Daryl Bible
Senior Executive Vice President, Chief Financial Officer at M&T Bank
Thank you, Brian, and good morning, everyone. As you will hear on today's call, the third quarter results represent M&T's continued strength through a dynamic economic environment. We continue to support our communities that we serve. For the 16th consecutive year, M&T Bank is among the nation's top 10 SBA lenders, ranking number one in Baltimore, Buffalo, Connecticut, Delaware, Syracuse, and Washington, D.C.
We recently launched the third phase of our [Technical Issues], which will provide $25 million to non-profits focused on financial inclusion and economic growth across New England, Long Island, and New York's Westchester County. We also recently updated several environmental goals, including offsetting 100% of our electricity use with renewable energy by 2030 and establishing interim reduction targets for Scope 1 and Scope 2 emissions.
Turning to Slide 5, our employees and products continue to receive awards from consumer, business, and trade organizations.
We're into Slide 7, which shows the results of the third quarter. As noted in this morning's press release, we released our third quarter results as we continue to make progress on the plans we laid out in January. There are several successes to highlight. Net interest margin and net interest income grew sequentially as we continue to grow loans while reducing our CRE concentration. In fact, since the fourth quarter of 2023, we have grown average loans by nearly $2 billion, while reducing CRE by over $4 billion and growing C&I and consumer loans.
Funding costs was well managed in this quarter with a 4 basis point decline in the cost of interest bearing liabilities. We restated, we restarted our share repurchase program in the third quarter and executed $200 million in share repurchases and grew our CET1 ratio to over 11.5%. Non-interest income reached a high point in the third quarter, if we exclude the prior gains on our two divestitures. This was achieved by even considering the foregone fee income from those two sold businesses, demonstrating the resiliency and strength of our diversified business model. Asset quality continued to improve this quarter with reduction in both non-accrual balances and commercial credit size loans and net charge-offs below the full year outlook.
Now let's look at the specifics for the third quarter. Diluted GAAP earnings per share were $4.02 for the third quarter, improved from $3.73 in the second quarter. Net income for the quarter was $721 million, compared to $655 million in the linked quarter, an increase of 10%. M&T's third quarter results produced an ROA and ROCE of 1.37% and 10.26%, respectively. The CET1 ratio remains strong, growing at 11.54% at the end of the third quarter and tangible book value first year grew 5%. Of note, the third quarter included a discrete tax benefit of $14 million, or an $0.08 EPS benefit.
Slide 8 includes supplemental reporting of M&T's results on a net operating and tangible basis. M&T's net operating income for the third quarter was $731 million compared with $665 million in the linked quarter. Diluted net operating earnings per share were $4.08 for the recent quarter, up from $3.79 in the second quarter. Net operating income yielded an ROTA and ROTCE of 1.45% and 15.47% for the recent quarter.
Next, let's look a little deeper into the underlying trends that generated our third quarter results. Please turn to Slide 9. Taxable-equivalent net interest income was $1.74 billion, an increase of $8 million, or 1% from the linked quarter. The net interest margin was 3.62%, an increase of 3 basis points from the second quarter. The primary drivers of the increase to the margin were positive 3 basis points from fixed asset repricing, mostly in the investment portfolio and consumer loans, positive 3 basis points from earning asset mix, positive 2 basis points from deposit and wholesale funding mix and costs, partially offset by a negative 4 basis points from lower non-accrual interest and a negative 1 basis point for all other items. Non-accrual interest amounted to $12 million compared to $30 million in the second quarter.
Turning to Slide 11 to talk about average loans. Average loans and leases increased slightly to $134.8 billion. Similar to the trend that we saw last several quarters, C&I growth outpaced the decline in CRE. C&I loans grew 3% to $59.8 billion, driven by increases in fund banking, dealer commercial services, mortgage warehouse, and franchise lending. Middle market utilization declined modestly, while dealer floor plan utilization increased from the second quarter as a result of slower auto sales and new model arrivals.
CRE loans declined 8% to $29.1 billion, reflecting continued low originations and paydowns as we continue to manage our CRE concentration. CRE as a percent of Tier 1 capital and allowance is estimated to be 148% at the end of the third quarter. Residential mortgage loans were relatively unchanged at $23 billion. Consumer loans grew 4% to $22.9 billion, reflecting growth in recreational finance and indirect auto loans. Loan yields were unchanged at 6.38% as lower non-accrual interest was largely offset by the benefit of fixed rate loan repricing and mix shift.
Turning to Slide 12, our liquidity remains strong. At the end of the third quarter, investment securities and cash, including cash held at the Fed, totaled $59 billion, representing 28% of total assets. The average investment securities increased $1.3 billion. The yield on securities increased 9 basis points to 3.7% as the yield on new purchases exceeded the yield on maturing securities. In the fourth quarter, we have $1 billion in securities maturing, in an average yield of 1.8%, which we intend to reinvest. The duration of the investment portfolio at the end of the quarter was 3.6 years, and the unrealized pre-tax gain on the available-for-sale portfolio was $68 million or 3 basis points CET1 benefit, if included in regulatory capital.
Turning to Slide 13, we remain focused on growing customer deposits and are pleased with the overall deposit performance. Average total loans declined $2 billion, or 1% to $161.5 billion, reflecting a $1.1 billion decline in broker deposits and a $0.9 billion decline in non-broker deposits. Commercial and business banking grew total average deposits from the second quarter while consumer deposits declined sequentially, as we continue to manage more rate-sensitive deposits.
Average non-interest bearing deposits declined $1.6 billion to $46.2 billion from an expected deal-related decline in trust demand deposits and modest continued disintermediation within commercial and consumer. Excluding broker deposits, average non-interest bearing deposit mix in the third quarter was 30.7%. Interest bearing deposit costs decreased 2 basis points to 2.88%.
Continuing on Slide 14, non-interest income was $606 million compared to $584 million in the linked quarter. Trust income was $170 million unchanged from the prior quarter with second quarter seasonal tax prep fees of $4 million offset by strong equity market performance and sales performance at ICS. Mortgage fees were $109 million compared to $106 million in the second quarter. Commercial mortgage fees increased $4 million from the linked quarter to $34 million, reflecting an uptick in the origination activity. Service charges increased $5 million to $132 million from both consumer and commercial, mostly related to the number of processing days in the quarter. Other revenues from operations were unchanged at $152 million.
Turning to Slide 15, non-interest expenses were $1.3 billion, an increase of $6 million from the second quarter. Salary and benefits increased $11 million to $775 million, reflecting one additional working day. Deposit insurance decreased $12 million, reflecting the prior quarter $5 million incremental special assessment. Other costs from operations increased $12 million to $128 million driven mostly by M&T's obligation under various agreements to share and losses stemming from certain litigation of Visa. The efficiency ratio of 55% was largely unchanged from the second quarter.
Let's turn to Slide 16 for credit. Net charge-offs for the quarter were $120 million or 35 basis points down from 41 basis points in the linked quarter. The three largest charge-offs in the quarter totaled $37 million combined with and represented two C&I loans and one office CRE loan. Non-accrual loans decreased $98 million, or 5% to $1.9 billion. The non-accrual ratio decreased 8 basis points to 1.42%, driven largely by a decrease in CRE non-accruals from upgrades out of non-accrual, as well as several large payoffs and pay downs.
In the third quarter, we recorded a provision of $120 million, compared to a net charge-off of $120 million. The allowance to loan ratio decreased 1 basis point to 1.62%, as a result of continued improvements in asset quality and improvements in the macroeconomic outlook, partially offset by growth in certain portfolios.
Please turn to Slide 17. When we file our Form 10-Q in a few weeks, we estimate that the level of criticized loans will be at $10.9 billion compared to $12.1 billion at the end of June. The improvement from the linked quarter was driven by a $315 million decline in C&I and $830 million decline in CRE criticized balances.
Slide 18 provides additional detail on the C&I criticized balances. The largest C&I criticized balance decreases were within the motor vehicle and recreational finance dealers and manufacturing segments with smaller changes across most other industries. The decline within the motor vehicle and recreational finance dealers mostly reflects improvements in debt service coverage ratios and normalizing profit margins within the RV segment.
Slide 19 includes the detail on CRE criticized balances. The largest CRE criticized declines were within healthcare and construction with continued but more modest declines in most other property types, except for office. Within healthcare, we saw an uptick in repayment activity as improvements in occupancy and rent growth combined with declining long-term rates, allowed for more viable take-outs. A decline in construction criticized was aided by improved project performance and loan modifications and curtailments as borrowers continue to support these projects. The largest factor that drove [Technical Issues] versus prior quarters was the amount of upgrades that occurred in the quarter.
Turning to Slide 20 for capital. M&T CET1 ratio at the end of the third quarter was an estimated 11.54% compared to 11.45% at the end of the second quarter. The increase was due to continued strong earnings and strong and a $200 million share repurchase in the third quarter. At the end of the third quarter, the negative AOCI impact on the CET1 ratio from available for sale securities and pension-related components combined would be approximately 4 basis points.
Now turning to Slide 21 for the outlook. Let's begin with the economic backdrop. The economy remains resilient in the third quarter, with GDP growth expected to come in stronger than we had projected. The labor market has slowed, but remains healthy. Though we see a soft landing scenario as having the highest probability, the possibility remains for a mild recession brought on by lagged impact and rate hikes. The consumer spending has slowed, alleviating inflation pressure for many goods and services. Recently inflation has nearly returned to the Fed's target of 2%.
Now turning to the outlook. Our outlook for the full year NII is unchanged from our last update. While the outlook from the full year fees, expenses and net charge-offs is unchanged from the ranges we initially discussed in January and maintained through the year. That said, with three quarters complete we will focus on the outlook for the fourth quarter. We expect taxable equivalent NII to be at least $1.73 billion, implying a full year NII near the top end of the range we provided previously. Net interest margin is expected to be in the low 3.60s. Our outlook incorporates the latest forward curve that has an additional 50 basis points in rate cuts by the end of the year.
We expect continued loan growth and average total loans of approximately $136 billion with growth in C&I and consumer and lower CRE balances. Total deposits are expected to be at least $160 billion, as we continue to focus on growing core customer deposits. We expect interest-bearing deposit beta of approximately 40% for the first couple of interest rate cuts. Security balances are expected to continue to grow in the fourth quarter. Our outlook for the fourth quarter non-interest income is about $600 million, reflecting continued strength in mortgage and trust partially offset by other fee categories.
Fourth quarter expenses including intangible amortization are expected to be about $1.32 billion due to the timing of projects coming online. This reflects continued investment in our key priorities and initiatives are closely managing our expenses. We continue to expect net charge-offs for the full year to be near 40 basis points. Our outlook for the tax rate for the fourth quarter is about 24.25% and the preferred dividends are expected to be approximately $36 million. We plan to continue the $200 million share repurchase in the fourth quarter.
To conclude on Slide 22, our results underscore an optimistic investment thesis. 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 all economic cycles, while growing within the markets we serve. We remain focused on shareholder returns and consistent dividend growth. Finally, we are a disciplined acquirer and prudent steward of shareholder capital.
Now let's open the call to questions before which our operator will briefly review instructions.
