Daryl Bible
Senior Executive Vice President, Chief Financial Officer at M&T Bank
Thank you, Brian, and good morning, everyone. Let's start with our purpose mission and operating principles on Slide 3. I would like to thank our more than 22,000 M&T colleagues for all their hard work. Whether serving our customers or our communities, our employees continue to deliver on our purpose: Making a difference in people's lives. This purpose drives our operating principles. We believe in local scale that is combining local knowledge, enhance on customer service of community bank with the resources of a large financial institution. Our 28 communities are led by on-the-ground regional presidents. Their knowledge allows us to better understand and meet the needs of our customers and communities. And importantly, this approach continues to produce strong results for our shareholders. Our local scale has led to superior credit performance, top deposit share, and high operating and capital efficiency over the long term.
Moving to Slide 4. Our seasoned talent and diverse board are keys to gaining in-depth understanding of our customers' needs and expectations. We have sound technology solutions, coupled with caring employees, which provide a differentiated client experience.
Please turn to Slide 5. This slide showcases how we activate our purpose through our operating principles. When our customers and communities succeed, we all succeed. Our investments in enhancing the customer experience and delivering impactful products have fueled organic growth. We also believe in supporting small business owners, who play a vital role in our communities. Despite operating in only 12 states, we are ranked as Number 6 SBA lender in the country, the 15th consecutive year M&T is ranked in the nation's top-10 SBA lenders. And for the first time, we have finished as the top SBA lender in Connecticut, an important milestone following our acquisition of People's United.
Our commitment to supporting the communities we serve extends to affordable housing projects, with almost $2.3 billion in financing and over 2,600 home loans for low- and moderate-income residents. Additionally, M&T Bank and our charitable foundation granted over $47 million in support of our communities in 2022 and approximately $30 million so far in 2023.
Please turn to Slide 6. Here we highlight our ongoing commitment to the environment. Last year, we invested over $230 million in renewable energy sector and have significantly reduced our Scope 1 and Scope 2 emissions since 2019. Our ESG report was published in July, but I encourage you to review this slide for some of the highlights. M&T's ESG ratings have improved at Moody's, MSCI, and Sustainalytics.
Turning to Slide 8. There are several successes to highlight this quarter. We continue to see growth in auto dealerships as well as specialty businesses. We continue to grow customer deposits despite increasing competition. And building on the strong liquidity position and comparative strength of our financial position in the industry allows us to continue lending in support of communities and local businesses. We remain focused on diligently managing expenses. Our third quarter results continue to reflect the strength of our core earnings power. Third quarter revenues have grown 4% compared to last year's third quarter. Pre-provision net revenues have increased 4% to $1.1 billion. Credit remained stable, net charge-offs decreased in the third quarter, and year-to-date, we still remain below the historical long-term average.
GAAP net income for the quarter with $690 million, up 7% versus like quarter in 2022. Diluted GAAP earnings per share was $3.98 for the third quarter, up 13% from last year's similar quarter.
Now let's review our net operating results for the quarter on Slide 9. M&T's net operating income for the third quarter, which excludes intangible amortization, was $702 million, and diluted net operating earnings per share was $4.05. Net operating return on tangible common equity was 17.41% and tangible book value per share increased 3% compared to the end of June. On Slide 10, you will see that diluted GAAP earnings per share was down 21% from linked quarter. Recall that results from the second-quarter of last year indicated an after-tax 157 gain from the sale of the CIT business in April. Excluding this gain, GAAP net income and diluted earnings per share were down 3% compared to the linked quarter. On a GAAP basis, M&T's third quarter results produced an ROA and ROE of 1.33% and 10.99%, respectively.
Next, we will look a little deeper into the underlying trends that generated the third quarter results. Please turn to Slide 11. Taxable equivalent net interest income was $1.79 billion in the third quarter, down $23 million from the linked quarter. This decline was driven largely by higher interest rates on consumer deposit funding, an unfavorable funding mix change, partially offset by higher interest rates on earning assets, and one additional day. The net interest margin for the past quarter was 3.79%, down 12 basis points from linked quarter. The primary drivers of the decrease to the margin were an unfavorable deposit mix shift, which reduced margin by 7 basis points, the net impact from higher interest rates on customer deposits, net benefit from higher rates on earning assets, which we estimate reduced the margin by 6 basis points. The remaining 1 basis point was due to higher nonaccrual interest, net of the impact of one additional day.
Turning to Slide 12. Average earning assets increased $1.5 billion from the linked quarter, due largely to the strong deposit growth that drove a $3 billion growth at the Fed. Average loans declined $928 million and average investment securities declined $630 million.
Turning to Slide 13 to talk about average loans. Total loans and leases averaged $132.6 billion for the third quarter of 2023, down 1% compared to the linked quarter. Looking at loans by category, on average basis compared to the second quarter, C&I loans increased slightly to $44.6 billion. We continue to see growth in dealer and specialty businesses. During the third quarter, average CRE loans decreased by 2% to $44.2 billion. This decline was driven largely by our continued strategy to reduce on-balance sheet exposure to this asset class. We have chosen to modernize our suite of products and services to offer more alternatives to better serve customers and to do so in a more capital-efficient manner possible.
Average residential real estate was $23.6 billion, down 1% largely due to portfolio paydowns. Average customer loans were down slightly to $20.2 billion. The decline was driven by lower auto loan and key log balances partially offset by the growth in recreational finance and credit card loans.
Turning to Slide 14. Average investment securities decreased to $28 billion during the third quarter. The duration of the investment securities book at the end of September was 3.9 years, and the unrealized pretax of our available-for-sale portfolio was only $447 million. At the end of the third quarter, cash held at the Fed and investment securities totaled $59.2 billion, representing 28% of total assets.
Turning to Slide 15. We continue to focus on growing deposits with our customers and we're pleased with the growth in both average and end-of-period customer deposits. Average total deposits grew $3.3 billion. However, consistent with our experience in prior rising rate environments, increased competition for deposits, and customer behavior continues the mix shift within the deposit base to higher-cost deposits. Average customer deposits increased $1 billion. The customer deposit mix to migrate to average demand deposits declined $2.3 billion in favor of commercial sweeps and customer money market savings and time deposits. Average brokered deposits increased $3.2 billion, while federal home loan bank advances decreased $2.2 billion. On average, brokered money market and now increased $800 million, brokered time increased $1.5 billion. Brokered deposits represent just ones of the several funding vehicles that we can employ in our management of the balance sheet.
At September 30 of this year, brokered deposits represented 8% of our outstanding deposits and short-term borrowings. The pace and reduction in demand deposits seem to have decreased during the quarter. Our determined focus on retaining and growing customer deposits yielded positive results during the quarter.
Next, let's discuss non-interest income. Please turn to Slide 16. Non-interest income totaled $560 million in the thiird quarter, compared to $803 million in the linked quarter. As noted earlier, the second quarter included $225 million from the sale of the CIT business. Excluding this gain, third quarter non-interest income decreased $18 million compared to the second quarter, driven predominantly by $15 million related to one month of the CIT trust revenues included in the previous quarter. Other revenues categories were largely unchanged from the linked quarter.
Turning to Slide 17 for expenses. Non-interest expenses were $1.28 billion in the third quarter of this year, down $15 million from the linked quarter. That decrease in expense was due to $11 million in lower compensation and benefit costs, reflecting lower average headcount, lower expenses for contracted resources, and overtime, $6 million lower in other cost of operations, largely reflecting lower sub-advisory fees as a result of the sale of the CIT business, lower legal-related expenses, partially offset by losses associated with certain retail banking activities. The efficiency ratio, which excludes intangible amortization and merger-related expenses from the numerator and security gains or losses from a denominator was 53.7% in the recent quarter compared to 53.4% in the linked quarter after excluding the gain from the sale of the CIT business.
Next, let's turn to Slide 18 for credit. The allowance for credit losses amounted to $2.1 billion at the end of the third quarter, up $54 million from the end of the linked quarter. In the third quarter, we recorded a $150 million provision in credit losses, which was equal to the second quarter. Net charge-offs were $96 million in the third quarter compared to $127 million in the linked quarter. The reserve build was primarily reflective of softening CRE values and the variability in the timing and the amount of CRE charge-offs. At the end of the third quarter, nonaccrual loans were $2.3 billion, a decrease of $94 million compared to the prior quarter and represent 1.77% of loans, down 6 basis points sequentially. As noted, net charge-offs for the recent quarter amounted to $96 million, significant charge-offs retired and four large credits, three large office buildings in Washington D.C., Boston, and Connecticut, and one large healthcare provider operating in multiple properties in Western New York and Pennsylvania. Annualized net charge-offs as a percentage of total loans were 29 basis points for the third quarter compared to 38 basis points in the second quarter. This brings our year-to-date net charge-off rate to 30 basis points, which is below our long-term average of 33 basis points.
We continue to assess the impact on future maturities and our investor real estate portfolio due to the level of interest rates, the impact of value declines, and emerging tenancy issues. Continued targeted deep portfolio dyes and office, healthcare, and multi-family portfolios are being done to identify any new emerging issues. While we fire our upcoming Form 10-Q in the few weeks, we will estimate the level of criticized loans will be up to mid- to high-single-digit percent as compared to the end of June, largely due to increases in investor real estate. Reflective of the financial strength and portfolio diversification of the CRE borrowers, almost 90% of the criticized loans are paying as agreed. Loans 90 days past due, on which we continue to accrue interest, were $354 million at the end of this quarter, compared to $308 million -- $380 million sequentially. And total 76% of these 90 days-past-due loans were guaranteed by government-related entities.
Turning to Slide 19 for capital. M&T's CET ratio at the end of September was an estimated 10.94% compared to 10.59% at the end of the second quarter. The increase was due in part to the continuation of a pause of repurchasing shares. At the end of September, based upon the proposed capital rules, the negative AOCI impact on the CET1 ratio from available-for-sale securities and pension-related components will be approximately 36 basis points.
Now turning to Slide 20 for our outlook. With three quarters in the books, we will focus on the outlook for the fourth quarter. First, let's talk about the economic outlook. The economic environment was supportive in the third quarter, and we were cautiously optimistic heading into the last quarter of this year. In the third quarter, the overall economy continued to expand. Thanks to the strong consumer spending and steady capital expenditures by businesses, though the housing market continues to struggle in the high-rate environment. Encouragingly, inflation continued to slow and label markets, while still tight, improved substantially with steady hiring, while wage pressures dissipated. Looking ahead to the fourth quarter, we are cautiously optimistic that the economy will continue to grow, but at a slower rate. We expect that, that slower growth will continue reducing inflation pressures. The Federal Reserve has probably reached the end of its hike cycle given slower inflation and recent run-up in long-term rates.
With that economic backdrop, let's review our net interest income outlook. We expect taxable equivalent net interest income to be in the $1.71 billion to $1.74 billion range. As we noted on the previous calls, the key driver to net interest income continues to be the ability to efficiently fund earning asset growth. We expect the continued intense competition for deposits in the face of industry-wide outflows. We remain focused on growing customer deposits. For the fourth quarter, we expect average deposits to be about the same level with growth of interest-bearing customer deposits, but continue to decline in demand deposit balances. This is expected to translate into a through-the-cycle, interest-bearing customer deposit beta through the fourth quarter of this year to be in the mid-40% range. This deposit beta excludes brokered deposits, including brokered deposits were at 6% to the beta. While the percent of the cumulative beta is slowing, we anticipate it will continue rising into the first half of next year.
Next, let's discuss the outlook for the average loan growth, which should be the main driver of earning asset growth. We expect average loans and leases balances to be slightly higher than the third quarter of $1.33 billion level. We expect the growth in C&I, but anticipate declines in CRE and residential mortgages, while consumer loan balances should be relatively flat.
Turning to fees. We expect non-interest income to be essentially flat compared to the third quarter.
Turning to expenses. We anticipate expenses, excluding intangible amortization and the FDIC special assessment, to be in the $1.245 billion to the $1.265 billion range in the fourth quarter. Intangible amortization is expected to be in the $15 million range and the FDIC special assessment is anticipated to be at $183 million. Given the prospects of slowing revenue growth, we remain focused on diligently managing expenses.
Turning to credit. We continue to expect loan losses for the full year to be near M&T's long-term average of 33 basis points, which implies fourth quarter charge-offs could be higher than the third quarter. For the fourth quarter, we expect taxable equivalent tax rate to be in the 25% range. Finally, as it relates to capital, our capital, coupled with limited investment security marks, have been a clear differentiator for M&T. M&T has proven to be a safe haven for our clients and communities. The strength of our balance sheet is extraordinary. We take our responsibility to manage our shareholders' capital very seriously, and we'll return capital when it is appropriate to do that.
Our businesses are performing very well and we are growing new relationships each and every day. We are still evaluating the proposed capital rules so that we believe that now is not the time to be repurchasing shares. That said, we are positioned to use our capital for organic growth. 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 from our clients, communities, regulators, investors, and rating agencies.
To conclude on Slide 21, our results underscore an optimistic investment thesis. While economic uncertainty remains high, that is when M&T has historically outperformed its 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 outperforming through and all economic cycles with growth about two times that of peers. Our strong shareholder returns include 15% to 20% return on tangible common equity and robust dividend growth. Finally, our disciplined acquirer and prudent steward of capital -- shareholder capital and our integrated -- our integration of People's merger is completed. We are confident in our ability to realize our potential post merger.
Now with that, I'll turn it back to our caller who'll briefly review the instructions.
