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 second quarter results continue M&T's strong momentum for 2024.
Turning to Slide 4. This April, we released our fourth annual sustainability report. We are proud of our continued progress towards our sustainability goals. Our efforts are creating positive outcomes for our businesses, our customers, and our communities. Of note, in 2023, our total sustainability finance loans and investments totaled $3.1 billion.
Turning to Slide 5. We continue to garner awards for our businesses, products and employees, including the highest customer satisfaction for mobile banking apps among regional banks, according to J.D. Power., and the Securitization Trustee of the Year for Wilmington Trust from GlobalCapital.
Turn to Slide 7, which shows the results for the second quarter. As noted in this morning's press release, we are pleased with the second quarter results and the performance through the first-half of the year. We continue to grow loans, while also shifting the composition of our loan portfolio and reducing CRE. Customer deposits increased sequentially, while total deposit costs have leveled off. Net interest income and net interest margin, both inflected off the first quarter cyclical loan. Asset quality trends are performing as expected, with reductions in non-accrual and criticized balances and net charge-offs in-line with our full-year outlook. Capital continues to build, with a CET1 ratio increasing to over 11.4%. We continue to make progress on our capital return considerations, and our stress capital buffer decreased 20 basis points to 3.8%, reflecting the strength of our core earnings power and ongoing risk management work.
Now, let's look at the specifics for the second quarter. Diluted GAAP earnings per share were $3.73 for the second quarter, improved from $3.02 in the first quarter. Net income for the quarter was $655 million, compared to $531 million in the linked-quarter, an increase of 23%. M&T's second quarter results produced an ROA and ROCE of 1.24% and 9.95%, respectively. The CET1 ratio remains strong, growing to 11.44% at the end of the second quarter, and tangible book value per share grew 3%. Included in our GAAP results for the recent quarter were pre-tax expenses of $5 million related to the FDIC special assessment. This amounts to $4 billion [Phonetic] after-tax, or $0.02 per share. As a reminder, results for this year's first quarter included $29 million related to the FDIC special assessment, amounting to $22 million after-tax effect, or $0.13 per share.
Slide 8 includes supplemental reporting of M&T's results on a net operating or tangible basis. From which, we have only ever excluded the after-tax effect of the amortization of intangible assets as well as any gains or expenses associated with mergers and acquisitions. M&T's net operating income for the second quarter was $665 million, compared to $543 million in the linked-quarter. Diluted net operating earnings per share were $3.79 for the recent quarter, up from $3.09 in the first quarter. Net operating income yielded an ROTA and an ROTCE of 1.31% and 15.27% for the recent quarter.
Next, let's look a little deeper into the underlying trends that generated our second quarter results. Please turn to Slide 9. Taxable equivalent net interest income was $1.73 billion in the second quarter, an increase of $39 million, or 2% from the linked-quarter. Net interest margin was 3.59%, an increase of 7 basis points from the first quarter. The primary drivers for the increase to the margin were a positive 6 basis points from fixed rate asset repricing, primarily within the investment and consumer loan portfolios; positive 5 basis points from sequentially higher non-accrual interest; positive 1 basis point from lower interest-bearing deposit costs, partially offset by a negative 3 basis points from the impact of swaps and a negative 2 basis points from higher borrowing costs and balances. The second quarter included non-accrual interest of $30 million, compared to an average of $14 million in the prior five quarters. If non-accrual interest was at the average run rate, the second quarter NIM would have been 3.56%. In total, swaps reduced NIM by 23 basis points in the second quarter.
Turn to Slide 11 to talk about average loans. Average loans and leases increased 1% to $134.6 billion compared to the linked-quarter. As have been the trend for the last several quarters, C&I and consumer growth outpaced the decline in CRE. C&I loans grew 2% to $58.1 billion, driven by increases in middle market, dealer commercial services, mortgage warehouse lending and fund banking. The C&I growth reflects an increase in line utilization and higher origination activity. CRE loans declined 4% to $31.5 billion, reflecting continued low originations and elevated pay-downs as we continue to manage our CRE concentration. Residential mortgage loans were relatively unchanged at $23 billion. Consumer loans grew 4% to $22 billion, reflecting growth in recreational finance and indirect auto loans. Loan yields increased 6 basis points to 6.38%, aided by sequentially higher non-accrual interest and fixed rate loan repricing, partially offset by a higher drag on our cash flow hedges.
Turning to Slide 12. Our liquidity remains strong. At the end of the second quarter, investment securities and cash, including cash held at the Fed, totaled $56.5 billion, representing 27% of total assets. Average investment securities increased by $1.1 billion. The yield on the investment securities increased 31 basis points to 3.61%, as the yield on new purchases exceeded the yield on maturing securities. During the second quarter, we repurchased over $3 billion in securities, with an average yield of 5.16% and a duration of 2.9 years. Over the remainder of the year, we expect an additional $2.8 billion in security maturities, with an average yield of 2.5%, which we intend to reinvest at higher yields. The duration of the investment portfolio at the end of the quarter was 3.7 years and the unrealized pre-tax loss on AFS portfolio was only $239 million or 12 basis-point drag on CET1.
Turning to Slide 13. We remain focused on growing customer deposits and are pleased with the stabilization of our yields. Average total deposit declined $0.6 billion, or less than 0.5% to $163.5 billion, reflecting sequential growth in average customer deposits, offset by a $1.2 billion decline in broker deposits. Average broker deposits of $12 billion reflects the decision to shrink non-customer funding sources. Consumer, mortgage, business banking and institutional finance had stable to growing average deposits compared to the first quarter, while commercial deposits declined. Average non-interest-bearing deposits declined $0.9 billion to $47.7 billion, with lower commercial and business banking balances as a result of seasonally and continued, but moderating disintermediation. Non-interest-bearing deposits were relatively stable for all other business lines. Excluding broker deposits, the non-interest-bearing deposit mix in the second quarter was 31.5% compared to 32.2% in the first quarter. Interest-bearing deposit cost decreased 3 basis points to 2.9%, while the total deposit cost was unchanged at 2.06%. This reflects more rational pricing in our markets.
Continuing on Slide 14. Non-interest income was $584 million compared to $580 million in the linked-quarter. Recall that the first quarter included $25 million Bayview distribution. Trust income increased $10 million to $170 million, reflecting approximately $4 million in seasonally tax preparation fees, typically earned in the second quarter, and strong sales performance across our institutional services business. Second quarter mortgage fees were $106 million compared to $104 million in the first quarter. Commercial mortgage fees increased $4 million from the linked-quarter to $30 million, reflecting an uptick in origination activity, where our residential mortgage fees decreased $2 million to $76 million, reflecting lower servicing fees. Service charges increased $3 million to $127 million from higher consumer debit interchange fees. Other revenues from operation were unchanged at $152 million, with increases in merchant discount, credit card, letter of credit and other credit-related fees, offsetting the $25 million first quarter BLG distribution. Security losses of $8 million primarily reflect realized losses on the sale of non-agency securities, as we derisked our portfolio.
Turning to Slide 15. Non-interest expenses for $1.3 billion, a decrease of $99 million from the first quarter. As is typical for M&T's first quarter results, expenses in the quarter included approximately $99 million of seasonally higher compensation costs. Salaries and benefits decreased $69 million to $764 million, reflecting seasonally elevated expenses in the first quarter, offset by the full-quarter impact of annual merit increases. The second quarter included $5 million related to the FDIC special assessment compared to $29 million in the prior quarter. Other costs of operations decreased $18 million to $116 million from lower supplemental executive retirement costs and lower losses on lease terminations. The adjusted efficiency ratio, excluding the impact of the FDIC special assessment, was 55.1%, compared to 59.6% in the first quarter.
Next, let's turn to Slide 16 for credit. Net charge-offs for the quarter totaled $137 million or 41 basis points, down from 42 basis points in the linked quarter. The three largest charge-offs were $40 million combined and represent C&I loans that span industries, including services, manufacturing and retail. The CRE charge-offs, including charge-offs within the office portfolio, remain at manageable levels through the first-half of the year. Non-accrual loans decreased $278 million to $2 billion. The non-accrual ratio decreased 21 basis points to 1.5%, driven largely by a decrease in CRE, reflecting favorable resolutions with borrowers, including pay-offs and pay-downs. In the second quarter, we recorded a provision of $150 million compared to net charge-offs of $137 million. The allowance to loan ratio increased 1 basis point to 1.63%. The provision for credit losses decreased $50 million compared to the first quarter, reflecting lower CRE loans, including criticized loans, and modest improvement in forecasted real estate prices, partially offset by growth in C&I and consumer 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 $12.1 billion compared to $12.9 billion at the end of March. The improvement for the linked-quarter was largely driven by $987 million decrease in CRE criticized loans.
Slide 18 provides additional detail on C&I criticized balances. Total C&I criticized balances increased $98 million. The majority of the increase is concentrated within vehicle and recreational finance dealers and healthcare sectors, offset by declines in most other industries. We saw additional migration to criticized within non-auto dealer portfolio, continuation from trends we discussed in the first quarter. However, there has been limited incremental migration within the portfolio since early in the second quarter.
Turning to Slide 19 includes a detail on CRE criticized balances. Total CRE criticized balances decreased $987 million from the last quarter. Upgrades and pay-offs of criticized loans outpaced downgrades into criticized. The decline was across multi-family, retail, health services, hotel and construction, though we did see modest increases in office and industrial. The decrease reflects the effects to work with borrowers to find favorable resolutions. We are actively working through our criticized population for favorable outcomes.
Turning to Slide 20 for capital. M&T's CET1 ratio at the end of the second quarter was an estimated 11.44%, compared to 11.08% at the end of the first quarter. The increase was due in part to the continued pause in repurchasing shares and capital -- and strong capital generation. At the end of the second quarter, the negative AOCI impact on the CET1 ratio from AFS securities and pension-related components would be approximately 19 basis points.
Now, turning to Slide 20 [Phonetic] for outlook. The economy is slowing a bit, but remains in good health. Job growth, wage growth and spending have slowed to more sustainable levels. We see the so-called soft landing scenario as having the highest probability, but the possibility remains for a mild recession brought on by the lagged impact of rate hikes. Consumer spending has slowed to a pace consistent with job and wage growth, alleviating inflation pressure for many goods and services. The labor market remains positive, but is clearly slowed, in turn, keeping a lid on wage pressure and leading to longer spells of unemployment. We expect that to continue for the rest of 2024. Inflation figures remain above the Fed's target of 2%, chiefly because of rent and home prices. We expect the weaknesses seen in rent listings to play through the official inflation data, helping bring the headline inflation figures down. Inflation in the second quarter slowed and encouraging development after higher ratings in the first quarter.
Shifting to 2024 outlook. We expect net interest income to be $6.85 billion to $6.90 billion. Our outlook incorporates the latest forward curve that has one rate cut in September and another in December. However, we expect the level of rates to have a limited direct effect on non-interest income outlook, as we have taken steps to reduce our asset sensitivity and are now more neutral. Higher for longer rates in the first-half of the year allowed us to take additional actions to protect NII from lower interest rate environment. For example, in the first-half of the year, we shifted $3 billion of cash into securities and added $5 billion in forward starting cash flow hedges, which became active in 2025. During -- or further, we expect that the downside in interest-bearing deposit beta will be approximately 30% to 40% in the first couple of rate cuts.
For the remainder of the year, M&T's balance sheet will be smaller, with total average assets closer to $208 billion. We expect average cash to be approximately $25 billion and securities to be $30 billion, with modest growth in loans and deposits. Our outlook for fees and expenses is unchanged, with fees, excluding any security gains or losses, of $2.3 billion to $2.4 billion and expenses, excluding the amounts related to the FDIC special assessment, are expected to be $5.25 billion to $5.30 billion. We continue to expect charge-offs for the full year to be near 40 basis points. The allowance level will be dependent on many factors, including changes in the macro-economic outlook, portfolio mix and underlying asset quality. Our outlook for the tax rate is 24.0% to 24.5%, excludes the discrete tax benefit in the first quarter. Preferred dividends are expected to be approximately $47 million in the third quarter and $36 million in the fourth quarter, reflecting our Series J issuance in May and the upcoming Series E redemption in August.
Finally, as it relates to capital, last quarter, we laid out five factors for consideration as we assessed our capital return plans for the rest of the year: the macro-economic environment remains healthy; M&T continues to generate significant capital, with the Bank growing tangible common equity by over $500 million in the second quarter; we continue to manage our CRE concentration, with CRE as a percent of Tier 1 capital and allowance of 151% as of the end of the second quarter; asset quality continues to improve, with declines in non-accrual and criticized loans; and net charge-offs in-line with expectations we laid out in the first quarter.
M&T's preliminary stress capital buffer declined 20 basis points to 3.8%, reflecting many of the factors just mentioned. Given the improvements in these factors, we plan to begin our share repurchase in the third quarter at a pace of $200 million per quarter through the end of the year. We expect to maintain our capital ratios, at least at the current levels for the remainder of the year. We will continue to monitor the previously discussed factors as well as the revised Basel III proposal, what's made public, and we'll adjust our capital return plans, if necessary. Our capital will also be used to support organic growth and grow new customer relationships. Our strong balance sheet will continue to differentiate us with our clients, communities, regulators, investors and rating agencies.
To conclude on Slide 22. Our results underscore an optimistic investment thesis. 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 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 up the questions, before which, Ashley will briefly review the instructions.
