Darren J. King
Senior Executive Vice President & Chief Financial Officer at M&T Bank
Thank you, Brian, and good morning, everyone.
As we reflect on the past quarter and the first half of the year, we're very pleased with our progress. The second quarter results include the impact of the People's United Financial acquisition, which closed on April 1. We're excited about the momentum we have as a combined organization especially the progress both franchises are making in preparation for the planned systems conversion later this quarter. With strong NII growth and effective expense management, M&T generated positive operating leverage, as pretax pre-provision net revenue increased by more than $300 million versus last quarter.
We repurchased $600 million of our common stock in the second quarter. And yesterday, the Board of Directors authorized a new program to repurchase up to $3 billion in M&T common stock. Our balance sheet management enabled us to benefit from the changing interest rate environment, boosting the net interest margin and allowing us to deploy excess cash into investment securities with higher yields. With more Fed hikes projected this year, we continue to add more fixed rate assets to our balance sheet and to continue expanding our interest rate hedging program.
While we're just beginning to see the positive net interest income benefit from rising rates, those same higher rates have prompted headwinds in our mortgage banking business, both for origination volumes and for gain on sale margins. We expect these headwinds to persist. Despite the macro challenges, the unemployment rate remains low and credit quality remains strong. We're well positioned for the future and excited to continue the integration of the People's United franchise and to deploying our excess cash and excess capital.
Now let's review the results for the quarter. Diluted GAAP earnings per common share were $1.08 for the second quarter of 2022, compared with $2.62 in the first quarter of 2022. Net income for the quarter was $218 million compared with $362 million in the linked quarter. On a GAAP basis, M&T's second quarter results produced an annualized rate of return on average assets of 0.42% and an annualized return on average common equity of 3.21%, this compares with rates of 0.97% and 8.55%, 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 $14 million or $0.08 per common share. That compares to $1 million or $0.01 per common share in the prior quarter.
Pretax merger-related expenses of $465 million related to the People's United acquisition were also included in these GAAP results. These merger-related expenses are comprised of the so-called CECL day 2 double-count of $242 million, plus additional pretax merger-related expenses of $223 million. The total merger-related charges translate to $346 million after tax or $1.94 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 only ever exclude 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 second quarter, which excludes intangible amortization and the merger-related expenses, was $578 million compared with $376 million in the linked quarter. Diluted net operating earnings per common share were $3.10 for the recent quarter compared with $2.73 in 2022's first quarter. Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholders' equity of 1.16% and 14.41% for the recent quarter. The comparable returns were 1.04% and 12.44% in the first quarter of 2022. 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. As a reminder, included in the first quarter's GAAP and net operating results, with a $30 million distribution from our investment in Bayview Lending Group. This amounted to $23 million after-tax effect and $0.17 per common share. We did not receive any distributions in this year's second quarter.
Next, let's take a little deeper dive into the underlying trends that generated these results. Taxable equivalent net interest income was $1.42 billion in the second quarter of 2022 an increase of $515 million or 57% from the linked quarter. The linked quarter increase was due largely to the $420 million net interest income contribution from People's United. This amount included $35 million for purchase accounting accretion. The legacy M&T Bank net interest income increased $95 million sequentially, inclusive of the $138 million impact from higher rates on interest-earning assets, an $8 million increase from 1 additional day in the quarter, partially offset by a $22 million decline and the benefit from cash flow swaps and a $16 million decrease in interest received on nonaccrual loans and a $9 million decline in interest income and fees related to PPP loans.
Net interest margin for the past quarter was 3.01%, up 36 basis points from 2.65% in the linked quarter. The primary driver of the increase to the margin was from higher interest rates, which we estimate boosted the margin by 26 basis points. The People's United Earning asset yields added 8 basis points to the net interest margin. And in addition, margin benefited from a reduced level of cash held on deposit with the Federal Reserve, which we estimate added 7 basis points. These items were partially offset by a 6 basis point decline resulting from the lower interest income recovered on nonaccrual loans. All other factors, including the day count, had a negligible impact on the margin.
Before we discuss the average loan balance trends for the quarter, we note there were reclassifications within the People's United Commercial loan portfolios. In order to be more consistent with M&T's reporting methodology, just over $2 billion in loans that People's United had classified as C&I were reclassified into CRE loans. Compared with the first quarter of 2022, average loans outstanding increased by $35.4 billion or 38% due primarily to the $35.5 billion average impact of the People's United loans.
Looking at loans by category. On an average basis compared with the linked quarter, commercial and industrial loans increased by $14.5 billion or about 62%. The average impact from the acquired People's United loans was $13.8 billion. Legacy M&T C&I average loans increased by about $1.2 billion, with strong growth in middle market C&I loans and average dealer floor plan balance growth of $209 million. This growth was partially offset by a decrease of approximately $466 million in PPP loans. On an end-of-period basis, for the combined bank, PPP loans amounted to $351 million.
Average commercial real estate loans increased by $12.3 billion or 35% compared with the first quarter. The average impact from the acquired People's United loans was $13.1 billion. Legacy M&T CRE average balances declined $830 million during the second quarter due to almost equal reductions in construction and permanent loans. We continue to reduce our construction exposure as there is a lack of new activity to offset the conversion of construction loans into permanent mortgages. There was an uptick in permanent mortgage financing in the quarter. However, it was outpaced by an elevated level of paydowns. Residential real estate loans increased by $6.9 billion or 43% due almost entirely to the average impact of the People's United loans.
The legacy M&T average loan balances were essentially flat as the retention of new originations retained for investment, were offset by normal runoff, combined with the sale of Ginnie Mae buyouts that became eligible for repooling into new RMBS. Average consumer loans were up $1.8 billion or 10%, again due in large part to the $1.6 billion average impact from the People's United loans.
For legacy M&T recreational finance loan growth continues to be a key driver of growth. Average investment securities increased by $14.7 billion due to the $11.2 billion average impact from the acquired People's United securities and a $3.5 billion increase in legacy M&T investment securities. Average earning assets excluding money market placements, which is inclusive of cash on deposit at the Federal Reserve, increased $50 billion or 50% due largely to the $46.7 billion average impact of People's United and growth in legacy M&T average investment securities. After closing the acquisition, we implemented various balance sheet restructuring actions to optimize the funding base of the combined bank. These actions utilize some of the cash available and resulted in a decrease in deposits. Many of these actions occurred during the quarter, so we thought it would be more informative to look at the change in end-of-period cash balances.
Cash balances decreased by $11.8 billion to $33.4 billion at the end of June, down from just over $45.2 billion on April 1. The decline was the result of several factors. These include a $2 billion increase in investment securities, a $1.5 billion restructuring of some People's United high-cost deposits notably broker deposits, a $3 billion decline in escrow and mortgage warehouse related deposits, reflecting lower levels of activity associated with the rising rate environment, a $500 million reduction in trust demand deposits resulting from lower levels of capital market activity compared with the first quarter and a $2 billion drop in municipal deposits.
We continue to actively manage higher cost deposits and in many cases, retain the customer and are able to move their balances to an off-balance sheet alternative that provides the interest rate they desire. With that background, average core customer deposits, which excludes CDs over $250,000 increased by $45 billion or 36% compared with the first quarter. The average impact from the People's United deposits was about $49 billion.
Turning to noninterest income. Noninterest income totaled $571 million in the second quarter compared with $541 million in the linked quarter. The People's United noninterest income contributed $79 million while legacy M&T declined by $49 million. As noted, M&T received a $30 million distribution from Bayview Lending Group in the first quarter and did not receive any distribution in the second quarter of this year. Mortgage banking revenues were $83 million in the recent quarter compared with $109 million in the linked quarter. Revenues from our residential mortgage business were $50 million in the second quarter, compared with $76 million in the prior quarter.
Residential loans originated for sale were $77 million in the recent quarter compared with $161 million in the first quarter. Both figures reflect our decision to retain a substantial majority of our mortgage originations for investment on our balance sheet. The primary driver of the linked quarter decline in revenue is the higher interest rate environment, which has pressured gain on sale margins for loans previously purchased from Ginnie Mae servicing pools, and which became eligible for resale or repooling. With the rapid increase in yields for new mortgage originations over the past few months, these Ginnie Mae repooled loans have fallen below new origination yields, which has driven the negative gain on sale margin.
During the quarter, residential mortgage loans were sold at a loss of $17 million compared to a $14 million gain on sale in the prior quarter. Commercial mortgage banking revenues were $33 million in the second quarter, essentially unchanged from the linked quarter. That figure was $35 million in the year ago quarter. Trust income was $190 million in the recent quarter and included about $14 million in income from People's United. Legacy M&T trust income increased about 4% due largely to about $10 million from the recapture of money market fee waivers and $4 million in seasonal tax preparation fees, partially offset by the impact of lower market valuations on assets under management and administration.
Service fees on deposit accounts were $124 million compared with $102 million in the first quarter. People's United contributed $33 million to this fee income line during the quarter. The decline in legacy M&T service charges primarily reflects the previously announced repricing of our consumer checking products. We expect foregone revenues from the program to reach a run rate of $15 million per quarter during the second half of the year.
Operating expenses for the second quarter, which exclude the amortization of intangible assets and merger-related expenses, were $1.16 billion, and included about $259 million in expenses from the operations of People's United. Legacy M&T operating expenses were about $903 million, compared to $941 million in the linked quarter and $859 million in the year ago quarter. Recall, operating expenses for the first quarter include approximately $74 million of seasonally higher compensation costs. Aside from those seasonal factors that flow through salaries and benefits, legacy M&T operating expenses increased by $36 million from the first quarter. This increase was due almost entirely to higher salaries and benefits costs resulting from 1 additional business day, a full quarter impact of merit increases and increased incentive accruals tied to improved bank performance. The efficiency ratio, which excludes intangible amortization and merger-related expenses from the numerator and securities gains or losses from the denominator, was 58.3% in the recent quarter compared with 64.9% in 2022's first quarter and 58.4% in the second quarter of last year.
Next, let's turn to credit. Despite the lingering challenges of the pandemic and its variance, supply chain disruption, labor shortages and persistent inflation, credit is stable to improving. The allowance for credit losses amounted to $1.82 billion at the end of the second quarter, up $352 million from the end of the linked quarter. The increase was due largely to the impact of the allowance related to the acquired People's United loan portfolio. We ran the acquired loan book through our allowance methodology and essentially confirmed their allowance at closing. Applying the provisions from the CECL accounting principle, we assigned $99 million of the People's United allowance to purchase credit deteriorated, or PCD loans and $242 million to non-PCD loans.
In addition, we recorded a $60 million provision in the second quarter. Partially offsetting these increases were net charge-offs of $50 million in the second quarter compared to just $7 million in this year's first quarter. Economic indicators continue to show improvement from the prior period, but inflation remains at a historically high levels. Aside from movements in forward interest rate curves, the second quarter's baseline macroeconomic forecast was relatively unchanged 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 commercial real estate values.
Nonaccrual loans increased to $2.6 billion compared to $2.1 billion sequentially. The increase was entirely the result of the acquired People's United loan portfolio as nonaccrual loans at legacy M&T decreased sequentially. At the end of the second quarter, nonaccrual loans represented 2.1% of loans, down from 2.3% at the end of the linked quarter. When we file our second quarter 10-Q in a few weeks, we expect to report an increase in criticized loans. However, the percentage of loans recognized as criticized will decrease. Similar to the trends in the nonaccrual portfolio, the increase in the dollar amount of criticized loans is due entirely to the acquired People's United portfolio. We expect a modest decline in criticized legacy M&T loans.
As noted, charge-offs for the recent quarter amounted to $50 million. Annualized net charge-offs as a percentage of total loans were 16 basis points for the quarter compared to 3 basis points in the first quarter. Loans 90 days past due on which we continue to accrue interest were $524 million at the end of the quarter, down from $777 million sequentially. 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 10.9% compared with 11.7% at the end of the first quarter. The decrease was largely due to the impact of the People's United acquisition and the repurchase of $600 million in common shares, which represented 2% of our outstanding common stock. Tangible common equity totaled $15.3 billion, increased 33% from the end of the prior quarter due largely to the impact of the People's United merger. Tangible common equity per share amounted to $85.78 per share, down $3.55 or 4% from the end of the first quarter. As previously noted, the Board of Directors authorized a new repurchase program for up to $3 billion of common stock, which replaces the previous $800 million repurchase program, under which $600 million of M&T shares were purchased in the second quarter.
Now let's turn to the outlook. Interest rate expectations continue to be volatile and can have a material impact on our outlook for full year 2022. Similar to last quarter, the outlook that follows reflects the combined balance sheet with 3 quarters of operations from People's United as well as a more recent forward curve and is on a full year basis. First, let's talk about our outlook for the balance sheet. We continue to expect to grow the investment securities portfolio by $2 billion per quarter for the remainder of the year. However, that cadence could accelerate or slow depending on market conditions as well as customer loan demand.
Now turning to the outlook for average loans. When compared to stand-alone M&T full year 2021 average loan balances of $97 billion, we continue to expect average loan growth for our combined franchise to be in the 24% to 26% range. However, growth may come in near the lower end of that range. Note that the updated average growth rates for C&I and CRE loans reflect the reclassification of C&I loans into CRE loans in the former People's United loan book that we mentioned earlier.
On a combined and full year average basis, we expect average C&I growth in the 37% to 39% range. We expect average CRE growth in the 17% to 19% range, average residential mortgage growth in the 28% to 30% range and average consumer loan growth in the 10% to 12% range. As we look at the combined income statement compared to stand-alone M&T operations from 2021, we believe we're well positioned to benefit from higher rates and to manage through the macro challenges we noted earlier on this call.
Our outlook for net interest income for the combined franchise is for 56% full year growth compared with the $3.8 billion in 2021. This reflects the forward yield curve from the beginning of the month. Given the speed of interest rate hikes by the Fed, the reactivity of deposit pricing and the deployment of excess liquidity and loan growth, the full year net interest income could be plus or minus 2%.
Turning to the fee businesses. We still expect strong trust income growth driven by new business and the recapture of money market fee waivers but albeit lower than previous expectations as a result of the lower equity valuations from second quarter. In addition, higher interest rates are expected to continue to pressure mortgage originations and gain on sale margins. We have completed the sales of Ginnie Mae repooled mortgages, and we will continue with the retention of almost all originations for the rest of the year. With this in mind, we expect the gain on sale from residential mortgages to be minimal in the second half of the year. We, therefore, now expect noninterest income to grow in the 5% to 7% range for the full year compared to $2.2 billion in 2021.
Next, our outlook for full year 2022 operating noninterest expense is impacted by the timing of the People's United systems conversion and subsequent realization of expense synergies. We continue to anticipate 24% to 26% growth in combined operating noninterest expenses when compared to the $3.6 billion in 2021. However, expenses are likely to be near the higher end of the range, reflecting inflationary pressures on wages and improved bank performance. As a reminder, these operating noninterest expenses do not include pretax merger-related charges. We do not expect these charges to be materially different than our initial estimates.
Turning to credit. We continue to expect credit losses to remain well below M&T's 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.
Finally, turning to capital. We believe the current level of core capital is higher than what is needed to safely run the combined organization and to support lending in our communities. We plan to return excess capital to shareholders at a measured pace. Late in June, the Federal Reserve released the results of its stress test, also known as the DFAS. Based on these DFAS results, M&T's preliminary stress capital buffer, or SCB, is estimated at 4.7%. As a result, we will be subject to a 9.2% common equity Tier 1 ratio threshold under the SCB regulation, which is in effect from October 1, 2022, through September 30, 2023.
M&T's common equity Tier 1 ratio of 10.9% at June 30, comfortably exceeds the threshold, although which capital distributions could be limited by that regulation. We continue to anticipate ending 2022 with a CET1 ratio in the 10.5% range. With a solid capital -- starting capital position and the potential to generate significant additional amounts of capital over the next few years, we don't anticipate 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. We anticipate continuing to repurchase common shares under the new $3 billion repurchase program.
Now let's open up the call to questions before which Gretchen will briefly review the instructions.