Darren J. King
Senior Executive Vice President, Chief Financial Officer at M&T Bank
Thank you, Brian, and good morning, everyone. As we reflect on 2022, we want to start by taking a moment to recognize the hard work and dedication of our more than 22,000 colleagues, your tireless efforts to support our customers and communities during challenging times are the heartbeat of M&T. We also give a shout out to number three and the early responders who saved his life. You remind us all about the bigger game of life. A year ago, we outlined three key objectives for 2022.
We completed our long-awaited merger with People's United; deploy excess liquidity to reduce asset sensitivity while protecting shareholder value, and to distribute capital that isn't required to support lending in our communities. Achieving those objectives, we believe, aligns with our goal to build a customer-focused bank and resultant balance sheet that produces consistent, predictable earnings over long periods of time. Against those objectives, here are a few key highlights of the work done in 2022.
We closed the acquisition of People's United, the largest in our history. We also completed the systems conversion and continue the process of integrating this valuable franchise. The financial benefits of this combination are consistent to slightly better than our expectations at announcement. We repositioned the balance sheet to deploy excess liquidity, reducing our interest-bearing deposits held at banks from $41.9 billion at the end of 2021 to under $25 billion at the end of 2022.
In deploying that excess liquidity, we reduced costly wholesale funding. We organically, that is, excluding the impact of People's, grew loans by $4.1 billion and added $7 billion in net investment securities growth. These efforts, which also included the retention of most of the residential mortgage production as well as the acquired People's United $12 billion longer-duration securities portfolio have led to a reduction in asset sensitivity, helping to protect our net interest margin from future rate shocks. In terms of capital, we resumed common share repurchases in last year's second quarter.
Now, having repurchased $1.8 billion in common stock, representing 6% of outstanding shares, and our common dividend grew by 7% in 2022 and representing the sixth year of consecutive increases. And despite the impact from the acquisition and the rapid rise in long bond yields, our CET1 ratio remained strong at 10.4% which continues to exceed our median peer bank. Our hard work translated into strong full year financial results. GAAP-based diluted earnings per common share, which include merger-related charges, were $11.53 compared to $13.80 in 2021, down 16%.
Net income was $1.99 billion compared with $1.86 billion in the prior year, improved by 7%. These results produced returns on average assets and average common equity of 1.05% and 8.67% compared to 1.22% and 11.4%, respectively, in 2021. We note that these results were impacted by merger-related expenses associated with the People's United transaction. Such expenses amounted to $580 million in 2022 or $2.63 per share. Those same expenses were $44 million or $0.25 per share in 2021. 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 combined institution. Net operating income which excludes the after-tax impact from the amortization of intangible assets as well as merger-related expenses was $2.47 billion during 2022, up 30% compared to -- with $1.9 billion in the prior year.
Net operating income per diluted common share was $14.42 compared with $14.11 in 2021, up 2%. Net operating income for 2022 expressed as a rate of return on average tangible assets and average tangible common shareholders' equity was 1.35% and 16.7%. This compares with 1.28% and 16.8%, respectively, in the prior year. On a net operating basis, we generated 4% positive operating leverage and 43% growth in pretax pre-provision net revenue. This was due in large part to the $2 billion or 53% increase in taxable equivalent net interest income as the net interest margin increased some 63 basis points year-over-year.
We are pleased with the results we achieved in 2022 in the face of many challenges, not the least of which was a rapid shift in monetary policy. But our work is not done. We will continue to recognize the value created by our merger while building a more capital-efficient, less asset-sensitive balance sheet that will produce stable and predictable revenue and earnings over the long term. Let's take a look at the results for the fourth quarter. Diluted GAAP earnings per common share were $4.29 in the fourth quarter of 2022, up 22% compared to $3.53 in the third quarter of 2022. Net income for the quarter was $765 million, 18% higher than the $647 million in the linked quarter.
On a GAAP basis, M&T's fourth quarter results produced an annualized rate of return on average assets of 1.53% and an annualized return on average common equity of 12.59%. This compares with rates of 1.28% and 10.43%, respectively, in the previous quarter. Included in GAAP results were after-tax expenses from the amortization of intangible assets amounting to $14 million in each of the two most recent quarters, 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 charges translate to $33 million after-tax or $0.20 per common share.
M&T's net operating income for the fourth quarter, which excludes intangible amortization and the merger-related expenses, was $812 million, up 16% from the $700 million in the linked quarter. Diluted net operating earnings per common share were $4.57 for the recent quarter compared to $3.83 in 2022's third quarter. Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholders' equity of 1.7% and 21.3% in the recent quarter. The comparable returns were 1.44% and 17.89% in the third quarter of 2022.
Both GAAP and net operating earnings for the fourth quarter of '22 were impacted by certain noteworthy items. Fourth quarter results included a $136 million gain related to the sale of M&T Insurance Agency reported in other revenue from operations as well as a $135 million contribution to M&T Charitable Foundation reported in other costs of operations. These items collectively net and did not materially impact net income. Let's take a deeper dive into the balance sheet and the net interest margin. Taxable-equivalent net interest income was $1.84 billion in the fourth quarter of 2022, an increase of $150 million or 9% from the linked quarter.
The increase was driven largely by the $143 million impact from higher rates on interest-earning assets, inclusive of the effect from interest rate hedges. Incremental $19 million from volume and mix of earning assets, partially offset by a $12 million reduction in interest received on nonaccrual loans. Net interest margin for the past quarter was 4.06%, up 38 basis points from the 3.68% in the linked quarter. The primary driver of the increase to the margin was higher interest rates, which we estimate boosted the margin by 32 basis points. In addition, the margin benefited from a reduced level of cash held on deposit at the Federal Reserve, which we estimate added 6 basis points.
Total average loans and leases were $129.4 billion during the fourth quarter of 2022, up 1.5% compared to the linked quarter. Looking at the loans by category; on an average basis compared with the third quarter, commercial and industrial loans and leases increased by $1.7 billion or 4.5% to $40 billion, with $1.2 billion or 4% growth being broad-based across our core commercial banking clients and $542 million or 22% growth in average dealer Floor Plan balances. During the fourth quarter, average commercial real estate loans decreased by $592 million or 1% to $45.7 billion, driven largely by declines in average construction loans.
On an end-of-period basis, construction balances increased slightly from the linked quarter. Permanent average commercial mortgage balances were nearly flat quarter-over-quarter. Residential real estate loans increased $372 million or about 2% to $23.3 billion due to the continued retention of new mortgage originations retained for investments partially offset by normal amortization. Average consumer loans were up $384 million or about 2% to $20.3 billion. Recreational finance loan growth continues to be the main driver. These average loans grew $325 million or 4%.
Average earning assets, excluding interest-bearing cash on deposit at the Federal Reserve increased by $3.2 billion or 2% due to the $1.9 billion growth in average loans and a $1.4 billion increase in average investment securities. Average interest-bearing cash balances decreased by $5.7 billion to $25.1 billion during the fourth quarter of this year, essentially in line with our projections. The sequential quarter decline was due to the drop in deposit balances and the cash deployed to fund loan growth and to purchase investment securities. Average deposits decreased $3.8 billion or 2% compared with the third quarter.
Our efforts to grow and retain deposits has helped reduce the rate of decline compared to recent quarters. However, due to the rapidly rising rate environment and increased competition for deposits, there has been a mix shift within the deposit base to higher cost deposits. Average demand deposits declined $2.6 billion. Savings and interest-bearing checking deposits declined by $2.3 billion, partially offset by a $1.1 billion increase in time deposits. Average commercial deposits declined $4.8 billion as business owners shifted money into both off and on balance sheet sweep accounts paid down debt and main distributions. On balance sheet sweep, average balances increased $2.5 billion during the fourth quarter of 2022.
Turning to non-interest income; non-interest income, excluding the $136 million gain from the sale of the M&T Insurance Agency, totaled $546 million in the fourth quarter, compared with $563 million in the linked quarter. Trust income was $195 million in the recent quarter, up 4% from the $187 million in the third quarter. The increase was due largely to the impact of better market valuations and on assets under management and administration. Service charges on deposit accounts were $106 million compared with $115 million in the third quarter.
The decline primarily reflects the waiver of service charges in October and November un-acquired customer deposit accounts. These service charges were also waived in September. Mortgage banking revenues were $82 million in the recent quarter, down 2% from the linked quarter. Revenues from our residential mortgage business were $54 million in the fourth quarter compared with $55 million in the prior quarter. Both figures reflect our decision to retain the substantial majority of the mortgage originations for investment on our balance sheet.
Commercial mortgage banking revenues were $28 million in both the third and fourth quarters. That figure was $49 million in the year ago quarter. Other revenue from operations, excluding the gain from the sale of the M&T Insurance Agency were $131 million, down $22 million sequentially. The decrease was due to the impact of two fewer months of revenues related to the M&T Insurance Agency, which was sold in October. Lower commercial loan fees, reflecting lower capital markets activities and a write-down on the underlying assets in certain bank-owned life insurance contracts.
Turning to expenses; operating expenses for the fourth quarter, which exclude the amortization of intangible assets and merger-related expenses, were $1.35 billion or $138 million higher than the linked quarter. This increase was largely due to the $135 million charitable donation in the fourth quarter. Excluding merger-related expenses, salary and benefits expense decreased by $30 million due to one less business day, the realization of acquisition synergies and the impact of the sale of the M&T Insurance Agency.
The quarter included $21 million in higher sequential advertising and outside data processing and software expenses. Both of these categories tend to show some degree of seasonality. The efficiency ratio, which excludes intangible amortization and merger-related expenses from the numerator and securities gains or losses from the denominator was 53.3% in the recent quarter compared with 53.6% in 2022's third quarter and 59.7% in the fourth quarter of last year. Next, let's turn to credit. Despite the challenges of labor shortages and persistent inflation, credit remained stable.
The allowance for credit losses amounted to $1.93 billion at the end of the fourth quarter, up $50 million from the end of the linked quarter. In the fourth quarter, we recorded a $90 million provision for credit losses compared to the $115 million provision in the third quarter. Net charge-offs were $40 million in the fourth quarter compared to $63 million in last year's third quarter. The reserve build was largely due to growth in our C&I and consumer portfolios.
The baseline macroeconomic forecast experienced nominal deterioration during the fourth quarter for those indicators that our reserve methodology is most sensitive to, including the unemployment rate, GDP growth and residential and commercial real estate values. At the end of the fourth quarter, nonaccrual loans were $2.4 billion and represented 1.9% of loans, essentially unchanged from the end of the linked quarter. As noted, net charge-offs for the recent quarter amounted to $40 million.
Annualized net charge-offs as a percentage of total loans were 12 basis points for the fourth quarter compared to 20 basis points in the third quarter. Loans 90 days past due on which we continue to accrue interest, were $491 million at the end of the recent quarter compared to $477 million sequentially. In total, 74% of these 90 days past due loans were guaranteed by government-related entities. Turning to capital; M&T Common equity Tier 1 ratio was an estimated 10.4% compared with 10.7% at the end of the third quarter.
The decrease was due in part to the impact of the repurchase of $600 million in common shares which represented 2% of our outstanding common stock as well as growth in risk-weighted assets. Tangible common equity totaled $14.7 billion, up slightly from the end of the period of the prior quarter. Tangible common equity per share amounted to $86.59, up 3% from the end of the third quarter. Now turning to the outlook; as we look forward into 2023, we expect that inflation and higher interest rates will continue to impact the bank and our customers.
We believe we are well positioned to sustain a strong net interest margin and pretax pre-provision net revenue to risk-weighted assets with our goal to generate top quartile return on average tangible common equity. As a reminder, the acquisition of People's United closed on April 1, 2022. Thus, the outlook for 2023 includes four quarters of operations and balances from the acquired company compared to only three quarters during 2022. This 2023 outlook also reflects the sale of M&T Insurance Agency that closed in October of 2022.
During the first 9 months in 2022, this business recorded revenues of $31 million and the results of its operations were not material to M&T's net income. Additionally, in December, our subsidiary, Wilmington Trust, N.A. announced the sale of its Collective Investment Trust business. Trust income associated with this business totaled $165 million in 2022. And after considering expenses, the results of operations from this business were not material to M&T's net income. Sale of this business is expected to close in the first half of 2023.
Since the timing of the closing is uncertain, this outlook includes the full year of the Collective Investment Trust business. First, let's talk about our net interest income outlook. We expect taxable equivalent net interest income to grow in the 23% to 26% range. When compared to the $5.86 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 federal -- fed funds hikes in the first quarter of 2023 and one 25 basis point cut in the fourth quarter.
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 phase of industry-wide outflows. Full year average total deposit balances are expected to be down low single digits compared to the $158.5 billion during 2022. In order to offset the positive declines and to ensure a stable liquidity profile, we plan to issue senior debt during 2023. We continue to expect deposit mix to shift toward higher cost deposits with declines expected in demand deposits and growth in time deposits as well as on balance sheet sweeps.
This is expected to translate into a through-the-cycle deposit beta in the high 30% to low 40% range. Next, let's discuss the drivers of earning asset growth. We currently plan to grow the securities portfolio by $4 billion compared to the $25 billion balance at the end of 2022 with the addition of longer duration mortgage-backed securities throughout the year. Next, turning to the outlook for average loans; we expect average loan and lease balances during 2023 to grow in the 8% to 9% range when compared to the 2022 full year average of $119.3 billion.
This implies total average loan and lease balances in the fourth quarter of 2023 to be flat to slightly up from the $129.4 billion average during the fourth quarter of 2022. Mix of C&I, CRE and consumer loans, inclusive of consumer real estate loans is almost one-third each at the end of 2022. We expect this trend to shift slightly as C&I growth outpaces CRE. As we've seen during the second half of 2022, higher levels of interest rates are expected to slow down the growth in our consumer loan book in 2023. 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, non-interest income was $2.23 billion in 2022.
We expect 2023 non-interest income growth to be in the 5% to 7% range compared to 2022. The outlook for 2023 reflects approximately 10 months of foregone income from M&T Insurance Agency as a result of the sale. Overall, mortgage banking revenues are expected to be up 5% to 7% compared to 2022. Commercial mortgage banking revenues are expected to rebound in 2023, and we will return to a gain on sale residential mortgage banking model in 2023. However, with the high level of interest rates, we expect muted origination volumes and thus, anticipate total residential mortgage banking revenues to be relatively stable compared to 2022.
We expect service charges on deposit accounts to be 3% to 6% higher than 2022 and anticipate trust income to be 8% to 10% higher in 2023. Turning to expenses. We anticipate expenses, excluding merger-related costs, the charitable contribution and intangible amortization to be up 10% to 12% when compared to the $4.52 billion we experienced during 2022. Approximately half of this increase reflects an extra quarter of People's United expenses. This outlook also incorporates the impact from the sale of the M&T Insurance Agency.
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. As a reminder, first quarter expenses will be elevated as a result of our typical seasonal increase in compensation expense. For the first quarter of 2023, we anticipate an uptick in the range of $90 million to $95 million. That amount last year was approximately $74 million. Turning to credit; we expect credit losses to be higher and the strong results in 2022, but to remain below M&T's legacy long-term average of 33 basis points.
Provision expense over the year will follow the CECL methodology and will be affected by changes in the macroeconomic outlook as well as changes in loan balances. For 2023, we expect taxable equivalent tax rate to be in the 25% range. Finally, turning to capital; we believe the current level of core capital exceeds that needed to safely run the company and to support lending in our communities. We plan to return excess capital to shareholders at a measured pace.
M&T's common equity Tier 1 ratio of 10.4% at December 31, 2022, comfortably exceeds the required regulatory minimum threshold which takes into account our stress capital buffer, or SCB, with a solid starting CET1 ratio and the potential to generate additional amounts of capital over the next few years, we don't expect to change our capital distribution plans. We anticipate continuing to repurchase common shares at a pace of $600 million per quarter under our current capital plan. Before we go to Q&A, I wanted to take them on and reflect back on some comments made at the beginning of the call, where we reference number 3 and how he is winning the game of life.
Sometimes numbers can be symbols with deeper meaning than what meets the eye like the divine proportion. I'd like to take a moment and share what I see with some of these numbers. The first game after number 3 went to the hospital. Our team returned a kickoff, the first time it has done so in three years and three months. First playoff game was won by 3 points. Number 14 and 17 are key leaders on our team. The difference between 14 and 17 is 3. That number seems to come up quite often.
If you look at those key leaders and you drop the one in front of 14 and the one in front of 7, you're left with 47, 47 is an interesting number. I know you're all thinking about the periodic table of elements. 47 is the atomic number of silver. The Vince Lombardi Trophy is made out of silver. That interesting, but it gets even weirder. The symbol for silver is Ag. If you reverse those letters, you get GA which is the abbreviation for Georgia, the potential site of the AFC Championship and all of this is happening in 2023. There's that number again. Probably just a set of random coincidences or is it?
With that, let's open it up to questions.
