Daryl Bible
Senior Executive Vice President & Chief Financial Officer at M&T Bank
Thank you, Brian, and good morning, everyone. As you will hear today on the call, 2023 mark a banner year for MT Bank.
On Slide 3, I want to acknowledge that the keys to our success, so what continues to drive performance remains our purpose, mission and operating principles. Our focused on making a difference in people's lives and creating a positive impact in the communities we serve is core to how we operate. It is evident in how we show-up for our communities in the moments of need like in Vermont and Lewiston, Maine where we continue to help those impacted by tragedies. It is why we are committed to supporting small businesses that are the backbone of local economies. And it dictates how our Charitable Foundation which celebrated its 30th anniversary last year continues to uplift our partners. It's all done alongside our daily work of helping our customers achieve their financial goals.
Turning to Slide 4, we are excited to see how deeply we've embedded sustainability across the bank and into our products and services. I look forward to sharing more information on the impact of our businesses, when we release our 2023 Sustainability Report in the spring.
Now let's turn to Slide 6. As we reflect on 2023, there are several successes to highlight. We continue to realize the benefits from the People's United franchise and are pleased with the growth in New England with M&T finishing as top SBA lender in Connecticut. C&I loans grew by over $5 billion or 11% in 2023, aided by the growth in several specialty businesses brought over by People's United. The C&I growth outpaced the reduction in CRE, as we continue to optimize the way we serve these customers in the most capital-efficient manner possible. At the end of 2023, CRE loans represented approximately 25% of total loans.
Our capital remains strong with the CET1 ratio near 11%. We continue to leverage our strong capital and liquidity levels to grow new customer accounts and relationships. We also reduced asset sensitivity in 2023, while protecting shareholder capital and value. However, our work is not done. We continue to recognize the value created by the merger with People's United, while also bringing more capital-efficient, [Indecipherable] neutral balance sheet that will produce stable and predictable revenue and earnings over the long-term.
Now let's review the highlights for the full year. Results for the full year 2023 were strong. We generated positive operating leverage, solid loan growth, improved expense control through the year and growth in EPS and strong returns. Our pre-tax pre-provision revenue or PPNR was 4.2 billion, up 22% from 2022, and we generated 3.9% positive operating leverage. Net charge-offs were 33 basis points, in line with our expectations and long-term average. GAAP net income was $2.7 billion.
Diluted earnings per share were $15.79, up 37% from the prior year. As a reminder, '22 results included merger charges, gain on sale of our insurance business and a sizable contribution to our Charitable Foundation, while 2023 included gain on sale of the CIT business and the FDIC special assessment. If you exclude these items, adjusted diluted earnings per share were $15.72 during 2023, up 11% compared to 2022. Our adjusted returns were also very strong with return on assets of 1.33%, and return on common equity of 11%.
Turn to Slide 7, which shows the results of the fourth quarter were also strong. PPNR declined modestly from the linked-quarter to just over $1 billion. C&I, consumer and loan growth was strong. Expense control was evident as adjusted expenses declined 2% from the linked-quarter, and were down each consecutive quarter in 2023. Diluted GAAP earnings per common share were $2.74 for the fourth quarter. If we exclude the FDIC special assessment, adjusted diluted earnings per common share were $3.62. On an adjusted basis M&T's fourth quarter results produced an ROA and ROCE of 1.19% and 9.8%, respectively.
Next, we will look a little deeper into the underlying trends that generated our fourth quarter results. Please turn to Slide 8. Taxable-equivalent net interest income was $1.7 billion in the fourth quarter, down 3% from linked quarter. This decline was driven by higher interest rates, customer deposit funding and changing deposit mix, partially offset by higher interest rates on earning assets. Net interest margin was 3.61%, down 18 basis points from the linked quarter. The primary drivers of the decrease to the margin were an unfavorable deposit mix shift contributing a negative 7 basis points, the impact of higher rates and customer deposit funding, net of the benefit from higher rates on earning assets contributing negative 5 basis points, and a negative 6 basis points for carrying additional liquidity on the balance sheet.
Turning to Slide 9, to look at the average balance sheet trends. Average investment securities were $27.5 billion, decreasing modestly during the fourth quarter. Average interest-bearing deposits at the Fed increased $3.5 billion to $30.2 billion. Due to our decision to have more liquidity on the balance sheet, this was mainly funded with strong deposit growth. Average loans increased slightly to $132.8 billion and average deposits grew $2 billion to a $164.7 billion.
Turning to Slide 10 to talk about average loans. Average loans and leases increased slightly. Growth in C&I and consumer loans outpaced declines in CRE and residential mortgage loans. Growth in C&I loans were driven largely by dealer, fund banking and corporate and institutional businesses. Loan yields increased 14 basis points to 6.33% with higher yields across all loan categories. Of note, the consumer loan yield increased 26 basis points as we continued to benefit from higher yields on new originations compared to yields on run-off balances.
Turning to Slide 11, our liquidity remains strong. At the end of the fourth quarter, investment securities and cash, including cash held at the Fed, totaled $56.7 billion, representing 27% of total assets. The duration of the investment securities portfolio at the end of 2023 was about 3.7 years and the unrealized pre-tax loss and available-for-sale portfolio was only $251 million.
Turning to slide 12, we continue to focus on growing customer deposits and we're pleased with our growth in average deposits. Average deposits totaled -- grew $2 billion. Approximately, three quarters of that quarterly growth was from customer deposits. Average demand deposits declined $3.8 billion, reflecting a continued shift toward higher yielding products such as sweeps, money market savings, and times deposits. The mix of average non-interest-bearing deposits was 30% of total deposits compared to 33% sequentially. Excluding broker deposits, non-interest-bearing deposit mix in the fourth quarter was 33%. Encouragingly, we saw the pace of deposit costs increases slow through the quarter.
Continuing on Slide 13, non-interest income was $578 million, up 3% sequentially. The increase was largely driven by a strong quarter for commercial mortgage banking revenues, growth in trust income, and a small unrealized gain on certain equity securities. Other income also benefited from higher loan syndication fees. The decrease in rates towards the end of the quarter drove the increase in commercial mortgage banking revenues.
Turning to slide 14, we continue to focus on controlling expenses. Non-interest expenses were $1.45 billion. Excluding the $197 million FDIC special assessment, non-interest expense were $1.25 billion, down 2% from linked quarter, and the adjusted efficiency ratio was 53.6%, largely unchanged from the third quarter. The decrease was driven by reductions in other expenses as a result of losses associated with certain retail banking activities in the linked quarter and lower merchant discount and credit card fees. The decrease in other expenses was partially offset by higher professional and other services. Salary and benefits decreased modestly from the third quarter as a result of lower average headcount and seasonally lower benefit costs, partially offset by higher severance expense.
Next, let's turn to Slide 15 for credit. Full year net charge-offs totaled 33 basis points in line with our long-term historical average, and expectations were set out earlier in 2023. Net charge-offs for the quarter totaled $148 million or 44 basis points, up 15 basis points over linked quarter. This quarter's increase was largely driven by three office-related charge-offs located in New York City, Boston and Washington D.C., and two C&I charge-offs related to an online retailer and to a RV dealer.
Non-accrual loans have trended down each consecutive quarter since the first quarter of 2023. That trend continued in the fourth quarter with non-accrual loans declining $176 million from linked quarter to $2.2 billion. The non-accrual ratio declined 15 basis points from the third quarter to 1.62%. The decline was primarily driven by the transfer of certain loans to accrual, commercial payoffs and charge-offs on loans previously deemed non-accrual. Since the end of 2022, we have increased the allowance over $200 million, and the allowance to loan ratio was 13 basis points, ending 2023 at 1.59%.
In the fourth quarter, we recorded a provision of $225 million compared to net charge-offs of $148 million. This resulted in allowance build $77 million this quarter and increase the allowance to loan ratio by 4 basis points. The current quarter build was primarily reflective of the commercial real estate volumes and higher interest rates, contributing to modest deterioration and the performance of the loans to commercial borrowers, as well as loan growth in the C&I and consumer portfolios.
Turning to Slide 16. When we file our Form 10-K in a few weeks, we estimate that the level of criticized loans will be $12.6 billion compared to $11.1 billion at the end of September. We completed thorough reviews covering more than 60% of all CRE loans including maturities in the next 12 months, construction loans, watch loans and all criticized loans. The increase in criticized CRE loans was tied to these reviews and to 2024 maturities were the prospect of continued higher rates could negatively impact performance of the portfolios or create shortfalls and debt service coverage or require interest reserves for construction loans. Growth in criticized C&I loans was not tied to any specific review, but rather completion of an annual review cycle and our ongoing quarterly update upon receipt of interim financials.
Generally, our reviews do not incorporate any benefit of the forward curve at potentially lower interest rates. Our 10 largest downgrades accounted for half of the total C&I downgrades, and represented a range of industries. Common themes include pressures from higher interest rates and labor costs. During the fourth quarter criticized non-owner occupied C&I loans increased $663 million, accounting for 44%, the total increase in criticized loans. Criticized permanent CRE loans increased $441 million, representing 29% of the increase, and criticized construction loans increased $375 million.
Turning to Slides 17 and 18 for more details on the criticized loan portfolio. About 18% of the increase in criticized loans was driven by health care, 13% by multifamily and 9% by retail CRE loans. Loan-to-values remained strong for these loan types, ranging from low-50% range for retail mid-50% range for multifamily, and high-50% range for health care. To date, modifications at maturity have had sponsors generally support their loans through replacement of reserves, loan paydowns and enhanced recourse. That is why our criticized has not led to growth in non-accruals. Our conservative underwriting and strong client selection has been supportive of these assets. Reflective of the financial strength of the portfolio, diversification of our CRE borrowers, 96% of criticized accrual loan balances and 53% of non-accrual loans are paying as agreed.
Turning to Slide 19 for capital. M&T's CET1 ratio at the end of 2023 was an estimated 10.98% compared to 10.95% at the end of the third quarter. The increase was due in part to continued pause and repurchase any shares, combined with continued strong capital generation. At the end of December, the negative AOCI impact on CET1 ratio for available-for-sale securities and pension-related components will be approximately 20 basis points.
Now turning to Slide 20 for outlook. First, let's talk about the economic outlook. We see so-called soft landing scenario as having the highest probability, but the possibility remains for mild recession brought on by lagged impact of rate hikes from last year. We are encouraged to be continued strong performance by the consumer as continued job gains as well as wage growth above inflation help drive consumer spending. Consumer spending has slowed enough to alleviate inflation pressure for many goods and services. We expect that to continue -- continue in 2024.
Inflation figures remain above the Fed target of 2%, chiefly because of rents and home prices. While the prices of many consumer goods have fallen, an inflation for consumer services has slowed. We expect weakness seen in rent listings to play through to the official inflation data in 2024, helping to bring the headline inflation figures down. Our outlook incorporates the forward curve, and it has multiple 25 basis point Fed cuts in 2024.
With that backdrop, let's review our net interest income outlook. We expect taxable net interest income to be in the $6.7 billion to 6.8 billion range, and net interest margin in the 3.50s. This outlook reflects the impact of higher deposit funding costs and the impact of different interest rate scenarios. As we have discussed, we continue to carry a high level of liquidity. Our current level of HQLA is about $46 billion, which is two-thirds in the cash and one-third in investment securities. In 2024, we started to shift some cash into securities. This combined with other potential hedging actions can help protect the downside risk for NII from lower rates, but may reduce NII in 2024.
We expect full year average loan and lease balances to be in the $135 billion to $136 billion range. We expect growth in C&I and consumer, but anticipate declines in CRE and residential mortgages. Average deposits are expected to be in the $163 billion to $165 billion range. We are focused on growing customer deposits at a reasonable cost. The level of broker deposits is expected to decline through the year.
Turning to fees. We expect non-interest income to be in the $2.3 billion to $2.4 billion range. We expect solid fee income across many business lines. Lower rates will help drive stronger residential and commercial mortgage banking revenue. Trust income is expected to grow from current levels from higher valuations and increase in clients.
Turning to expenses. We anticipate non-interest expenses including intangible amortization to be in $5.25 billion to $5.3 billion range. This outlook includes our typical first quarter seasonal salary and benefit increase which is estimated to be $110 million. We also included the outlook to be approximately $53 million for intangible amortization.
Our business lines are focused on holding their expenses flat while allowing us to continue to invest in the franchise and our key priorities. These priorities include growing the New England and Long Island markets, optimizing resources in both expense savings and revenue generation, transferring our systems and processes, making them more resilient and scalable and continuing to build out our risk management.
Turning to credit. We expect net charge-offs for the full year to be near 40 basis points due to the ongoing credit cost normalization in the loan portfolio and resolution of some stress credits. We expect that the taxable equivalent rate to be 24.5%, plus or minus 50 basis points.
Finally, as it relates to capital, our capital, coupled with limited investment security marks has been a clear differentiator for M&T. The strength of our balance sheet is extraordinary. We take our responsibility to manage our shareholders' capital very seriously and will return more when it is appropriate to do that. Our businesses are performing very well, and we are growing new relationships each and every day.
While every economic uncertainty is improving, our share repurchase remains on hold. Our decision to resume share repurchases will consider the results of the 2024 internal and supervisory stress test, including the stress test capital buffer. Additional clarity on Basel III end game regulations and continued stabilization and economic conditions as it relates to the probability of a mild recession. That said, we continue to use our capital for organic growth and growing new customer relationships. 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 with our clients, communities, regulators, investors, and rating agencies.
On Slide 21, there is a summary of three enhancements we made to our financial reporting. First, we reclassified the substantial majority of owner-occupied loans and related interest income from CRE to C&I loans. This better aligns with the classification with the underlying management and repayment source of the loans. Second, in the upcoming 10-K, we are changing our operating segments to reflect how management organizes its businesses to make operating decisions, allocate capital resources, and assess performance. Third, as certain categories have started to contribute more or less to our expense base, we opted to include printing, postage and supplies in other costs in operations and break out professional and other services as a distinct line item in the income statement.
To conclude, on Slide 22, our results underscore an optimistic investment thesis. While the economic uncertainty remains high, that is when M&T has historically outperformed peers. M&T has always been a purpose-driven organization with a successful business model that benefits all stakeholders, including shareholders. We have a long track record of credit outperformance through all economic cycles while growing in the markets we serve. We remain focused on shareholder returns and consistent dividend growth.
Finally, we are disciplined inquirer and prudent steward of shareholder capital. Our integration of People's United is complete, and we are confident in the ability to realize our potential post merger.
Now, let's open up the call to questions before which Michael will briefly review the instructions.
