we expect the heightened level of payoffs to largely run their course and thus the outlook for a total combined CRE loans is essentially flat for the rest of this year. The tailwinds from our mortgage retention strategy are expected to help drive 7% to 8% loan growth in residential mortgage balances over the course of this year and excluding the impact of the re-pooling of Ginnie Mae buyouts, growth is expected to be in the 12% to 14% range. Of course, mortgage rates and home supply will ultimately affect that pace of growth. Finally, we are pleased with the momentum in our consumer loan portfolio and expect this growth to continue to be strong over the remainder of the year. We anticipate growth in the 7% to 9% range in this portfolio.
To help you understand the outlook for end of period growth or outlook for end of period loan growth ties into growth in average, the average balance sheet when compared to standalone M&T 2021 average balances. We expect average loans for the combined franchise to grow in the 24% to 26% range when compared to standalone M&T full year 2021 average balances of $97 billion. On a combined and full year average basis, we expect average C&I growth in the 43% to 45% range. We expect average CRE growth in the 15% to 16% range. Average residential mortgage growth in the 26% to 28% range. Finally, we expect average consumer loan growth in the 16% to 18% range.
As we look at the outlook for the combined income statement compared to standalone M&T operations from 2021, we believe we are well positioned to benefit from higher rates and manage through the macro challenges we noted earlier on this call. This outlook includes the impact from preliminary estimates of acquisition accounting marks that are expected to be finalized later in the quarter. Our outlook for net interest income for the combined franchise is for 50% full year growth compared to the $3.8 billion in 2021. We expect that 50% growth to be plus or minus 2% depending on the speed of interest rate hikes by the Fed and the pace of the deployment of excess liquidity as well as loan growth. This outlook reflects the forward yield curve from the beginning of this month.
Turning to the fee businesses, while higher rates are expected to pressure mortgage originations and gain on sale margins, growth in trust revenues should benefit from the recapture of money market fee waivers sooner than previously anticipated. We expect noninterest income to grow in the 11% to 13% range for the full year compared to $2.2 billion in 2021.
Next, our outlook for full year 2022 operating noninterest expenses is impacted by the timing of the People's United system conversion and subsequent realization of expense synergies. We anticipate 23% to 26% growth in combined operating noninterest expenses when compared to $3.6 billion in 2021. As a reminder, these operating noninterest expenses do not include pretax merger related charges. At the time of the merger announcement, one-time pretax merger charges are estimated at $740 million, including $93 million of capitalized expenditures. These merger charges are not expected to be materially different than these initial estimates. We expect the majority of these merger charges to be incurred in the second and third quarters of this year.
Turning to credit. We continue to expect credit losses to remain well below M&T's legacy long-term average of 33 basis points. For 2022 we conservatively estimate that net charge-offs for the combined company will be in the 20 basis point range. As a reminder, the provision for credit losses in this year's second quarter will include provision related to the non-purchased credit deteriorated loans from People's United. We are still finalizing the acquisition accounting marks, but given the improvement in economic conditions over the past year, this provision will likely be lower than the $352 million pretax provision estimated at the time of the announcement, the so-called double-count.
Finally, turning to capital. Due to the delay and growth in capital at both firms, the preliminary combined CET1 ratio at closing should be over 11%. We believe this level of core capital is higher than what is needed to safely run the combined company and to support lending in our communities. We plan to return excess capital to shareholders at a measured pace. We will be participating in the DFAST this year and again in 2023. Normally next year would have been an off-year for a category for a bank like M&T, however, the Federal Reserve has reasonably requested that we participate again next year so that our stress test and stress capital buffer can be assessed including the balance sheet and operations of People's United. With a solid starting capital position and the potential to generate significant amounts of capital over the next few years, we don't anticipate the test results causing a material change to our capital distribution plans.
Our objective, as always is to bring our CET1 ratio down gradually to a level that is near the high end of the lower quartile of our peer group. Based on that objective, we anticipate ending 2022 with a CET1 ratio in the 10.5% range. As noted earlier, we anticipate restarting the currently authorized $800 million common share repurchase program, now that the acquisition is closed.
Now, let's open up the call to questions, before which Gretchen will briefly review the instructions.