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 nine months of the year, we're pleased with the progress we have made executing on the plans we laid out in January.
Through the first three quarters of the year, we have been actively putting our dry powder to work. We deployed $6 billion of cash into net investment securities growth investing at consecutively higher yields, thereby limiting the impact on accumulated other comprehensive income and, at the same time, we began to rebuild our derivatives hedging portfolio.
Excluding the impact of the acquired loans and PPP loans, we've grown commercial and industrial loans by $3 billion, consumer loans by about $640 million, while the $2.8 billion decline in CRE balances reflects our decision to serve our commercial real estate customer base in a slightly different way. All of these efforts have led to a reduction in our asset sensitivity, helping to protect our net interest margin from future rate shocks and making our balance sheet more capital efficient.
In terms of capital, we restarted common share repurchases in this year's second quarter and have now repurchased $1.2 billion in common stock, representing 4% of outstanding shares. And we closed the acquisition of People's United Bank and began the process of integrating this valuable franchise.
Looking back through the first nine months of this year, this hard work has translated into strong financial results. We generated positive operating leverage and 27% growth in pre-tax pre-provision net revenue. And the trend has grown stronger each quarter as we generated pre-tax pre-provision net revenue of more than $1 billion in the third quarter of this year, representing 9% positive operating leverage compared to the linked quarter. Tangible book value per share has also remained relatively stable during 2022 despite the rising rate environment and the impact that can have on accumulated other comprehensive income.
We end the third quarter with a CET1 ratio of 10.7%, which exceeds the median peer bank level by a wide margin. But our work is not done. We continue on the path set out at the beginning of this year to build a more capital efficient, less asset-sensitive balance sheet that will produce predictable revenue and earnings. A key element of our plan is to recognize the value created from the combined franchise. We're excited about our expanded footprint and the benefits that our combined company can bring to our shareholders, customers, employees and communities.
Now let's review our results for the quarter. Diluted GAAP earnings per common share were $3.53 for the third quarter of 2022 compared with $1.08 in the second quarter of 2022. Net income for the quarter was $647 million compared with $218 million in the linked quarter. On a GAAP basis, M&T's third quarter results produced an annualized rate-of-return on average assets of 1.28% and an annualized return on average common equity of 10.43%. This compares with rates of 0.42% and 3.21% respectively in the previous quarter.
Included in GAAP results in both the second and third quarters were after-tax expenses from the amortization of intangible assets amounting to $14 million or $0.08 per common share. Pre-tax merger-related expenses of $53 million related to the People's United acquisition were included in these GAAP results. These merger-related charges translate into $39 million after-tax or $0.22 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 third quarter, which excludes intangible amortization and merger-related expenses, was $700 million compared with $578 million in the linked quarter. Diluted net operating earnings per common share were $3.83 for the recent quarter compared with $3.10 in 2022 second quarter.
Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholders' equity of 1.44% and 17.89% in the recent quarter. The comparable returns were 1.16% and 14.41% in the second 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.
Next, we'll look a little deeper into the underlying trends that generated these results. Taxable equivalent net interest income was $1.69 billion in the third quarter of 2022, an increase of $268 million or 19% from the linked quarter. The increase was driven largely by approximately $250 million of impact from higher rates on interest-earning assets inclusive of the effects of interest rate hedges, also an $8 million increase from one additional day in the quarter and a $6 million increase in interest received on non-accrual loans.
The net interest margin for the past quarter was 3.68%, up 67 basis points from 3.01% in the linked quarter. The primary driver of the increase to the margin was higher rates, which we estimate boosted the margin by 55 basis points. In addition, the margin benefited from the reduced level of cash held on deposit with the Federal Reserve, which we estimate added 10 basis points. All other factors added 2 basis points to the margin.
Next, let's discuss the average loan balance trends during the quarter where you'll be able to see the progress we continue to make transitioning to a more capital-efficient balance sheet. Average loans and leases were $127.5 billion during the third quarter of 2022, essentially unchanged with the linked quarter.
Looking at the loans by category on an average basis compared with the second quarter, commercial and industrial loans and leases increased $504 million or 1% to $38.3 billion with $458 million or 2% growth largely coming from core commercial banking clients, and $353 million or 17% growth in average dealer floor plan balances. This growth was partially offset by a decrease of approximately $304 million in PPP loans. Excluding PPP loans, total average C&I loans and leases grew by $808 million or 2% quarter-over-quarter. PPP loans ended the third quarter at only $168 million and are not expected to have a material impact on loan growth going forward.
With the People's United acquisition, we have two new business lines that impact our balance sheet. Growth in average equipment financing continues to be solid growing $165 million or 3% sequentially. However, this growth was offset by a $171 million or 30% decline in average mortgage warehouse line usage. During the third quarter, average commercial real estate loans decreased by $946 million or 2% to $46.3 billion. Permanent commercial mortgages and construction loans equally contributed to the decrease.
Our construction exposure continues to decline as projects reach completion and the decline in the permanent commercial mortgages is due in part to converting some of these loans into off-balance sheet financing facilitated by our M&T Realty Capital Corporation subsidiary. Residential real estate loans increased $201 million or about 1% to $23 billion due to the continued retention of new originations that we hold on the balance sheet for investment, partially offset by normal amortization. Average consumer loans were up $167 million or about 1% to $20 billion.
Recreational finance loan growth continues to be the main driver of growth. These average loans grew by $303 million or 4%. That growth was partially offset by a $236 million or 5% decline in average auto loan. Average earning assets, excluding interest-bearing cash balances, which is inclusive of cash on deposit at the Federal Reserve, increased $1.5 billion or 1%, due largely to the $1.6 billion increase in average investment securities.
During the quarter, we completed various balance sheet restructuring actions to optimize the funding base of the combined bank. These actions utilize some of the excess cash available and resulted in a decrease in deposits. We expect cash balances to remain relatively stable until the end of this year. Average interest-bearing cash balances decreased by $8.9 billion to $30.8 billion during the third quarter of this year, due largely to the decline in deposit balances and the cash deployed to purchase investment securities.
Average deposits decreased by $7.4 billion or 4% compared with the second quarter. The decline in deposits reflect the impact of market conditions and planned balance sheet management actions. Some of these include, a $1 billion decline in escrow and mortgage warehouse-related deposits, reflecting lower levels of activity associated with the rising rate environment; $600 million reduction in trust demand deposits resulting from lower levels of capital markets activity compared with the second quarter. There was a $1 billion planned reduction in non-core high-cost deposits and a $1.6 billion reduction in municipal average balances as customers paid down lines and shifted to paying-off some higher-yielding higher balanced products.
$1 billion in commercial mortgages -- there was a reduction of $1 billion in commercial balances as customers moved to off-balance sheet sweep as well as a reduction in line utilization, and $2 billion and lower time deposit balances and other rate-sensitive products. Customer operating account balances have stabilized. Average non-interest bearing deposit balances declined 2% during the third quarter of this year. However, these deposit balances grew by $648 million or 1% on an end-of-period basis.
Turning to noninterest income. Noninterest income totaled $563 million in the third quarter compared with $571 million in the linked quarter. Mortgage banking revenues were $83 million in the recent quarter, unchanged from the linked quarter. Revenues from our residential mortgage business were $55 million in the third quarter compared to $50 million in the prior quarter. Residential mortgage loans originated for sale were $47 million in the recent quarter compared with $77 million in the second quarter. Both figures reflect our decision to retain a substantial majority of the mortgage originations for investment on our balance sheet.
Commercial mortgage banking revenues were $28 million in the third quarter compared with $33 million in the linked quarter. That figure was $50 million in the year-ago quarter. Trust income was $187 million in the recent quarter, down 2% from $190 million in the second quarter. The decrease was due largely to the impact of lower market valuations on assets under management and assets under administration. In addition, recall that the second quarter included $4 million in tax preparation fees, which did not recur in the recent quarter. These declines were partially offset by an incremental $5 million in recapture of money market fee waivers. These fee waivers are now fully recaptured.
Service charges on deposit accounts were $115 million compared with $124 million in the second quarter. The decline primarily reflects the waiver of service charges in September on acquired customer deposit accounts.
Turning to expenses. Operating expenses for the third quarter, which exclude the amortization of intangible assets and merger-related expenses, were $1.21 billion compared to $1.16 billion in the linked quarter. The increase was due largely to higher salary and benefit costs resulting from one additional business day and the investment in talent that -- in an investment in our talent that affected approximately half of our organization, as well as increased incentive accruals tied to improved bank performance.
We also saw an increase in FDIC insurance expense, reflecting the impact of acquired loans deemed to be criticized. The efficiency ratio, which excludes intangible amortization and merger-related expenses from the numerator and securities gains or losses from the denominator, was 53.6% in the recent quarter compared with 58.3% in 2022 second quarter and 57.7% in the third quarter of last year.
Next, let's turn to credit. Despite the supply chain disruptions, labor shortages and persistent inflation, credit remained stable. The allowance for credit losses amounted to $1.88 billion at the end of the third quarter, up $52 million from the end of the linked quarter. In the third quarter, we recorded a $115 million provision for credit losses compared to $60 million in the second quarter. Note that this amount in the second quarter excludes the $242 million so-called CECL double count provision related to the non-purchase credit deteriorated acquired loans. Net charge-offs were $63 million in the third quarter compared to $50 million in this year's second quarter.
The reserve build was largely due to changes in economic assumptions included in our reserve methodology, as well as growth in our consumer portfolios. As forward interest rate curves were adjusted to reflect the rising interest rate environment, the baseline macroeconomic forecast experienced a deterioration in the third quarter for those indicators that our reserve methodology is most sensitive to, including unemployment rate, GDP growth, and residential and commercial real estate values.
Non-accrual loans decreased to $2.4 billion compared to $2.6 billion sequentially. At the end of the third quarter, non-accrual loans represented 1.9% of loans outstanding, down from 2.1% at the end of the linked quarter. As noted, net charge-offs for the recent quarter amounted to $63 million. Annualized net charge-offs as a percentage of total loans were 20 basis points for the third quarter compared to 16 basis points in the second quarter. Loans 90 days past due on which we continue to accrue interest were $477 million at the end of the recent quarter, down from $524 million sequentially. In total, 89% of those 90-day past due loans were guaranteed by government-related entities.
Turning to capital. M&T's common equity Tier 1 ratio was an estimated 10.7% compared with 10.9% at the end of the second quarter. The decrease was due largely to the impact of the repurchase of $600 million in common shares, which represented 2% of outstanding stock. Reflecting the common share repurchases, tangible common equity totaled $14.6 billion, a decrease of 3% from the end of the prior quarter. Tangible common equity per share amounted to $84.28, down $1.50 or 2% from the end of the second quarter.
Now, turning to the outlook. With three quarters in the books, we'll focus on the outlook for the fourth quarter relative to this year's third quarter. First, let's take a look at the outlook for the balance sheet. We continue to expect to grow the investment securities portfolio by $2 billion in the final quarter of this year. Keep in mind, this cadence could accelerate or slow depending on market conditions and customer loan demand.
Turning to the outlook for average loans. We expect average loan and lease balances to be largely in line with the third quarter average of $128 billion. We expect growth in average C&I, residential mortgage and consumer loans and anticipate a slight decline in average CRE balances sequentially.
As we look to the income statement, we're excited about the continued growth in pre-tax pre-provision revenue in the fourth quarter. Fourth quarter net interest income is expected to be $1.9 billion, plus or minus $25 million. The variability in this guidance reflects the uncertainty of the speed of interest rate hikes by the Fed as well as the reactivity of deposit pricing and the deployment of excess liquidity and loan growth.
Turning to our fee businesses. We expect fourth quarter fee income to be essentially flat compared to the third quarter. We anticipate operating expenses, which exclude both merger-related costs and intangible amortization. We expect them to also be flat from the third quarter. We do expect further realization of merger synergies to be reflected in a decline in the salary and benefit line. However, we expect this decline to be offset by elevated professional services and advertising and promotion costs as we continue to work to integrate both franchises and to introduce M&T to our new markets.
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 the fourth quarter, we estimate that net charge-offs for the combined company will be in the 20 basis point range. Our provision follows the CECL methodology, which is heavily dependent upon macroeconomic assumptions. Any change in our allowance for credit losses would be reflective of any changes in the economic outlook and their assumptions.
Turning to capital. We believe the current level of core capital exceeds that 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. M&T's common equity Tier 1 ratio of 10.7% at September 30, 2022, comfortably exceeds the required regulatory minimum threshold, which takes into account our stress capital buffer, or SCB.
We anticipate ending this year with a CET1 ratio slightly above the 10.5% range we have been targeting previously. With a solid starting CET1 ratio and the potential to generate additional amounts of capital over the next years, we do not expect to change our capital distribution plans. We anticipate continuing to repurchase common shares at the pace of $600 million per quarter under our current capital plan.
All right. Now, let's open up the call to questions before which Gretchen will briefly review the instructions.