filings.toolsItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
M&T Bank Corporation (“M&T”) and its consolidated subsidiaries ("the Company") recorded net income of $867 million in the second quarter of 2023, compared with $218 million in the corresponding quarter of 2022 and $702 million in the first quarter of 2023. Diluted and basic earnings per common share were $5.05 and $5.07, respectively, in the recent quarter, $1.08 each in the second quarter of 2022 and $4.01 and $4.03, respectively, in the first quarter of 2023. For the first six months of 2023 net income totaled $1.57 billion or $9.06 and $9.09 of diluted and basic earnings per common share, respectively, compared with $580 million or $3.45 and $3.47 of diluted and basic earnings per common share, respectively, in the similar 2022 period. The after-tax impact of merger-related expenses associated with M&T's acquisition of People's United Financial, Inc. ("People's United") for the three-month and six-month periods ended June 30, 2022 was $346 million ($465 million pre-tax) or $1.94 of diluted earnings per common share and $359 million ($482 million pre-tax) or $2.33 of diluted earnings per common share, respectively. Merger-related expenses incurred in 2022 and associated with the People's United acquisition generally consisted of professional services, temporary help fees and other costs associated with actual or planned conversions of systems and/or integration of operations and the introduction of M&T to its new customers, costs related to terminations of existing contractual arrangements to purchase various services, severance, travel costs, and, in the second quarter of 2022, an initial provision for credit losses on loans not deemed to be purchased credit deteriorated ("PCD") on the April 1, 2022 acquisition date of People's United. The Company did not incur any merger-related expenses in the first or second quarters of 2023.
Net income expressed as an annualized rate of return on average total assets for the Company in 2023's second quarter was 1.70%, compared with 0.42% in the year-earlier quarter and 1.40% in the first quarter of 2023. The annualized rate of return on average common shareholders’ equity was 14.27% in the recent quarter, compared with 3.21% in the second quarter of 2022 and 11.74% in the first quarter of 2023. During the six-month period ended June 30, 2023, the annualized rates of return on average assets and average common shareholders' equity were 1.55% and 13.02%, respectively, compared with .65% and 5.34%, respectively, in the first six months of 2022.
On April 1, 2022, M&T closed the acquisition of People's United resulting in the issuance of 50,325,004 common shares. Pursuant to the terms of the merger agreement, People’s United shareholders received consideration valued at .118 of an M&T common share in exchange for each common share of People’s United. The purchase price totaled approximately $8.4 billion (with the price based on M&T’s closing price of $164.66 per share as of April 1, 2022). Additionally, People’s United outstanding preferred stock was converted into new shares of Series H Preferred Stock of M&T.
The People's United transaction has been accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at estimated fair value on the acquisition date. The Company recorded assets acquired of $64.2 billion, including $35.8 billion of loans and leases and $11.6 billion of investment securities, and liabilities assumed totaling $55.5 billion, including $53.0 billion of deposits. The transaction added $8.4 billion to M&T's common shareholders' equity and $261 million to preferred equity. In connection with the acquisition the Company recorded $3.9 billion of goodwill and $261 million of core deposit and other intangible assets. The acquisition of People's United formed a banking franchise with approximately $200 billion in assets serving communities in the Northeast and Mid-Atlantic from Maine to Virginia, including Washington, D.C.
In April 2023 M&T completed the divestiture of its Collective Investment Trust ("CIT") business to a private equity firm. The sale of this business resulted in a pre-tax gain of $225 million ($157 million after tax, or $0.94 of diluted earnings per common share) in the second quarter of 2023 results of operations. Prior to the sale, the operations of that business did not have a material impact on M&T's net income.
M&T repurchased 3,505,946 shares of its common stock at an average cost per share of $171.14 resulting in a total cost of $600 million in 2022's second quarter and 3,838,157 shares at an average cost per share of
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$154.76 resulting in a total cost, including the share repurchase excise tax, of $600 million in the first quarter of 2023. No share repurchases occurred in the second quarter of 2023.
Supplemental Reporting of Non-GAAP Results of Operations
M&T consistently provides supplemental reporting of its results on a “net operating” or “tangible” basis, from which M&T excludes the after-tax effect of amortization of core deposit and other intangible assets (and the related goodwill, core deposit intangible and other intangible asset balances, net of applicable deferred tax amounts) and gains (when realized) and expenses (when incurred) associated with merging acquired operations into the Company, since such items are considered by management to be “nonoperating” in nature. Although “net operating income” as defined by M&T is not a GAAP measure, M&T’s management believes that this information helps investors understand the effect of acquisition activity in reported results.
Net operating income aggregated $879 million in the second quarter of 2023, compared with $578 million in the year-earlier quarter. Diluted net operating earnings per common share in the recent quarter and the corresponding 2022 quarter were $5.12 and $3.10, respectively. Net operating income and diluted net operating earnings per common share were $715 million and $4.09, respectively, in the first quarter of 2023. For the first six months of 2023, net operating income and diluted net operating earnings per common share were $1.59 billion and $9.21, respectively, compared with $954 million and $5.88, respectively, in the first half of 2022.
Expressed as an annualized rate of return on average tangible assets, net operating income in the recent quarter was 1.80%, compared with 1.16% in the second quarter of 2022 and 1.49% in 2023’s first quarter. Net operating income represented an annualized return on average tangible common equity of 22.73% in the second quarter of 2023, 14.41% in the year-earlier quarter and 19.00% in the first quarter of 2023. For the first half of 2023, net operating income represented an annualized return on average tangible assets and average tangible common shareholders' equity of 1.65% and 20.90%, respectively, compared with 1.11% and 13.57%, respectively, in the corresponding 2022 period.
Reconciliations of GAAP amounts with corresponding non-GAAP amounts are provided in table 2.
Taxable-equivalent Net Interest Income
Net interest income expressed on a taxable-equivalent basis was $1.81 billion in the second quarter of 2023 increased from $1.42 billion recorded in the year-earlier quarter. That increase reflects a 90 basis point (hundredths of one percent) expansion of the net interest margin, or taxable-equivalent net interest income expressed as an annualized percentage of average earning assets, to 3.91% in the recent quarter from 3.01% in the year-earlier quarter. The increased net interest margin was influenced by a rising interest rate environment resulting from actions taken by the Federal Reserve to mitigate inflationary pressures on the U.S. economy. The Federal Reserve raised its target Federal funds rate through multiple hikes totaling 5.0% from March 2022 through June 2023, which led to higher yields on loans, deposits at the Federal Reserve Bank ("FRB") of New York and investment securities, partially offset by higher rates paid on interest-bearing deposits and borrowings. Taxable-equivalent net interest income in the recent quarter declined slightly from $1.83 billion in the first quarter of 2023. That decrease reflects a 13 basis point narrowing of the net interest margin and a $7.1 billion increase in interest-bearing liabilities to $118.3 billion, compared with $111.2 billion in the initial 2023 quarter, partially offset by a $1.9 billion increase in average earning assets to $185.9 billion in the recent quarter from $184.1 billion in 2023's first quarter. The net interest margin was 4.04% in the first quarter of 2023.
For the first six months of 2023, taxable-equivalent net interest income was $3.64 billion, up from $2.33 billion recognized in the corresponding 2022 period. The increase was primarily attributable to the higher level of average earning assets and a 111 basis point expansion of the net interest margin to 3.97% in the 2023 period from 2.86% in the year-earlier period, partially offset by an increase in average interest-bearing liabilities. The increase in average earning assets in the first half of 2023 includes the impact of one additional quarter from earning assets obtained in the People's United transaction on April 1, 2022, commercial loan growth and purchases of investment securities, partially offset by lower deposits at the FRB of New York. The increase in average interest-bearing liabilities reflects interest-bearing liabilities assumed in the People's United acquisition and a continued shift in customer deposits toward higher cost interest-bearing products, including time deposits, and higher average borrowings.
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Average loans and leases totaled $133.5 billion in the second quarter of 2023, up $5.9 billion or 5% from $127.6 billion in the similar quarter of 2022. Commercial loans and leases averaged $44.5 billion in the recent quarter, up $6.7 billion or 18% from $37.8 billion in the year-earlier quarter. That increase predominantly reflects growth in loans to financial and insurance industry customers and loans to motor-vehicle and recreational finance dealers, partially offset by a reduction in average balances of Paycheck Protection Program ("PPP") loans reflecting loan repayments by the Small Business Administration. PPP loans averaged $86 million in the second quarter of 2023, compared with $545 million in the second quarter of 2022. Average commercial real estate loans decreased $2.3 billion or 5% to $44.9 billion in the second quarter of 2023 from $47.2 billion in the year-earlier quarter. That decrease reflects declines of $1.7 billion in average construction loans and $570 million in average permanent commercial real estate loans.
Average residential real estate loans increased $1.0 billion or 4% to $23.8 billion in the second quarter of 2023 from $22.8 billion in the year-earlier quarter. Throughout 2022, M&T retained rather than sold most originated residential mortgage loans. M&T returned to originating for sale the majority of its newly committed residential mortgage loans in the first quarter of 2023. Consumer loans averaged $20.3 billion in the second quarter of 2023, up $496 million or 3% from $19.8 billion in the year-earlier quarter. That growth reflected a higher average balance of $884 million in M&T's portfolio of recreational finance loans, partially offset by a decline of $425 million in average balances of automobile loans.
Average loan and lease balances in the second quarter of 2023 increased $1.5 billion from $132.0 billion in the first quarter of 2023. The higher balances resulted predominantly from growth in commercial loans and leases which increased $2.1 billion from $42.4 billion in the first quarter of 2023 and reflected higher balances of loans to financial and insurance industry customers and motor vehicle and recreational finance dealers. Average commercial real estate loans in the second quarter of 2023 declined $383 million from $45.3 billion in the first quarter of 2023. Average balances of residential real estate loans in the recently completed quarter were essentially unchanged from 2023’s first quarter. Average consumer loans in the recent quarter decreased $199 million from $20.5 billion in the first quarter of 2023. The accompanying table summarizes quarterly changes in the major components of the loan and lease portfolio.
AVERAGE LOANS AND LEASES
(net of unearned discount)
| Percent Increase | |||||||||||||
| (Decrease) from | |||||||||||||
| 2nd Qtr. | 2nd Qtr. | 1st Qtr. | |||||||||||
| 2023 | 2022 | 2023 | |||||||||||
| (In millions) | |||||||||||||
| Commercial, financial, etc. | $ | 44,531 | 18 | % | 5 | % | |||||||
| Real estate — commercial | 44,944 | (5 | ) | (1 | ) | ||||||||
| Real estate — consumer | 23,781 | 4 | — | ||||||||||
| Consumer | |||||||||||||
| Recreational finance | 9,207 | 11 | 1 | ||||||||||
| Automobile | 4,189 | (9 | ) | (5 | ) | ||||||||
| Home equity lines and loans | 4,818 | (4 | ) | (2 | ) | ||||||||
| Other | 2,075 | 14 | 4 | ||||||||||
| Total consumer | 20,289 | 3 | (1 | ) | |||||||||
| Total | $ | 133,545 | 5 | % | 1 | % |
For the first six months of 2023, average loans and leases totaled $132.8 billion, up 21%, from $110.0 billion in the corresponding 2022 period. Loans obtained in the People's United acquisition and commercial loan growth were the predominant factors for that increase, partially offset by declining average balances of commercial real estate loans and average balances of PPP loans. PPP loans averaged $95 million and $706 million in the first six months of 2023 and 2022, respectively.
The investment securities portfolio averaged $28.6 billion in the second quarter of 2023, up $6.2 billion from $22.4 billion in the year-earlier quarter and $1.0 billion higher than the $27.6 billion averaged in the first quarter of 2023. The higher average balance in the second quarter of 2023 when compared with the year-earlier quarter reflects the purchase of $7.0 billion of investment securities during the twelve-month period ended June 30, 2023. Those
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purchases were predominantly U.S. Treasury notes and fixed rate mortgage-backed securities. When compared with the first quarter of 2023 the increase relates to a full quarter's impact of the purchases of approximately $3.3 billion of investment securities during that first quarter. Those purchases consisted predominantly of fixed rate mortgage-backed securities. For the first six months of 2023 and 2022, investment securities averaged $28.1 billion and $15.1 billion, respectively. In addition to the purchases described herein, $11.6 billion of investment securities obtained in the acquisition of People's United on April 1, 2022 contributed to the increase in average investment securities during the first half of 2023 as compared with the first half of 2022. There were no significant sales of investment securities during the six months ended June 30, 2023 and 2022. The Company routinely has increases and decreases in its holdings of capital stock of the Federal Home Loan Bank (“FHLB”) of New York and the FRB of New York. Those holdings are accounted for at cost and are adjusted based on amounts of outstanding borrowings and available lines of credit with those entities.
The investment securities portfolio is largely comprised of residential mortgage-backed securities and shorter-term U.S. Treasury and federal agency notes, but also includes municipal securities and commercial real estate mortgage-backed securities. When purchasing investment securities, the Company considers its liquidity position and its overall interest-rate risk profile as well as the adequacy of expected returns relative to risks assumed, including prepayments. The Company may occasionally sell investment securities as a result of movements in interest rates and spreads, changes in liquidity needs, actual or anticipated prepayments, credit risk associated with a particular security, or as a result of restructuring its investment securities portfolio in connection with a business combination. The amounts of investment securities held by the Company are influenced by such factors as available yield in comparison with alternative investments, demand for loans, which generally yield more than investment securities, ongoing repayments, the levels of deposits, and management of liquidity and balance sheet size and resulting capital ratios.
Fair value changes in equity securities with readily determinable fair values are recognized in the Consolidated Statement of Income. Net unrealized gains and losses on such equity securities were not significant in each of the first six months of 2023 and 2022.
The Company regularly reviews its debt investment securities for declines in value below amortized cost that might be indicative of credit-related losses. In light of such reviews, there were no credit-related losses on debt investment securities recognized in either of the six months ended June 30, 2023 or 2022. Based on management’s assessment of future cash flows associated with individual investment securities as of June 30, 2023, the Company did not expect to incur any material credit-related losses in its portfolios of debt investment securities. Additional information about the investment securities portfolio is included in notes 3 and 12 of Notes to Financial Statements.
Other earning assets include interest-bearing deposits at banks, trading account assets, federal funds sold and agreements to resell securities. Those other earning assets in the aggregate averaged $23.8 billion in the recently completed quarter, compared with $39.8 billion in the year-earlier quarter and $24.4 billion in the first quarter of 2023. Interest-bearing deposits at banks averaged $23.6 billion, $39.4 billion and $24.3 billion during the three months ended June 30, 2023, June 30, 2022 and March 31, 2023, respectively. The amounts of interest-bearing deposits at banks at those respective dates were predominantly comprised of deposits held at the FRB of New York. In general, the amount of deposits held at the FRB of New York fluctuates due to changes in levels of the Company's investments, loans, deposits and other borrowings. The lower balances in the recent quarter and the first quarter of 2023, compared with the year-earlier quarter reflect loan portfolio growth, the purchases of investment securities and treasury stock and the decline in noninterest bearing deposits, partially offset by the issuance of long-term debt and other short-term borrowings and an increase in time deposits.
As a result of the changes described herein, average earning assets totaled $185.9 billion in the most recent quarter, compared with $189.8 billion in the second quarter of 2022 and $184.1 billion in the first quarter of 2023. Average earning assets totaled $185.0 billion and $164.3 billion during the first six months of 2023 and 2022, respectively.
The most significant source of funding for the Company is core deposits. The Company considers noninterest-bearing deposits, interest-bearing transaction accounts, savings deposits and time deposits of $250,000 or less as core deposits. The Company’s branch network is its principal source of core deposits, which generally carry lower interest rates than wholesale funds of comparable maturities. Average core deposits totaled $146.8 billion in the second quarter
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of 2023, compared with $169.6 billion in the similar 2022 quarter and $152.0 billion in the first quarter of 2023. The decrease in average core deposits in the recent quarter as compared with the year-earlier quarter and 2023's initial quarter was primarily the result of monetary tightening that influenced customers to seek higher rate alternatives, including a shift from operating demand accounts to off-balance sheet sweep accounts for commercial customers. Lower levels of activity in the capital markets also resulted in a reduction of trust demand deposits. The following table provides an analysis of quarterly changes in the components of average core deposits.
AVERAGE CORE DEPOSITS
| Percent Increase | |||||||||||||
| (Decrease) from | |||||||||||||
| 2nd Qtr. | 2nd Qtr. | 1st Qtr. | |||||||||||
| 2023 | 2022 | 2023 | |||||||||||
| (In millions) | |||||||||||||
| Savings and interest-checking deposits | $ | 83,456 | (8 | ) | % | (1 | ) | % | |||||
| Time deposits | 7,143 | 53 | 29 | ||||||||||
| Noninterest-bearing deposits | 56,180 | (24 | ) | (9 | ) | ||||||||
| Total | $ | 146,779 | (13 | ) | % | (3 | ) | % |
The Company also receives funding from other deposit sources, including branch-related time deposits over $250,000 and brokered deposits. Time deposits over $250,000 averaged $2.0 billion in the recent quarter, compared with $808 million in the second quarter of 2022 and $1.5 billion in the first quarter of 2023. The increase in such deposits in the two most recent quarters as compared with the second quarter of 2022 reflects higher demand for time deposit products in a rising interest rate environment. The Company had brokered savings and interest-bearing transaction accounts that averaged $3.8 billion during the recent quarter, $4.2 billion in the year-earlier quarter and $3.4 billion in the first quarter of 2023. Brokered time deposits averaged $6.9 billion in the second quarter of 2023 compared with $58 million in the second quarter of 2022 and $4.6 billion in the first quarter of 2023. The increase in such deposits from the second quarter of 2022 was predominantly due to deposits added late in the fourth quarter of 2022 and through the second quarter of 2023. Additional brokered deposits may be solicited in the future depending on market conditions, including demand by customers and other investors for those deposits, and the cost of funds available from alternative sources at the time. Total uninsured deposits were estimated to be $67.0 billion at June 30, 2023, compared with $67.7 billion at March 31, 2023, $74.2 billion at December 31, 2022 and $79.9 billion at June 30, 2022. Approximately $10.5 billion, $10.7 billion, $11.4 billion and $13.2 billion of those uninsured deposits were collateralized by the Company at June 30, 2023, March 31, 2023, December 31, 2022 and June 30, 2022 respectively.
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The accompanying table summarizes average total deposits for the quarters ended June 30, 2023, March 31, 2023 and June 30, 2022.
AVERAGE DEPOSITS
| Retail | Trust | Commercial and Other | Total | |||||||||||||
| (In millions) | ||||||||||||||||
| Three Months Ended June 30, 2023 | ||||||||||||||||
| Savings and interest-checking deposits | $ | 43,576 | $ | 6,322 | $ | 37,312 | $ | 87,210 | ||||||||
| Time deposits | 8,548 | 16 | 7,445 | 16,009 | ||||||||||||
| Noninterest-bearing deposits | 14,579 | 9,269 | 32,332 | 56,180 | ||||||||||||
| Total | $ | 66,703 | $ | 15,607 | $ | 77,089 | $ | 159,399 | ||||||||
| Three Months Ended March 31, 2023 | ||||||||||||||||
| Savings and interest-checking deposits | $ | 45,996 | $ | 7,172 | $ | 34,885 | $ | 88,053 | ||||||||
| Time deposits | 6,483 | 13 | 5,134 | 11,630 | ||||||||||||
| Noninterest-bearing deposits | 15,071 | 10,348 | 36,435 | 61,854 | ||||||||||||
| Total | $ | 67,550 | $ | 17,533 | $ | 76,454 | $ | 161,537 | ||||||||
| Three Months Ended June 30, 2022 | ||||||||||||||||
| Savings and interest-checking deposits | $ | 52,750 | $ | 6,852 | $ | 35,547 | $ | 95,149 | ||||||||
| Time deposits | 5,001 | 17 | 462 | 5,480 | ||||||||||||
| Noninterest-bearing deposits | 14,483 | 11,691 | 47,880 | 74,054 | ||||||||||||
| Total | $ | 72,234 | $ | 18,560 | $ | 83,889 | $ | 174,683 |
The Company also uses borrowings from banks, the FHLB of New York, the FRB of New York and others as sources of funding. Short-term borrowings represent borrowing arrangements that at the time they were entered into had a contractual maturity of one year or less. Average short-term borrowings totaled $7.5 billion in the second quarter of 2023, compared with $1.1 billion in the year-earlier quarter and $5.0 billion in the first quarter of 2023. Short-term borrowings from the FHLB of New York averaged $7.1 billion in the second quarter of 2023 compared with $4.6 billion in the first quarter of 2023 and a nominal amount in the second quarter of 2022. Short-term borrowings assumed in connection with the People's United acquisition totaled $895 million on April 1, 2022. In October 2022 M&T redeemed $500 million of unsecured senior notes due to mature in December 2022 that had been assumed in the acquisition of People's United and included in short-term borrowings. In general, the increase in short-term borrowings reflects the Company's liquidity ratio management.
Long-term borrowings averaged $7.5 billion in the second quarter of 2023, compared with $3.3 billion in the year-earlier quarter and $6.5 billion in the first quarter of 2023. As of April 1, 2022, long-term borrowings assumed in the People's United acquisition totaled $494 million and included $483 million of fixed-rate subordinated notes and $11 million of FHLB advances. Average balances of the Company’s outstanding senior notes were $6.0 billion, $1.7 billion and $5.0 billion during the three months ended June 30, 2023, June 30, 2022 and March 31, 2023, respectively. In January 2023, M&T issued $1.0 billion of senior notes that mature in January 2034 and pay a 5.053% fixed rate semi-annually until January 2033 after which the Secured Overnight Financing Rate ("SOFR") plus 1.85% will be paid quarterly until maturity. Additionally, in January 2023 M&T Bank issued $1.3 billion of senior notes that mature in January 2026 and pay a fixed rate of 4.65% semi-annually until maturity and $1.2 billion of senior notes that mature in January 2028 and pay a fixed rate of 4.70% semi-annually until maturity. In November 2022 M&T Bank issued $500 million of fixed rate senior notes that pay a rate of 5.4% semi-annually and mature in November 2025. In August 2022 M&T issued $500 million of senior notes that mature in August 2028 and pay a fixed rate of 4.553% semi-annually until August 2027 after which the SOFR plus 1.78% will be paid quarterly until maturity. In April 2022, M&T Bank redeemed $650 million of fixed rate senior notes that were due to mature on May 18, 2022. During May 2022, $250 million of variable rate senior notes of M&T Bank matured. Subordinated capital notes included in long-term borrowings averaged $979 million in the second quarter of 2023, compared with $983 million in the second quarter of 2022 and $980 million in the first quarter of 2023. Junior subordinated debentures associated with trust preferred securities that were included in average long-term borrowings were $537 million during the second and first quarters of 2023 compared with $533 million in the second quarter of 2022. Additional information regarding junior subordinated debentures is provided in note 5 of Notes to Financial Statements.
The Company has utilized interest rate swap agreements to modify the repricing characteristics of certain components of its loans and long-term debt. As of June 30, 2023, interest rate swap agreements were used as fair value
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hedges of approximately $2.5 billion of outstanding fixed rate long-term borrowings. Additionally, interest rate swap agreements with a notional amount of $11.4 billion (exclusive of forward-starting swap agreements) were used as cash flow hedges of interest payments associated with variable rate commercial real estate loans. Further information on interest rate swap agreements is provided herein and in note 10 of Notes to Financial Statements.
Net interest income can be impacted by changes in the composition of the Company's earning assets and interest-bearing liabilities, as discussed herein, as well as changes in interest rates and spreads. Net interest spread, or the difference between the taxable-equivalent yield on earning assets and the rate paid on interest-bearing liabilities, was 3.03% in the recent quarter, up 11 basis points from 2.92% in the second quarter of 2022. The yield on earning assets during the second quarter of 2023 was 5.46%, up 234 basis points from 3.12% in the similar 2022 period, while the rate paid on interest-bearing liabilities increased 223 basis points to 2.43% in the recent quarter from .20% in the year-earlier period. In the first quarter of 2023, the net interest spread was 3.30%, the yield on earning assets was 5.16% and the rate paid on interest-bearing liabilities was 1.86%. The increases in the net interest spread since the second quarter of 2022 reflect the impact of generally rising interest rates that resulted in higher yields on loans and leases, deposits at the FRB of New York and investment securities, partially offset by higher rates on interest-bearing liabilities. The Federal Reserve raised its target Federal funds rate 5.0% from March 2022 through June 2023, including various increases totaling 275 basis points in the last half of 2022 and 50 basis points and 25 basis points in the first and second quarters of 2023, respectively. The decline in the net interest spread in the recent quarter as compared with the first quarter of 2023 reflected increased demand for time deposit products, higher average borrowings and the impact of competitive pricing and rising rates associated with interest-bearing instruments. For the first six months of 2023, the net interest spread was 3.16%, up 38 basis points from 2.78% in the year-earlier period. The yield on earning assets and the rate paid on interest-bearing liabilities for the first half of 2023 were 5.31% and 2.15%, respectively, compared with 2.96% and .18%, respectively, in the initial six months of 2022.
Net interest-free funds consist largely of noninterest-bearing demand deposits and shareholders’ equity, partially offset by bank owned life insurance and non-earning assets, including goodwill and core deposit and other intangible assets. Net interest-free funds averaged $67.7 billion in the second three months of 2023, compared with $84.7 billion in the year-earlier quarter and $72.9 billion in the first quarter of 2023. The lower level of average net interest-free funds in the recent quarter as compared with the first quarter of 2023 and second quarter of 2022 is predominantly the result of a decline in the average balance of noninterest-bearing deposits. Noninterest-bearing deposits averaged $56.2 billion in the second quarter of 2023 and $61.9 billion in the first quarter of 2023, compared with $74.1 billion in the second quarter of 2022. The lower levels of noninterest-bearing deposits in the first and second quarter of 2023 as compared with the second quarter of 2022 reflected customer use of off-balance sheet investment products and a shift in deposits to interest-bearing accounts as interest rates rose. During the first six months of 2023 and 2022, average net interest-free funds aggregated $70.3 billion and $75.0 billion, respectively. Average noninterest-bearing deposits were $59.0 billion in the first half of 2023, compared with $66.1 billion in the first two quarters of 2022. The decline in average noninterest-bearing deposits, resulting from a shift of customer funds from noninterest-bearing accounts to interest-bearing accounts and off-balance sheet investment products, was partially offset by the impact of $17.4 billion of noninterest-bearing deposits the Company assumed in connection with the People's United acquisition on April 1, 2022. Shareholders’ equity averaged $25.7 billion during the three-month period ended June 30, 2023, compared with $26.1 billion during the year-earlier period and $25.4 billion during the first quarter of 2023. M&T issued $8.4 billion of common equity and $261 million of preferred equity in completing the acquisition of People's United on April 1, 2022. Repurchases of common stock totaled approximately $600 million in the first quarter of 2023 and $1.8 billion in the last three quarters of 2022. There were no repurchases of common stock during the second quarter of 2023. Goodwill and core deposit and other intangible assets averaged $8.7 billion in each of the second and first quarters of 2023 compared with $8.8 billion in the year-earlier quarter. The Company recorded $3.9 billion of goodwill on April 1, 2022 which represents excess consideration over the fair value of net assets acquired in the People's United transaction. As part of the transaction, intangible assets were identified and recorded at fair value, thereby increasing the balance of core deposit and other intangible assets on the Company's balance sheet by $261 million on April 1, 2022. The cash surrender value of bank owned life insurance averaged $2.6 billion in each of the second quarter of 2023, first quarter of 2023 and year-earlier quarter. Changes in the cash surrender value of bank owned life insurance and benefits received are not included in interest income, but rather are recorded in “other revenues from operations.”
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The contribution of net interest-free funds to net interest margin was .88% in the second quarter of 2023, compared with .09% and .74% in the second quarter of 2022 and the first quarter of 2023, respectively. The increased contribution of net interest-free funds to net interest margin in the most recent quarter and first quarter of 2023 as compared with the second 2022 quarter reflects higher rates paid on interest-bearing liabilities used to value net interest-free funds. The contribution of net interest-free funds in the first half of 2023 and 2022 was .81% and .08%, respectively.
Reflecting the changes to the net interest spread and the contribution of net interest-free funds as described herein, the Company’s net interest margin was 3.91% in the second quarter of 2023, compared with 3.01% in the year-earlier period. During the first six months of 2023 and 2022, the net interest margin was 3.97% and 2.86%, respectively. Future changes in market interest rates or spreads, as well as changes in the composition of the Company’s portfolios of earning assets and interest-bearing liabilities that result in changes to spreads, could impact the Company’s net interest income and net interest margin. The Federal Open Market Committee has conducted a series of basis point increases in short-term interest rates from March 2022 through June 2023 totaling 5.0%. Those actions have led to generally higher interest rates overall and, accordingly, have contributed to the Company's higher net interest margin in the recent quarter as compared with the year-earlier quarter. The recent quarter's net interest margin narrowed from 4.04% in the first quarter of 2023. That 13 basis point decrease reflects a 27 basis point compression of the net interest spread partially offset by a 14 basis point increase in the contribution of interest-free funds.
Management assesses the potential impact of future changes in interest rates and spreads by projecting net interest income under several interest rate scenarios. In managing interest rate risk, the Company has utilized interest rate swap agreements to modify the repricing characteristics of certain portions of its earning assets and interest-bearing liabilities. Periodic settlement amounts arising from these agreements are reflected in either the yields on earning assets or the rates paid on interest-bearing liabilities. The notional amount of interest rate swap agreements entered into for interest rate risk management purposes was $13.9 billion (excluding $7.3 billion of forward-starting swap agreements related to cash flow hedges) at June 30, 2023, $16.0 billion (excluding $3.3 billion of forward-starting swap agreements) at June 30, 2022 and $12.7 billion (excluding $4.7 billion of forward-starting swap agreements) at December 31, 2022. Under the terms of those interest rate swap agreements, the Company received payments based on the outstanding notional amount at fixed rates and made payments at variable rates. At June 30, 2023, interest rate swap agreements with notional amounts of $11.4 billion were serving as cash flow hedges of interest payments associated with variable rate commercial real estate loans, compared with $15.0 billion at June 30, 2022 and $11.2 billion at December 31, 2022. Interest rate swap agreements with notional amounts of $2.5 billion at June 30, 2023, $1.0 billion at June 30, 2022 and $1.5 billion at December 31, 2022 were serving as fair value hedges of fixed rate long-term borrowings. The Company also enters into forward-starting interest rate swap agreements predominantly to extend the term of its interest rate swap agreements serving as cash flow hedges and provide a hedge against changing interest rates on certain of its variable rate loans.
In a fair value hedge, the fair value of the derivative (the interest rate swap agreement) and changes in the fair value of the hedged item are recorded in the Company’s Consolidated Balance Sheet with the corresponding gain or loss recognized in current earnings. The difference between changes in the fair value of the interest rate swap agreements and the hedged items represents hedge ineffectiveness and is recorded as an adjustment to the interest income or interest expense of the respective hedged item. In a cash flow hedge, the derivative’s gain or loss is initially reported as a component of other comprehensive income and subsequently reclassified into earnings when the forecasted transaction affects earnings. The amounts of hedge ineffectiveness recognized during each of the quarters ended June 30, 2023, June 30, 2022 and March 31, 2023 were not material to the Company’s consolidated results of operations. Information regarding the fair value of interest rate swap agreements and hedge ineffectiveness is presented in note 10 of Notes to Financial Statements. Information regarding the valuation of cash flow hedges included in other comprehensive income is presented in note 9 of Notes to Financial Statements. The changes in the fair values of the interest rate swap agreements and the hedged items primarily result from the effects of changing interest rates and spreads. The average notional amounts of interest rate swap agreements entered into for interest rate risk management purposes, the related effect on net interest income and margin, and the weighted-average interest rates paid or received on those swap agreements are presented in the accompanying table. Additional information about the Company’s use of interest rate swap agreements and other derivatives is included in note 10 of Notes to Financial Statements.
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INTEREST RATE SWAP AGREEMENTS
| Three Months Ended June 30 | |||||||||||||||||
| . | 2023 | 2022 | |||||||||||||||
| Amount | Rate (a) | Amount | Rate (a) | ||||||||||||||
| (Dollars in thousands) | |||||||||||||||||
| Increase (decrease) in: | |||||||||||||||||
| Interest income | $ | (48,691 | ) | (.11 | ) | % | $ | 19,947 | .04 | % | |||||||
| Interest expense | 14,388 | .05 | (5,297 | ) | (.02 | ) | |||||||||||
| Net interest income/margin | $ | (63,079 | ) | (.14 | ) | % | $ | 25,244 | .05 | % | |||||||
| Average notional amount (c) | $ | 13,027,330 | $ | 14,894,505 | |||||||||||||
| Rate received (b) | 3.13 | % | 1.46 | % | |||||||||||||
| Rate paid (b) | 5.04 | % | .79 | % | |||||||||||||
| Six Months Ended June 30 | |||||||||||||||||
| . | 2023 | 2022 | |||||||||||||||
| Amount | Rate(a) | Amount | Rate(a) | ||||||||||||||
| (Dollars in thousands) | |||||||||||||||||
| Increase (decrease) in: | |||||||||||||||||
| Interest income | $ | (107,730 | ) | (.12 | ) | % | $ | 57,966 | .07 | % | |||||||
| Interest expense | 24,308 | .04 | (13,785 | ) | (.03 | ) | |||||||||||
| Net interest income/margin | $ | (132,038 | ) | (.14 | ) | % | $ | 71,751 | .09 | % | |||||||
| Average notional amount (c) | $ | 12,053,796 | $ | 14,933,149 | |||||||||||||
| Rate received (b) | 2.92 | % | 1.46 | % | |||||||||||||
| Rate paid (b) | 5.10 | % | .51 | % |
(a)
Computed as an annualized percentage of average earning assets or interest-bearing liabilities.
(b)
Weighted-average rate paid or received on interest rate swap agreements in effect during the period.
(c)
Excludes forward-starting interest rate swap agreements not in effect during the period.
As a financial intermediary, the Company is exposed to various risks, including liquidity and market risk. Liquidity refers to the Company’s ability to ensure that sufficient cash flow and liquid assets are available to satisfy current and future obligations, including demands for loans and deposit withdrawals, funding operating costs and other corporate purposes. Liquidity risk arises whenever cash flows associated with financial instruments included in assets and liabilities differ.
The most significant source of funding for the Company is core deposits, which are generated from a large base of consumer, corporate and institutional customers. That customer base has, over the past several years, become more geographically diverse as a result of expansion of the Company’s businesses. Nevertheless, the Company faces competition in offering products and services from a large array of financial market participants, including banks, thrifts, mutual funds, securities dealers and others. The Company supplements funding provided through deposits with various short-term and long-term wholesale borrowings, including overnight federal funds purchased, short-term advances from the FHLB of New York, brokered deposits, and longer-term borrowings. M&T Bank has access to additional funding sources through borrowings from the FHLB of New York, lines of credit with the FRB of New York, M&T Bank’s Bank Note Program, and other available borrowing facilities. The Bank Note Program enables M&T Bank to offer unsecured senior and subordinated notes. The Company has, from time to time, issued subordinated capital notes and junior subordinated debentures associated with trust preferred securities to provide liquidity and enhance regulatory capital ratios. The Company’s junior subordinated debentures associated with trust preferred securities and other subordinated capital notes are considered Tier 2 capital and are includable in total regulatory capital. At June 30, 2023 and December 31, 2022, long-term borrowings aggregated $7.4 billion and $4.0 billion, respectively and short-term borrowings aggregated $7.9 billion and $3.6 billion, respectively.
The Company has benefited from the placement of brokered deposits. The Company had brokered savings and interest-checking deposit accounts which aggregated approximately $3.8 billion at each of June 30, 2023 and December 31, 2022, compared with $3.9 billion at June 30, 2022. Funding from brokered time deposits increased $799 million and $4.0 billion in the first and second quarter of 2023, respectively to $8.9 billion at June 30, 2023 from $4.1 billion at December 31, 2022. Brokered time deposits were not a significant source of funding at June 30, 2022.
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The Company’s ability to obtain funding from these sources could be negatively impacted should the Company experience a substantial deterioration in its financial condition or its debt ratings or should the availability of funding become restricted due to a disruption in the financial markets. The Company attempts to quantify such credit-event risk by modeling scenarios that estimate the liquidity impact resulting from a short-term ratings downgrade over various grading levels. Such impact is estimated by attempting to measure the effect on available unsecured lines of credit, available capacity from secured borrowing sources and securitizable assets. In addition to deposits and borrowings, other sources of liquidity include maturities of investment securities and other earning assets, repayments of loans and investment securities, and cash generated from operations, such as fees collected for services. The Company also has the ability to securitize or sell certain financial assets, including various loan types, to provide other liquidity alternatives. On August 7, 2023, Moody's Investor Service reaffirmed M&T Bank's short-term deposit rating at Prime-1, but downgraded M&T's and M&T Bank's senior and subordinated debt ratings from A3 to Baa1 and M&T Bank's long-term deposits rating from Aa3 to A1.
Certain customers of the Company obtain financing through the issuance of variable rate demand bonds (“VRDBs”). The VRDBs are generally enhanced by letters of credit provided by M&T Bank. M&T Bank oftentimes acts as remarketing agent for the VRDBs and, at its discretion, may from time-to-time own some of the VRDBs while such instruments are remarketed. When this occurs, the VRDBs are classified as trading account assets in the Company’s Consolidated Balance Sheet. Nevertheless, M&T Bank is not contractually obligated to purchase the VRDBs. There were no such securities in the trading account at June 30, 2023, December 31, 2022 and June 30, 2022. The total amounts of VRDBs outstanding backed by M&T Bank letters of credit were $564 million at June 30, 2023, $604 million at December 31, 2022 and $645 million at June 30, 2022. M&T Bank also serves as remarketing agent for most of those bonds.
The Company enters into contractual obligations in the normal course of business that require future cash payments. Such obligations include, among others, payments related to deposits, borrowings, leases and other contractual commitments. Off-balance sheet commitments to customers may impact liquidity, including commitments to extend credit, standby letters of credit, commercial letters of credit, financial guarantees and indemnification contracts, and commitments to sell real estate loans. Because many of these commitments or contracts expire without being funded in whole or in part, the contract amounts are not necessarily indicative of future cash flows. Further discussion of these commitments is provided in note 13 of Notes to Financial Statements.
M&T’s primary source of funds to pay for operating expenses, shareholder dividends and treasury stock repurchases has historically been the receipt of dividends from its bank subsidiaries, which are subject to various regulatory limitations. Dividends from any bank subsidiary to M&T are limited by the amount of earnings of the subsidiary in the current year and the two preceding years. For purposes of that test, at June 30, 2023 approximately $1.63 billion was available for payment of dividends to M&T from bank subsidiaries. M&T also may obtain funding through long-term borrowings. As previously described, in January 2023 M&T issued $1.0 billion of senior notes that mature in January 2034. Outstanding senior notes of M&T at June 30, 2023 and December 31, 2022 were $2.2 billion and $1.2 billion, respectively. Junior subordinated debentures of M&T associated with trust preferred securities outstanding at June 30, 2023 and December 31, 2022 totaled $538 million and $536 million, respectively.
Management closely monitors the Company’s liquidity position on an ongoing basis for compliance with internal policies and regulatory expectations and believes that available sources of liquidity are adequate to meet funding needs anticipated in the ordinary course of business. Available liquidity at June 30, 2023 included cash on deposit at the FRB of New York of $27.1 billion, unused lines of credit of $31.0 billion and unencumbered investment securities (after estimated haircut) of approximately $18.5 billion. Management continually evaluates the use and mix of its various available funding alternatives, including short-term borrowings, issuance of long-term debt, the placement of brokered deposits and the securitization of certain loan products. Management does not anticipate engaging in any activities, either currently or in the long term, for which adequate funding would not be available and would therefore result in a significant strain on liquidity at either M&T or its subsidiary banks.
Market risk is the risk of loss from adverse changes in the market prices and/or interest rates of the Company’s financial instruments. The primary market risk the Company is exposed to is interest rate risk. Interest rate risk arises from the Company’s core banking activities of lending and deposit-taking, because assets and liabilities reprice at
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different times and by different amounts as interest rates change. As a result, net interest income earned by the Company is subject to the effects of changing interest rates. The Company measures interest rate risk by calculating the variability of net interest income in future periods under various interest rate scenarios using projected balances for earning assets, interest-bearing liabilities and derivatives used to manage interest rate risk. Management’s philosophy toward interest rate risk management is to limit the variability of net interest income. The balances of financial instruments used in the projections are based on expected growth from forecasted business opportunities, anticipated prepayments of loans and investment securities, and expected maturities of investment securities, loans and deposits. Management uses a “value of equity” model to supplement the modeling technique described above. Those supplemental analyses are based on discounted cash flows associated with on- and off-balance sheet financial instruments. Such analyses are modeled to reflect changes in interest rates and provide management with a long-term interest rate risk metric. The Company has entered into interest rate swap agreements to help manage exposure to interest rate risk. At June 30, 2023, the aggregate notional amount of interest rate swap agreements entered into for interest rate risk management purposes that were currently in effect was $13.9 billion. In addition, the Company has entered into $7.3 billion of forward-starting interest rate swap agreements related to cash flow hedges.
The Company’s Asset-Liability Committee, which includes members of executive management, monitors the sensitivity of the Company’s net interest income to changes in interest rates with the aid of a computer model that forecasts net interest income under different interest rate scenarios. In modeling changing interest rates, the Company considers different yield curve shapes that consider both parallel (that is, simultaneous changes in interest rates at each point on the yield curve) and non-parallel (that is, allowing interest rates at points on the yield curve to vary by different amounts) shifts in the yield curve. In utilizing the model, market-implied forward interest rates over the subsequent twelve months are generally used to determine a base interest rate scenario for the net interest income simulation. That calculated base net interest income is then compared with the income calculated under the varying interest rate scenarios. The model considers the impact of ongoing lending and deposit-gathering activities, as well as interrelationships in the magnitude and timing of the repricing of financial instruments, including the effect of changing interest rates on expected prepayments and maturities. When deemed prudent, management has taken actions to mitigate exposure to interest rate risk through the use of on- or off-balance sheet financial instruments and intends to do so in the future. Possible actions include, but are not limited to, changes in the pricing of loan and deposit products, modifying the composition of earning assets and interest-bearing liabilities, and adding to, modifying or terminating existing interest rate swap agreements or other financial instruments used for interest rate risk management purposes.
The accompanying table as of June 30, 2023 and December 31, 2022 displays the estimated impact on net interest income in the base scenario described above resulting from parallel changes in interest rates across repricing categories during the first modeling year.
SENSITIVITY OF NET INTEREST INCOME
TO CHANGES IN INTEREST RATES
| Calculated Increase (Decrease) in Projected Net Interest Income | |||||||||
| Changes in interest rates | June 30, 2023 | December 31, 2022 | |||||||
| (In thousands) | |||||||||
| +200 basis points | $ | 102,183 | 224,555 | ||||||
| +100 basis points | 83,575 | 158,020 | |||||||
| -100 basis points | (164,202 | ) | (216,202 | ) | |||||
| -200 basis points | (329,022 | ) | (439,512 | ) |
The Company utilized many assumptions to calculate the impact that changes in interest rates may have on net interest income. The more significant of those assumptions included the rate of prepayments of mortgage-related assets, cash flows from derivative and other financial instruments, loan and deposit volumes, mix and pricing, and deposit maturities. In the scenarios presented, the Company also assumed gradual changes in interest rates during a twelve-month period as compared with the base scenario. Changes in amounts presented since December 31, 2022 reflect changes in portfolio composition (including shifts between noninterest-bearing and interest-bearing deposits and higher levels of borrowings), the level of market-implied forward interest rates and hedging actions taken by the Company. Amidst the rising rate environment since the first quarter of 2022, M&T's cumulative deposit pricing beta,
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which is the change in deposit pricing in response to a change in market interest rates, approximated 40 percent. Excluding brokered deposits that cumulative pricing beta approximated 34 percent. The cumulative deposit pricing beta (including and excluding brokered deposits) is assumed to approximate 40 to 45 percent in the scenarios presented with interest rate increases and to approximate 35 to 40 percent in the scenarios presented with interest rate decreases. The assumptions used in interest rate sensitivity modeling are inherently uncertain and, as a result, the Company cannot precisely predict the impact of changes in interest rates on net interest income. Actual results may differ significantly from those presented due to the timing, magnitude and frequency of changes in interest rates and changes in market conditions and interest rate differentials (spreads) between maturity/repricing categories, as well as any actions, such as those previously described, which management may take to counter such changes.
Certain of the Company's earning assets, interest-bearing liabilities, preferred equity instruments and interest rate swap agreements at June 30, 2023 have contractual repricing terms that reference the London Interbank Offered Rate ("LIBOR"). The determination of LIBOR has effectively ceased after its final publication on June 30, 2023. In preparation for the elimination of LIBOR as a reference rate, the Company essentially had discontinued entering into LIBOR-based contracts at the end of 2021 and as of the end of the second quarter of 2023 has substantially completed its work engaging with customers and other counterparties to remediate LIBOR-based agreements which expire after June 30, 2023 by incorporating alternative language, negotiating new agreements, or other means. The Company's enterprise-wide LIBOR transition program has been and continues to be monitored by executive management as well as the Risk Committee of the Board of Directors.
At June 30, 2023 the Company had outstanding LIBOR-based commercial loans and leases and commercial real estate loans of $19.2 billion and residential mortgage and consumer loans of $445 million. Substantially all of those loans have been amended to include appropriate alternative language effective upon cessation of LIBOR publication and are planned to migrate to a new index (generally SOFR) at their next scheduled reset date, which except for an insignificant percentage of the Company's loan portfolio is expected to occur in the third quarter of 2023. Additionally, M&T has approximately $483 million of variable rate junior subordinated debentures at June 30, 2023 that, as described in note 9 of Notes to Financial Statements in the Company's Form 10-K, will be indexed to SOFR beginning at their next scheduled reset date. M&T also has certain issued and outstanding preferred stock for which dividends are declared and paid at a fixed rate until a determined future date at which time such dividends convert to a variable rate that previously would have been based on LIBOR, but will now be based on SOFR. Refer to note 10 of Notes to Financial Statements in the Company's Form 10K for information on the rates for dividends on each series of preferred stock. At June 30, 2023 many of the Company's interest rate swap agreements referenced LIBOR. In October 2020, the International Swaps and Derivatives Association, Inc. published the IBOR Fallbacks Supplement ("Supplement") and the IBOR Fallback Protocol ("Protocol"). The Protocol enables market participants to incorporate certain revisions into their legacy non-cleared derivative trades with other counterparties that also choose to adhere to the Protocol. M&T adhered to the Protocol in November 2020. With respect to the Company's cleared interest rate swap agreements that reference LIBOR, clearinghouses have adopted the same SOFR benchmark alternatives of the Supplement and Protocol. Substantially all of the Company's LIBOR-based interest rate swap agreements at June 30, 2023 are expected to reset to a suitable alternative index, primarily SOFR, by the end of the third quarter of 2023.
As loans have matured and new originations occurred a larger percentage of the Company’s variable-rate loans reference SOFR or other indexes, including the Bloomberg Short Term Bank Yield Index (“BSBY”). At June 30, 2023 the Company had approximately $48.1 billion and $233 million of outstanding loan balances that reference SOFR and BSBY, respectively. Additionally, as of June 30, 2023, the Company had $20.7 billion of notional amounts of interest rate swap agreements entered into for hedging purposes, including $7.3 billion of forward-starting interest rate swap agreements and notional amounts of $24.5 billion of non-hedging derivative interest rate contracts that are referenced to SOFR. The Company’s usage of interest rate swap agreements referenced to SOFR or other alternative indexes is expected to increase in response to the discontinuation of LIBOR. The discontinuation of LIBOR and uncertainty relating to the emergence of alternative benchmark indexes to replace LIBOR could materially impact the Company's interest rate risk profile and its management thereof.
In addition to the effect of interest rates, changes in fair value of the Company’s financial instruments can also result from a lack of trading activity for similar instruments in the financial markets. That impact is most notable on
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the values assigned to some of the Company’s investment securities. Information about the fair valuation of investment securities is presented in notes 3 and 12 of Notes to Financial Statements.
The Company enters into interest rate and foreign exchange contracts to meet the financial needs of customers that it includes in its financial statements as other non-hedging derivatives within other assets and other liabilities. Financial instruments utilized for such activities consist predominantly of interest rate swap agreements and forward and futures contracts related to foreign currencies. The Company generally mitigates the foreign currency and interest rate risk associated with customer activities by entering into offsetting positions with third parties that are also included in other assets and other liabilities. The fair values of non-hedging derivative positions associated with interest rate contracts and foreign currency and other option and futures contracts are presented in note 10 of Notes to Financial Statements. As with any non-government guaranteed financial instrument, the Company is exposed to credit risk associated with counterparties to the Company’s non-hedging derivative activities. Although the notional amounts of these contracts are not recorded in the Consolidated Balance Sheet, the unsettled fair values of such financial instruments are recorded in the Consolidated Balance Sheet. The fair values of such non-hedging derivative assets and liabilities recognized on the Consolidated Balance Sheet were $313 million and $1.3 billion, respectively, at June 30, 2023 and $380 million and $1.3 billion, respectively, at December 31, 2022. The fair value asset and liability amounts at June 30, 2023 have been reduced by contractual settlements of $1.1 billion and $17 million, respectively, and at December 31, 2022 have been reduced by contractual settlements of $1.1 billion and $29 million, respectively. The values associated with the Company's non-hedging derivative activities at June 30, 2023 as compared with December 31, 2022 reflect changes in values associated with interest rate swap agreements entered into with commercial customers that are not subject to periodic variation margin settlement payments.
Trading account assets were $137 million at June 30, 2023, $118 million at December 31, 2022 and $134 million at June 30, 2022. Included in trading account assets were assets related to deferred compensation plans of $22 million at June 30, 2023, $23 million at December 31, 2022 and $17 million at June 30, 2022. Changes in the fair values of such assets are recorded as “trading account and other non-hedging derivative gains” in the Consolidated Statement of Income. Included in “other liabilities” in the Consolidated Balance Sheet at June 30, 2023 was $27 million of liabilities related to deferred compensation plans, compared with $29 million at December 31, 2022 and $22 million at June 30, 2022. Changes in the balances of such liabilities due to the valuation of allocated investment options to which the liabilities are indexed are recorded in “other costs of operations” in the Consolidated Statement of Income. Also included in trading account assets were investments in mutual funds and other assets that the Company was required to hold under terms of certain non-qualified supplemental retirement and other benefit plans that were assumed by the Company in various acquisitions. Those assets totaled $83 million at June 30, 2023, $95 million at December 31, 2022 and $117 million at June 30, 2022.
Given the Company’s policies and positions, management believes that the potential loss exposure to the Company resulting from market risk associated with trading account and other non-hedging derivative activities was not material, however, as previously noted, the Company is exposed to credit risk associated with counterparties to transactions related to the Company’s actions to mitigate foreign currency and interest rate risk associated with customer activities. Additional information about the Company’s use of derivative financial instruments is included in note 10 of Notes to Financial Statements.
Provision for Credit Losses
A provision for credit losses is recorded to adjust the level of the allowance to reflect expected credit losses that are based on economic forecasts as of each reporting date. A provision for credit losses of $150 million was recorded in the second quarter of 2023, compared with $302 million in the year-earlier quarter and $120 million in the first quarter of 2023. The Company's estimates of expected credit losses at June 30, 2023 reflect an expected uptick in the unemployment rate, a brief retraction of economic activity measured by gross domestic product followed by growth, and a decline in residential real estate prices. Expected declines in commercial real estate values were forecasted to steepen and, in particular, concerns continue around the healthcare and office building sectors. The provision for credit losses in the second quarter of 2022 included $242 million on loans obtained in the acquisition of People's United not deemed to be purchased credit deteriorated ("PCD"). GAAP requires a provision for credit losses to be recorded related to those loans beyond the recognition of credit losses utilized in the determination of the estimated fair value of the
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loans at the acquisition date. In addition to the recorded provision, the allowance for credit losses was also increased by $99 million in the second quarter of 2022 to reflect the expected credit losses on loans obtained in the acquisition of People's United deemed to be PCD. That addition represented an increase of the carrying values of loans identified as PCD at the time of the acquisition.
A summary of net charge-offs by loan type and as an annualized percentage of such average loans is presented in the table that follows.
NET CHARGE-OFFS (RECOVERIES)
BY LOAN/LEASE TYPE
| 2023 | ||||||||||||||||||||||||
| First Quarter | Second Quarter | Year- to-date | ||||||||||||||||||||||
| Net Charge-Offs (Recoveries) | Percentage of Average Loans | Net Charge-Offs (Recoveries) | Percentage of Average Loans | Net Charge-Offs (Recoveries) | Percentage of Average Loans | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| Commercial, financial, leasing, etc. | $ | 9,561 | .09 | % | $ | 4,827 | .04 | % | $ | 14,388 | .07 | % | ||||||||||||
| Real estate: | ||||||||||||||||||||||||
| Commercial | 29,055 | .26 | 99,037 | .88 | 128,092 | .57 | ||||||||||||||||||
| Residential | 378 | .01 | (1,243 | ) | (.02 | ) | (865 | ) | (.01 | ) | ||||||||||||||
| Consumer | 31,227 | .62 | 24,123 | .48 | 55,350 | .55 | ||||||||||||||||||
| $ | 70,221 | .22 | % | $ | 126,744 | .38 | % | $ | 196,965 | .30 | % | |||||||||||||
| 2022 | ||||||||||||||||||||||||
| First Quarter | Second Quarter (a) | Year- to-date (a) | ||||||||||||||||||||||
| Net Charge-Offs (Recoveries) | Percentage of Average Loans | Net Charge-Offs (Recoveries) | Percentage of Average Loans | Net Charge-Offs (Recoveries) | Percentage of Average Loans | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| Commercial, financial, leasing, etc. | $ | 5,569 | .10 | % | $ | 29,502 | .31 | % | $ | 35,071 | .23 | % | ||||||||||||
| Real estate: | ||||||||||||||||||||||||
| Commercial | (13,143 | ) | (.15 | ) | 7,140 | .06 | (6,003 | ) | (.03 | ) | ||||||||||||||
| Residential | 865 | .02 | 256 | — | 1,121 | .01 | ||||||||||||||||||
| Consumer | 13,576 | .31 | 12,671 | .26 | 26,247 | .28 | ||||||||||||||||||
| $ | 6,867 | .03 | % | $ | 49,569 | .16 | % | $ | 56,436 | .10 | % |
(a)
For the three and six months ended June 30, 2022, net charge-offs do not reflect $33 million of charge-offs related to PCD acquired loans.
Net charge-offs of commercial loans in the second quarter of 2023 reflect a $9 million recovery of a previously charged off loan to a skilled nursing facility. There were no individually notable commercial loan charge-offs or recoveries in the first quarter of 2023. Net charge-offs of commercial loans in the year-earlier quarter reflected a $23 million charge-off of a loan to a consumer products manufacturer. The net charge-offs of commercial real estate loans in the second quarter of 2023 reflect a $38 million charge-off of a loan secured by a multi-tenant office and retail building in New York City, a $28 million charge-off of eight loans related to a single operator of multiple healthcare facilities located in New York, Vermont, and Rhode Island, a $13 million charge-off of a loan secured by a multi-tenant office and retail building in Massachusetts, and a $12 million charge-off to a real estate development and management company in the mid-Atlantic region. There were no notable charge-offs or recoveries of commercial real estate loans in the second quarter of 2022. Net charge-offs of commercial real estate loans in the first quarter of 2023 included an $18 million net charge-off of a loan secured by a multi-tenant office and retail building in New York City and a $9 million charge-off of a loan to a real estate development and management company in the mid-Atlantic region. Included in net charge-offs of consumer loans were: net charge-offs of automobile loans of less than $1 million in the recent quarter and $2 million in the first quarter of 2023, compared with net recoveries of $1 million in the second quarter of 2022; net charge-offs of recreational finance loans of $10 million in the second quarter of 2023, $7 million in the year-earlier quarter and $11 million in the first quarter of 2023; and net charge-offs associated with other consumer loans including credit cards and installment loans that totaled $14 million in the recent quarter, $7 million in the year-earlier quarter and $17 million in the first quarter of 2023.
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Nonaccrual loans aggregated $2.4 billion or 1.83% of total loans and leases outstanding at June 30, 2023, compared with $2.6 billion or 2.05% at June 30, 2022 and $2.4 billion or 1.85% at December 31, 2022, and $2.6 billion or 1.92% at March 31, 2023. Loans obtained in the acquisition of People's United that have been classified as nonaccrual totaled $570 million at June 30, 2023, $545 million at June 30, 2022, $572 million at December 31, 2022, and $605 million at March 31, 2023. The level of nonaccrual loans reflects the continuing impact of economic conditions on borrowers’ abilities to make contractual payments on their loans, most notably commercial real estate loans in the retail, office, healthcare and hospitality sectors.
Accruing loans past due 90 days or more were $380 million or .29% of loans and leases at June 30, 2023, compared with $524 million or .41% at June 30, 2022, $491 million or .37% at December 31, 2022 and $407 million or .31% at March 31, 2023. Approximately 75% of accruing loans past due 90 days or more were residential real estate loans and included in that population were loans guaranteed by government-related entities of $294 million, $468 million, $363 million, and $306 million at June 30, 2023, June 30, 2022, December 31, 2022 and March 31, 2023, respectively. The lower balances reported since June 30, 2022 reflect residential real estate loans guaranteed by government-related entities receiving payment deferrals during the COVID-19 pandemic, but ineligible for treatment under the CARES Act, that subsequently exited those arrangements and became less than 90 days past due. Guaranteed loans included one-to-four family residential mortgage loans serviced by the Company that were repurchased to reduce associated servicing costs, including a requirement to advance principal and interest payments that had not been received from individual mortgagors. Despite the loans being purchased by the Company, the insurance or guarantee by the applicable government-related entity remains in force. The outstanding principal balances of the repurchased loans included in the amounts noted above that are guaranteed by government-related entities totaled $223 million at June 30, 2023, $435 million at June 30, 2022, $294 million at December 31, 2022, and $242 million at March 31, 2023. The remaining accruing loans past due 90 days or more not guaranteed by government-related entities were loans considered to be with creditworthy borrowers that were in the process of collection or renewal.
Loans that were 30-89 days past due were $1.7 billion at June 30, 2023, or 1.24% of total loans outstanding, $952 million or .74% of total loans outstanding at June 30, 2022, $1.8 billion or 1.35% of total loans outstanding at December 31, 2022, and $1.9 billion or 1.42% of total loans outstanding at March 31, 2023. At June 30, 2023, 75% of loans 30-89 days past due were less than 60 days delinquent. Loans subject to COVID-19 related payment deferrals were classified as current in accordance with regulatory guidance and, as a result, did not contribute to past due loan categories in earlier periods. Information about delinquent loans at June 30, 2023 and December 31, 2022 is included in note 4 of Notes to Financial Statements.
During the normal course of business, the Company modifies loans to maximize recovery efforts. The types of modifications that the Company grants typically include principal deferrals and interest rate reductions but may also include other types of modifications. The Company may offer such modified terms to borrowers experiencing financial difficulty. Such modified loans may be considered nonaccrual if the Company does not expect to collect the contractual cash flows owed under the loan agreement. Information about modifications of loans to borrowers experiencing financial difficulty is included in note 4 of Notes to Financial Statements.
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Commercial loans and leases classified as nonaccrual totaled $416 million, $442 million, $347 million and $382 million at June 30, 2023, June 30, 2022, December 31, 2022 and March 31, 2023, respectively. Commercial real estate loans in nonaccrual status aggregated $1.5 billion at June 30, 2023, $1.6 billion at June 30, 2022, $1.5 billion at December 31, 2022 and $1.7 billion at March 31, 2023. Commercial real estate loans in nonaccrual status were largely reflective of loans in the retail, office, healthcare and hospitality sectors. Commercial loans and leases and commercial real estate loans acquired from People's United and classified as nonaccrual totaled $96 million and $418 million, respectively, at June 30, 2023, $188 million and $312 million, respectively, at June 30, 2022, $118 million and $401 million, respectively, at December 31, 2022 and $96 million and $456 million, respectively, at March 31, 2023.
Nonaccrual residential real estate loans totaled $305 million at June 30, 2023, compared with $444 million at June 30, 2022, $350 million at December 31, 2022 and $323 million at March 31, 2023. The lower balance of nonaccrual residential real estate loans at the three most recent quarter-ends as compared with June 30, 2022 is reflective of improved customer repayment performance in current economic conditions. Residential real estate loans obtained in the acquisition of People's United and classified as nonaccrual aggregated $39 million at June 30, 2023, $35 million at June 30, 2022, $36 million at December 31, 2022 and $37 million at March 31, 2023. Included in residential real estate loans classified as nonaccrual were limited documentation first mortgage loans of $67 million at June 30, 2023, compared with $113 million at June 30, 2022, $78 million at December 31, 2022 and $69 million at March 31, 2023. Limited documentation first mortgage loans represent loans secured by residential real estate that at origination typically included some form of limited borrower documentation requirements as compared with more traditional loans. The Company no longer originates limited documentation loans. Residential real estate loans past due 90 days or more and accruing interest aggregated $284 million at June 30, 2023, compared with $474 million at June 30, 2022, $345 million at December 31, 2022 and $293 million at March 31, 2023. Those amounts related predominantly to government-guaranteed loans. The lower balances at June 30, 2023, December 31, 2022 and March 31, 2023 as compared with the 2022's second quarter reflect improved borrower repayment performance. Information about the location of nonaccrual and charged-off residential real estate loans as of and for the quarter ended June 30, 2023 is presented in the accompanying table.
Nonaccrual consumer loans were $184 million at June 30, 2023, $196 million at June 30, 2022, $218 million at December 31, 2022 and $189 million at March 31, 2023. Included in nonaccrual consumer loans at June 30, 2023, June 30, 2022, December 31, 2022 and March 31, 2023 were: automobile loans of $22 million, $36 million, $40 million and $27 million, respectively; recreational finance loans of $32 million, $33 million, $45 million and $34 million, respectively; and outstanding balances of home equity loans and lines of credit of $77 million, $79 million, $85 million and $81 million, respectively. Consumer loans acquired from People's United and classified as nonaccrual were $16 million at each of June 30, 2023 and March 31, 2023 and totaled $10 million and $17 million at June 30, 2022 and December 31, 2022, respectively, and consisted predominantly of home equity loans and lines of credit. Information about the location of nonaccrual and charged-off home equity loans and lines of credit as of and for the quarter ended June 30, 2023 is presented in the accompanying table.
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Information about past due and nonaccrual loans as of June 30, 2023 and December 31, 2022 is also included in note 4 of Notes to Financial Statements.
SELECTED RESIDENTIAL REAL ESTATE-RELATED LOAN DATA
| Quarter Ended | |||||||||||||||||||||
| June 30, 2023 | June 30, 2023 | ||||||||||||||||||||
| Nonaccrual | Net Charge-offs (Recoveries) | ||||||||||||||||||||
| Annualized | |||||||||||||||||||||
| Percent of | |||||||||||||||||||||
| Percent of | Average | ||||||||||||||||||||
| Outstanding | Outstanding | Outstanding | |||||||||||||||||||
| Balances | Balances | Balances | Balances | Balances | |||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||
| Residential mortgages: | |||||||||||||||||||||
| New York | $ | 6,821,113 | $ | 95,922 | 1.41 | % | $ | 260 | .02 | % | |||||||||||
| Mid-Atlantic (a) | 6,779,605 | 71,460 | 1.05 | (1,191 | ) | (.07 | ) | ||||||||||||||
| New England (b) | 6,149,687 | 51,703 | .84 | (39 | ) | — | |||||||||||||||
| Other | 2,974,012 | 15,090 | .51 | (430 | ) | (.06 | ) | ||||||||||||||
| Total | $ | 22,724,417 | $ | 234,175 | 1.03 | % | $ | (1,400 | ) | (.02 | %) | ||||||||||
| Residential construction loans: | |||||||||||||||||||||
| New York | $ | 19,608 | $ | 3,421 | 17.45 | % | $ | — | — | % | |||||||||||
| Mid-Atlantic (a) | 11,696 | 913 | 7.81 | — | — | ||||||||||||||||
| New England (b) | 10,585 | — | — | — | — | ||||||||||||||||
| Other | 4,743 | — | — | — | — | ||||||||||||||||
| Total | $ | 46,632 | $ | 4,334 | 9.29 | % | $ | — | — | % | |||||||||||
| Limited documentation first lien mortgages: | |||||||||||||||||||||
| New York | $ | 453,315 | $ | 29,729 | 6.56 | % | $ | 134 | .11 | % | |||||||||||
| Mid-Atlantic (a) | 405,870 | 23,235 | 5.72 | 25 | .02 | ||||||||||||||||
| New England (b) | 91,876 | 9,694 | 10.55 | — | — | ||||||||||||||||
| Other | 40,107 | 3,956 | 9.86 | (2 | ) | (.02 | ) | ||||||||||||||
| Total | $ | 991,168 | $ | 66,614 | 6.72 | % | $ | 157 | .06 | % | |||||||||||
| First lien home equity loans and lines of credit: | |||||||||||||||||||||
| New York | $ | 914,405 | $ | 17,288 | 1.89 | % | $ | (140 | ) | (.06 | %) | ||||||||||
| Mid-Atlantic (a) | 1,063,871 | 20,015 | 1.88 | 60 | .02 | ||||||||||||||||
| New England (b) | 506,062 | 3,943 | .78 | 36 | .03 | ||||||||||||||||
| Other | 14,332 | 194 | 1.35 | — | — | ||||||||||||||||
| Total | $ | 2,498,670 | $ | 41,440 | 1.66 | % | $ | (44 | ) | .01 | % | ||||||||||
| Junior lien home equity loans and lines of credit: | |||||||||||||||||||||
| New York | $ | 755,274 | $ | 16,096 | 2.13 | % | $ | (110 | ) | (.06 | %) | ||||||||||
| Mid-Atlantic (a) | 890,964 | 14,379 | 1.61 | (357 | ) | (.16 | ) | ||||||||||||||
| New England (b) | 607,772 | 4,951 | .81 | (47 | ) | (.03 | ) | ||||||||||||||
| Other | 20,410 | 224 | 1.10 | 38 | .76 | ||||||||||||||||
| Total | $ | 2,274,420 | $ | 35,650 | 1.57 | % | $ | (476 | ) | (.08 | %) |
(a)
Includes Delaware, Maryland, New Jersey, Pennsylvania, Virginia, West Virginia and the District of Columbia.
(b)
Includes Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island and Vermont.
Real estate and other foreclosed assets totaled $43 million at June 30, 2023, compared with $29 million at June 30, 2022, $41 million at December 31, 2022 and $45 million at March 31, 2023. Net gains or losses associated with real estate and other foreclosed assets were not material during the three months ended June 30, 2023, June 30, 2022 and March 31, 2023. At June 30, 2023, foreclosed assets are comprised predominantly of residential real estate-related properties.
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A comparative summary of nonperforming assets and certain past due loan data and credit quality ratios is presented in the accompanying table.
NONPERFORMING ASSET AND PAST DUE LOAN DATA
| 2023 Quarters | 2022 Quarters | |||||||||||||||||||
| Second | First | Fourth | Third | Second | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Nonaccrual loans | $ | 2,435,581 | 2,556,799 | 2,438,435 | 2,429,326 | 2,633,005 | ||||||||||||||
| Real estate and other foreclosed assets | 42,720 | 44,567 | 41,375 | 37,031 | 28,692 | |||||||||||||||
| Total nonperforming assets | $ | 2,478,301 | 2,601,366 | 2,479,810 | 2,466,357 | 2,661,697 | ||||||||||||||
| Accruing loans past due 90 days or more | $ | 380,079 | 407,457 | 491,018 | 476,503 | 523,662 | ||||||||||||||
| Government guaranteed loans included in totals above: | ||||||||||||||||||||
| Nonaccrual loans | $ | 39,846 | 42,102 | 43,536 | 44,797 | 46,937 | ||||||||||||||
| Accruing loans past due 90 days or more (a) | 294,184 | 306,049 | 363,409 | 423,371 | 467,834 | |||||||||||||||
| Nonaccrual loans to total loans and leases, net of unearned discount | 1.83 | % | 1.92 | % | 1.85 | % | 1.89 | % | 2.05 | % | ||||||||||
| Nonperforming assets to total net loans and leases and real estate and other foreclosed assets | 1.86 | % | 1.96 | % | 1.88 | % | 1.92 | % | 2.07 | % | ||||||||||
| Accruing loans past due 90 days or more to total loans and leases, net of unearned discount | .29 | % | .31 | % | .37 | % | .37 | % | .41 | % |
(a)
Predominantly residential real estate loans.
Management determines the allowance for credit losses under accounting guidance that requires estimating the amount of current expected credit losses over the remaining contractual term of the loan and lease portfolio. A description of the methodologies used by the Company to estimate its allowance for credit losses can be found in note 4 of Notes to Financial Statements.
In establishing the allowance for credit losses, the Company estimates losses attributable to specific troubled credits identified through both normal and targeted credit review processes and also estimates losses for other loans and leases with similar risk characteristics on a collective basis. For purposes of determining the level of the allowance for credit losses, the Company evaluates its loan and lease portfolio by type. At the time of the Company’s analysis regarding the determination of the allowance for credit losses as of June 30, 2023 concerns existed about elevated levels of inflation; fears of liquidity shortages in the financial services markets and a slowing economy or possible recession in coming quarters; the volatile nature of global markets and international economic conditions that could impact the U.S. economy; Federal Reserve positioning of monetary policy; downward pressures on commercial and residential real estate values especially in the office and healthcare sectors; ongoing supply chain issues and wage pressures impacting commercial borrowers; the extent to which borrowers, in particular commercial real estate borrowers, may be negatively affected by general economic conditions; and continued stagnant population and economic growth in the upstate New York and central Pennsylvania regions (approximately 37% of the Company’s loans and leases are to customers in New York State and Pennsylvania) that historically lag other regions of the country. The Company utilizes a loan grading system to differentiate risk amongst its commercial loans and commercial real estate loans. Loans with a lower expectation of default are assigned one of ten possible “pass” loan grades while specific loans determined to have an elevated level of credit risk are classified as “criticized.” A criticized loan may be classified as “nonaccrual” if the Company no longer expects to collect all amounts according to the contractual terms of the loan agreement or the loan is delinquent 90 days or more. Criticized commercial loans and commercial real estate loans totaled $10.5 billion, including $2.2 billion of loans acquired from People's United, at June 30, 2023, compared with $11.6 billion, including $2.8 billion acquired from People's United at June 30, 2022, and $10.7 billion, including $2.5 billion of loans acquired from People's United, at December 31, 2022, and $10.6 billion, including $2.5 billion of loans acquired from People's United, at March 31, 2023. Despite improved economic conditions during 2022 as pandemic-related restrictions were lifted and consumer spending increased, the business climate through the first half of 2023 continues to be subjected to inflationary pressures, supply chain constraints, rising interest rates and liquidity concerns. The level of criticized loans remains reflective of the impact of current conditions on many borrowers, particularly those with investor-owned commercial real estate loans in the hotel, office,
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retail and healthcare sectors. Investor-owned commercial real estate loans comprised $7.6 billion or 72% of total criticized loans at June 30, 2023. The weighted-average loan-to-value (“LTV”) ratio for investor-owned commercial real estate properties was approximately 56%. Criticized loans secured by investor-owned commercial real estate had a weighted-average LTV ratio of approximately 62%.
The accompanying tables summarize the outstanding balances of commercial loans and leases and commercial real estate loans by industry or property type at June 30, 2023 and December 31, 2022.
COMMERCIAL LOANS AND LEASES, NET OF UNEARNED DISCOUNT
(Excludes Loans Secured by Real Estate)
| June 30, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||
| Outstanding | Criticized Accrual | Criticized Nonaccrual | Total Criticized | Outstanding | Criticized Accrual | Criticized Nonaccrual | Total Criticized | ||||||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||||||||
| Financial and insurance | $ | 9,205 | $ | 10 | $ | 1 | $ | 11 | $ | 7,428 | $ | 139 | $ | 1 | $ | 140 | |||||||||||||||||
| Services | 6,691 | 312 | 34 | 346 | 6,494 | 333 | 35 | 368 | |||||||||||||||||||||||||
| Manufacturing | 5,962 | 343 | 64 | 407 | 5,524 | 299 | 72 | 371 | |||||||||||||||||||||||||
| Motor vehicle and recreational finance dealers | 5,306 | 5 | 39 | 44 | 4,797 | 7 | — | 7 | |||||||||||||||||||||||||
| Wholesale | 3,690 | 228 | 30 | 258 | 4,140 | 183 | 8 | 191 | |||||||||||||||||||||||||
| Transportation, communications, utilities | 3,383 | 191 | 58 | 249 | 3,078 | 217 | 73 | 290 | |||||||||||||||||||||||||
| Retail | 2,753 | 157 | 52 | 209 | 2,525 | 175 | 34 | 209 | |||||||||||||||||||||||||
| Construction | 2,252 | 218 | 56 | 274 | 2,324 | 248 | 46 | 294 | |||||||||||||||||||||||||
| Real estate investors | 1,703 | 31 | 2 | 33 | 1,882 | 35 | 3 | 38 | |||||||||||||||||||||||||
| Health services | 1,990 | 281 | 40 | 321 | 1,972 | 171 | 39 | 210 | |||||||||||||||||||||||||
| Other | 1,749 | 101 | 40 | 141 | 1,686 | 75 | 36 | 111 | |||||||||||||||||||||||||
| Total | $ | 44,684 | $ | 1,877 | $ | 416 | $ | 2,293 | $ | 41,850 | $ | 1,882 | $ | 347 | $ | 2,229 |
COMMERCIAL REAL ESTATE LOANS, NET OF UNEARNED DISCOUNT
| June 30, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||
| Outstanding | Criticized Accrual | Criticized Nonaccrual | Total Criticized | Outstanding | Criticized Accrual | Criticized Nonaccrual | Total Criticized | ||||||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||||||||
| Investor-owned | |||||||||||||||||||||||||||||||||
| Permanent finance by property type | |||||||||||||||||||||||||||||||||
| Apartments/Multifamily | $ | 6,396 | $ | 647 | $ | 95 | $ | 742 | $ | 5,888 | $ | 684 | $ | 78 | $ | 762 | |||||||||||||||||
| Retail/Service | 6,054 | 839 | 246 | 1,085 | 6,296 | 971 | 182 | 1,153 | |||||||||||||||||||||||||
| Office | 4,992 | 849 | 278 | 1,127 | 5,186 | 863 | 208 | 1,071 | |||||||||||||||||||||||||
| Health services | 3,824 | 979 | 188 | 1,167 | 3,667 | 1,052 | 222 | 1,274 | |||||||||||||||||||||||||
| Hotel | 2,825 | 615 | 357 | 972 | 2,810 | 676 | 512 | 1,188 | |||||||||||||||||||||||||
| Industrial/Warehouse | 2,201 | 151 | 14 | 165 | 2,238 | 98 | 12 | 110 | |||||||||||||||||||||||||
| Other | 363 | 4 | 12 | 16 | 527 | 42 | 24 | 66 | |||||||||||||||||||||||||
| Total permanent | 26,655 | 4,084 | 1,190 | 5,274 | 26,612 | 4,386 | 1,238 | 5,624 | |||||||||||||||||||||||||
| Construction/development | 7,500 | 2,196 | 147 | 2,343 | 8,257 | 2,169 | 126 | 2,295 | |||||||||||||||||||||||||
| Total investor-owned | 34,155 | 6,280 | 1,337 | 7,617 | 34,869 | 6,555 | 1,364 | 7,919 | |||||||||||||||||||||||||
| Owner-occupied by industry (a) | |||||||||||||||||||||||||||||||||
| Other services | 2,263 | 153 | 68 | 221 | 2,253 | 168 | 69 | 237 | |||||||||||||||||||||||||
| Motor vehicle and recreational finance dealers | 1,911 | 5 | 2 | 7 | 1,848 | — | 2 | 2 | |||||||||||||||||||||||||
| Retail | 1,697 | 53 | 34 | 87 | 1,688 | 66 | 11 | 77 | |||||||||||||||||||||||||
| Health services | 707 | 49 | 19 | 68 | 989 | 30 | 6 | 36 | |||||||||||||||||||||||||
| Wholesale | 991 | 37 | 2 | 39 | 978 | 19 | 2 | 21 | |||||||||||||||||||||||||
| Real estate investors | 904 | 45 | 21 | 66 | 732 | 50 | 23 | 73 | |||||||||||||||||||||||||
| Manufacturing | 871 | 69 | 23 | 92 | 841 | 52 | 23 | 75 | |||||||||||||||||||||||||
| Other | 1,150 | 28 | 24 | 52 | 1,167 | 49 | 23 | 72 | |||||||||||||||||||||||||
| Total owner-occupied | 10,494 | 439 | 193 | 632 | 10,496 | 434 | 159 | 593 | |||||||||||||||||||||||||
| Total commercial real estate | $ | 44,649 | $ | 6,719 | $ | 1,530 | $ | 8,249 | $ | 45,365 | $ | 6,989 | $ | 1,523 | $ | 8,512 |
(a)
Includes $417 million and $359 million of construction loans at June 30, 2023 and December 31, 2022, respectively.
Line of business personnel in different geographic locations with support from and review by the Company’s credit risk personnel review and reassign loan grades based on their detailed knowledge of individual borrowers and their judgment of the impact on such borrowers resulting from changing conditions in their respective regions. The Company’s policy is that, at least annually, updated financial information is obtained from commercial borrowers associated with pass grade loans and additional analysis performed. On a quarterly basis, the Company’s credit personnel review all criticized commercial loans and commercial real estate loans greater than $1 million to determine the appropriateness of the assigned loan grade, including whether the loan should be reported as accruing or
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nonaccruing. For criticized nonaccrual loans, additional meetings are held with loan officers and their managers, workout specialists and senior management to discuss each of the relationships. In analyzing criticized loans, borrower-specific information is reviewed, including operating results, future cash flows, recent developments and the borrower’s outlook, and other pertinent data. The timing and extent of potential losses, considering collateral valuation and other factors, and the Company’s potential courses of action are contemplated.
With regard to residential real estate loans, the Company’s loss identification and estimation techniques make reference to loan performance and house price data in specific areas of the country where collateral securing the Company’s residential real estate loans is located. For residential real estate-related loans, including home equity loans and lines of credit, the excess of the loan balance over the net realizable value of the property collateralizing the loan is charged-off when the loan becomes 150 days delinquent. That charge-off is based on recent indications of value from external parties that are generally obtained shortly after a loan becomes nonaccrual. Loans to consumers that file for bankruptcy are generally charged off to estimated net collateral value shortly after the Company is notified of such filings. At June 30, 2023, approximately 52% of the Company’s home equity portfolio consisted of first lien loans and lines of credit and 48% were junior liens. With respect to junior lien loans, to the extent known by the Company, if a related senior lien loan would be on nonaccrual status because of payment delinquency, even if such senior lien loan was not owned by the Company, the junior lien loan or line that is owned by the Company is placed on nonaccrual status. In monitoring the credit quality of its home equity portfolio for purposes of determining the allowance for credit losses, the Company reviews delinquency and nonaccrual information and considers recent charge-off experience. When evaluating individual home equity loans and lines of credit for charge off and for purposes of determining the allowance for credit losses, the Company gives consideration to the required repayment of any first lien positions related to collateral property. Home equity line of credit terms vary but such lines are generally originated with an open draw period of ten years followed by an amortization period of up to twenty years. At June 30, 2023 approximately 86% of all outstanding balances of home equity lines of credit related to lines that were still in the draw period, the weighted-average remaining draw periods were approximately five years, and approximately 16% were making contractually allowed payments that do not include any repayment of principal.
Factors that influence the Company’s credit loss experience include overall economic conditions affecting businesses and consumers, generally, but also residential and commercial real estate valuations, in particular, given the size of the Company’s real estate loan portfolios. Commercial real estate valuations can be highly subjective, as they are based upon many assumptions. Such valuations can be significantly affected over relatively short periods of time by changes in business climate, economic conditions, interest rates and, in many cases, the results of operations of businesses and other occupants of the real property. Similarly, residential real estate valuations can be impacted by housing trends, the availability of financing at reasonable interest rates and general economic conditions affecting consumers.
The Company generally estimates current expected credit losses on loans with similar risk characteristics on a collective basis. To estimate expected losses, the Company utilizes statistically developed models to project principal balances over the remaining contractual lives of the loan portfolios and determine estimated credit losses through a reasonable and supportable forecast period. The Company’s approach for estimating current expected credit losses for loans and leases at June 30, 2023, March 31, 2023, December 31, 2022 and June 30, 2022 included utilizing macroeconomic assumptions to project losses over a two-year reasonable and supportable forecast period. Subsequent to the forecast period, the Company reverted to longer-term historical loss experience, over a period of one year, to estimate expected credit losses over the remaining contractual life. Forward-looking estimates of certain macroeconomic variables are determined by the M&T Scenario Development Group, which is comprised of senior management business leaders and economists. Events posing emerging risks to the macroeconomic environment, such as international conflicts and other events, liquidity concerns, inflation and supply chain issues, are considered when developing economic forecasts even if the events do not directly and materially impact the Company’s financial results. Supply chain disruptions, inflationary pressures, liquidity trends or other peripheral impacts of global events may alter economic forecasts and the Company monitors this activity as part of its risk management procedures in assessing the allowance for credit losses. Among the assumptions utilized as of June 30, 2023 was that the national unemployment rate will average 4.6% through the reasonable and supportable forecast period. The forecast also assumed gross domestic product grows at a 0.8% average rate during the first year of the reasonable and supportable forecast period
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and at a 2.3% average rate in the second year. Commercial real estate and residential real estate prices were assumed to cumulatively contract 11.1% and 6.6%, respectively over the two-year reasonable and supportable forecast period. The assumptions utilized as of March 31, 2023 included an average national unemployment rate of 4.4% through the reasonable and supportable forecast period. The forecast also assumed gross domestic product would grow 1.0% during the first year of the reasonable and supportable forecast period followed by 2.4% in the second year. Commercial real estate prices were assumed to cumulatively contract 5.5% and residential real estate prices were assumed to contract 6.7% over the two-year reasonable and supportable forecast period. The assumptions utilized as of December 31, 2022 included an average national unemployment rate of 4.0% through the reasonable and supportable forecast period. The forecast also assumed gross domestic product would grow during the first year of the reasonable and supportable period at a 1.0% average annual rate followed by a 2.5% average rate in the second year. Commercial real estate prices were assumed to cumulatively grow 1.9% and residential real estate prices were assumed to contract 6.2% over the two-year reasonable and supportable forecast period. Among the assumptions utilized as of June 30, 2022 was that the national unemployment rate would average 3.4% through the reasonable and supportable forecast period. The forecast also assumed gross domestic product would grow at a 2.4% average rate during the first year of the reasonable and supportable forecast period and at a 2.9% average rate in the second year. Commercial real estate and residential real estate prices were assumed to cumulatively grow 11.6% and 0.4%, respectively, over the two-year reasonable and supportable forecast period. The assumptions utilized were based on the information available to the Company at or near June 30, 2023, March 31, 2023, December 31, 2022 and June 30, 2022 (at the time the Company was preparing its estimate of expected credit losses as of those dates).
In establishing the allowance for credit losses, the Company also considers the impact of portfolio concentrations, imprecision in economic forecasts, geopolitical conditions and other risk factors that might influence the loss estimation process. With respect to economic forecasts, the Company assessed the likelihood of alternative economic scenarios during the two-year reasonable and supportable time period. Generally, an increase in unemployment rate or a decrease in any of the rate of change in gross domestic product, commercial real estate prices or home prices could have an adverse impact on expected credit losses and may result in an increase to the allowance for credit losses. Forward looking economic forecasts are subject to inherent imprecision and future events may differ materially from forecasted events. In consideration of such uncertainty, the following alternative economic scenarios were considered to estimate the possible impact on modeled credit losses.
A potential downside economic scenario assumed the unemployment rate averages 7.1% in the reasonable and supportable forecast period. The scenario also assumed gross domestic product contracts 2.2% in the first year of the reasonable and supportable forecast period before recovering to 1.8% growth in the second year and commercial real estate and residential real estate prices cumulatively decline 27.4% and 15.0%, respectively, by the end of the reasonable and supportable forecast period.
A potential upside economic scenario assumed the unemployment rate averages approximately 3.3% for the duration of the reasonable and supportable forecast period. The scenario also assumes gross domestic product grows 3.3% in the initial year of the reasonable and supportable forecast period and 2.4% in the second year while commercial real estate prices cumulatively decline 3.2% and residential real estate prices cumulatively rise 0.5% over the two-year reasonable and supportable forecast period.
The scenario analyses resulted in an additional $471 million of modeled credit losses under the assumptions of the downside economic scenario, whereas under the assumptions of the upside economic scenario a $210 million reduction in modeled credit losses could occur. These examples are only a few of the numerous possible economic scenarios that could be utilized in assessing the sensitivity of expected credit losses. The estimated impacts on credit losses in such scenarios pertain only to modeled credit losses and do not include consideration of other factors the Company may evaluate when determining its allowance for credit losses.
As a result, it is possible that the Company may, at another point in time, reach different conclusions regarding credit loss estimates. The Company’s process for determining the allowance for credit losses undergoes quarterly and periodic evaluations by independent risk management personnel, which among many other considerations, evaluate the reasonableness of management’s methodology and significant assumptions. Further information about the Company’s methodology to estimate expected credit losses is included in note 4 of Notes to Financial Statements.
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Management believes that the allowance for credit losses at June 30, 2023 appropriately reflected expected credit losses inherent in the portfolio as of that date. The allowance for credit losses totaled $2.00 billion at June 30, 2023, compared with $1.82 billion at June 30, 2022, $1.93 billion at December 31, 2022 and $1.98 billion at March 31, 2023. As a percentage of loans outstanding, the allowance was 1.50% at June 30, 2023, 1.42% at June 30, 2022, 1.46% at December 31, 2022 and 1.49% at March 31, 2023. Using the same methodology described herein, the Company added $341 million to the allowance for credit losses related to the $35.8 billion of loans and leases obtained in the acquisition of People's United on April 1, 2022. Macroeconomic assumptions used to estimate credit losses on loans acquired from People's United were consistent with those used by the Company to estimate credit losses at March 31, 2022. The combined Company allowance for credit losses at April 1, 2022 as a percentage of loans outstanding was 1.42%. The level of the allowance reflects management’s evaluation of the loan and lease portfolio using the methodology and considering the factors as described herein. Should the various economic forecasts and credit factors considered by management in establishing the allowance for credit losses change and should management’s assessment of losses in the loan portfolio also change, the level of the allowance as a percentage of loans could increase or decrease in future periods. The reported level of the allowance reflects management’s evaluation of the loan and lease portfolio as of each respective date.
The ratio of the allowance for credit losses to total nonaccrual loans at June 30, 2023, June 30, 2022, December 31, 2022 and March 31, 2023 was 82%, 69%, 79% and 77%, respectively. Given the Company’s general position as a secured lender and its practice of charging off loan balances when collection is deemed doubtful, that ratio and changes in the ratio are generally not an indicative measure of the adequacy of the Company’s allowance for credit losses, nor does management rely upon that ratio in assessing the adequacy of the Company’s allowance for credit losses.
Other Income
Other income totaled $803 million in the second quarter of 2023, improved from $571 million in the year-earlier quarter and $587 million in the first quarter of 2023. For the first six months of 2023, other revenues totaled $1.39 billion compared with $1.11 billion for the similar 2022 period. The three-month and six-month periods ended June 30, 2023 reflect a $225 million gain on sale of the CIT business. The components of other income are presented in the accompanying table.
| Three Months Ended | Six Months Ended | |||||||||||||||||||
| June 30, 2023 | June 30, 2022 | March 31, 2023 | June 30, 2023 | June 30, 2022 | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Mortgage banking revenues | $ | 107,112 | $ | 82,926 | $ | 84,985 | $ | 192,097 | $ | 192,074 | ||||||||||
| Service charges on deposit accounts | 118,697 | 124,170 | 113,546 | 232,243 | 225,677 | |||||||||||||||
| Trust income | 172,463 | 190,084 | 193,802 | 366,265 | 359,297 | |||||||||||||||
| Brokerage services income | 25,126 | 24,138 | 24,041 | 49,167 | 44,328 | |||||||||||||||
| Trading account and non-hedging derivative gains | 16,754 | 2,293 | 11,675 | 28,429 | 7,662 | |||||||||||||||
| Gain (loss) on bank investment securities | 1,004 | (62 | ) | (416 | ) | 588 | (805 | ) | ||||||||||||
| Other revenues from operations | 362,015 | 147,551 | 159,500 | 521,515 | 283,754 | |||||||||||||||
| Total other income | $ | 803,171 | $ | 571,100 | $ | 587,133 | $ | 1,390,304 | $ | 1,111,987 |
Mortgage banking revenues were $107 million in the second quarter of 2023, compared with $83 million in the second quarter of 2022 and $85 million in the first quarter of 2023. Mortgage banking revenues are comprised of both residential and commercial mortgage banking activities. The Company’s involvement in commercial mortgage banking activities includes the origination, sales and servicing of loans under the multifamily loan programs of Fannie Mae, Freddie Mac and the U.S. Department of Housing and Urban Development.
Residential mortgage banking revenues, consisting of realized gains and losses from sales of residential real estate loans and loan servicing rights, unrealized gains and losses on residential real estate loans held for sale and related commitments, residential real estate loan servicing fees, and other residential real estate loan-related fees and income, were $77 million in the second quarter of 2023, $50 million in the similar quarter of 2022 and $55 million in the first quarter of 2023. That income reflects gains associated with residential mortgage loans originated for sale and loan servicing of $8 million and $69 million, respectively, in the recent quarter and $3 million and $52 million,
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respectively, in the first quarter of 2023, compared with losses on residential mortgage loans originated for sale of $17 million and income from loan servicing of $67 million in the year earlier quarter.
Throughout 2022, the Company originated the majority of its residential real estate loans for retention in its loan portfolio rather than for sale. However, in the first quarter of 2023 the Company returned to originating for sale the majority of its newly originated residential mortgage loans. New commitments to originate residential real estate loans to be sold were approximately $395 million in the second quarter of 2023, compared with $78 million in the year-earlier quarter and $276 million in the first quarter of 2023. Loans held for sale that were secured by residential real estate aggregated $216 million at June 30, 2023, $65 million at June 30, 2022 and $32 million at December 31, 2022. Commitments to sell residential real estate loans and commitments to originate residential real estate loans for sale at pre-determined rates totaled $393 million and $243 million, respectively, at June 30, 2023, compared with $84 million and $69 million, respectively, at June 30, 2022 and $53 million and $31 million, respectively, at December 31, 2022. Net recognized unrealized gains on residential real estate loans held for sale, commitments to sell loans, and commitments to originate loans for sale were $7 million at June 30, 2023 and less than $1 million at June 30, 2022, compared with net recognized unrealized losses of $1 million at December 31, 2022. Changes in net unrealized gains or losses are recorded in mortgage banking revenues and resulted in a net increase in revenues of $4 million in the recent quarter and $2 million in the first quarter of 2023, compared with a net decrease of $5 million in the second quarter of 2022.
Revenues from servicing residential real estate loans for others were $69 million during the quarter ended June 30, 2023, compared with $67 million and $52 million during the three months ended June 30, 2022 and March 31, 2023, respectively. The higher revenues from servicing residential real estate loans in the recent quarter as compared with the first quarter of 2023 reflect a $350 million bulk purchase of residential mortgage loan servicing rights associated with $19.5 billion of residential real estate loans on March 31, 2023. The increase in revenues in the recent quarter as compared with the year-earlier quarter also reflects that bulk purchase of residential mortgage loan servicing rights, partially offset by lower sub-servicing fees on modified loans with improved performance as compared with the year-earlier period. Residential real estate loans serviced for others totaled $153.7 billion at June 30, 2023, $102.5 billion at June 30, 2022 and $118.4 billion at December 31, 2022. Loans sub-serviced for others that were included in residential real estate loans serviced for others were $112.8 billion, $79.0 billion and $96.0 billion at June 30, 2023, June 30, 2022 and December 31, 2022, respectively. Revenues earned for sub-servicing loans totaled $32 million during each of the recent quarter and the first quarter of 2023, compared with $44 million in the second quarter of 2022. The decrease in sub-servicing fees in the two most recent quarters as compared with the second quarter of 2022 reflects lower fees associated with modifying and selling reperforming loans previously repurchased by the holder of the contractual servicing rights. The contractual servicing rights associated with loans sub-serviced by the Company were predominantly held by affiliates of Bayview Lending Group LLC ("BLG"). Information about the Company’s relationship with BLG and its affiliates is included in note 15 of Notes to Financial Statements. Capitalized residential mortgage servicing assets totaled $505 million at June 30, 2023, $215 million at June 30, 2022 and $194 million at December 31, 2022. The higher balance of capitalized mortgage servicing rights at June 30, 2023 as compared with June 30, 2022 and December 31, 2022 reflects the bulk purchase of residential mortgage loan servicing rights described herein.
Commercial mortgage banking revenues totaled $30 million in each of the second quarter of 2023 and the first quarter of 2023, compared with $33 million in the second quarter of 2022. Included in such amounts were revenues from loan origination and sales activities of $13 million in the second quarter of 2023, $14 million in the second quarter of 2022 and $15 million in the first quarter of 2023. Commercial real estate loans originated for sale to other investors were $940 million in the recent quarter, compared with $692 million in the second quarter of 2022 and $672 million in the first quarter of 2023. Loan servicing revenues totaled $17 million and $19 million in the second quarters of 2023 and 2022, respectively, compared with $15 million in the first quarter of 2023. Capitalized commercial mortgage servicing assets were $124 million and $130 million at June 30, 2023 and June 30, 2022, respectively, and $126 million at December 31, 2022. Commercial real estate loans serviced for other investors totaled $26.9 billion at June 30, 2023, $24.4 billion at June 30, 2022 and $26.0 billion at December 31, 2022. Those servicing amounts included $3.9 billion at each of June 30, 2023, June 30, 2022 and December 31, 2022 of loan balances for which investors had recourse to the Company if such balances are ultimately uncollectable. Included in commercial real estate loans serviced for others
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were loans sub-serviced for others of $3.8 billion at each of June 30, 2023 and December 31, 2022, compared with $3.6 billion at June 30, 2022. Commitments to sell commercial real estate loans and commitments to originate commercial real estate loans for sale were $632 million and $310 million, respectively, at June 30, 2023, $824 million and $569 million, respectively, at June 30, 2022 and $480 million and $349 million, respectively, at December 31, 2022. Commercial real estate loans held for sale at June 30, 2023, June 30, 2022 and December 31, 2022 were $322 million, $255 million and $131 million, respectively.
Service charges on deposit accounts were $119 million and $124 million in the second quarter of 2023 and 2022, respectively, compared with $114 million in the first quarter of 2023. The decline in the recent quarter as compared with the year-earlier quarter reflects a full quarter impact of the Company's planned elimination of certain non-sufficient funds fees and overdraft protection transfer charges from linked deposit accounts beginning in the second quarter of 2022. The $5 million increase in service charges on deposit accounts from the first quarter of 2023 reflects $3 million of increased commercial service charges and higher consumer service charges of $2 million.
Trust income includes fees related to two businesses. The Institutional Client Services (“ICS”) business provides a variety of trustee, agency, investment management and administrative services for corporations and institutions, investment bankers, corporate tax, finance and legal executives, and other institutional clients who: (i) use capital markets financing structures; (ii) use independent trustees to hold retirement plan and other assets; and (iii) need investment and cash management services. The Wealth Advisory Services (“WAS”) business offers personal trust, planning, fiduciary, asset management, family office and other services designed to help high net worth individuals and families grow, preserve, and transfer wealth. Trust income aggregated $172 million in the second quarter of 2023, compared with $190 million in the year-earlier quarter and $194 million in the first quarter of 2023. Revenues associated with the ICS business were $91 million, $109 million and $120 million during the quarters ended June 30, 2023, June 30, 2022 and March 31, 2023, respectively. In April 2023 M&T completed the divestiture of its CIT business through a sale to a private equity firm. The resulting decline in trust income associated with that business was $25 million and $31 million, respectively, when compared with 2022's second quarter and the first quarter of 2023. Higher money market fees on new and existing business partially offset the decline in CIT-related trust income as compared with the second quarter of 2022. Revenues attributable to the WAS business totaled $79 million in the three-month period ended June 30, 2023 and $78 million during the quarter ended June 30, 2022. Revenues from the WAS business were $73 million in the quarter ended March 31, 2023. The increase from the initial quarter of 2023 reflected seasonal tax service fees of $4 million. Reflective of the divestiture of the CIT business, trust assets under management declined to $78.5 billion at June 30, 2023 from $151.8 billion and $165.2 billion at June 30, 2022 and December 31, 2022, respectively. Trust assets under management include the Company’s proprietary mutual funds’ assets of $14.1 billion, $11.9 billion and $13.0 billion at June 30, 2023, June 30, 2022 and December 31, 2022, respectively. Additional trust income from investment management activities comprised of fees earned from retail customer investment accounts was $2 million in the second quarter of 2023, $3 million in the corresponding quarter of 2022, and $1 million in the first quarter of 2023.
Brokerage services income, which includes revenues from the sale of mutual funds and annuities, securities brokerage fees and select investment products of LPL Financial totaled $25 million in the second quarter of 2023 and $24 million in each of the second quarter of 2022 and the first quarter of 2023. Trading account and other non-hedging derivative activity resulted in gains of $17 million, $2 million and $12 million during the quarters ended June 30, 2023, June 30, 2022 and March 31, 2023, respectively. The increase in trading account and other non-hedging derivative gains in the recent quarter as compared with the year-earlier quarter and the first quarter of 2023 reflects higher revenues from interest rate swap agreements with commercial customers and comparative gains on assets related to the Company's supplemental executive retirement plans in the recent quarter. Information about the notional amount of interest rate, foreign exchange and other contracts entered into by the Company is included in note 10 of Notes to Financial Statements and herein under the heading “Taxable-equivalent Net Interest Income.” There were no significant net gains or losses on investment securities in each of the second quarter of 2023, the second quarter of 2022 and the first quarter of 2023.
Other revenues from operations were $362 million in the second quarter of 2023, compared with $148 million in the corresponding 2022 period and $160 million in the first quarter of 2023. A $225 million gain on the sale of CIT
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was recorded in the second quarter of 2023. Also included in other revenues from operations were the following significant components. Letter of credit and other credit-related fees aggregated $48 million in the recent quarter, compared with $38 million in the year-earlier quarter and $43 million in the first quarter of 2023. The higher revenues in the two most recent quarters as compared with 2022's second quarter reflect higher loan syndication fees. Revenues from merchant discount and credit card fees were $45 million in each of the second quarter of 2023 and 2022, compared with, $39 million in the first quarter of 2023. The lower merchant discount and credit card fees in the first quarter of 2023 as compared with the recent quarter and 2022's second quarter is reflective of seasonal declines in customer activity. Tax-exempt income from bank owned life insurance, which includes changes in the cash surrender value of life insurance policies and benefits received, totaled $14 million in each of the second quarter of 2023 and 2022, compared with $13 million in the first quarter of 2023. Insurance-related sales commissions and other revenues declined to $5 million in the quarter ended June 30, 2023 and $4 million in the first quarter of 2023 from $14 million in the second quarter of 2022 due to the sale of M&T Insurance Agency ("MTIA") in the fourth quarter of 2022. M&T received distributions as a result of its investment in BLG of $20 million in the first quarter of 2023. There was no similar distribution in the second quarter of 2023 or 2022.
Other income totaled $1.39 billion during the first six months of 2023, up from $1.11 billion during the year-earlier period. The increase as compared with the first half of 2022 was predominantly due to the gain on sale of the CIT business in April 2023 and the impact of one additional quarter of People's United-related revenues in the first half of 2023. Those positive factors were partially offset by a decrease in revenues resulting from the sales of the CIT business in April 2023 and of MTIA in October 2022 and from lower distributions from the Company's investment in BLG in the first half of 2023 as compared with the corresponding 2022 period.
Mortgage banking revenues totaled $192 million in each of the first six months of 2023 and 2022. Residential mortgage banking revenues aggregated $132 million and $126 million during the six-month periods ended June 30, 2023 and 2022, respectively. New commitments to originate residential real estate loans to be sold aggregated $671 million and $239 million in the initial six months of 2023 and 2022, respectively. Realized gains from sales of residential real estate loans and loan servicing rights and recognized unrealized gains and losses on residential real estate loans held for sale, commitments to originate loans for sale and commitments to sell loans aggregated to gains of $11 million in the first six months of 2023, compared with losses of $3 million in the first six months of 2022. The increase in volume and revenues reflect the Company’s decision in the first quarter of 2023 to return to selling the majority of recently originated residential mortgage loans rather than retaining such loans in its own portfolio. Revenues from servicing residential real estate loans for others were $121 million in the first half of 2023 and $129 million in the corresponding 2022 period. Included in servicing revenues were sub-servicing revenues aggregating $64 million and $86 million in the first six months of 2023 and 2022, respectively. For the six months ended June 30, commercial mortgage banking revenues were $60 million and $66 million in 2023 and 2022, respectively. Commercial real estate loans originated for sale to other investors totaled $1.6 billion and $1.3 billion during the six-month periods ended June 30, 2023 and 2022, respectively.
Service charges on deposit accounts aggregated $232 million during the first six months of 2023, compared with $226 million in the year-earlier period. Trust income totaled $366 million and $359 million during the first six months of 2023 and 2022, respectively. The increase in trust income in 2023 as compared with 2022, despite two less months of CIT-related trust income as a result of the sale of that business in April 2023, was largely due to the impact of one additional quarter of revenues associated with the People's United acquisition. Brokerage services income totaled $49 million in the first six months of 2023, compared with $44 million in the six-month period ended June 30, 2022. Trading account and non-hedging derivative gains were $28 million and $8 million, respectively, for the six-months ended June 30, 2023 and 2022, reflecting higher revenues from interest rate swap agreements with commercial customers and comparative gains on assets related to the Company's supplemental executive retirement plans in the first half of 2023. There were no significant net gains or losses on investment securities recognized during the first six months of 2023 and 2022.
Other revenues from operations totaled $522 million in the first six months of 2023, compared with $284 million in the year-earlier period. Other revenues from operations in the most recent six months include the $225 million gain on the sale of the CIT business. Other revenues from operations also include the following significant components.
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Letter of credit and other credit-related fees aggregated $91 million and $65 million in 2023 and 2022, respectively. The higher level of revenues in the recent period reflects higher loan syndication and line usage fees. Merchant discount and credit card fees were $84 million and $79 million in the first six months of 2023 and 2022, respectively. Income from bank owned life insurance totaled $27 million in the first six months of 2023, compared with $24 million in the corresponding 2022 period. Insurance-related commissions and other revenues aggregated $9 million and $29 million in the first six months of 2023 and 2022, respectively. The comparative decline reflects the sale of MTIA in October 2022. M&T’s investment in BLG resulted in income of $20 million in the first six months of 2023 and $30 million in the first half of 2022.
Other Expense
Other expense totaled $1.29 billion in the second quarter of 2023, compared with $1.40 billion in the year-earlier quarter and $1.36 billion in the first quarter of 2023. Included in those amounts are expenses considered to be “nonoperating” in nature consisting of amortization of core deposit and other intangible assets of $15 million in the recent quarter, $18 million in the second quarter of 2022 and $17 million in the first 2023 quarter, and merger-related expenses of $223 million in the second quarter of 2022. There were no merger-related expenses during the first and second quarters of 2023. Exclusive of those nonoperating expenses, noninterest operating expenses were $1.28 billion in the recent quarter, compared with $1.16 billion in the year-earlier quarter and $1.34 billion in the first quarter of 2023. Other expense for the first half of 2023 totaled $2.65 billion, compared with $2.36 billion in the year-earlier period. Included in those amounts are expenses considered to be “nonoperating” in nature consisting of amortization of core deposit and other intangible assets of $32 million and $20 million in the six-month periods ended June 30, 2023 and 2022, respectively, and merger-related expenses of $240 million during 2022's first half. There were no merger-related expenses recognized in 2023. Exclusive of those nonoperating expenses, noninterest operating expenses for the first half of 2023 were $2.62 billion, compared with $2.10 billion in the first six months of 2022. Table 2 provides a reconciliation of other expense to noninterest operating expense. The components of other expense are presented in the accompanying table.
| Three Months Ended | Six Months Ended | |||||||||||||||||||
| June 30, 2023 | June 30, 2022 | March 31, 2023 | June 30, 2023 | June 30, 2022 | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Salaries and employee benefits | $ | 737,665 | 776,201 | 807,942 | 1,545,607 | 1,353,721 | ||||||||||||||
| Equipment and net occupancy | 128,689 | 124,655 | 126,904 | 255,593 | 210,467 | |||||||||||||||
| Outside data processing and software | 106,438 | 93,820 | 105,780 | 212,218 | 173,539 | |||||||||||||||
| FDIC assessments | 27,932 | 22,585 | 29,758 | 57,690 | 38,161 | |||||||||||||||
| Advertising and marketing | 28,353 | 20,635 | 31,063 | 59,416 | 36,659 | |||||||||||||||
| Printing, postage and supplies | 14,199 | 15,570 | 14,183 | 28,382 | 25,720 | |||||||||||||||
| Amortization of core deposit and other intangible assets | 14,945 | 18,384 | 17,208 | 32,153 | 19,640 | |||||||||||||||
| Other costs of operations | 234,338 | 331,304 | 226,392 | 460,730 | 504,988 | |||||||||||||||
| Total other expense | $ | 1,292,559 | 1,403,154 | 1,359,230 | 2,651,789 | 2,362,895 |
Salaries and employee benefits expense totaled $738 million in the second quarter of 2023, compared with $776 million in the year-earlier quarter and $808 million in the first quarter of 2023. Excluding the nonoperating expense items described earlier, salaries and employee benefits expense totaled $691 million in the second quarter of 2022. The increase in salaries and employee benefits operating expense in the recent quarter as compared with the second quarter of 2022 reflects the impact of higher employee staffing levels and merit increases. Comparing the recent quarter with the first quarter of 2023, the effect of seasonally higher stock-based compensation, medical plan costs, payroll-related taxes and unemployment insurance that totaled $99 million in the initial 2023 quarter was partially offset by the full quarter impact of annual merit increases, higher average staffing levels and higher severance expense. During the first six months of 2023 and 2022, salaries and employee benefits expense aggregated $1.55 billion and $1.35 billion, respectively. Excluding nonoperating expenses described herein, salaries and employee benefits operating expense in the first half of 2022 totaled $1.27 billion. The higher operating expense level in 2023 largely reflects the addition of People's United employees at the beginning of the second quarter of 2022 and higher salaries resulting from an increase in legacy staffing levels, annual merit increases and a rise in incentive compensation, including stock-based compensation. The Company, in accordance with GAAP, has accelerated the recognition of compensation costs
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for stock-based awards. As a result, stock-based compensation expense during the first quarters of 2023 and 2022 included $41 million and $36 million, respectively, that would have been recognized over the normal vesting period if not for the accelerated recognition provisions of GAAP. That acceleration had no effect on the value of stock-based compensation awarded to employees. Salaries and employee benefits expense included stock-based compensation of $19 million, $23 million and $62 million in the three-month periods ended June 30, 2023, June 30, 2022 and March 31, 2023, respectively, and $81 million and $73 million during the six-month periods ended June 30, 2023 and 2022, respectively. The number of full-time equivalent employees was 22,946 at June 30, 2023, compared with 22,680 and 23,004 at June 30, 2022 and March 31, 2023, respectively.
Excluding the nonoperating expense items described earlier from each quarter, nonpersonnel operating expenses were $540 million, $471 million and $534 million in the quarters ended June 30, 2023, June 30, 2022 and March 31, 2023, respectively. On that same basis, such expenses were $1.07 billion and $835 million in the six-month periods ended June 30, 2023 and 2022, respectively. The increase in the recent quarter as compared with the second quarter of 2022 reflects increases in outside data processing and software costs, expenses related to the bulk purchase of residential mortgage loan servicing rights at the end of the first quarter of 2023 and check fraud losses, partially offset by a decline in professional and outside services expenses reflecting a decline in sub-advisory fees resulting from the sale of the CIT business in April 2023. The rise in non-personnel operating expenses in 2023’s second quarter as compared with 2023’s first quarter reflected an increase in expenses related to the bulk purchase of residential mortgage loan servicing rights, partially offset by a decline in professional services expenses primarily driven by a decline in sub-advisory fees resulting from the sale of the CIT business. In addition to the impact of an additional quarter of nonpersonnel operating expenses in 2023 associated with the People's United acquisition, the year-over-year increase reflects higher professional and outside services expenses, outside data processing and software costs, check fraud losses, deposit insurance and advertising and marketing costs.
On May 11, 2023, the Federal Deposit Insurance Corporation (“FDIC”) released a proposed rule that would impose a special assessment to recover the costs to the deposit insurance fund (“DIF”) resulting from the FDIC’s use, in March 2023, of the systemic risk exception in connection with the receiverships of Silicon Valley Bank and Signature Bank. Under the proposed rule, the assessment base would be the estimated uninsured deposits of an insured depository institution at December 31, 2022, excluding the first $5 billion of those estimated uninsured deposits. The special assessments would be collected at an annual rate of approximately 12.5 basis points per year (3.13 basis points per quarter) over eight quarters in 2024 and 2025, with the first assessment period beginning January 1, 2024. Under the proposed rule, the estimated loss pursuant to the systemic risk determination may be periodically adjusted by the FDIC. M&T expects the special assessments, as currently contemplated, would be tax deductible. Although the proposal could be revised, the total of the assessments for the Company is estimated at $183 million and such amount is expected to be recorded as an expense in the quarter of enactment. Such expense would significantly affect noninterest expense and results of operations for that future quarter. Refer to note 13 of Notes to Financial Statements for additional information on the FDIC special assessment.
The efficiency ratio, or noninterest operating expenses divided by the sum of taxable-equivalent net interest income and noninterest income (exclusive of gains and losses from bank investment securities), measures the relationship of noninterest operating expenses to revenues. The Company’s efficiency ratio was 48.9% during the recent quarter, compared with 58.3% and 55.5% in the second quarter of 2022 and first quarter of 2023, respectively. The efficiency ratios for the six-month periods ended June 30, 2023 and 2022 were 52.0% and 61.1%, respectively.
Income Taxes
Income tax expense was $293 million in the second quarter of 2023, compared with $60 million in the year-earlier quarter and $225 million in the first quarter of 2023. For the six-month periods ended June 30, 2023 and 2022, the provisions for income taxes were $517 million and $173 million, respectively. The effective tax rates were 25.2%, 21.7% and 24.2% for the quarters ended June 30, 2023, June 30, 2022 and March 31, 2023, respectively, and 24.8% and 23.0% for the six-month periods ended June 30, 2023 and 2022, respectively.
The effective tax rate is affected by the level of income earned that is exempt from tax relative to the overall level of pre-tax income, the amount of income allocated to the various state and local jurisdictions where the Company operates, because tax rates differ among such jurisdictions, and the impact of any large discrete or infrequently
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occurring items. The Company’s effective tax rate in future periods will also be affected by any change in income tax laws or regulations and interpretations of income tax regulations that differ from the Company’s interpretations by any of various tax authorities that may examine tax returns filed by M&T or any of its subsidiaries.
Capital
Shareholders’ equity was $25.8 billion at June 30, 2023, representing 12.42% of total assets, compared with $25.8 billion or 12.64% a year earlier and $25.3 billion or 12.61% at December 31, 2022. Shareholders' equity at each of the respective quarter ends reflects the issuance of 50,325,004 M&T common shares and other common equity consideration totaling $8.4 billion for the acquisition of People's United and the conversion of People's United preferred stock into 10,000,000 shares of Series H Perpetual Fixed-to-Floating Rate Non-cumulative Preferred Stock of M&T ("Series H Preferred Stock") amounting to $261 million on April 1, 2022. Included in shareholders’ equity was preferred stock with financial statement carrying values of $2.01 billion at each of June 30, 2023, December 31, 2022 and June 30, 2022.
Common shareholders’ equity was $23.8 billion, or $143.41 per share, at June 30, 2023, compared with $23.8 billion, or $135.16 per share, a year earlier and $23.3 billion, or $137.68 per share, at December 31, 2022. Tangible equity per common share, which excludes goodwill and core deposit and other intangible assets and applicable deferred tax balances, was $91.58 at the end of the recent quarter, compared with $85.78 at June 30, 2022 and $86.59 at December 31, 2022. The Company’s ratio of tangible common equity to tangible assets was 7.63% at each of June 30, 2023 and December 31, 2022, as compared with 7.73% at June 30, 2022. Reconciliations of total common shareholders’ equity and tangible common equity and total assets and tangible assets as of each of those dates are presented in table 2.
Shareholders’ equity reflects accumulated other comprehensive income or loss, which includes the net after-tax impact of unrealized gains or losses on investment securities classified as available for sale, remaining unrealized losses on held-to-maturity securities transferred from available for sale that have not yet been amortized, gains or losses associated with interest rate swap agreements designated as cash flow hedges, foreign currency translation adjustments and adjustments to reflect the funded status of defined benefit pension and other postretirement plans. Net unrealized losses on investment securities reflected in shareholders’ equity, net of applicable tax effect, were $328 million or $1.98 per common share at June 30, 2023, $129 million or $.73 per common share at June 30, 2022 and $329 million, or $1.94 per common share, at December 31, 2022. Changes in unrealized gains and losses on investment securities are predominantly reflective of the impact of changes in interest rates on the values of such securities. Information about unrealized gains and losses on investment securities as of June 30, 2023 and December 31, 2022 is included in note 3 of Notes to Financial Statements.
Reflected in the carrying amount of available-for-sale investment securities at June 30, 2023 were pre-tax effect unrealized gains of $234 thousand on securities with an amortized cost of $32 million and pre-tax effect unrealized losses of $441 million on securities with an amortized cost of $11.2 billion. Information concerning the Company’s fair valuations of investment securities is provided in notes 3 and 12 of Notes to Financial Statements.
Each reporting period the Company reviews its available-for-sale investment securities for declines in value that might be indicative of credit-related losses through an analysis of the creditworthiness of the issuer or the credit performance of the underlying collateral supporting the bond. If the Company does not expect to recover the entire amortized cost basis of a debt security a credit loss is recognized in the Consolidated Statement of Income. A loss is also recognized if the Company intends to sell a bond or it more likely than not will be required to sell a bond before recovery of the amortized cost basis. As of June 30, 2023, based on a review of each of the securities in the available-for-sale investment securities portfolio, the Company concluded that it expected to realize the amortized cost basis of each security. As of June 30, 2023, the Company did not intend to sell nor is it anticipated that it would be required to sell any securities for which fair value was less than the amortized cost basis of the security. The Company intends to continue to closely monitor the performance of its securities because changes in their underlying credit performance or other events could cause the amortized cost basis of those securities to become uncollectable.
Accounting guidance requires investment securities held to maturity to be presented at their net carrying value that is expected to be collected over their contractual term. The Company estimated no material credit losses for its
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investment securities classified as held-to-maturity at June 30, 2023 and December 31, 2022. The amortized cost basis of obligations of states and political subdivisions in the held-to-maturity portfolio totaled $2.5 billion at June 30, 2023 and $2.6 billion at December 31, 2022. At June 30, 2023 and December 31, 2022, the Company had in its held-to-maturity portfolio privately issued mortgage-backed securities with an amortized cost basis of $47 million and $50 million, respectively, and a fair value of $49 million and $51 million, respectively. At June 30, 2023, 82% of those mortgage-backed securities were in the most senior tranche of the securitization structure. The mortgage-backed securities are generally collateralized by residential and small-balance commercial real estate loans originated between 2004 and 2008. After considering the repayment structure and estimated future collateral cash flows of each individual bond, the Company concluded that as of June 30, 2023, it expected to recover the amortized cost basis of those privately issued mortgage-backed securities. Nevertheless, it is possible that adverse changes in the estimated future performance of mortgage loan collateral underlying such securities could impact the Company’s conclusions.
Adjustments to reflect the funded status of defined benefit pension and other postretirement plans, net of applicable tax effect, reduced accumulated other comprehensive income by $205 million or $1.24 per common share at June 30, 2023, $261 million or $1.48 per common share at June 30, 2022 and $202 million or $1.19 per common share at December 31, 2022.
Other adjustments, substantially comprised of net unrealized losses on interest rate swaps designated as cash flow hedges, reduced accumulated other comprehensive income by $332 million or $2.00 per common share at June 30, 2023, $116 million or $.66 per common share at June 30, 2022 and $259 million or $1.53 per common share at December, 31, 2022. Information about net unrealized losses on interest rate swaps designated as cash flow hedges is provided in note 10 of the Notes to Financial Statements.
On July 19, 2022, M&T's Board of Directors authorized a stock purchase program to repurchase up to $3.0 billion of common shares subject to all applicable regulatory reporting limitations. M&T repurchased 3,505,946 shares of its common stock for a total cost of $600 million under the program in the second quarter of 2022 and 3,838,157 shares for a total cost, including the share repurchase excise tax, of $600 million in the first quarter of 2023. No share repurchases occurred in the second quarter of 2023. Discretion as to the amount and timing of authorized share repurchases in a given period has been delegated, through the authorization of the Board of Directors, to management and can be influenced by capital and liquidity requirements, including funding of future loan growth and other balance sheet management activities, as well as market and economic conditions.
Cash dividends declared on M&T's common stock totaled $217 million in the recent quarter, compared with $215 million and $219 million in the quarters ended June 30, 2022 and March 31, 2023, respectively. Common stock dividends during the six-month periods ended June 30, 2023 and 2022 were $436 million and $371 million, respectively. Cash dividends declared on preferred stock aggregated $25 million during each of the first two quarters of 2023 and the second quarter of 2022. Preferred stock dividends totaled $50 million and $47 million during the first six months of 2023 and 2022, respectively.
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M&T and its subsidiary banks are required to comply with applicable capital adequacy standards established by the federal banking agencies. Pursuant to those regulations, the minimum capital ratios are as follows:
4.5% Common equity Tier 1 (“CET1”) to risk-weighted assets (each as defined in the capital regulations);
6.0% Tier 1 capital (that is, CET1 plus additional Tier 1 capital) to risk-weighted assets (each as defined in the capital regulations);
8.0% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets (each as defined in the capital regulations); and
4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the “leverage ratio”), as defined in the capital regulations.
Capital regulations require buffers in addition to the minimum risk-based capital ratios noted above. M&T is subject to a stress capital buffer requirement that is determined through the Federal Reserve’s supervisory stress tests and M&T’s bank subsidiaries are subject to a 2.5% capital conservation buffer requirement. The buffer requirement must be composed entirely of CET1. M&T's current stress capital buffer is 4.7%. In June 2023, the Federal Reserve released the results of its most recent supervisory stress tests. Based on those results, M&T's stress capital buffer is estimated to be 4.0% effective October 1, 2023.
The regulatory capital ratios of the Company and its bank subsidiaries, M&T Bank and Wilmington Trust, N.A., as of June 30, 2023 are presented in the accompanying table.
REGULATORY CAPITAL RATIOS
June 30, 2023
| M&T | M&T | Wilmington | ||||||||||
| (Consolidated) | Bank | Trust, N.A. | ||||||||||
| Common equity Tier 1 | 10.59 | % | 11.47 | % | 287.31 | % | ||||||
| Tier 1 capital | 11.91 | % | 11.47 | % | 287.31 | % | ||||||
| Total capital | 13.71 | % | 13.01 | % | 287.67 | % | ||||||
| Tier 1 leverage | 9.25 | % | 8.89 | % | 89.22 | % |
The Company is subject to the comprehensive regulatory framework applicable to bank and financial holding companies and their subsidiaries, which includes examinations by a number of regulators. Regulation of financial institutions such as M&T and its subsidiaries is intended primarily for the protection of depositors, the DIF of the FDIC and the banking and financial system as a whole, and generally is not intended for the protection of shareholders, investors or creditors other than insured depositors. Changes in laws, regulations and regulatory policies applicable to the Company’s operations can increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive environment in which the Company operates, all of which could have a material effect on the business, financial condition or results of operations of the Company and in M&T’s ability to pay dividends. For additional information concerning this comprehensive regulatory framework, refer to Part I, Item 1 of M&T’s Form 10-K for the year ended December 31, 2022.
On July 27, 2023 the federal banking agencies issued a notice of proposed rulemaking to modify the regulatory capital requirements applicable to large banking organizations with over $100 billion of total assets and their depository institution subsidiaries. The proposed rule would generally require banking organizations subject to Category III and IV standards, like the Company, to compute their regulatory capital consistent with Category I and II standards. Management is in the process of evaluating the impact of the proposed rule on the regulatory capital requirements of M&T and its subsidiary banks.
Segment Information
The Company's reportable segments have been determined based upon its internal profitability reporting system, which is organized by strategic business unit. Financial information about the Company's segments is presented in note 14 of Notes to Financial Statements. The reportable segments are Business Banking, Commercial Banking, Commercial Real Estate, Discretionary Portfolio, Residential Mortgage Banking and Retail Banking. As described in the
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Company’s Form 10-K for the year ended December 31, 2022, certain lending relationships within the hospitality sector were realigned from the Commercial Banking segment to the Commercial Real Estate segment and certain expenses were reallocated from the All Other segment to various reportable segments in the fourth quarter of 2022. During 2022, the Company also realigned certain acquired operations associated with People's United primarily consisting of reclassifications of certain revenues and expenses to the Commercial Banking segment from other reportable segments. The results and analysis provided herein are reflective of those changes.
The Business Banking segment recorded net income of $116 million in the second quarter of 2023, compared with $68 million and $113 million, respectively, in the periods ended June 30, 2022 and March 31, 2023. As compared with the year-earlier quarter, the increase was predominantly due to higher net interest income of $73 million reflecting a comparatively higher interest rate environment in the recent quarter, partially offset by a $7 million increase in centrally-allocated costs associated with data processing, risk management and other support services provided to the Business Banking segment. The higher net interest income reflected a 224 basis point widening of the net interest margin on deposits, partially offset by a 106 basis point narrowing of the net interest margin on loans and a decline in average outstanding deposit balances of $5.0 billion. As compared with the first quarter of 2023, the modest increase in net income in the recent quarter was attributable to a $4 million decrease in the provision for credit losses. Net income recorded by the Business Banking segment was $229 million in the first six months of 2023, compared with $107 million in the year-earlier period. Reflecting the impact of one additional quarter of People’s United-related operations, that 114% improvement resulted from a $199 million rise in net interest income, partially offset by a $23 million increase in centrally-allocated costs associated with data processing, risk management and other support services and higher personnel-related costs of $10 million. The increase in net interest income reflected a widening of the net interest margin on deposits of 232 basis points, partially offset by a narrowing of the net interest margin on loans of 116 basis points.
Net income earned by the Commercial Banking segment totaled $166 million during the quarter ended June 30, 2023, $162 million in the year-earlier quarter and $220 million in the first quarter of 2023. The increase in net income as compared with the second quarter of 2022 reflected higher credit-related and other fees of $12 million and a lower provision for credit losses of $7 million, largely offset by a $19 million increase in centrally-allocated costs associated with data processing, risk management and other support services provided to the Commercial Banking segment. The recent quarter’s 25% decline in net income as compared with the initial 2023 quarter was largely due to lower net interest income of $47 million, a $15 million increase in the provision for credit losses and a $10 million rise in centrally-allocated costs associated with data processing, risk management and other support services. The recent quarter’s decline in net interest income as compared with the first quarter of 2023 reflected a narrowing of the interest margin on loans and deposits of 31 and 14 basis points, respectively, and a decrease in average outstanding deposit balances of $2.5 billion, partially offset by higher average outstanding loan balances of $2.0 billion. The Commercial Banking segment contributed $386 million of net income in the first half of 2023, up from $290 million earned in the similar 2022 period. Contributing to that rise was a $179 million increase in net interest income and higher credit-related fees of $34 million, partially offset by higher centrally-allocated costs associated with data processing, risk management and other support services of $59 million and increases in personnel-related costs of $37 million, all reflecting one additional quarter of People’s United-related activity. The higher net interest income in the first half of 2023 was driven by a widening of the net interest margin on deposits of 157 basis points and higher average outstanding loan balances of $13.2 billion, partially offset by a 43 basis point narrowing of the net interest margin on loans and lower average outstanding deposit balances of $5.0 billion.
The Commercial Real Estate segment contributed net income of $39 million in the recent quarter, compared with $118 million in the second quarter of 2022 and $81 million in the initial 2023 quarter. The decline as compared with the second quarter of 2022 reflects a rise in the provision for credit losses of $68 million, a $25 million decrease in net interest income and higher centrally-allocated costs associated with data processing, risk management and other support services provided to the Commercial Real Estate segment of $11 million. The lower net interest income was driven by a 38 basis point narrowing of the net interest margin on loans and decreases in average outstanding balances of deposits and loans of $2.5 billion and $1.8 billion, respectively, partially offset by a widening of the net interest margin on deposits of 142 basis points. The decline in the recent quarter’s net income as compared with the first quarter of 2023 was driven by a $43 million increase in the provision for credit losses and lower net interest income of $8
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million. The increase in the provision for credit losses in the recent quarter as compared with the year-earlier quarter and 2023’s first quarter reflects higher net charge-offs. Net income earned by the Commercial Real Estate segment totaled $120 million during the six-month period ended June 30, 2023, compared with $229 million in the corresponding 2022 period. The factors contributing to that decline included: a $106 million increase in the provision for credit losses, reflecting higher net charge-offs; a $30 million rise in centrally-allocated costs associated with data processing, risk management and other support services; and a $14 million decline in net interest income reflecting the narrowing of the net interest margin on loans of 52 basis points. Those unfavorable factors were partially offset by a widening of the net interest margin on deposits of 165 basis points and higher average outstanding balances of loans of $2.4 billion.
The Discretionary Portfolio segment recorded net losses of $32 million in the recent quarter and $40 million in the initial 2023 quarter, compared with net income of $44 million in the second quarter of 2022. As compared with 2022’s second quarter, the recent quarter’s results reflected a decline in net interest income of $117 million, driven by increased interest expense from interest rate swap agreements utilized as part of the Company’s management of interest rate risk, partially offset by a $19 million decrease in intersegment fees paid to the Residential Mortgage Banking segment reflecting the Company’s return in the first quarter of 2023 to originating for sale the majority of its newly originated residential mortgage loans, and favorable trading and non-hedging derivative gains of $6 million. The reduction in net loss in the recent quarter as compared with the immediately preceding quarter was attributable to a $5 million increase in net interest income. In the first six months of 2023, the Discretionary segment recorded a net loss of $72 million, compared with net income of $79 million in the comparable 2022 period. The year-over-year decline was predominantly the result of a $226 million decrease in net interest income reflecting the Company’s management of interest rate risk through interest rate swap agreements, offset, in part, by lower intersegment fees paid to the Residential Mortgage Banking segment of $28 million and favorable trading and non-hedging derivative gains of $7 million.
The Residential Mortgage Banking segment recorded net losses of $15 million and $12 million, respectively, during the quarters ended June 30, 2023 and March 31, 2023, compared with net income of $8 million in the quarter ended June 30, 2022. As compared with the year-earlier period, the net loss in the recent quarter reflects lower net interest income of $11 million. The modest increase in net loss from the first quarter of 2023 was driven by higher personnel-related costs (including severance and overtime salary expenses) of $6 million. The Residential Mortgage Banking segment recorded a net loss of $27 million in the first six months of 2023, compared with net income of $35 million in the corresponding 2022 period. Factors attributable to the net loss included a decline in net interest income of $30 million and lower revenues associated with mortgage origination and sales activities (including intersegment revenues) of $27 million, partially offset by a $7 million decline in centrally-allocated costs associated with data processing, risk management and other support services provided to the Residential Mortgage Banking segment and $5 million of lower personnel-related costs.
Net income earned by the Retail Banking segment totaled $336 million in the second quarter of 2023, compared with $105 million in the year-earlier quarter and $317 million in the first quarter of 2023. The improvement in the recent quarter as compared with the second quarter of 2022 included higher net interest income of $351 million reflecting a 226 basis point widening of the net interest margin on deposits, partially offset by a $5.6 billion decline in average outstanding balances in deposits. Those beneficial results were partially offset by higher personnel-related costs and a rise in the provision for credit losses of $14 million each, and a $6 million decline in service charges on deposit accounts. As compared with the immediately preceding quarter, the $20 million increase in net income was driven by higher net interest income of $29 million, declines of $5 million each in the provision for credit losses and check fraud and other losses. Those favorable factors were partially offset by a $20 million increase in centrally-allocated costs associated with data processing, risk management and other support services provided to the Retail Banking segment. The rise in net interest income was predominantly due to a 21 basis point widening in the net interest margin on deposits, partially offset by a 9 basis point narrowing of the net interest margin on loans. Net income recorded by the Retail Banking segment totaled $653 million in the first half of 2023 and $184 million in 2022. The most significant factor contributing to that 255% increase in net income was an $822 million increase in net interest income, reflecting a widening of the net interest margin on deposits of 229 basis points and higher average outstanding balances of deposits of $7.2 billion due, in part, to deposits assumed on April 1, 2022 in the People’s United transaction.
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Partially offsetting that favorable factor was an increase in personnel-related costs of $77 million, a higher provision for credit losses of $33 million due to higher net charge-offs, a $29 million rise in equipment and occupancy costs, an increase in check fraud and other losses of $23 million and higher centrally-allocated costs associated with data processing, risk management and other support services of $9 million. Higher levels of expenses in the first half of 2023 reflect an additional three months of operations related to People’s United as compared with the year-earlier period.
The “All Other” category reflects other activities of the Company that are not directly attributable to the reported segments. Reflected in this category are the amortization of core deposit and other intangible assets resulting from the acquisitions of financial institutions, distributions from BLG, merger-related expenses resulting from acquisitions, and the net impact of the Company’s allocation methodologies for internal transfers for funding charges and credits associated with the earning assets and interest-bearing liabilities of the Company’s reportable segments and the provision for credit losses. The “All Other” category also includes income from the Company's ICS and WAS business activities. The various components of the “All Other” category resulted in net income of $256 million for the quarter ended June 30, 2023, compared with a net loss of $287 million in the second quarter of 2022 and net income of $24 million and first quarter of 2023. The $543 million favorable change from the year-earlier quarter reflected the $225 million gain on sale of the CIT business in April 2023, a decrease to the provision for credit losses of $223 million reflecting a $242 million provision for credit losses in the second quarter of 2023 on loans acquired from People’s United not deemed to be PCD, a $116 million increase in net interest income attributable to an increased net interest margin of 222 basis points on deposits related to the ICS and WAS businesses, a favorable impact from the Company’s allocation methodologies for internal transfers for funding charges and credits associated with earning assets and interest-bearing liabilities of the Company’s reportable segments, and merger-related expenses associated with acquisition of People’s United that were incurred in the second quarter of 2022. No merger-related expenses were incurred in the recent quarter. The increase in net income in the second quarter of 2023 as compared with the immediately preceding quarter reflected the gain on sale of the CIT business, a decrease in personnel-related expenses of $74 million predominantly due to seasonal stock compensation and employee benefits expenses recorded in the first quarter of 2023 and a decline in the provision for credit losses of $17 million, partially offset by income received from BLG of $20 million in the first quarter of 2023. The “All Other” category had a net gain of $280 million for the six months ended June 30, 2023, compared with a net loss of $345 million recorded in the corresponding prior year period. The improved performance in 2023 was attributable to the following factors: a $373 million increase in net interest income attributable to a 234 basis point widening in net interest margin on deposits, the $225 million gain on the sale of the CIT business; a decrease in the provision for credit losses of $184 million reflecting a $242 million provision for credit losses in the second quarter of 2023 on loans acquired from People’s United not deemed to be PCD; lower merger-related costs associated with People’s United; and the favorable impact from the Company's allocation methodologies for internal transfers for funding charges and credits associated with earnings assets and interest-bearing liabilities of the Company's reportable segments. Increased expenses generally resulting from one additional quarter of operations from People’s United partially offset those favorable factors.
Other Matters
As widely reported a global cybersecurity incident involving MOVEit, a file transfer software owned by Progress Software Corporation, occurred in May 2023. The software is used by thousands of public and private sector entities around the world. This incident resulted in the potential exposure of customer information for any organization using MOVEit. It was determined that no information was obtained from the Company’s internal systems and these systems were not at risk from the MOVEit incident, however, certain customer information available at some of the Company's external service providers was compromised. The Company has begun notifying its affected customers of this incident. The Company does not believe this incident will have a material impact on its business, operations or consolidated financial statements.
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Recent Accounting Developments
A discussion of recent accounting developments is included in note 16 of Notes to Financial Statements.
Forward-Looking Statements
Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this quarterly report contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the rules and regulations of the SEC. Any statement that does not describe historical or current facts is a forward-looking statement, including statements based on current expectations, estimates and projections about the Company’s business, management's beliefs and assumptions made by management.
Statements regarding the potential effects of events or factors specific to the Company and/or the financial industry as a whole, as well as national and global events generally, including economic conditions, on the Company's business, financial condition, liquidity and results of operations may constitute forward-looking statements. Such statements are subject to the risk that the actual effects may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable and in many cases beyond the Company's control.
Forward-looking statements are typically identified by words such as "believe," "expect," "anticipate," "intend," "target," "estimate," "continue," or "potential," by future conditional verbs such as "will," "would," "should," "could," or "may," or by variations of such words or by similar expressions. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions ("Future Factors") which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements.
Examples of Future Factors include: the impact of the Company's acquisition of People's United (as described in the next paragraph); events and developments in the financial services industry, including legislation, regulations and other governmental actions as well as business conditions affecting the industry and/or M&T and its subsidiaries, individually or collectively; economic conditions, including inflation and market volatility; changes in interest rates, spreads on earning assets and interest-bearing liabilities, and interest rate sensitivity; prepayment speeds, loan originations, credit losses and market values on loans, collateral securing loans, and other assets; sources of liquidity; common shares outstanding; common stock price volatility; fair value of and number of stock-based compensation awards to be issued in future periods; the impact of changes in market values on trust-related revenues; regulatory supervision and oversight, including monetary policy and capital requirements; domestic or international political developments and other geopolitical events, including international conflicts; governmental and public policy changes, including tax policy; the outcome of pending and future litigation and governmental proceedings, including tax-related examinations and other matters; changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board, regulatory agencies or legislation; increasing price, product and service competition by competitors, including new entrants; rapid technological developments and changes; the ability to continue to introduce competitive new products and services on a timely, cost-effective basis; the mix of products and services; containing costs and expenses; protection and validity of intellectual property rights; reliance on large customers; technological, implementation and cost/financial risks in large, multi-year contracts; continued availability of financing; financial resources in the amounts, at the times and on the terms required to support M&T and its subsidiaries' future businesses; and material differences in the actual financial results of merger, acquisition, divestment and investment activities compared with M&T's initial expectations, including the full realization of anticipated cost savings and revenue enhancements.
In addition, Future Factors related to the acquisition of People's United include, among others: the possibility that the anticipated benefits of the transaction will not be realized when expected or at all; potential adverse reactions or changes to business, customer or employee relationships; the Company's success in executing its business plans and strategies and managing the risks involved in the foregoing; the results and costs of integration efforts; the business, economic and political conditions in the markets in which M&T and its subsidiaries operate; the outcome of any legal proceedings that may be instituted against M&T or its subsidiaries; and other factors related to the acquisition that may affect future results of the Company.
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These are representative of the Future Factors that could affect the outcome of the forward-looking statements. In addition, as noted, such statements could be affected by general industry and market conditions and growth rates, general economic and political conditions, either nationally or in the states in which M&T and its subsidiaries do business, including interest rate and currency exchange rate fluctuations, changes and trends in the securities markets, and other Future Factors.
M&T provides further detail regarding these risks and uncertainties in its Form 10-K for the year ended December 31, 2022, including in the Risk Factors section of such report, as well as in other SEC filings. Forward-looking statements speak only as of the date made, and M&T does not assume any duty and does not undertake to update forward-looking statements.
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M&T BANK CORPORATION AND SUBSIDIARIES
Table 1
QUARTERLY TRENDS
| 2023 Quarters | 2022 Quarters | |||||||||||||||||||||||
| Second | First | Fourth | Third | Second | First | |||||||||||||||||||
| Earnings and dividends | ||||||||||||||||||||||||
| Amounts in thousands, except per share | ||||||||||||||||||||||||
| Interest income (taxable-equivalent basis) | $ | 2,529,511 | 2,340,447 | 2,085,594 | 1,793,340 | 1,475,868 | 931,490 | |||||||||||||||||
| Interest expense | 716,496 | 508,721 | 244,835 | 102,822 | 53,425 | 24,082 | ||||||||||||||||||
| Net interest income | 1,813,015 | 1,831,726 | 1,840,759 | 1,690,518 | 1,422,443 | 907,408 | ||||||||||||||||||
| Less: provision for credit losses | 150,000 | 120,000 | 90,000 | 115,000 | 302,000 | 10,000 | ||||||||||||||||||
| Other income | 803,171 | 587,133 | 681,537 | 563,079 | 571,100 | 540,887 | ||||||||||||||||||
| Less: other expense | 1,292,559 | 1,359,230 | 1,408,288 | 1,279,253 | 1,403,154 | 959,741 | ||||||||||||||||||
| Income before income taxes | 1,173,627 | 939,629 | 1,024,008 | 859,344 | 288,389 | 478,554 | ||||||||||||||||||
| Applicable income taxes | 292,707 | 224,543 | 245,252 | 200,921 | 60,141 | 113,146 | ||||||||||||||||||
| Taxable-equivalent adjustment | 13,886 | 13,462 | 13,385 | 11,827 | 10,726 | 3,234 | ||||||||||||||||||
| Net income | $ | 867,034 | 701,624 | 765,371 | 646,596 | 217,522 | 362,174 | |||||||||||||||||
| Net income available to common shareholders-diluted | $ | 840,524 | 675,511 | 739,126 | 620,554 | 192,236 | 339,590 | |||||||||||||||||
| Per common share data | ||||||||||||||||||||||||
| Basic earnings | $ | 5.07 | 4.03 | 4.32 | 3.55 | 1.08 | 2.63 | |||||||||||||||||
| Diluted earnings | 5.05 | 4.01 | 4.29 | 3.53 | 1.08 | 2.62 | ||||||||||||||||||
| Cash dividends | $ | 1.30 | 1.30 | 1.20 | 1.20 | 1.20 | 1.20 | |||||||||||||||||
| Average common shares outstanding | ||||||||||||||||||||||||
| Basic | 165,842 | 167,732 | 171,187 | 174,609 | 177,367 | 128,945 | ||||||||||||||||||
| Diluted | 166,320 | 168,410 | 172,149 | 175,682 | 178,277 | 129,416 | ||||||||||||||||||
| Performance ratios, annualized | ||||||||||||||||||||||||
| Return on | ||||||||||||||||||||||||
| Average assets | 1.70 | % | 1.40 | % | 1.53 | % | 1.28 | % | .42 | % | .97 | % | ||||||||||||
| Average common shareholders’ equity | 14.27 | % | 11.74 | % | 12.59 | % | 10.43 | % | 3.21 | % | 8.55 | % | ||||||||||||
| Net interest margin on average earning assets (taxable-equivalent basis) | 3.91 | % | 4.04 | % | 4.06 | % | 3.68 | % | 3.01 | % | 2.65 | % | ||||||||||||
| Nonaccrual loans to total loans and leases, net of unearned discount | 1.83 | % | 1.92 | % | 1.85 | % | 1.89 | % | 2.05 | % | 2.32 | % | ||||||||||||
| Net operating (tangible) results (a) | ||||||||||||||||||||||||
| Net operating income (in thousands) | $ | 878,661 | 714,935 | 812,359 | 700,030 | 577,622 | 375,999 | |||||||||||||||||
| Diluted net operating income per common share | $ | 5.12 | 4.09 | 4.57 | 3.83 | 3.10 | 2.73 | |||||||||||||||||
| Annualized return on | ||||||||||||||||||||||||
| Average tangible assets | 1.80 | % | 1.49 | % | 1.70 | % | 1.44 | % | 1.16 | % | 1.04 | % | ||||||||||||
| Average tangible common shareholders’ equity | 22.73 | % | 19.00 | % | 21.29 | % | 17.89 | % | 14.41 | % | 12.44 | % | ||||||||||||
| Efficiency ratio (b) | 48.9 | % | 55.5 | % | 53.3 | % | 53.6 | % | 58.3 | % | 64.9 | % | ||||||||||||
| Balance sheet data | ||||||||||||||||||||||||
| In millions, except per share | ||||||||||||||||||||||||
| Average balances | ||||||||||||||||||||||||
| Total assets (c) | $ | 204,376 | 202,599 | 198,592 | 201,131 | 208,865 | 151,648 | |||||||||||||||||
| Total tangible assets (c) | 195,764 | 193,957 | 189,934 | 192,450 | 200,170 | 147,053 | ||||||||||||||||||
| Earning assets | 185,936 | 184,069 | 179,914 | 182,382 | 189,755 | 138,624 | ||||||||||||||||||
| Investment securities | 28,623 | 27,622 | 25,297 | 23,945 | 22,384 | 7,724 | ||||||||||||||||||
| Loans and leases, net of unearned discount | 133,545 | 132,012 | 129,406 | 127,525 | 127,599 | 92,159 | ||||||||||||||||||
| Deposits | 159,399 | 161,537 | 163,468 | 167,271 | 174,683 | 128,055 | ||||||||||||||||||
| Common shareholders’ equity (c) | 23,674 | 23,366 | 23,335 | 23,654 | 24,079 | 16,144 | ||||||||||||||||||
| Tangible common shareholders’ equity (c) | 15,062 | 14,724 | 14,677 | 14,973 | 15,384 | 11,549 | ||||||||||||||||||
| At end of quarter | ||||||||||||||||||||||||
| Total assets (c) | $ | 207,672 | 202,956 | 200,730 | 197,955 | 204,033 | 149,864 | |||||||||||||||||
| Total tangible assets (c) | 199,074 | 194,321 | 192,082 | 189,281 | 195,344 | 145,269 | ||||||||||||||||||
| Earning assets | 188,504 | 183,853 | 181,855 | 178,351 | 185,109 | 137,237 | ||||||||||||||||||
| Investment securities | 27,916 | 28,443 | 25,211 | 24,604 | 22,802 | 9,357 | ||||||||||||||||||
| Loans and leases, net of unearned discount | 133,344 | 132,938 | 131,564 | 128,226 | 128,486 | 91,808 | ||||||||||||||||||
| Deposits | 162,058 | 159,075 | 163,515 | 163,845 | 170,358 | 126,319 | ||||||||||||||||||
| Common shareholders’ equity (c) | 23,790 | 23,366 | 23,307 | 23,245 | 23,784 | 16,126 | ||||||||||||||||||
| Tangible common shareholders’ equity (c) | 15,192 | 14,731 | 14,659 | 14,571 | 15,095 | 11,531 | ||||||||||||||||||
| Equity per common share | 143.41 | 140.88 | 137.68 | 134.45 | 135.16 | 124.93 | ||||||||||||||||||
| Tangible equity per common share | 91.58 | 88.81 | 86.59 | 84.28 | 85.78 | 89.33 |
(a)
Excludes amortization and balances related to goodwill and core deposit and other intangible assets and merger-related expenses which, except in the calculation of the efficiency ratio, are net of applicable income tax effects. A reconciliation of net income and net operating income appears in Table 2.
(b)
Excludes impact of merger-related expenses and net securities transactions.
(c)
The difference between total assets and total tangible assets, and common shareholders’ equity and tangible common shareholders’ equity, represents goodwill, core deposit and other intangible assets, net of applicable deferred tax balances. A reconciliation of such balances appears in Table 2.
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M&T BANK CORPORATION AND SUBSIDIARIES
Table 2
RECONCILIATION OF QUARTERLY GAAP TO NON-GAAP MEASURES
| 2023 Quarters | 2022 Quarters | |||||||||||||||||||||||
| Second | First | Fourth | Third | Second | First | |||||||||||||||||||
| Income statement data (in thousands, except per share) | ||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||
| Net income | $ | 867,034 | 701,624 | 765,371 | 646,596 | 217,522 | 362,174 | |||||||||||||||||
| Amortization of core deposit and other intangible assets (a) | 11,627 | 13,311 | 13,559 | 14,141 | 14,138 | 933 | ||||||||||||||||||
| Merger-related expenses (a) | — | — | 33,429 | 39,293 | 345,962 | 12,892 | ||||||||||||||||||
| Net operating income | $ | 878,661 | 714,935 | 812,359 | 700,030 | 577,622 | 375,999 | |||||||||||||||||
| Earnings per common share | ||||||||||||||||||||||||
| Diluted earnings per common share | $ | 5.05 | 4.01 | 4.29 | 3.53 | 1.08 | 2.62 | |||||||||||||||||
| Amortization of core deposit and other intangible assets (a) | 0.07 | .08 | .08 | .08 | .08 | .01 | ||||||||||||||||||
| Merger-related expenses (a) | — | — | .20 | .22 | 1.94 | .10 | ||||||||||||||||||
| Diluted net operating earnings per common share | $ | 5.12 | 4.09 | 4.57 | 3.83 | 3.10 | 2.73 | |||||||||||||||||
| Other expense | ||||||||||||||||||||||||
| Other expense | $ | 1,292,559 | 1,359,230 | 1,408,288 | 1,279,253 | 1,403,154 | 959,741 | |||||||||||||||||
| Amortization of core deposit and other intangible assets | (14,945 | ) | (17,208 | ) | (17,600 | ) | (18,384 | ) | (18,384 | ) | (1,256 | ) | ||||||||||||
| Merger-related expenses | — | — | (45,113 | ) | (53,027 | ) | (222,809 | ) | (17,372 | ) | ||||||||||||||
| Noninterest operating expense | $ | 1,277,614 | 1,342,022 | 1,345,575 | 1,207,842 | 1,161,961 | 941,113 | |||||||||||||||||
| Merger-related expenses | ||||||||||||||||||||||||
| Salaries and employee benefits | $ | — | — | 3,670 | 13,094 | 85,299 | 87 | |||||||||||||||||
| Equipment and net occupancy | — | — | 2,294 | 2,106 | 502 | 1,807 | ||||||||||||||||||
| Outside data processing and software | — | — | 2,193 | 2,277 | 716 | 252 | ||||||||||||||||||
| Advertising and marketing | — | — | 5,258 | 2,177 | 1,199 | 628 | ||||||||||||||||||
| Printing, postage and supplies | — | — | 2,953 | 651 | 2,460 | 722 | ||||||||||||||||||
| Other costs of operations | — | — | 28,745 | 32,722 | 132,633 | 13,876 | ||||||||||||||||||
| Other expense | — | — | 45,113 | 53,027 | 222,809 | 17,372 | ||||||||||||||||||
| Provision for credit losses | — | — | — | — | 242,000 | — | ||||||||||||||||||
| Total | $ | — | $ | — | 45,113 | 53,027 | 464,809 | 17,372 | ||||||||||||||||
| Efficiency ratio | ||||||||||||||||||||||||
| Noninterest operating expense (numerator) | $ | 1,277,614 | 1,342,022 | 1,345,575 | 1,207,842 | 1,161,961 | 941,113 | |||||||||||||||||
| Taxable-equivalent net interest income | $ | 1,813,015 | 1,831,726 | 1,840,759 | 1,690,518 | 1,422,443 | 907,408 | |||||||||||||||||
| Other income | 803,171 | 587,133 | 681,537 | 563,079 | 571,100 | 540,887 | ||||||||||||||||||
| Less: Gain (loss) on bank investment securities | 1,004 | (416 | ) | (3,773 | ) | (1,108 | ) | (62 | ) | (743 | ) | |||||||||||||
| Denominator | $ | 2,615,182 | 2,419,275 | 2,526,069 | 2,254,705 | 1,993,605 | 1,449,038 | |||||||||||||||||
| Efficiency ratio | 48.9 | % | 55.5 | % | 53.3 | % | 53.6 | % | 58.3 | % | 64.9 | % | ||||||||||||
| Balance sheet data (in millions) | ||||||||||||||||||||||||
| Average assets | ||||||||||||||||||||||||
| Average assets | $ | 204,376 | 202,599 | 198,592 | 201,131 | 208,865 | 151,648 | |||||||||||||||||
| Goodwill | (8,473 | ) | (8,490 | ) | (8,494 | ) | (8,501 | ) | (8,501 | ) | (4,593 | ) | ||||||||||||
| Core deposit and other intangible assets | (185 | ) | (201 | ) | (218 | ) | (236 | ) | (254 | ) | (3 | ) | ||||||||||||
| Deferred taxes | 46 | 49 | 54 | 56 | 60 | 1 | ||||||||||||||||||
| Average tangible assets | $ | 195,764 | 193,957 | 189,934 | 192,450 | 200,170 | 147,053 | |||||||||||||||||
| Average common equity | ||||||||||||||||||||||||
| Average total equity | $ | 25,685 | 25,377 | 25,346 | 25,665 | 26,090 | 17,894 | |||||||||||||||||
| Preferred stock | (2,011 | ) | (2,011 | ) | (2,011 | ) | (2,011 | ) | (2,011 | ) | (1,750 | ) | ||||||||||||
| Average common equity | 23,674 | 23,366 | 23,335 | 23,654 | 24,079 | 16,144 | ||||||||||||||||||
| Goodwill | (8,473 | ) | (8,490 | ) | (8,494 | ) | (8,501 | ) | (8,501 | ) | (4,593 | ) | ||||||||||||
| Core deposit and other intangible assets | (185 | ) | (201 | ) | (218 | ) | (236 | ) | (254 | ) | (3 | ) | ||||||||||||
| Deferred taxes | 46 | 49 | 54 | 56 | 60 | 1 | ||||||||||||||||||
| Average tangible common equity | $ | 15,062 | 14,724 | 14,677 | 14,973 | 15,384 | 11,549 | |||||||||||||||||
| At end of quarter | ||||||||||||||||||||||||
| Total assets | ||||||||||||||||||||||||
| Total assets | $ | 207,672 | 202,956 | 200,730 | 197,955 | 204,033 | 149,864 | |||||||||||||||||
| Goodwill | (8,465 | ) | (8,490 | ) | (8,490 | ) | (8,501 | ) | (8,501 | ) | (4,593 | ) | ||||||||||||
| Core deposit and other intangible assets | (177 | ) | (192 | ) | (209 | ) | (227 | ) | (245 | ) | (3 | ) | ||||||||||||
| Deferred taxes | 44 | 47 | 51 | 54 | 57 | 1 | ||||||||||||||||||
| Total tangible assets | $ | 199,074 | 194,321 | 192,082 | 189,281 | 195,344 | 145,269 | |||||||||||||||||
| Total common equity | ||||||||||||||||||||||||
| Total equity | $ | 25,801 | 25,377 | 25,318 | 25,256 | 25,795 | 17,876 | |||||||||||||||||
| Preferred stock | (2,011 | ) | (2,011 | ) | (2,011 | ) | (2,011 | ) | (2,011 | ) | (1,750 | ) | ||||||||||||
| Common equity | 23,790 | 23,366 | 23,307 | 23,245 | 23,784 | 16,126 | ||||||||||||||||||
| Goodwill | (8,465 | ) | (8,490 | ) | (8,490 | ) | (8,501 | ) | (8,501 | ) | (4,593 | ) | ||||||||||||
| Core deposit and other intangible assets | (177 | ) | (192 | ) | (209 | ) | (227 | ) | (245 | ) | (3 | ) | ||||||||||||
| Deferred taxes | 44 | 47 | 51 | 54 | 57 | 1 | ||||||||||||||||||
| Total tangible common equity | $ | 15,192 | 14,731 | 14,659 | 14,571 | 15,095 | 11,531 |
(a)
After any related tax effect.
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M&T BANK CORPORATION AND SUBSIDIARIES
Table 3
AVERAGE BALANCE SHEETS AND ANNUALIZED TAXABLE-EQUIVALENT RATES
| 2023 Second Quarter | 2023 First Quarter | 2022 Fourth Quarter | |||||||||||||||||||||||||||||||||||
| Average Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | |||||||||||||||||||||||||||||
| Average balance in millions; interest in thousands | |||||||||||||||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||||||||||
| Earning assets | |||||||||||||||||||||||||||||||||||||
| Loans and leases, net of unearned discount (a) | |||||||||||||||||||||||||||||||||||||
| Commercial, financial, etc. | $ | 44,531 | $ | 754,312 | 6.79 | % | $ | 42,428 | $ | 676,194 | 6.46 | % | $ | 40,038 | $ | 581,161 | 5.76 | % | |||||||||||||||||||
| Real estate – commercial | 44,944 | 710,284 | 6.25 | 45,327 | 659,099 | 5.82 | 45,690 | 591,290 | 5.06 | ||||||||||||||||||||||||||||
| Real estate – consumer | 23,781 | 243,896 | 4.10 | 23,770 | 235,141 | 3.96 | 23,334 | 228,391 | 3.92 | ||||||||||||||||||||||||||||
| Consumer | 20,289 | 297,217 | 5.88 | 20,487 | 286,596 | 5.67 | 20,344 | 270,590 | 5.28 | ||||||||||||||||||||||||||||
| Total loans and leases, net | 133,545 | 2,005,709 | 6.02 | 132,012 | 1,857,030 | 5.70 | 129,406 | 1,671,432 | 5.12 | ||||||||||||||||||||||||||||
| Interest-bearing deposits at banks | 23,617 | 302,429 | 5.14 | 24,312 | 278,417 | 4.64 | 25,089 | 237,021 | 3.75 | ||||||||||||||||||||||||||||
| Federal funds sold and agreements to resell securities | — | 6 | 5.53 | — | 2 | 4.89 | — | 4 | 4.32 | ||||||||||||||||||||||||||||
| Trading account | 151 | 994 | 2.66 | 123 | 712 | 2.32 | 122 | 652 | 2.13 | ||||||||||||||||||||||||||||
| Investment securities (b) | |||||||||||||||||||||||||||||||||||||
| U.S. Treasury and federal agencies | 24,630 | 179,452 | 2.92 | 23,795 | 166,978 | 2.85 | 21,590 | 140,315 | 2.58 | ||||||||||||||||||||||||||||
| Obligations of states and political subdivisions | 2,555 | 23,600 | 3.71 | 2,570 | 23,751 | 3.75 | 2,607 | 24,228 | 3.67 | ||||||||||||||||||||||||||||
| Other | 1,438 | 17,321 | 4.83 | 1,257 | 13,557 | 4.38 | 1,100 | 11,942 | 4.31 | ||||||||||||||||||||||||||||
| Total investment securities | 28,623 | 220,373 | 3.09 | 27,622 | 204,286 | 3.00 | 25,297 | 176,485 | 2.77 | ||||||||||||||||||||||||||||
| Total earning assets | 185,936 | 2,529,511 | 5.46 | 184,069 | 2,340,447 | 5.16 | 179,914 | 2,085,594 | 4.60 | ||||||||||||||||||||||||||||
| Allowance for credit losses | (1,985 | ) | (1,938 | ) | (1,888 | ) | |||||||||||||||||||||||||||||||
| Cash and due from banks | 1,747 | 1,952 | 1,989 | ||||||||||||||||||||||||||||||||||
| Other assets | 18,678 | 18,516 | 18,577 | ||||||||||||||||||||||||||||||||||
| Total assets | $ | 204,376 | $ | 202,599 | $ | 198,592 | |||||||||||||||||||||||||||||||
| Liabilities and shareholders’ equity | |||||||||||||||||||||||||||||||||||||
| Interest-bearing liabilities | |||||||||||||||||||||||||||||||||||||
| Interest-bearing deposits | |||||||||||||||||||||||||||||||||||||
| Savings and interest-checking deposits | $ | 87,210 | $ | 368,362 | 1.69 | $ | 88,053 | $ | 277,068 | 1.28 | $ | 87,068 | $ | 167,421 | .76 | ||||||||||||||||||||||
| Time deposits | 16,009 | 150,337 | 3.77 | 11,630 | 89,197 | 3.11 | 6,182 | 20,119 | 1.29 | ||||||||||||||||||||||||||||
| Total interest-bearing deposits | 103,219 | 518,699 | 2.02 | 99,683 | 366,265 | 1.49 | 93,250 | 187,540 | .80 | ||||||||||||||||||||||||||||
| Short-term borrowings | 7,539 | 95,996 | 5.11 | 4,994 | 57,776 | 4.69 | 1,632 | 13,336 | 3.24 | ||||||||||||||||||||||||||||
| Long-term borrowings | 7,516 | 101,801 | 5.43 | 6,511 | 84,680 | 5.27 | 3,753 | 43,959 | 4.65 | ||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 118,274 | 716,496 | 2.43 | 111,188 | 508,721 | 1.86 | 98,635 | 244,835 | .98 | ||||||||||||||||||||||||||||
| Noninterest-bearing deposits | 56,180 | 61,854 | 70,218 | ||||||||||||||||||||||||||||||||||
| Other liabilities | 4,237 | 4,180 | 4,393 | ||||||||||||||||||||||||||||||||||
| Total liabilities | 178,691 | 177,222 | 173,246 | ||||||||||||||||||||||||||||||||||
| Shareholders’ equity | 25,685 | 25,377 | 25,346 | ||||||||||||||||||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 204,376 | $ | 202,599 | $ | 198,592 | |||||||||||||||||||||||||||||||
| Net interest spread | 3.03 | 3.30 | 3.62 | ||||||||||||||||||||||||||||||||||
| Contribution of interest-free funds | .88 | .74 | .44 | ||||||||||||||||||||||||||||||||||
| Net interest income/margin on earning assets | $ | 1,813,015 | 3.91 | % | $ | 1,831,726 | 4.04 | % | $ | 1,840,759 | 4.06 | % |
(a)
Includes nonaccrual loans.
(b)
Includes available-for-sale securities at amortized cost.
(continued)
- 87 -
M&T BANK CORPORATION AND SUBSIDIARIES
Table 3 (continued)
AVERAGE BALANCE SHEETS AND ANNUALIZED TAXABLE-EQUIVALENT RATES (continued)
| 2022 Third Quarter | 2022 Second Quarter | ||||||||||||||||||||||||
| Average Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | ||||||||||||||||||||
| Average balance in millions; interest in thousands | |||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||
| Earning assets | |||||||||||||||||||||||||
| Loans and leases, net of unearned discount (a) | |||||||||||||||||||||||||
| Commercial, financial, etc. | $ | 38,321 | $ | 470,738 | 4.87 | % | $ | 37,818 | $ | 373,543 | 3.96 | % | |||||||||||||
| Real estate – commercial | 46,282 | 531,225 | 4.49 | 47,227 | 461,594 | 3.87 | |||||||||||||||||||
| Real estate – consumer | 22,962 | 220,464 | 3.84 | 22,761 | 207,080 | 3.64 | |||||||||||||||||||
| Consumer | 19,960 | 239,471 | 4.76 | 19,793 | 210,290 | 4.26 | |||||||||||||||||||
| Total loans and leases, net | 127,525 | 1,461,898 | 4.55 | 127,599 | 1,252,507 | 3.94 | |||||||||||||||||||
| Interest-bearing deposits at banks | 30,752 | 172,956 | 2.23 | 39,386 | 80,773 | .82 | |||||||||||||||||||
| Federal funds sold and agreements to resell securities | 29 | 41 | .55 | 250 | 253 | .41 | |||||||||||||||||||
| Trading account | 131 | 583 | 1.78 | 136 | 199 | .59 | |||||||||||||||||||
| Investment securities (b) | |||||||||||||||||||||||||
| U.S. Treasury and federal agencies | 20,227 | 124,084 | 2.43 | 18,644 | 109,755 | 2.36 | |||||||||||||||||||
| Obligations of states and political subdivisions | 2,688 | 23,626 | 3.49 | 2,768 | 23,344 | 3.38 | |||||||||||||||||||
| Other | 1,030 | 10,152 | 3.91 | 972 | 9,037 | 3.73 | |||||||||||||||||||
| Total investment securities | 23,945 | 157,862 | 2.62 | 22,384 | 142,136 | 2.55 | |||||||||||||||||||
| Total earning assets | 182,382 | 1,793,340 | 3.90 | 189,755 | 1,475,868 | 3.12 | |||||||||||||||||||
| Allowance for credit losses | (1,822 | ) | (1,814 | ) | |||||||||||||||||||||
| Cash and due from banks | 1,962 | 1,690 | |||||||||||||||||||||||
| Other assets | 18,609 | 19,234 | |||||||||||||||||||||||
| Total assets | $ | 201,131 | $ | 208,865 | |||||||||||||||||||||
| Liabilities and shareholders’ equity | |||||||||||||||||||||||||
| Interest-bearing liabilities | |||||||||||||||||||||||||
| Interest-bearing deposits | |||||||||||||||||||||||||
| Savings and interest-checking deposits | $ | 89,360 | $ | 68,690 | .31 | $ | 95,149 | $ | 27,907 | .12 | |||||||||||||||
| Time deposits | 5,050 | 1,124 | .09 | 5,480 | 1,227 | .09 | |||||||||||||||||||
| Total interest-bearing deposits | 94,410 | 69,814 | .29 | 100,629 | 29,134 | .12 | |||||||||||||||||||
| Short-term borrowings | 913 | 2,670 | 1.16 | 1,126 | 3,419 | 1.22 | |||||||||||||||||||
| Long-term borrowings | 3,281 | 30,338 | 3.67 | 3,282 | 20,872 | 2.55 | |||||||||||||||||||
| Total interest-bearing liabilities | 98,604 | 102,822 | .41 | 105,037 | 53,425 | .20 | |||||||||||||||||||
| Noninterest-bearing deposits | 72,861 | 74,054 | |||||||||||||||||||||||
| Other liabilities | 4,001 | 3,684 | |||||||||||||||||||||||
| Total liabilities | 175,466 | 182,775 | |||||||||||||||||||||||
| Shareholders’ equity | 25,665 | 26,090 | |||||||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 201,131 | $ | 208,865 | |||||||||||||||||||||
| Net interest spread | 3.49 | 2.92 | |||||||||||||||||||||||
| Contribution of interest-free funds | .19 | .09 | |||||||||||||||||||||||
| Net interest income/margin on earning assets | $ | 1,690,518 | 3.68 | % | $ | 1,422,443 | 3.01 | % |
(a)
Includes nonaccrual loans.
(b)
Includes available-for-sale securities at amortized cost.
- 88 -
Previous: Item 1. Financial Statements. · Next: Item 3. Quantitative and Qualitative Disclosures About Market Risk.