Darren J. King
Senior Executive Vice President, Chief Financial Officer at M&T Bank
Thank you, Brian, and good morning, everyone. Our first quarter results reflect the strength of our balance sheet and liquidity position as well as the impact of our merger with People's United Bank. Compared to last year's first quarter, revenues have grown over $970 million, or 67%, translating into 24% positive operating leverage year-over-year. Pre-provision net revenues have more than doubled since last year to $1.1 billion. Credit remains solid with net charge-offs still below our long-term average. Capital levels remained strong with the CET1 ratio estimated to end the first quarter at 10.15%. During the quarter, we repurchased $600 million in common shares, which represented 2% of our outstanding common stock, and the board approved an 8%, or $0.10 per share, increase in the quarterly common dividend to $1.30 per share. Tangible common equity per share increased 3% to $88.81 per share.
In addition, April 1 marked the one-year anniversary of the closing of the People's United acquisition. We're pleased with the results of the largest acquisition in our company's history. The tangible book value dilution was only 4% and has been earned back already. Merger costs were less than anticipated at the time of announcement. Our targeted expense synergies have largely been realized and are now in the run rate. As a result of the above, the return on investment and EPS accretion have exceeded those expected at the time the deal was announced.
Let's take a look at the first quarter results. Diluted GAAP earnings per common share were $4.01 for the first quarter of 2023, down 7% compared with $4.29 in the fourth quarter of 2022. Net income for the quarter was $702 million, 8% lower than the $765 million in the linked quarter. On a GAAP basis, M&T's first quarter results produced an annualized rate of return on average assets of 1.4% and an annualized rate of return on average common equity of 11.74%. This compares with rates of 1.53% and 12.59%, respectively, in the previous quarter. Included in GAAP results were after-tax expenses from the amortization of intangible assets amounting to to $13 million in the first quarter and $14 million in the sequential quarter, representing $0.08 per common share in both quarters. Pretax merger-related expenses of $45 million related to the People's United acquisition were included in the fourth quarter's GAAP results. These merger-related charges translate to $33 million after tax, or $0.20 per common share. There were no merger-related expenses in this year's first quarter. 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.
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. We believe this information provides investors with a better picture of the long-term earnings power of the institution. M&T's net operating income for the first quarter, which excludes intangible amortization and the merger-related expenses, was $715 million, down 12% from the $812 million in the linked quarter. Diluted net operating earnings per common share were $4.09 for the recent quarter compared with $4.57 in 2022's fourth quarter. Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholders' equity of 1.49% and 19% in the recent quarter. The comparable returns were 1.7% and 21.3% in the fourth quarter of 2022. As a reminder, GAAP and net operating earnings for the fourth quarter of 2022 were impacted by certain noteworthy events. This included a $136 million gain related to the sale of the M&T Insurance Agency, as well as a $135 million contribution to M&T's Charitable Foundation. These items collectively netted and did not materially impact net income.
Next, we'll take a deeper dive into the underlying trends that generated our first quarter results. Taxable net interest income was $1.83 billion for the first quarter of 2023, slightly below the linked quarter. The $9 million decrease was driven largely by $30 million in lower net interest income, reflecting the two-days shorter calendar quarter, partially offset by $13 million positive impact from our hedging program and $8 million from higher average earning asset volumes net of higher average interest-bearing liability volumes. The net interest margin for the past quarter was 4.4%, down 2 basis points from the 4.06% in the linked quarter. The primary driver of the decrease to the margin was the impact from a higher level of borrowing, which we estimate reduced the margin by 19 basis points. This was partially offset by the impact from higher rates on earning assets net of deposit funding, which we estimate added 18 basis points. All other factors had a negligible impact on the margin.
Total average loans and leases were $132 billion during the quarter, up $2.6 billion, or 2% compared to the linked quarter. Looking at the loans by category, on an average basis compared to the fourth quarter, commercial and industrial loans and leases increased $2.4 billion, or 6%, to $42.4 billion, with $1.9 billion being broadly based and $453 million of growth in average dealer floorplan balances. During the first quarter, average commercial real estate loans decreased by $363 million, or 1%, to $45.3 billion. The decline was driven largely by lower permanent mortgages as average construction loan balances were essentially flat. Residential real estate loans increased by $435 million, or about 2%, to $23.8 billion, due largely to the timing of the retention of originations throughout the prior quarter. End of period balances were essentially flat sequentially.
Average consumer loans were up $144 million, or about 1%, to $20.5 billion. Recreational finance loan growth continues to be the main driver of increased balances and these average loans grew $178 million, or 2%. Average earning assets excluding interest-bearing cash on deposit at the Federal Reserve increased $4.9 billion, or 3%, due to the $2.6 billion growth in average loans and $2.3 billion increase in average investment securities. Although average interest-bearing cash balances have decreased $777 million to $24.3 billion during the first quarter of this year, they came in higher than our initial projections. The sequential quarterly decline in cash reflects loan growth and the drop in deposit balances, partially offset by the proceeds from long-term borrowings issued during the quarter. Consistent with our expectations and normal seasonal outflows deposits declined sequentially. However, the $1.9 billion, or 1% sequential average decline, was slightly better than our expectations at the January earnings call.
We remain focused on growing and retaining deposits. Our experience in prior rising rate environments remind us to expect increased competition for deposits and changing customer behavior, leading to a mix-shift within the deposit base. During the first quarter, average demand deposits declined $8.4 billion, savings and interest-bearing checking deposits increased $1 billion, and time deposits increased $5.4 billion. Average commercial deposits declined and net $2.4 billion as business owners shifted $6.3 billion out of operating demand deposit accounts and into both on- and off-balance sheet sweep accounts to earn a higher return on their excess balances as well as to make distributions. Almost two-thirds of the decline in non-interest-bearing deposits was offset by movement into on-balance sheet sweep accounts, where those average balances increased $3.8 billion during the first quarter of 2023.
Turning to consumer deposits, they declined a net $758 million in the first quarter as $2.5 billion in outflows were partially offset by $1.7 billion increase in average time deposits. Lower levels of activity in the capital markets and seasonal factors also impacted average balances for the following lines of business: Trust fund demand balances declined $1.2 billion; municipal deposits declined $789 million; and escrow deposits declined $684 million. Average brokered CDs increased $3.8 billion sequentially, due almost entirely from growth during the previous quarter.
Turning to non-interest income. Non-interest income totaled $587 million in the first quarter compared with $682 million in the linked quarter. M&T normally receives an annual distribution from the Bayview Lending Group during the first quarter of the year. This distribution was $20 million in 2023 and $30 million in last year's first quarter. As noted earlier, the fourth quarter of last year included a $136 million gain from the sale of the M&T Insurance Agency. Excluding these two items, non-interest income was up $21 million, or 4% sequentially. Trust income of $194 million in the recent quarter was flat sequentially. Service charges on deposit accounts were $114 million, compared with $106 million in the fourth quarter. The increase primarily reflects a full quarter of service charges on acquired customer deposit accounts after these fees were waived in October and November of last year. Mortgage banking revenues were $85 million in the recent quarter, up 4% from the linked quarter. Revenues from our residential mortgage business were $55 million in the first quarter compared with $54 million in the prior quarter. Commercial mortgage banking revenues were $30 million in the first quarter compared to $28 million in the final quarter of 2022. Other revenue from operations, excluding the distribution from Bayview Lending Group in this year's first quarter and the gain from the sale of the M&T Insurance Agency in the sequential quarter, were $140 million, up $9 million sequentially.
Turning to expenses. Operating expenses, which exclude the amortization of intangible assets and merger-related expenses were $134 billion in the first quarter of this year, little changed from the fourth quarter of last year. As is typical for M&T's first quarter results, operating expenses for the recent quarter included approximately a Gretzky of seasonally higher compensation costs relating to accelerated recognition of equity compensation expense for certain retirement-eligible employees. 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 $74 million in last year's first quarter. As usual, [Technical Issues] net charge-offs for the recent quarter amounted to $70 million, including amounts that reflect updated appraisals of nonaccrual office loans. Annualized net charge-offs as a percentage of total loans were 22 basis points for the first quarter compared to 12 basis points in the fourth quarter. Loans 90 days past-due on which we continue to accrue interest were $407 million at the end of the recent quarter compared to $491 million sequentially. In total, 75% 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 10.5% compared with 10.4% at the end of the fourth quarter. The decrease was due in part to growth in risk-weighted assets and the impact of the repurchase of $600 million in common shares, which represented 2% of our outstanding common stock. Tangible common equity totaled $14.7 billion, up slightly from the end of the prior quarter. Tangible common equity per share amounted to $88.81 per share, up 3% from the end of the year.
Turning to the outlook. As we look forward to the rest of this year, we believe we're well-positioned to navigate through the challenging economic conditions. However, the rapidly changing interest rate expectations, combined with continued pressure on funding, affect our outlook for the full year of 2023. As a reminder, the acquisition of People's United closed on April 1, 2022, and thus, the outlook for 2023 includes four quarters of operations in balances from the acquired company compared to only three quarters during 2022. Our 2023 outlook also reflects the sale of the M&T Insurance Agency that closed in October of last year. And even though the sale of the Collective Investment Trust business is expected to close in the first half of this year, our outlook includes the full year of operations from this business.
First, let's talk about net interest income outlook. The outlook for interest rates and the economy continues to change frequently. Since March 8, the 10-year U.S. government bond yield has dropped 46 basis points and the forward curve has changed meaningfully as well. We expect taxable net interest income to grow in the 20% to 23% range when compared to the $5.6 billion during 2022. This range reflects different rates of deposit balance growth, deposit pricing, and loan growth. Consistent with the current forward curve, our forecast incorporates two 25 basis-point cuts in the final quarter of this year.
As we noted on the first quarter call, a key driver of net interest income in 2023 will be the ability to efficiently fund earning asset growth. We expect continued intense competition for deposits in the face of industry-wide outflows. Full-year average total deposit balances are expected to be down low-single-digits. Compared to the $158.5 billion average during 2022. During the first quarter, we issued $3.5 billion in senior debt and we'll utilize the combination of FHLB funding and senior debt over the course of this year as needed to ensure that we can continue to meet the long demands of our customers. We continue to expect the deposit mix to shift toward higher-cost deposits with declines expected in demand deposits and growth in time and on-balance sheet sweep. This is expected to translate to a through-the-cycle interest-bearing deposit beta in the high-30% to low-40% range. Taking all these factors into account, we anticipate the net interest margin to be slightly below 4% for the full year of 2023 and to continue to migrate towards the long-term range we have been discussing for the past couple of quarters.
Next, let's discuss the drivers of earning asset growth. We currently plan to grow the securities portfolio by $2 billion compared to the $28 billion balance at the end of March of this year with the addition of longer duration mortgage-backed securities throughout the year. Looking at average loans, we expect average loan and lease balances during 2023 to grow in the 10% to 12% range when compared to the 2022 full-year average of $119.3 billion. We anticipate growth to continue in the second quarter and then for average balances to be flat to slightly down over the second half of the year. This implies total average loan and lease balances in the fourth quarter of 2023 to be up 1% to 3% from the $129.4 billion average during the fourth quarter of 2022. The mix of C&I, CRE, and consumer loans, inclusive of consumer real estate, is almost one-third each as of the end of March. We expect this trend to shift slightly as C&I growth outpaces CRE. As we've seen over the past three quarters, higher levels of interest rates are expected to slow down the growth in our consumer loan book in 2023. After these average loans grew 2% in the first quarter, we expect the indirect portfolio to be relatively flat over the remainder of the year.
Turning to fees. Excluding the $136 million gain on the sale of the M&T Insurance Agency in the fourth quarter of 2022, as well as securities losses, net interest income -- sorry, non-interest income was $2.23 billion in 2022. We expect 2023 non-interest income growth to be in the 7% to 9% range compared to the $2.23 billion in 2022. This outlook for non-interest income includes the impact of a bulk purchase of residential mortgage servicing rights which we completed at the end of this year's first quarter.
Turning to expenses. We anticipate expenses excluding merger-related costs, the charitable contribution, and intangible amortization to be up 11% to 13% when compared to the $4.52 billion during 2022. Recall that approximately half of this increase reflects an extra quarter of People's United expenses. In addition, this outlook for net operating expenses includes the impact of the previously noted mortgage servicing rights purchase. We do not anticipate incurring any material merger-related costs in 2023 and intangible amortization is expected to be in the $60 million to $65 million range during 2023.
Turning to credit. We expect credit losses to migrate towards M&T's long-term average of 33 basis points although the quarterly cadence could be lumpy. Provision expense over the year will follow CECL methodology and will be affected by changes in the macroeconomic outlook as well as loan balances. For 2023, we expect the taxable equivalent tax rate to be in the 25% range.
Finally, turning to capital. M&T's Common Equity Tier 1 ratio of 10.15% at March 31, 2023 comfortably exceeds the required regulatory minimum threshold, which takes into account our stress capital buffer, or SCB. We believe the current level of core capital exceeds that needed to safely run the company and to support lending and our communities. We plan to return excess capital to shareholders at a measured pace over the long term. However, in the near term, we plan to maintain a CET1 ratio slightly above the current level until the current economic uncertainty abates.
With that, let's open up the call to questions, before which Shelby will briefly review the instructions.
