M&T Bank Corporation (MTB) Q2 2023 Earnings Call
M&T Bank Corporation (NYSE:MTB) Q2 2023 Earnings Conference Call July 19, 2023 8:00 AM ET
Company Participants
Brian Klock - Head of Markets and Investor Relations
Daryl Bible - Senior Executive Vice President and Chief Financial Officer
Conference Call Participants
Manan Gosalia - Morgan Stanley
Matthew O'Connor - Deutsche Bank
Steven Alexopoulos - JPMorgan
Gerard Cassidy - RBC
Brent Erensel - Portales Partners
Kenneth Usdin - Jefferies
Ebrahim Poonawala - Bank of America
Frank Schiraldi - Piper Sandler
Michael Mayo - Wells Fargo Securities
John Pancari - Evercore
Operator
Good day and welcome to the M&T Bank Second Quarter 2023 Earnings Conference Call. All lines have been placed on listen-only mode and the floor will be opened for your questions following the presentation. [Operator Instructions] Please be advised that today's conference is being recorded.
I would now like to hand the conference over to Brian Klock, Head of Market and Investor Relations. Please go ahead.
Brian Klock
Thank you, Todd, and good morning everyone. I'd like to thank everyone for participating in M&T's second quarter 2023 earnings conference call, both by telephone and through the webcast. If you have not read the earnings release we issued this morning, you may access it, along with the financial tables and schedules by going to our website www.mtb.com.
Once there, you can click on the Investor Relations link, and then on the Events and Presentations link. Also, before we start, I'd like to mention that today's presentation may contain forward-looking information. Cautionary statements about this information are included in today's earnings release materials and in the Investor presentation as well as our SEC filings and other investor materials.
The presentation also includes non-GAAP financial measures as identified in the earnings release and Investor presentation. The appropriate reconciliations to GAAP are included in the appendix.
Joining me on the call this morning are M&T's Senior Executive Vice President and CFO, Daryl Bible; and Senior Executive Vice President and Former CFO, Darren King.
Now I'd like to turn the call over to Daryl Bible.
Daryl Bible
Thank you, Brian, and good morning, everyone. I would like to start by thanking Darren for his help with my transition. I'm very appreciative of his guidance and support. I'm also grateful for everyone across the bank that has welcomed me and helped me get up to speed quickly, including my incredibly talented finance team.
Like me, I'm sure all of you are extremely happy that we now have an earnings presentation. So thank you to investor relations, corporate communication and corporate reporting teams for making this a reality. I'm very excited about the work we are doing and the transition has gone even smoother than I could have anticipated.
I'm proud to be part of M&T's strong financial history, consistent operating philosophy, and conservative community focused banking principles. I'm even prouder to be part of a company that is tied to its purpose to make a difference in people's lives.
I would like to thank our over 22,000 M&T colleagues for all their hard work each and every day. You are driven by the idea of delivering on our purpose and guided by our set of core values. It is because of you that M&T continues to make a difference in our customers' lives and continue to produce strong results for our shareholders.
Please turn to slide three. Let's start with our purpose, mission and operating principles. Our purpose is to make a difference in people's lives by focusing on communities we serve. Our purpose drives our operating principles.
We believe in local scale with 28 community-led regional presidents who make decisions about loans and community activities. This local scale has led us to superior credit performance, top deposit share and higher operating and capital efficiency. Our performance is fueled by a relentless focus on customers, talent and communities.
Moving to slide four. We deliver for customers. We have seasoned talent, diverse board and new capabilities that provide solutions that make a meaningful difference to our customers. Please let's turn to slide five. This slide showcases how we activate our purpose through our operating principles.
When our customers and communities succeed, we all succeed. Our investments in enhancing customer experience and delivering impactful products have fueled organic growth. A significant milestone this year was a designation of over 119 multicultural banking branches across our footprint, with more to come in our expanded communities. These branches are a community assets dedicated to the cultural fluency for our customers. We also believe in supporting small business owners who play a vital role in our communities.
Despite operating only in 12 states, we rank as the number six SBA lender in the country and ranked highly in ten of our 16 markets. Our commitment to supporting the communities we serve extends to affordable housing projects with over $2.3 billion in financing and over 2600 home loans for low and moderate income residents.
Additionally, M&T Bank and our charitable foundation granted over $47 million to support our communities in '22 alone. Please turn to slide six. Here we highlight our commitment to the environment. We have invested over $230 million in renewable energy sector and significantly reduced our electricity consumption since 2019.
Our ESG report will be published soon, but I encourage you to review this slide for some of the highlights. Turning to slide eight. Our second quarter results reflect the strength of our core earnings power balance sheet and liquidity position. Adjusted to exclude the $225 million pre-tax gain from the sale of the Collective Investment Trust or CIT business in April.
Second quarter revenues have grown $395 million or 20% compared to last year's similar quarter. This translates to a 10% positive operating leverage year-over-year. On the same basis, pre-provision net revenues have increased 35% since last year's second quarter to $1.1 billion. Credit remained stable.
Net charge-offs increased in the second quarter, but year-to-date still remain below our historical long-term average. Net income for the quarter was $867 million, up 24% from linked-quarter. Diluted GAAP earnings per share was $5.05 for the second quarter, up 26% sequentially.
Now let's review our net operating results for the quarter on slide nine. M&T's net operating income for the second quarter, which excludes intangible amortization, was $879 million, up 23% from linked-quarter. Diluted net operating earnings per share common share were $5.12 for the recent quarter compared to $4.09 in this year's first quarter. Tangible book value per share increased 3% to $91.58.
On slide ten, you will see that, on a GAAP basis, M&T's second quarter results produced an annualized return on average assets and return on average common equity of 1.7% and 14.27% respectively.
Results for the second quarter of this year included an after tax $170 million gain on the sale of the CIT business in April. Excluding this gain, adjusted GAAP earnings per share was $4.11 and adjusted return on average assets and average common shareholder equity was 1.39% and 11.6%.
Next, let's look a little bit deeper into the underlying trends that generated our second quarter results. Please turn to slide 11. Taxable equivalent net interest income was $1.81 billion in the second quarter, slightly below linked-quarter. This decline was driven by higher volumes of non-core funding and unfavorable mix change caused by disintermediation partially offset by higher interest rates and one additional day.
Net interest margin for the past quarter was 3.91%, down 13 basis points from linked-quarter. The primary driver was the decrease to the margin was partially impacted from the mix change to the higher cost funding, which we estimate reduced the margin by 18 basis points. Higher yields on earning assets, net of rates on deposit funding benefited the margin by four basis points.
Turning to slide 12. Capital levels remained strong with the CET1 ratio to the end of the second quarter at 10.58%. Average earning assets increased $1.9 billion or 1% from the first quarter to the second quarter due largely to the $1.5 billion growth in average loans and $1 billion increase in average investment securities.
Turning to slide 13, we talk about the drivers on the loan growth. The total average loans and leases were $133.5 billion during the second quarter, up $1.5 billion compared to the linked-quarter. Looking at the loans by category on an average basis compared to the first quarter. Commercial and industrial loans increased 5% to $44.5 billion. We continue to see in our dealer and specialty businesses. Plus, we are adding new customers as we grow market share in legacy and new markets.
During the second quarter, average commercial real estate loans decreased 1% to $44.9 billion. The decline was driven largely by lower construction loan balances. Average residential real estate loans were $23.8 billion, essentially flat compared to the first quarter of this year. Average consumer loans were down 1% to $20.3 billion, driven by lower activity due to rising interest rates.
Turning to slide 14. Average investment securities increased to $28.6 billion during the second quarter due to the large part to purchases late at the end of the first quarter. The duration of the investment securities book at the end of June is 3.9 years and the unrealized pre-tax loss on the available for sale was only $441 million.
At the end of June, cash and interest-bearing deposits at bank and the investment securities totaled $56.9 billion. Turning to slide 15. Deposit outflows during the second quarter on an average basis accounted for $2.1 billion or 1.3% in line with industry trends. Consistent with our experience prior to rising rates, the increased competition for deposits and customer behavior is leading to a mix shift with the deposit base to higher cost deposits.
Comparing the second to first quarters, average demand deposits declined $5.7 billion. Savings and interest-bearing checking deposits decreased $843 million while deposits while time deposits increased $4.4 billion. The decline in average demand deposits resulted predominantly from a $1.1 billion decline in the corporate trust balances due in part to a large to lower capital markets activities. The movement to sweep products as customers seeking higher yields with $1.8 billion on balance sheet and $2.4 billion shifted off balance sheet sweep accounts during the second quarter.
Average time deposit growth was driven by $2.3 billion in brokered CDs and $2.1 billion growth consumer time deposits. We remain focused on growing and retaining deposits. In the period, deposits grew $3 billion or 1.9% from the end of the first quarter. The growth was largely driven by broker CD balances, which increased $4.1 billion compared to the end of the linked-quarter.
However, since the end of May, our customer base for wholesale deposit balances have stabilized and started to grow with an increase of $523 million, driven largely by growth in commercial and consumer deposits. Now let's discuss non-interest income. Please turn to slide 16.
Non-interest income totaled $803 million in the second quarter compared to $587 million linked-quarter. As noted earlier, the second quarter included a $225 million gain from the sale of our CIT business. Recall that M&T normally receives an annual distribution from Bayview Lending Group during the first quarter of the year. This distribution was $20 million in this year's first quarter.
Excluding these two items, second quarter non-interest income increased $11 million compared to the first quarter. Mortgage banking revenues were $107 million in the recent quarter, up 26% from linked-quarter, driven by $18 million in additional servicing revenues, representing the full quarter impact of the bulk of the MSR purchase completed at the end of March.
Service charges on deposits were $119 million or up 5% compared to the first quarter. Trust income of $172 million in the recent quarter declined from $194 million in the first quarter, due largely to a $31 million in lower fee income resulting from the sale of the CIT business, partially offset by the impact of the seasonal tax preparation fees.
Our revenue from operations adjusted from the gain from the CIT sale and the distribution at Bayview Lending Group in this year's first quarter were $137 million, down $2 million sequentially.
Turning to slide 17 for expenses. Operating expenses, which exclude the amortization of intangible assets were $1.28 billion in the second quarter of this year, down $64 million from the linked-quarter. As is typical for M&T's first quarter results, operating expenses in the first quarter included approximately $99 million of seasonally higher compensation costs.
Excluding the seasonally higher compensation in the first quarter, operating expenses increased $35 million sequentially. That increase was due to a $31 million in higher compensation and benefit costs reflecting higher average headcount. The full impact of the annual merit increases and severance costs $20 million in higher other operating expenses related to the bulk of the MSR purchase.
These increases were partially offset by lower CIT related expenses, including $22 million of lower sub adviser expenses and lower advertising and marketing and deposit insurance expenses. Given the prospect of slowing revenue growth, we remain focused on diligently managing expenses.
The efficiency ratio, which excludes the intangible amortization and merger related expenses from the numerator and the security gains and losses from the denominator was 48.9% in the recent quarter compared to 55.5% in 2023's first quarter, excluding the gain from the sale of the CIT business, in the second quarter, the efficiency ratio was 53.4%.
Next, let's turn to slide 18 for credit. The allowance for credit losses amounted to $2 billion at the end of the second quarter, up $23 million from the end of linked-quarter. In the second quarter, we recorded $150 million provision and credit losses compared to $120 million in the first quarter.
Net charge-offs were $127 million in the second quarter compared to $70 million in this year's first quarter. The reserve build was largely due to anticipation of declining commercial real estate values and loan growth. At the end of the second quarter, non-accrual loans were $2.4 billion, a decrease of $122 million compared to the prior quarter and represent a 1.83% of loans down nine basis points sequentially.
As noted, net charge-offs for the recent quarter amounted to $127 million. The increase in net charge-offs was driven by four large credits, three office buildings in New York City and Washington, D.C., and one large health care company operating in New York State.
Annualized net charge-offs as a percentage of total loans were 38 basis points for the second quarter, compared to 22 basis points in the first quarter. This brings our year-to-date net charge-offs to 30 basis points, which is below our long-term average of 33 basis points.
As we have noted previously, we expect net charge-offs to be lumpy on a quarter-to-quarter basis. This is the result of a unique nature of each property and borrower. In order to identify emerging issues that could lead to loan grade adjustments, we continue to perform ongoing rate risk, resizing risk, tenant sensitivities on commercial real estate portfolios on a quarterly basis.
This work is reflected in our criticized loan portfolio. Loans 90 days past due on which we continue to accrue interest or $380 million at the end of the first quarter compared to $407 million sequentially and total 43% of these loans 90 days past due loans were guaranteed by the government or government related entities.
Turning to slide 19 for capital. M&T Cet1 ratio at the end of June was an estimated 10.58% compared to 10.16% at the end of the first quarter. The increase was due in part to higher net income and in repurchasing shares in the second quarter.
In June, tangible common shareholder equity totaled $15.2 billion, up 3% from the end of the prior quarter. Tangible book value per share accounted at $91.58, up 3% from the end of the first quarter.
In late June, the Federal Reserve released results from the annual bank stress test. While this was an off year for Category IV banks, given the timing of the People's United acquisition, M&T participated in the stress test this year. Our preliminary stress test capital buffer or SCB is estimated to be 4%.
Using the SCB, which is in effect from October 1st, 2023 to September 30th of 2024 will be subject to 8.5% CET1 ratio. Now turning to slide 20 for the outlook. As we look forward to the second quarter of this year, we believe we are well positioned to navigate through a challenging economic conditions.
However, the rapidly changing interest rate expectations, combined with continued pressure on funding, affect our outlook for the full year 2023. The 2023 outlook reflects the impact of the sale of the M&T insurance agency that closed in October of last year and the sale of the CIT business that closed in April of this year.
First, let's talk about net interest income outlook. We expect taxable equivalent net interest income to trend toward the lower end of the $7 billion to $7.2 billion range, which reflects a flat to modestly higher loan and deposit growth and incorporates 125 basis point hike in August of this year.
We noted on the first quarter call, a key driver of net interest income in 2023 will be the ability to efficiently fund earning assets. We expect continued intense competition for deposits in the face of industry-wide outflows. Full year average deposit balances are expected to be up low single-digits compared to 2022.
We continue to expect the deposit mix to shift towards higher cost of deposits, with declines expected in demand deposits and growth in time deposits and on balance sheet sweeps. This is expected to translate through the cycle interest-bearing deposit beta through the fourth quarter of this year to the low to mid 40% range.
This deposit beta excludes broker deposits. Next, let's discuss the outlook for average loan growth, which should be the main driver of earning asset growth. We expect the full year average loans and leases balances during 2023 to be relatively stable. The mix of C&I, CRE consumer loans inclusive of consumer real estate loans is almost one-third each as of the end of June.
We expect this trend to shift slightly to C&I growth outpacing CRE. As we have seen over the past four quarters, higher levels of interest rates are expected to slow down the growth of our consumer loan book over the remainder of 2023.
Turning to fees. We expect noninterest income to be in the range of $2.25 billion to $2.3 billion range. This outlook for noninterest-bearing reflects lower trust revenues resulting from the sale of the CIT business in April as well as the incremental income from the bulk purchase of residential mortgage servicing rights at the end of this year's first quarter.
Remember, the outlook does not include the $225 million gain from the sale of the CIT business. Turning to expenses. We anticipate expenses excluding intangible amortization to trend near the higher end of $5 billion to $5.1 billion.
In addition, this outlook for net operating expenses includes the impact of the previously mentioned sale of the CIT business and the bulk mortgage servicing purchase. Intangible amortization is expected to be in the $60 million to $65 million range. Turning to credit. We expect loan losses to be near M&T's long-term average of 33 basis points. Although the quarterly cadence could be lumpy, provision expense over the year will follow the CECL methodology and be affected by changes in the macro outlook and loan balances.
For 2023, we expect taxable equivalent rate to be in the 25% range. Finally, as it relates to capital, this is a very clear differentiator for M&T. Our capital, coupled with our limited investment security market has been a clear strength during these turbulent times. M&T has proven to be a safe haven for our clients and communities. The strength of our balance sheet is extraordinary.
We take our responsibilities to manage our shareholders' capital very seriously and will return more when it's appropriate to do that. Our businesses are performing very well, and we are growing new relationships each and every day. Given the uncertainties related to the new capital rules that are coming out, we believe now is not the time to be repurchasing shares. That said, we are best positioned to use our capital for both organic and inorganic growth along with buybacks in the future, which will always be part of our core capital distribution strategy.
In the meantime, our strong balance sheet will continue to differentiate us with our clients, communities, regulators, investors and rating agencies. To conclude on slide 21. Our results underscore and optimistic investment thesis. Our economic uncertainty remains high, and that is when M&T has historically outperformed its peers.
M&T has always been a purpose-driven organization with a successful business model that benefits all stakeholders, including shareholders. We have a long track record of credit outperforming through all economic cycles with more than two times growth relative to peers. Our strong shareholder returns include 15% to 20% return on average tangible common equity and robust dividend growth. Finally, we are a disciplined acquirer and prudent steward of shareholder capital.
Our integration of People's United is complete, and we are confident in our ability to realize our potential post-merger. Now let's open up the call to questions before which Todd will briefly review the instructions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] We'll take our first question from Manan Gosalia with Morgan Stanley.
Manan Gosalia
Hey, good morning.
Daryl Bible
Good morning.
Manan Gosalia
I had a question on NII. I noticed you took your deposit balance guide up along with the deposit beta guide but kept the NII guide the same. So can you talk about the puts and takes there? I guess the question is why hold more liquidity and hold more in interest-bearing deposits in an environment where you're not growing loans that much? Is it more a function of any upcoming LCR rules or anything the regulators are asking you to do?
Daryl Bible
Yes, Manan. Thank you for the question. What I would tell you is that we start right now each and every day in making sure we have really strong liquidity on our balance sheet. And we want to make sure that is a really good strength as we continue to move through these times.
Our deposits, we believe we are in a great position to continue to grow and gain share in our markets that we're serving. So we are aggressively going out and trying to get deposits from our clients and more customers out in these marketplaces.
The beta guide did go up, but it's really a mix of how much of funding we get from core versus broker deposits. When the crisis first started in March, we took down Federal Home Loan Bank advances this quarter -- this past quarter and second quarter, we access the broker CD market. We thought that was a good use.
And when we access the broker CD market that automatically increased their deposit beta. So if you look at our deposit beta this quarter, it was 40%, but if you back out the broker CDs, it's worth six points, so it was down to 34%. So the guide is that we gave going up to low to mid-40s.
It was really excluding the broker deposits because you don't know if we're going to issue more broker deposits is going to be a mix between Federal Home Loan Bank advances, broker deposits and actually issuing debt in the marketplace.
So it's a really mix, and it's really up to our treasury team to figure out what's best to do for our company. But right now, having liquidity is really important and really gaining share and serving our clients, we think, is really important as well.
Manan Gosalia
So you took cash up this quarter, and it sounds like you're going to keep it at a high level for some time?
Daryl Bible
Yes. Yes, we're going to continue to keep really strong liquidity and continue to stay where it is. And it's one of the strengths that we have in the marketplace right now.
Manan Gosalia
Got it. Okay. And then just as a follow-up, the debt markets seem to be opening up. Can you talk about how you're thinking about issuance for the remainder of the year? Just keeping in mind the possibility that TLAC rules could apply to banks of your asset size?
Daryl Bible
Yes. When you look at the three sources that I just talked about, whether it's broker deposits, Federal Home Loan Bank Advances or debt, early on, when you're going into a crisis, it makes sense to access the home loan bank first because it's there available and you get a really fast in size.
Broker markets, I think, were good use this past quarter. And over time, you will see us issue unsecured debt and basically pay off some of the home loan bank advances and probably some of the broker deposits over time. And that's just normally how we would fund the bank overall. But we start with really having really good core funding and making sure our core funding is growing and doing what it needs to from that perspective.
Manan Gosalia
Great. Thanks so much.
Daryl Bible
Thanks.
Operator
Thank you. We'll take our next question from Matt O'Connor with Deutsche Bank.
Matthew O'Connor
Hi. Good morning. Just, I guess, first, a follow-up on the capital. Obviously, strong built quite a bit, and you talked about letting it continue to build as you wait for new capital rules, but I guess how high are you willing to let it get, I think, under kind of any rules, it seems like you have access and obviously, a good outcome from CCAR GFS. So this first question is how high are you willing to let it go and then maybe just kind of review the priorities in terms of capital deployment as you think about the next couple of years?
Daryl Bible
Yes. So let me start with capital deployment question. First and foremost, we want to make sure we serve our clients and our communities. So organic growth is number one, on how we deploy capital. And during turbulent time like this, we want to make sure that all of our customers and potential new customers that we want and want to join M&T that we have the capital there to serve and that's first and foremost when we start.
Dividends, obviously, the second, second is dividend growth. And we have a long history of our dividend policy and keeping really strong dividends at M&T, really, really value a strong dividend from that perspective. And share buyback has always been part of our history of repurchasing shares. And from time to time, we might do any acquisitions, if that makes sense, and it's a good shareholder value from that perspective.
But long-term, there's really not a change. Just right now in these turbulent times, we're keeping extra capital, and we think it's prudent to do that. And as we get more information from the rules that come out from the regulators.
But right now, we are doing really well. Our business is performing well. We're getting new clients in, in the commercial area, business banking, wealth, corporate trust, I mean, our businesses are growing because we are strong. So I think it's an advantage right now to have a lot of capital.
Matthew O'Connor
And then just separately, last fall, Darren threw out this kind of long-term NIM range, I think it was 3.6 to 3.9 that kind of spooked folks a little bit, but obviously, you guys were kind of ahead of the curve in messaging the over-earning on deposits. And you did get to the high end of that NIM range this quarter. Wondering if you still think that's kind of a good long-term range? And do you get below that range at some point in the cycle, if you had to guess? Thanks.
Daryl Bible
Yes. So I want to give Darren a lot of credit. He was definitely ahead of the industry. And talking about margin and the impact of the margin and he saw it coming and I think he was a leader in telling people where everything was going. So it was really, really good guidance from that perspective.
I would say that we will continue to have margin pressure just because of the cost of what we're seeing on the funding side. We have in disintermediation. And if you look at it, our DDA was down $5.7 billion. We retained all the clients. Some of the balances went to on-balance sheet sweeps. Some of them went into off-balance sheet sweeps. If you look at our consumer book, we are moving balances from nonmaturity buckets to CDs.
But if you go back 20 plus years and you look at the deposit that we had back then, CDs were 20% plus of our funding base. Right now, we're at 10%, and we're probably going to be in the mid-teens before it's all said and done, it really depends on how long rates stay higher. And that's just the normal mix of how we run our retail bank.
I mean it's the right thing to do. It's the right thing for our clients. It's the right thing for our bank. We can adjust our rate sensitivities with CDs on the books and manage that really well. So it's just basically learning things that when you ran banks 20 years ago, we're doing the same thing right now and doing it the same way. But we feel really good about our businesses.
Our margin pressure is going to continue to come down, and I think we've given you some guidance for this year don't really want to get into '24 right now until we get working on our plan, which would be later this quarter.
Matthew O'Connor
Okay. Thank you very much.
Daryl Bible
Yeah. Thanks, Matt.
Operator
Thank you. We'll take our next question from Steven Alexopoulos with JPMorgan.
Steven Alexopoulos
Hey, good morning, everybody.
Daryl Bible
Good morning, Steve.
Steven Alexopoulos
And thank you for the earning slide deck.
Daryl Bible
You got to thank the team.
Steven Alexopoulos
Appreciate it.
Daryl Bible
Yeah. The team did a great job.
Steven Alexopoulos
I want to start on the noninterest-bearing deposits. So when I look at the decline this quarter, it's still perplexing to me that this mix shift is not basically done by now, right? If you're a commercial customer, you have a treasury function. I'd imagine you've done the analysis and you've already moved those balances, but you guys are now guiding you expect more decline in DDA. When you look at your client base, can you walk us through why is this taking so long? I mean, it's been quite a few quarters, right, the two years has been above 3% or 4%. And what's still to happen to cause this mix shift?
Daryl Bible
Yes. Thank you for the question, Steven. First and foremost, if you look at M&T and you look at pre-COVID and going in into COVID, M&T had one of the largest increases of surplus balances of all the banks out there proportionately. So we're starting at a really high strength.
I think our DDA percentage of total deposits was 48%, yes. So it was really high to start with. And if you look at how we run this company, as I learn about this company, I am just amazed at how well we are getting primacy, getting the operating accounts. We are really good in the consumer business, in our business banking, business and commercial businesses. We lead with getting operating accounts so we have a disproportionate amount of operating accounts there.
So that said, to answer your question, it just means that we're going to continue to have mix shift changes. It does seem to be slowing down a bit. But we're still seeing some mix change happen, and it's going to continue to put a little bit pressure on funding, but we're still serving our clients at the end of the day.
We're gaining new clients, too. So I think all-in-all, I think we're doing good. We still have a pretty high margin overall, if you look at others in the industry even with this coming down. So I think we feel really good at what we're doing and how we're executing.
Steven Alexopoulos
Okay. That's helpful. And then just a question on the reserve. What's the unemployment rate you're assuming in the total reserve? And then I know you increased the reserve a bit. You called out commercial real estate. What's the reserve on the commercial real estate portfolio? Thanks.
Daryl Bible
We're right around 4%. If you really look at the reserves, Steve, there's four drivers there that we have. The one that really impacted our increase in our allowance was really the crappy. The change in the commercial real estate this quarter. That went from a negative 5% to 11%. The other three variables, unemployment was around mid-4s. GDP was basically right around 1% didn't change a whole lot. And HPI was right at mid-6s didn't change a lot. So what really drove the change was the crappy on the allowance side.
Steven Alexopoulos
Got it. I'm sorry, I missed it. What was the specific reserve now on commercial real estate loans?
Daryl Bible
Commercial real estate, when the macro variable value that we used in the model went from 6 to 11 and if you look at the allowance, the allowance we increase more to office overall, we had decreases in hotel and multifamily.
Steven Alexopoulos
Got it. I'm still not following what the specific reserve is on CRE, but I could follow up with Brian after. Thanks.
Daryl Bible
Yeah. I didn't hear that well. Okay. All right.
Operator
We'll take our next question from Gerard Cassidy with RBC.
Gerard Cassidy
Hey, Daryl.
Daryl Bible
Hey, Gerard.
Gerard Cassidy
Good luck with the new position for you. And ditto on the slide deck to you, Brian, and your colleagues, it's a very strong slide deck. So thank you. Daryl, can you share with us these proposals that we're hearing about for Basel III end game may include banks as low as $100 billion in assets and so when you guys talk about what could happen and then I believe earlier this week, Bloomberg kind of story, that there may be higher risk-weighted asset assumptions for residential mortgages, which seem to be a new twist to these capital requirements. How are you guys approaching what could happen in terms of greater RWA increases for your organization and the capital needed to support them?
Daryl Bible
Yes. Thanks for the question, Gerard. Obviously, we are very eager to get these new roles and see what's out there and make comments that's going to go through those normal process there. So it's going to take time, probably get most of these things implemented. On your specific question of RWA and mortgages, we'll wait and see how that comes out.
We are in the residential mortgage space. We exited the correspondent space last quarter. So we're really just focusing on meeting the needs of our clients of the company. And we're basically selling all the conforming into the marketplace and we're balance sheeting all of our wealth clients and clients that are low and moderate income are the ones that really are going on the balance sheet.
So we're going to stay in our core businesses because we're serving our clients. If it's a little bit higher capital, the market will probably adjust and just raise pricing to accommodate for that would be my best guess from that.
As far as the other changes out there, there's a lot of proposals there. If it's like long-term debt or TLAC, we're waiting to see what that happens. M&T really, we don't have a whole lot of debt outstanding.
So it's something that we will have to just manage. It's probably going to be holding company. If it's not holding company and allow bank will probably end up with a mix of holding company and bank because you still want to have a strong parent company from a source of capital perspective there, but we'll just optimize it.
But with us using now Federal Home Loan Bank advances, broker deposits, I think we have, right now, ability where we can pay those off, issue unsecured debt and really not blow the balance sheet from that and still have a really strong liquidity position from that. So we're waiting to see.
I think you know our AOCI comes in, looks like that's coming in were 55 basis points, that's 55 basis points negative adjustment at the end of this quarter includes all three pieces. It's the AFS securities, cash flow hedges as well as pension. That's probably one of the lowest that we have in the industry. So it's not a real big impact for us. So that's the strength as well.
Gerard Cassidy
Very good. And then as a follow-up question, you touched on and I may have missed some of this, the charge-offs in the quarter about some lower values for commercial real estate in a slide deck you guys put out earlier in the second quarter, you gave some very detailed information about your commercial real estate portfolio by location and loan to values. Can you share with us where is it the higher loan to values that were required to be written down? Or are you actually seeing it in some of the lower loan to values seeing some weakness as well? And then second, on top of that, when you go through the portfolio, where are you in terms of -- are you 50% through reviewing the portfolio or 75% or 20%?
Daryl Bible
Yes. Thank you for the question. So on your first question, CRE is really just you have to look at it on a case-by-case basis just because of the unique quality and pieces of how it is each borrower has different implications. You have tenant things, you have to market conditions, interest rate. So that is a case-by-case basis. So you really go through the deep dives there.
On your question on portfolio review. Yes. So we are 50%, 60% plus through it. All the loans that we have in the criticized bucket is reviewed every quarter. We stress test those really well. And if I look at what we're doing versus my prior places, I would say, we're doing as much if not more.
What I've seen done in our credit process. So we're staying on top of this. Our teams are doing really well. Valuations are coming in, and we're doing the best we can with the information we have. But I would say we feel good at where we are and we're just continuing to monitor where everything is.
Gerard Cassidy
Very good and good luck again in your new role. Thank you.
Daryl Bible
Thanks, Gerard.
Operator
Thank you. We'll take our next question from Brent Erensel with Portales Partners.
Brent Erensel
Good morning and, Daryl, welcome to Western New York.
Daryl Bible
Thank you, Brent.
Brent Erensel
So specifically on the CRE drilling down to the Manhattan real estate or New York City real estate, I was wondering, could you walk us through what you do? You said you were taking charge-offs there. So you take possession, do you restructure? What happens when you have a CRE Manhattan, I guess it's an office building. What do you do here in that situation?
Daryl Bible
Yes. So in New York City, New York City, is a big marketplace, and every place is a little bit different. Right now, it seems like the downtown area might be a little weaker than the middle part of Manhattan. So the charge-off that we took in Manhattan was in the downtown district there.
But I would say we do all the above. I mean we really work with our clients. It really for us starts from a client perspective. Client is really, really important client selection. And in the CRE business, we make loans in the larger studies like New York, D.C., Boston, and in those markets, I would say, 75% of those are very long-term oriented clients and really good clients.
Once you get outside of these major market cities, it's almost all of our clients are really long-term oriented. But as far as which notes we would sell or whatever, it's probably more the financially oriented clients that we have, where they've had their returns and they are putting any more equity into the deal is really how we would handle that.
Brent Erensel
To follow-up on that, you're seeing strong-handed borrowers, some of these big names, just mailing in the keys. Are you experiencing that as well? Where your long-term strong-handed CRE borrower is actually not so strong-handed after all.
Daryl Bible
I would say what we're seeing right now is our long-term clients. It really comes on to client selection, but they're really holding in there. You have to look at their portfolios that they have, and they might have one trouble property, but they have a lot of others that are really performing well and they move cash over to support and put equity into those transactions.
So we feel good about that. And we've been in this business for a long time. I get a lot of comfort when I look at Bob and his team, there's a lot of gray hair there. They've been through this many, many times and gives me a lot of confidence. And like I said earlier, the processes we're using are as good or better than what I've seen in the past.
Brent Erensel
Thank you.
Operator
Thank you. We'll take our next question from Ken Usdin with Jefferies.
Kenneth Usdin
Thanks. Good morning, everyone.
Daryl Bible
Hey, Ken.
Kenneth Usdin
Daryl, a couple of clarifications, if you don't mind. So on the guide slide, you talk about mid-40s interest cumulative interest-bearing betas. I assume that's what's built into the low end of NII guide for the year. And because in your comments, you said low to mid. So I would assume that if you ended up being in the low 40s, that would be kind of better. So just clarifying what's in the guide. I would assume it's the mid-40s that's on this slide.
Daryl Bible
Yes. I think that's right. And it does exclude broker because we may pay off some of the broker deposits to really dependently access the unsecured market or not. So I would say, if you look at core, I think that's the right assumption to use, Ken.
Kenneth Usdin
And that was going to be my follow-up, Daryl. So can you explain that just to broker deposit beta is completely outside of that mid-40s beta comment?
Daryl Bible
Yes. So if you look this quarter, our beta on total interest-bearing deposits was 40% and we issued $4 billion of broker deposits during the quarter. If we back out those broker deposits, we were at 34% deposit beta. Our decision to issue broker deposits was one versus looking at it from issuing doing Federal Home Loan Bank Advances or doing unsecured debt, we chose that. As we move forward, the treasury team will basically do what's best for the company and what we need to do.
And we'll probably use all three pieces. And when it actually goes into deposits, it impacts the deposit beta. So we tried to give you, excluding the broker piece, what deposit beta is, what Darren said the last several quarters on deposit betas, if you back out the book or he's spot on still where we're performing. So I mean the guide there, we just kind of mixed it up by issuing these broker deposits.
Kenneth Usdin
Understood. And then could you just tell us then, so of -- I don't know, a great way to think about $103 billion of total interest-bearing deposits, just how much of that in aggregate is brokered.
Daryl Bible
I think our broker deposits are about $10 billion in total. And I would say $8 billion of it is CDs and $2 billion of it money market.
Kenneth Usdin
Okay. I get it. That helps. Thanks a lot Daryl.
Daryl Bible
You're welcome.
Operator
Thank you. Our next question comes from Ebrahim Poonawala with Bank of America.
Ebrahim Poonawala
Hey, Daryl, good morning.
Daryl Bible
Good morning, Ebrahim.
Ebrahim Poonawala
Good morning. Just a follow-up on Ken's question around broker to $10 billion at the end of the quarter. Is there a target that the MAX that we should think about how much brokered deposits can get either on a dollar basis or as a percentage of total deposits that we should keep in mind when we're thinking about betas and the outlook there?
Daryl Bible
Yes. Probably just a few more billion from Ken is probably as high as we want to go there. So we don't want to be outsized in the use of that. Like anything else, we want to be diversified and kind of use all of our funding tools just kind of you want to just make sure you have use them all and you have access to all of them. So but I'd say a couple more billion is all we're going to use in the broker space, but you might actually see that come down if we issue more unsecured debt.
Ebrahim Poonawala
Got it. And just one follow-up on the CRE appraisals. I think if I heard you correctly, you said you had to 50% to 60% of the portfolio. How hard is it to get a true appraisal on a CRE property right now and what I'm trying to get to is what's the risk of being blindsided on reserve levels two or three quarters from now where you need to take a lot more because of fair values. And I'm just wondering the visibility on the appraisal, how conservative are you being as a bank in kind of trying to put this -- getting ahead of this issue?
Daryl Bible
Yes, that's a great question. So what I would tell you is there aren't a whole lot of sales in the marketplace right now. So we don't have a lot of specs when we do have when we use them. But a lot of the valuations we're using, we use the discounted cash flow method and when we look at just a couple of pieces of the discounted cash flow method, when we're looking at properties and the properties vacant, we assume a three-year vacancy for it to get sold up when something is coming due and it's turning over, we assume with 12-year vacancy or 12 months vacancy.
So from a cash flow perspective, we're factoring in three amenities to get people in leases. So all that cash flow adjusted in the discounted cash flow model. So it's really impacting the valuation that you have. Cap rates really haven't changed a whole lot, it's really the assumptions you're using on the cash that you're generating in these properties is really what's driving down the values.
Ebrahim Poonawala
Got it. And welcome to the new role. Good to hear you -- call again. Thanks.
Operator
Thank you. We'll take our next question from Frank Schiraldi with Piper Sandler.
Frank Schiraldi
Thanks. Good morning.
Daryl Bible
Good morning.
Frank Schiraldi
Just, Daryl, I missed the -- I know you talked about the back to sort of the noninterest-bearing mix shift. You talked about maybe a more normalized, I guess, sort of balance sheet, getting CD balances ultimately back into the mid-teens. Is the best way to think about noninterest-bearing shift from here is basically that all comes at the cost of noninterest-bearing so that we could continue to see pretty significant shift adding noninterest bearing because it seems like you could have some offsetting tailwinds from the trust business as well, right, as sort of that transactional volume maybe picks up or normalized. So I'm just wondering the best way to think about where noninterest-bearing balances could kind of migrate?
Daryl Bible
Yes. No, I think those are all great questions. If you look at our noninterest-bearing to total deposits this quarter, we were at 35%. But if you actually back out the broker deposits that you put in there, we were at 38%. So that here again, broker is kind of playing something with the numbers from that perspective.
We probably have that going down, though, by the end of the year, maybe 2% or 3% with a mix change that we have. So I think from that, Corporate Trust is definitely a great business for us. It's a business that's growing for us. As market activity increases in that sector, it will be a big contributor to our balances that we have on the noninterest-bearing side.
So that is a really important piece. Right now, the activity just is down some. So there's a lot of market activity. But right now, we're just giving an outlook for a couple of quarters, but as market activity picks up, Corporate Trust will definitely be a big benefit for us in having that mix change.
Frank Schiraldi
Okay. Great. And then just on the other side of the balance sheet, back to the loan growth outlook and I guess, consumers continuing to slow and 4Q balances maybe being down overall. Just on the C&I side, should that growth decelerate here as the floor deal planning stabilizes? And ultimately, where do you think CRE kind of flushes out or stabilizes in terms of the total loans?
Daryl Bible
Right now, if you look at our projections for total loans, it's relatively flat to maybe up slightly. If you look specifically at the commercial side, C&I is growing. This past quarter, it was really driven by dealers, floor planning as far as we're getting on the lots.
Some of our specialty businesses and fund or sponsor or kind of the growth areas there. As you move forward, I think as CRE, we're going to serve our clients in CRE. But with the businesses that we have, some of it where we will basically lend to them and sell it back out, so that's more fee business.
So that overall business is going to become a smaller percentage of the balance sheet and C&I will continue to be a larger percentage. On the consumer side, it's I think performing well. We might do some asset sales or securitizations just to test the plumbing later this year. So that's really impacting some of those balances if that actually happens.
Frank Schiraldi
Okay. All right. Great. Thank you.
Operator
Thank you. We'll take our next question from Mike Mayo with Wells Fargo Securities.
Michael Mayo
Hey, Daryl.
Daryl Bible
How are you doing, Mike?
Michael Mayo
Welcome to the North. Just a big picture question. I mean, you've been in the Midwest, U.S. Bancorp and you've been in the South, BB&T and Truist and now you're at M&T. And just how do you view M&T when you pull the lens back, having been on the inside at so many different firms and so much perspective over a few decades. Why did you choose to go to M&T, what do you see as the potential that's not unrealized? And what do you think that you can bring extra to the table, which you probably brought up when you spoke to management?
Daryl Bible
Yes, Mike, thank you for the question. I would tell you, first and foremost, I am ecstatic to be here and to be part of the leadership team at M&T. I was actually, my neighbor, Tracy, one of my peers, I walked into her office one evening, and I told her, I think it's better than I expected it to be just the reception of the people and the work ethic and we run a really good company here, and it is really performing well.
I'm just blessed to be on the team to try to continue that performance. To me, it reminds me a lot of a bank that's getting larger. And as we get larger, you have to adjust and to meet certain requirements and from regulations and basically actually running a larger company. For me, the big balance that we have to keep is the magic that happens on in the communities each and every day.
We empower our regional presidents and people to make decisions out in the field and really do a great job with client touch and how we serve clients. And we want to make sure that, that stays intact. But running a larger company, we also have to have controls and processes in place, so we know what's going on and we can manage the risk as we continue to get larger.
So I think it's just a balancing act from that perspective, Mike. And I see a lot of opportunity where I think I can help us perform and get things in working better potentially as we kind of move forward just because we're a bigger company.
But I can't say, I can't tell you how much the work ethic here, just how well we run the company and everything. We do a great job and it really starts with the community and are serving our clients. And from that, it kind of all falls down.
Working for Rene somebody that I've really respected have known over the industry, I would tell you, it is just a dream come true for me in my career. So I am really blessed to be here, Mike.
Michael Mayo
And just one follow-up. Qualitatively, I think that makes sense, helping a bank manage through becoming bigger and all the regulatory and complexity that involves, but if there was one quantitative metric where you say, you know what, three years from now or maybe five years from now, this financial measure should be better and I'm going to take ownership of that. What would that one financial metric be or maybe a couple?
Daryl Bible
I would say we have a good strong performance, if you look at our investor deck and you look at our investor thesis, our return on average tangible common equity at 15% to 20% is pretty darn good to do that consistently. I think that's good. If you get well over 20% you're either growing too fast or taking more risk, so you have to be careful for some of that.
So I think that, that would be a really good target. We are really focused by how we run the company to really, at the end of the day, give a great return to our shareholders. We are really prudent with how we manage our capital, whether it's through buybacks, dividends are definitely key and acquisition.
The acquisitions we do and you just look at the Peoples acquisition, I mean, we have great returns off that acquisition. I went through some of the metrics earlier in my prepared remarks. So that's going well. And I would continue to see probably more acquisitions in our future over time. It's kind of in the pace of how we absorb it. When you do these acquisitions, it really takes us good two, three, four years to get the performance up to the M&T standard.
So just buying people last year, we probably don't expect people's performance to really be at the M&T performance until we get a couple of years under our growth there. But as we grow into that, we could have potentially other opportunities to do more of that over time. So it's good and it will continue to change and evolve as the industry changes, but people here are fully dedicated to the mission. Everybody is 110% all in, and I'm just excited to be on the team.
Michael Mayo
All right. Thank you.
Operator
Thank you. We'll take our next question from Erika Najarian with UBS.
Erika Najarian
Hey, just one last question. I'm sure everybody is hopping on their 9 o'clock call. But Daryl, could you give us a sense of how you think if you are going to do $7 billion in NII, how is the cadence unfurls for the second half of the year. More importantly, what fourth quarter looks like? And is the $183 million impact on a down 100 basis point scenario, from your last Q still sort of in the ballpark of your rate sensitivity to the downside?
Daryl Bible
Yes. Let me start with the sensitivity question, Erika. As we continue to look at our hedging strategies that we have in place and that we are continuing to operate on, we are becoming less and less asset sensitive and right now, when we -- if the Fed increases one or two more times, we'll get a little benefit out of it.
But what I use, if you go up 25 basis points and over a 12-month period with that increase, our net interest margin is probably only going to increase one or two basis points because of that. On the downside, we're getting less negatively impacted as we move forward such that if you go down 25 basis points, our deposit betas are not deposit betas. Our net interest margin is only going to go down three to five basis points.
So it's getting tighter and over time, we just want to try to keep it as close to zero. I mean it's a big balance sheet so you can't be exact, but you want to be as close as you can, and you don't really want to take a whole lot of rate risk and our treasury team is doing an awesome job and manage this through that.
As far as the guide goes, right now with the funding pressures, if you look at what we have rolling off or what's rolling in, we'll probably have a little bit more pressure third quarter versus fourth quarter just because of the repricing that's occurring on the liability side.
That said, as things kind of normalize, we're starting to pick up spreads, higher spreads on the asset side and if things stabilize on the liability side, you could actually start to stabilize margin probably in the mid-3s as you kind of embark, but we'll see how that goes maybe next quarter when we look at '24 and beyond. But hopefully, that helps.
Erika Najarian
That really helps. Thanks, Daryl, and look forward to working with you again.
Daryl Bible
Yes. Thanks, Erica. Appreciate it.
Operator
Thank you. We'll take our last question from John Pancari with Evercore.
John Pancari
Good morning and congrats, Daryl in the new role. Just a couple of very quick things for me. And just on that NIB, noninterest-bearing mix of 34%. Did you -- where you believe it could bottom? Could it be below that 30 -- you're around currently the level that you were pre-pandemic? Could it how much further below that could be noninterest-bearing mix migrate?
Daryl Bible
Yes. I said earlier on another question, John, you may have missed it, but we -- because of the broker deposits that we put on, just putting those broker deposits on dilutes our percentages. So you aren't comparing apples-to-apples from that perspective. But I would say we're going to go down probably 2% or 3%.
The rest of this year will be our best guess. So it's really serving clients to have higher rates. But what I said earlier, we started from a really high place because we've got a lot of surplus deposits, and we really have a huge focus on getting primacy on the operating accounts. And that basically gives us a lot to deal with.
And I think at the end of the day, M&T will still have one of the highest percentages of noninterest-bearing to total deposits of our peer group. So I think it's just playing out with just a higher rate environment, and that will change if rates start to go down at some point.
John Pancari
Got it. All right. And then lastly for me. On the deposit side, your outlook does imply modest growth in the second half of this year? What is that primarily going to reflect? Is that a lot of the incremental broker that you expect? Or maybe a little bit of color there?
Daryl Bible
Yes. It's not broker. We really saw this quarter in the middle of the quarter start to stabilize and start to grow. So we're hopeful that we'll be able to get some growth out of our core businesses, whether it's retail, business banking and commercial and maybe towards the end of the year, maybe we'll get higher activity out of the capital markets area in our corporate trust space as well and wealth areas. So I'm hoping that all those business lines will continue to modestly grow throughout the year as we compete for deposits.
John Pancari
Okay. Great. Thanks for taking my questions.
Daryl Bible
Yes. Thanks, John.
Operator
Thank you. At this time, I'll turn the floor back over to Brian Klock for any additional or closing remarks.
Brian Klock
Again, thank you all for participating today. And as always, clarification of any items on the call or news release is necessary, please contact our Investor Relations Department at area code 716-842-5138. Thank you, and have a great day.
Operator
This does conclude today's M&T Bank Second Quarter 2023 Earnings Conference Call. You may disconnect your line at this time and have a wonderful day.
