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Welcome to the M&T Bank First Quarter 2025 Earnings Conference Call. All lines have been placed on a listen-only mode further. And the floor will be open for your questions following the presentation. [Operator Instructions] Please be advised that today's conference is being recorded. And I would now like to turn the conference over to Steve Wendelboe, Senior Vice President, Investor Relations.
Please go ahead.
Thank you, Margo, and good morning. I'd like to thank everyone for participating in M&T's First Quarter 2025 Earnings Conference Call, both by telephone and through the webcast. If you have not read through the earnings release we issued this morning, you may access it along with the financial tables and schedules by going to our website at mtb.com. Once there, you can click on the Investor Relations link and then on the Events and Presentations link.
Closed captioning has been provided for webcast participants. 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 today is M&T's Senior Executive Vice President and CFO, Daryl Bible. Now I'd like to turn the call over to Daryl.
Thank you, Steve, and good morning, everyone. First, I will begin with our purpose on Slide 3. Our purpose is to make a difference in people's lives. We are committed to serving not only our customers, but also supporting communities where we live and work, inspiring our 22,000 employees and delivering for our shareholders. In Rene's annual shareholder letter, he notes that our – that we operate in an environment in which change is the only constant.
In these uncertain times, M&T starts from a position of strength with a strong liquidity, capital levels and capital generation. This position of strength reflects our consistent adherence to the fundamentals of liquidity management, capital allocation and transparency. The strength of this operating model allows M&T to continue to perform through the peaks and valleys of the macroeconomic cycles and support our customers and communities in the moments that matter most. As highlighted on Slide 4, we continue to receive notable recognition, including 13 Greenwich Coalition awards for our small business and middle market segments.
And we were included in Fortune's most admired and most innovative company list. Turning to Slide 6, which shows the results for the first quarter. Our first quarter results represent a strong start to the year with several successes to highlight. Net interest margin increased 8 basis points, reflecting our efficient balance sheet and the strength of our deposit franchise.
We executed $662 million in share repurchases, as we continue toward an 11% CET1 ratio in 2025, while also growing tangible book value per share by 2%. Fee income grew 5% since the first quarter of 24% or 10% if you exclude last year's BOG distribution. Asset quality continued to improve with $516 million reduction in commercial criticized balances and a $150 million reduction in nonaccrual loans. Our net charge-offs of 34 basis points were below our full year expectations of 40 basis points.
Now let's look at the specifics for the first quarter. Diluted GAAP earnings per share were $3.32, down from $3.86 in the prior quarter. Net income was $584 million compared to $681 million in the linked quarter. M&T's first quarter results produced an ROA and ROCE of 1.14% and 8.36%, respectively.
Slide 7 includes supplemental reporting of M&T's results on a net operating or tangible basis, M&T's net operating income was $594 million compared to $691 million in the linked quarter. Diluted net operating earnings per share were $3.38 down from $3.92 in the prior quarter. Net operating income muted an ROTA and ROTCE of 1.21% and 12.53%. Next, let's look a little deeper into the underlying trends that generated our first quarter results.
Please turn to Slide 8. Taxable equivalent net interest income was $1.71 billion, a decrease of $33 million or 2% from linked quarter. The lower NII was primarily driven by 2 fewer days and lower average returning assets, partially offset by favorable deposit costs. Net interest margin was 3.66%, an increase of 8 basis points from the prior quarter. The primary drivers of the increase in margin include continued securities growth and lower wholesale funding and time deposits and favorable deposit pricing with interest-bearing deposit cost declining 27 basis points.
Turning to Slide 10 to talk about average loans. Average loans and leases decreased $0.9 million to $134.8 billion. Lower CRE balances were partially offset by the growth in C&I, consumer and residential mortgage. C&I loans grew 1% to [$61 billion] (ph), driven by continued strength in the corporate institutional and fund banking.
CRE loans declined 6% to $26.3 billion, reflecting payoffs and paydowns and muted origination activity with increased market competition. Residential mortgage loans were relatively unchanged at $23.2 billion. Consumer loans grew 1% to $24.3 billion, reflecting increases in recreational finance and indirect auto loans. Loan yields decreased 11 basis points to 6.06%, as lower rates on variable loans and lower non-accrual interest was partially offset by fixed rate loan repricing and a smaller drag on our cash flow hedges.
Turning to Slide 11. Our liquidity remains strong. At the end of the first quarter, investment securities and cash, including cash held at the Fed totaled $57.9 billion, representing 28% of total assets. Average investment securities increased $0.8 billion. The yield on the investment securities increased 12 basis points to 4%, as the yield for new purchases exceeded the yield on maturing securities.
In the first quarter, we purchased $2.6 billion in debt securities at an average yield of 4.9%. The duration of the portfolio at the end of the quarter was 3.6 years, and the unrealized pretax loss on the available-for-sale portfolio was $8 million or less than 1 basis point CET1 drag if included in regulatory capital. Turning to Slide 12. Average total deposits declined $3.4 billion or 2% to $161.2 billion. A sequential decline included $0.7 billion decline in broker deposits, where the remainder of the decline was concentrated in commercial and business banking partially reflecting seasonal lower balances.
Average noninterest-bearing deposits declined $1.1 billion to $45.4 billion. Excluding broker deposits, average noninterest-bearing deposit mix in the first quarter was relatively unchanged at 30.2%. Interest-bearing deposit costs decreased 27 basis points to 2.37%. We sold favorable deposit declines across business lines, higher level of broker and retail time deposit maturities in the quarter also contributed to the deposit cost decline.
Continuing on Slide 13. Non-interest income was $611 million compared to $657 million in the linked quarter. We saw continued strength across fee income categories with increases in mortgage banking, service charges, trust and brokerage fee income. Recall that the fourth quarter included an $18 million net gain from the sale of noncore securities and a $23 million BLG distribution. Excluding these items from the prior quarter, non-interest income declined by $5 million sequentially.
Mortgage banking revenues were $118 million compared to $117 million in the fourth quarter. Residential mortgage banking revenues increased $6 million sequentially to $82 million reflecting the partial quarter benefit from new subservicing. We expect to reach the full run rate on this subservicing in the second quarter. Commercial mortgage banking revenues decreased $5 million to $36 million, reflecting lower gains on the sale of commercial mortgage loans.
Other revenues from operations decreased $34 million to $142 million mostly reflecting the fourth quarter $23 million BLG distribution. Turning to Slide 14. We continue to execute on our expense plans. Non-interest expenses were $1.42 billion, an increase of $52 million from the prior quarter. Last year's fourth quarter included $35 million in notable expenses related to the redemption of certain M&T Trust preferred obligations, expenses associated with corporate real estate optimization, partially offset by pension-related credit.
Salary and benefits increased $97 million to $887 million, mostly reflecting $110 million of seasonally higher compensation expense related to stock-based compensation, payroll-related taxes and other employee benefit expenses. As usual, we expect those seasonal factors to decline significantly, as we enter the second quarter. Other cost of operations decreased $50 million to $118 million, primarily reflecting the previously mentioned fourth quarter notable items. The efficiency ratio was 60.5% compared to 56.8% in the linked quarter.
Next, let's turn to Slide 15 for credit. Net charge-offs for the quarter totaled $114 million or 34 basis points decreasing from 47 basis points in the linked quarter. Charge-offs were relatively granular in the first quarter, with the five largest charges amounting to less than $30 million in total, representing both C&I and CRE credits. Nonaccrual loans decreased $150 million or 9% to $1.5 billion.
The nonaccrual ratio decreased 11 basis points to 1.14% driven largely by payoffs, charge-offs and upgrades out of nonaccrual. In the fourth quarter, we reported a provision of $130 million compared to the net charge-offs of [$114 million] (ph). The allowance to loan ratio increased 2 basis points to 1.63%, reflecting growth in certain consumer loan portfolios, as well as a modest deterioration in the macroeconomic forecast. The increase was not related to changes in the underlying credit performance, which is mostly in-line with expectations.
Please turn to Slide 16. We estimate that the level of criticized loans will be $9.4 billion compared to $9.9 billion at the end of December. The improvement from the linked quarter was driven by $667 million decline and CRE criticized balances, partially offset by a $150 million increase in C&I. Within C&I, the increase in criticized was concentrated in a motor vehicle and recreational finance dealers. The CRE criticized decline was primarily within multifamily, office, health care, construction and was driven by payoffs, paydowns and upgrades to past status.
Improved leasing, occupancy and cash flows and healthcare and multifamily helped drive the improvement in the CRE criticized. Turning to Slide 19 for capital. M&T CET1 ratio at the end of the first quarter was an estimated 11.5% compared to 11.68% at the end of the fourth quarter. The decline in the CET1 ratio reflects increased capital distributions, including $662 million in share repurchases, partially offset by continued strong capital generation.
AOCI impact on the CET1 ratio from available-for-sale securities and pension-related components combined would be approximately a positive 6 basis points is included in regulatory capital. Now turning to Slide 20 for the outlook. First, let's begin with the economic backdrop. The economic backdrop remains dynamic in light of the developments over the past several weeks.
Recent economic data is mixed with strong job gains of moderating wage growth. Our recent readings show weakening business and consumer sentiment and easing inflation. The ultimate impact on tariffs on the broader economy remains unknown at this point. That uncertainty is reflected in recent equity market and rate volatility.
We ended the first quarter well positioned for a dynamic economic environment of strong liquidity, strong capital generation and a CET1 ratio at 11.5%. With that economic backdrop, let us review our net interest income outlook. We expect taxable equivalent, net interest income to be $7.05 billion to $7.15 billion, with net interest margin increasing through the year and averaging in the mid-to-high [3.60s] (ph). We expect the full year average loan and lease balances to be $135 billion to $137 billion.
The lower loan outlook reflects lower CRE balances with elevated payoffs and pay downs and muted originations. Full year average deposit balances are expected to be $162 billion to $164 billion. We remain focused on growing customer deposits at a reasonable cost, while also considering loan growth. Turning to fee income.
We expect noninterest income to be at the high end of the $2.5 billion to $2.6 billion range. The environment remains dynamic. However, our diversified product set should help provide relative stability from our fee income businesses. Continuing with expenses, we anticipate total noninterest expense, including intangible amortization, to be $5.4 billion to $5.5 billion.
Our business lines remain focused on closely managing their expenses, allowing the bank to continue to target investments in projects and business opportunities that support our enterprise priorities. Regarding credit, we continue to expect net charge-offs for the full year to be near 40 basis points. We also expect criticized loans to continue to decline in 2025. As it relates to capital, we expect the CET1 ratio to reach 11% in 2025 but we'll monitor the economic backdrop and adjust as needed. The level of share repurchases will vary with RWA growth.
As shown on Slide 21, we remain committed to our four priorities, including growing our New England and Long Island markets, optimizing our resources through simplification, making our systems resilient and scalable and continuing to scale and develop our risk management capabilities. To conclude on Slide 22, our results underscore an optimistic investment thesis. M&T has always been a purpose-driven organization with a successful business model that benefits all stakeholders, including shareholders. We have a long track record of credit outperforming through all economic cycles, while growing within the markets we serve.
We remain focused on shareholder returns and consistent dividend growth. Finally, we are a disciplined acquirer and prudent steward of our shareholder capital. Now let's open the call up to questions before which Margo will briefly review the instructions.
[Operator Instructions] We'll take our first question from Ken Houston with Autonomous Research. Please go ahead.
Hey. Good morning Daryl .So one question just on the NII. You mentioned that the environment has meaningfully changed. And we see a smaller balance sheet here, offset by a little bit better of a NIM output.
Are you noticing anything in terms of the deposit flow activity, more specifically in terms of how much more mix shift you might expect and how much more you might be able to also continue to work down that higher cost liability side? Thanks.
Yes, Ken, we are definitely -- we did lower the guidance on deposits, but I think we feel pretty comfortable that we'll probably be at the higher end of the deposit range. So having really good growth of our businesses across the board, whether it's commercial, small business, consumer. Our ICS business kind of grows, as activity in the marketplace is growing. So I think where we feel pretty positive on the deposit growth.
And we'll use those additional deposits if we don't have loan growth to either pay off higher liabilities in the marketplace that we have on the balance sheet cheaper funding or we'll put it at the Fed and just got more liquidity on hand, one or the other. But we feel good about on the deposit side.
Okay. And second one on fees. The first quarter [indiscernible] or so, but you're still talking about the high end of 2.6. I noticed that -- I don't believe -- was there a Bayview distribution in the first quarter? Was that pushed? And can you just talk about the ramp that you get from here going forward and your confidence in getting towards that higher end on fees?
Yes. So you are right, Bayview, we did not get a distribution in the first quarter. We kind of took it out for the rest of the year. We may or may not get a distribution from Bayview.
They're working on some things internally. So we will do. But if you look at all of our other businesses that we're having, [indiscernible] having really good growth across. I would expect our fee businesses to grow from where we are in the first quarter, I think significantly in the second, third and first quarters.
We have a lot of momentum across all of our businesses. Our trust businesses are strong. If you look at ICS, they are doing really well and they are structured loan agency businesses and activity, also bringing in deposits activity. So that's really positive.
Our service charges are actually performing really well right now. From a mortgage banking perspective, if rates come down, and then who knows which way the yield curve is going to go. But we are positioned to have really good mortgage revenues, both on the commercial and residential side from originations. You did see the increase in our numbers now this quarter from additional subservicing that couldn't have other opportunities for growth, potentially as that kind of continues to grow. [indiscernible] services are strong.
So I think net-net, overall, I think we're pretty positive on our fees.
Okay, thanks Daryl.
Thank you.
We'll take our next question from Ebrahim Poonawala with Bank of America. Please go ahead.
Hi, good morning Daryl.
Good morning.
Good morning. I guess, in your remarks, you mentioned tariff uncertainties were reflected in the stock markets and in interest rates. Just if you don't mind, talk to us about any anecdotal sort of feedback from your customers over the last week or two around tariffs? Are you seeing CapEx decisions being pulled back?
Just would love any color there? And then how is that informing your outlook on C&I growth?
Yes. All that's fair. So I think if you look at it overall, you saw the sentiment numbers were both weak on the consumer and on the business side. If you start with the consumer, from just looking at our debit card activity, our spending patterns are still pretty much intact there.
So I think we are pretty consistent. We are seeing and it could just be short lived, but in our indirect channels on the consumer side, a lot of loan volume coming in auto, marine and RV, maybe people rushing before higher prices. So -- but that's really good volume there. In the bottom 20% consumer has been struggling for the last several years, and we'll continue to probably continue to struggle.
Business-wise, our customers actually really wanted to make a lot of investments. They want to do acquisitions. They are just really on pause right now. I think it's just lack of confidence.
They don't know what the rules of the road are right now. Things keep changing in the DC. And until that settles out a little bit, I think they're going to be on hold until they come through. That said, we've been able to grow our C&I business.
We grew nicely. If you look at it in our middle market space, we had good growth there. We had growth in fund banking, corporate institutional, our dealer commercial services grew. So we are growing really well in that space.
It's really our CRE portfolio. It is really where the challenges are. And that's really a portfolio that's having us shrink and lower our loan guidance for the most part.
That's helpful. And I guess maybe the other thing on capital. You mentioned CET1 to 11% depending on RWA growth. Just give us -- how price sensitive you are?
I mean I think the stock's come down a fair bit relative to where you repurchased during the first quarter. Like how quickly could we see if customers remain on pause, that M&T gets to 11%? Yes. And you mentioned also opportunistic buyer as regards to capital.
Like are there any deals to be done and given just all the macro uncertainties right now? Thanks.
So with the volatility in the marketplace, I emphasized in the prepared remarks, we really do have strong capital and liquidity and our capital is the real capital. Our AOCI actually is a positive 6 basis points. So we feel good about that. We will monitor market conditions.
We still plan to start our share repurchase back on Wednesday when we come out of blackout. And we are just monitoring if we see the economy go into a negative spend down, we might slow down or pause. But until we see that, right now the trends for the most part are pretty uneventful. And we'll just kind of playing as we go.
I know it's not good guidance for you, but we got to kind of just have to see how things play out, but we're prepared to start with share repurchases on Wednesday and just monitor economic conditions.
Very good. Thank you.
We'll take our next question from Gerard Cassidy with RBC. Please go ahead.
Hi Daryl.
Hi Gerard. How you doing?
Good thank you. Can you give us some color on your insights regarding the regulatory environment? We are reading a lot about the regulators look to ease up, if you will on some of the regulatory requirements. There's a lot of talk about the supplementary leverage ratio and the leverage ratio.
But they seem to pertain to our biggest banks, the trillionaire banks. Are you seeing anything on the horizon that would be very beneficial to the regional banks like yourself from the regulatory stuff that you are hearing and seeing?
Yes, I just want to start with, it really doesn't matter to us who's actually in D.C. in the administration, Republican or Democrat. We perform and do well. If you look at our people's acquisition that was done under the Biden administration. So we can do business either way.
From a regulatory perspective, I would tell you, the people that are getting in the seats tend to be much more focused on having our industry help grow the economy and really have an impact positively to it. You're seeing that with acting chair and the FDIC actually came out this past week, he actually is pulling back on some of the RRP stuff. We're in the first wave. So we actually had this stuff already prepared and completed.
And we are pulling back on that. So that's a positive. But Head of Supervision, [Bowman] (ph) is really looking at tailoring. I think that's a really good positive for us.
I think that would be good. OCC and CFPB are also, I think, very positive. So I think, generally there are more pro-business, we're trying to grow the economy. And you could see some tweaks around the Tier 1 leverage ratio, the SLR stress testing, Basel III, LCR, long-term debt, RRP.
And hopefully, maybe they pulled back on all the regulatory reporting. We've produced thousands of reports to the government officials and I'm sure we can weed out some of that information as well. So -- but I think it is an opportunity-rich environment to actually make some improvements and be more efficient.
Very good. Thank you. And then a follow-up to your comment about loan growth and how the commercial real estate portfolio is making it more challenging. Can you dive into that a little further?
Is it your choice to kind of continue to shrink it? Or is there just not -- your customers are paying off and you can't grow it. What's some of the color behind the challenges within the commercial real estate portfolio?
So what we've seen in the last quarter or two is that there's a lot more active lenders in this space. So you have a lot more people providing loan capital. And if you look at it, it's very competitive. So people are already being very aggressive on pricing and on structure.
And at M&T, we're very disciplined in how we make loans and put things on our balance sheet. And we are doing our best to support our customers and all that. But at the end of the day, we aren't going to put loans on that aren't structured properly from that perspective. In the first quarter, and you look at the payoffs that we received, it was a much higher amount than what we expected.
About half of them were known maturities that were coming through in the first quarter. Another 10% was just pulling forward maturities in later '25. But 40% was really pulling in maturities from '26 and beyond. And that's really where there's a lot of impact going on from that perspective. And given that – that increase, it's not all bad, we've been able to remix our portfolio.
So we actually have a lot less office exposure, which is good. We're also reducing a lot of the smaller credits, less than $5 million. And we are actually growing areas that we want to grow like multifamily and industrial. So it's not all bad.
I would say the pipeline is building, and we feel good that it will kind of level out over the next couple of quarters and start to grow, and we just continue to do that. I mean, at the end of the day, we'll have a smaller balance sheet and probably just repurchase back more stock.
And Daryl, just quickly on those maturities that were being pulled forward in '25 and '26 that were paid off. Was that due to that competition that you referenced?
Part of that was competition. Some of it was some of our REIT customers decided to prepay early and all that. It was mixed.
Okay, good. Thank you.
We'll next go to Matt O'Connor with Deutsche Bank. Please go ahead.
Matt O’Connor : Good morning. You guys added a little bit to the loan loss reserves, even though the loans were down and the credit metrics were better. Can you just talk about how you tweak your macro outlook to support the higher reserves?
Yes, we did tweak it just because of what's going on in the marketplace, Matt. I think that's correct. Our provision probably would have been close to 110, if we did not have the tweaks. But we just wanted to wait the lower -- we have three scenarios that the scenario that has the downward pressure.
We just increased that proportionately more so that you have higher unemployment rates and you have lower GDP rates. We didn't have it go into a recession, but we had it close just above that, that 0.1% positive. So we're reflecting it. Obviously, if we do go into a recession, we'll probably would continue to add to the reserves appropriately as needed.
But we just felt comfortable that, that was the right thing to do given everything that's going on and uncertainty in the marketplace.
Matt O’Connor : Okay. That's helpful. And then separately, maybe I missed it, but what are the interest rate assumptions that you have within your net interest income guide? And just remind us just sensitivity to rate changes on both the short and long run of the curve? Thank you.
Yes. So our ALCO team and treasury has been working hard because rates keep changing, the curve keeps changing. So it is a very dynamic environment for sure. What we have as our baseline with our forecast has four drops, the last one being in December, which isn't very significant.
And we have the yield curve that we had on April 7, which is a relatively lower yield curve from that. The way I would look at it, there is a lot of puts and takes here. From a net interest margin perspective, just high level, if rates on the curve continue to flatten out, if they go down, that would be negative for margin. As we get more deposits like Ken asked earlier, that could be good for NII, but maybe lower for margin if we deploy that in our liquidity portfolio.
For higher margin, I'd say, obviously, a steeper curve would be helpful. And if we can maybe start to grow our loan book, again on CRE starts to come online. I think that would be possible and all that. So there's a lot of puts and takes there.
That said, overall, I feel really good with margin trajectory, mid-to-high [3.60s] (ph), I think overall profitability in the company is going to be really strong capital generation. So I think we feel really good and we can weather whatever the economy gives us, I think, very well.
Matt O’Connor : Okay. And then just to summarize that, though, like as we think about the net interest income dollars, are you asset sensitive? Are you relatively neutral? Again all things else being equal, but if rates are lower than you expect, has that impact the dollars? Just calling a parallel shift down to keep it simple. Thanks.
Yes. So our short hand, we are definitely pretty neutral. It really does not impact us much one way or the other what direction the Fed does on rates. I think we are relatively good.
And you saw our deposit betas are 50-plus percent. So they're reacting like we thought they would react. So all that is coming in really well. With the yield curve flattening, -- we still have positive roll-on, so like in the consumer loan portfolio, it's probably repricing right now maybe 100 to 150 basis points more.
If rates flatten down, it is going to still reprice positive, but maybe only 50 basis points better. So we still get the benefit. It's just less of a benefit. I think the thing to really emphasize though is we have a lot of knowns in our balance sheet, which kind of gives us the comfort, we're going to have strong margin and strong NII.
We know for a fact that we have $4 billion of securities coming off at a yield of 3.5%, depending on what the yield curve looks like it is going to reprice higher, maybe 4.5%, maybe 5.5%, but it is going up. Consumer loans I just talked about, that's going to continue to reprice higher. Strong beta -- deposit beta is good. And then on the swap book, we know for a fact that our swap book is going to go up and accrete more over time, up to 30 basis points.
We should be in the [370s] (ph) by the end of the year and early '26. So all those are known and all those are going to happen. And that's baked into our numbers and all that. So that gives us confidence that we're going to perform well and then tweaking on the edges either way if we're going to outperform or maybe be a little bit less. But net-net, overall, earnings will be strong.
We'll next go to Manan Gosalia with Morgan Stanley. Please go ahead.
Hi, good morning. Daryl, just a follow-up on your point on the security side. Just given that the long end of the curve has been so volatile, how are you thinking about putting on more securities here? And what kind of duration would you be willing to take?
Yes. So we are very disciplined in how we are doing this. We're in it for the long term. It's kind of how we approach it.
So our strategies really haven't changed. We are investing -- obviously, we cleansed our portfolio last year. So all we have is government-backed securities in our portfolio, whether they're treasuries, agencies or municipalities. We don't have any non-agency stuff in the portfolio.
So it is all liquid to $35 billion. We've been buying -- about half of our purchases are basically non-convexed. So we're buying treasuries and CMBS in the marketplace. Obviously, we don't have the attractive yields that you do in the CMBS, but you know you're going to keep them over the whole maturity.
And then the other half has been going into shorter CMOs and seasoned MBS. Our average duration, if you go back maybe two years ago, we were four, we're now in the 3.5 range, and we stayed in the 3.5 range and feel really good about how we're positioned. It's a portfolio for liquidity and we're going to continue to use it for that if we need it.
Got it. And maybe on loan growth, actually the other side of the loan growth question is credit. And you've had some nice loan growth in C&I over the past few quarters. I think C&I is up 7% year-on-year, and that's clearly well above peers.
So how are you thinking about the credit performance of that book if we get a weakening macro environment from here? And I ask because I noticed that the declines in CRE criticized were actually in line with last quarter, but then you had some offsets on the C&I side.
Yes. Our CRE portfolio has been performing really well. We've stress tested, looked at it backwards and forwards and feel really good on the trajectory of that portfolio. That said, we have maybe a little bit of exposure in the greater D.C. area, a couple of hundred million, nothing significant.
But things to watch out for in certain areas. But net-net, overall, we feel CRE is going to perform and continue to perform very, very well from that perspective. Our C&I went up. It was really just idiosyncratic one customer, a large credit, a couple of hundred million, basically had some issues with a roll-up strategy for the big trucks that you see on the road and all that.
And we think that's going to play out positively as the year goes. So we don't think there is any losses there. So net-net, overall, we still think that we will continue to lower our criticized throughout the year, not at the pace that we did in '24, but still at a measured pace. If things get really bad in the economy, which I don't think is going to happen, but if they do, then we can adjust accordingly.
But right now, I think we are just seeing a slowdown for the most part.
Great. Thank you.
And next, we'll go to John Pancari with Evercore ISI. Please go ahead.
Good morning, Daryl.
Good morning John.
Just back to the loan growth. I know you gave some good color on the commercial real estate balances that are coming down and also seeing some growth selectively in C&I within that average loan guidance of 1.35 to 1.37. Can you talk to us maybe -- can you break down the incremental CRE decline that you expect and where you expect that could bottom just given what you're seeing right now? And then perhaps maybe help us with how we should think about the pace of C&I loan growth as we look out through the remainder of the year? Thanks.
Yes. So we expect right now our CRE portfolio, the bottom out on an average basis, probably by the fourth quarter. We think that pipeline is going to start to build. Its building now and it just has to go through and basically get on the books.
A lot of the new production on the pipeline is construction. So our construction loans won't actually start to fund up meaningfully for probably 12 months to 15 months from that standpoint. But CRE is, I think going to work its way through and start to grow momentum and grow positively. For us, it is all about making sure it's -- we're serving client selection, the best customers out in the marketplace, making sure that the loans are structured really well.
That helped us through some down periods. We won't lose that. So structure is really important to us. And we will compete on price if everything else falls into place from that perspective.
So we'll just see. But our C&I book portfolio, I think is gaining momentum. Consumer is going really well. And we're actually, we're going to try to grow a little bit in residential mortgage as well to help offset it.
That said, portfolio -- we'll just see how it plays out overall. But we are doing everything we can, but we're going to make sure we emphasize and really put loans on our books that we know won't be issues in the next couple of years, and that will be good long-term assets for us.
Okay. Great. And then it sounds like it is probably not the case, but are you seeing -- on that loan topic, are you seeing any line utilization or line drawdowns out of precautionary concerns by borrowers given the recessionary environment? Any evidence of that at this point?
No, not really. I mean you look at the utilization this past quarter, commercial is down -- brought down about 1%. And really nothing hit our screens that showed any big draws or anything from that. And it's not like COVID where it was having draws every day.
You saw your capital ratios come down. It's not like that at all. There's really almost no additional activity. Behaviors have been pretty consistent, to be honest with you than what we went through in the last down period with COVID.
Right. That's good to hear. And then I'm sorry, just one more on deposits. It looks like you saw some pretty good end-of-period growth where balances were above the average and particularly in noninterest-bearing. Any read into that? Or should we pay attention more so to the average deposit trajectory?
The first quarter is always a low seasonal quarter for us. So it always drops in January, February, then starts to build back in March. You have to also remember, we have a lot of escrow deposits because of our mortgage servicing businesses that we have. So we intend to gain through the first half of the month and then it kind of drops off in the second half of the month.
And our ICS business and trust has a lot of activity and that kind of comes and goes depending on what we have there. And we had some ICS deposits on the balance sheet at the end of the quarter as well. But that's all good funding to have, and it helps us manage our balance sheet and helps with NII overall.
Okay, great. Thanks Daryl.
We'll next go to Christopher Spahr with Wells Fargo. Please go ahead.
Hi, good morning. Thanks. Just a quick question. On long-term debt, just what is your perspective on like with sluggish loan growth and I guess you seem to be somewhat optimistic on deposits? But like long-term loan-to-deposit ratio? And where do you see long-term debt kind of settling out?
So our long-term debt, we are really focused on trying to reduce kind of broker deposits, Federal Home Loan, bank advances. I think our broker deposits are around $7 billion or $8 billion right now. So they're down from the peak of a 1.5 years ago. And if you look at Federal Home Loan Bank advances $1 billion or $2 billion.
So I think we are pretty much through that. Long-term debt we'll issue as needed, depending on what our customer growth is and what our loan growth is, all that being said. So we'll access it accordingly. I think there is some sub debt down the road in the next year or so that you might have to issue it down to get our total capital ratios where they need to be.
But net-net, overall, we'll do long debt when it makes sense. We've had spreads come in for us versus our peers, relatively well this past year or so. Obviously, with some volatility in the marketplace, spreads have gapped out, but it is consistent with everybody else in the marketplace from that point. And you can get deals done now just at a higher cost.
With all that, and right now, we really don't need a lot of funding, our liquidity is really strong.
Okay. Thank you. And as a follow-up on the expenses and what degree of flexibility on your guide range -- like there is low hanging fruit with some specific examples of your simplification efforts and maybe also then some potential settings on regulation? Thank you.
Yeah. I would say for the last couple of years that I've been part of M&T, our businesses and leaders have done a great job controlling their expenses, and this year is no exception to that. They are doing a great job for that. if we actually did get into a bad recession period where revenue was really challenged. There are things we could do to pull on expenses.
But right now, I'm still thinking we are going to drive positive operating leverage for the year. I think we still have a shot at that, still growing NII and fees, and we still have a modest increase on the expense side. That said, if you look at our strategic projects, there are some strategic projects that we have to just get finished because we've been doing them for so long. So like the GL, our data centers, cyber and our commercial CDA program, all those need to finish out.
We are really close on a lot of these and should get those done. The other ones are more newer. So if you really had to, you could slow some of that down from an expense perspective. We're also really focusing and working on how we can just deliver our products and services and we are efficiently in the back office.
So I think you'll see a lot of realignment, some automation and some workforce strategies potentially needed if we had to do something like that. So net-net, overall, I think we have flexibility on expenses, but really don't believe we have to pull the trigger now, still have a shooting for a positive operating leverage.
Okay. Thank you.
We'll next go to Peter Winter with D.A. Davidson. Please go ahead.
Hi, thanks good morning. Daryl, I was just wondering, given the increase in uncertainty, are there any loan portfolios maybe you are watching a little bit more closely? Or any portfolios causing you to tighten underwriting standards a little more?
Yes. There is a list of portfolios, obviously that we are looking for and monitoring really well. If you look at it, retail trade is one, manufacturing -- you look at anything from construction, wholesale trade. So all those tend to be areas that we're watching very closely.
From DOGE and USAID perspective, we have seen some stress in our government contractors. Actually, we've had two smaller credits get downgraded in those areas. And we're also monitoring our nonprofit portfolio. Nonprofits, we've had one -- they get downgrade.
It focused specialty on immigration and all that. So areas that we are funding is adjusted for and how they are reacting to it could have some impact there. That said, none of that is really meaningful to date that we've seen. But we are monitoring all these portfolios very closely.
And we'll just see how the economy plays out.
Got it. And just one housekeeping on the margin. I just want to clarify, you said that the exit rate should be around [3.70] (ph) this year. Is that correct?
No, I did not say that. I said that we are guiding for [mid-3.60s to high 3.60s] (ph) and that we have a good upward trajectory on our net interest margin.
Okay, thanks Daryl.
We'll next go to Erika Najarian with UBS. Please go ahead.
Hi, there. Sorry, they just took away our physical phones. And so old people like me have to figure out how to unmute more quickly. Just a few follow-up questions, Daryl.
So clearly, there are near-term sort of headwinds to growth. But as we think about everything that you described your balance sheet to be positioned and everything that you've said about growth, it does feel like -- again, just a follow-up to the questions on the exit rate. It does feel like the NII trajectory should be upward from here, if we just sort of dissect your guide and what you reported because you'll get the day count back in the second quarter, then it feels like we'll get to the [18] (ph) -- we have to get to the [1.8] (ph) for the low end of your guidance to be achieved. And if you have a smaller balance sheet that would imply a [3.70] (ph) exit NIM as well?
Yes. I mean we talked earlier, one of the analysts are talking about what happens with what interest rate environment you have, what the yield curve is, what the Fed actions really do and also what the size of the balance sheet, both on the loan and deposit side. There's just a lot of puts and takes out there. Is it possible we can get in the [3.70s] (ph), yes.
But it’s not in our base forecast right now. We are basically just trying to balance what we see today with all the risks and uncertainty we have in the marketplace. And give me a rate scenario, I'll give you my best estimate of what that rate scenario is from a margin perspective from that. I think your NII comment is positive.
And I think that we -- and I should continue to move in an upward direction. I think that's right.
Fair enough. We've gotten whipsawed by the curve and the forward curve for sure. And then a follow-up question. First is if you could tell us in sort of in the CECL model, what your unemployment assumption is underpinning your current reserve?
And then as a follow-up, somewhat related question, you are participating in the stress test this year, you did opt in? I'm wondering, since the Fed had put out the -- their own language and their own press release indicating that changes to administrative law is requiring them to reexamine the test itself. Have you noticed any changes in the process yet in terms of the stress test in terms of more transparency, more feedback? And additionally, does the -- if you receive a smaller or a lower stress capital buffer, does that change the way you are also thinking about capital allocation and the go forward?
Yes. Let me start with the stress testing one. We submitted our information at the end of March, early April, and we really have not heard anything from the fed. It is kind of a normal year from a processing perspective, at least to-date, that is what we've seen.
We are optimistic, obviously, that to opt in, we thought we would have a lower stress capital buffer. We'll see if we are correct with that and all that. For us, I think it's just is meaningful that we can continue to drive that. Last year, we were one of three banks out of 30 that we're able to have a decrease.
We went down two tenants but we're still at the higher end of our stress capital buffer versus most of our peers in the industry. So we are just trying to see if our balance sheet basically de-risking of what we have is working and moving closer to the middle or maybe into the early or maybe top quartile or whatever of our peer group. So that is really what we're trying to do there. Obviously, other constituencies can look at that and can weigh in on what impact that has.
I think long term, Erika, it might make an impact. But I don't think, immediately given all the uncertainty in the marketplace, it is going to have much of an impact of what we're trying to do from a capital perspective. We're going to just really monitor to see if we actually go into a recession or not right now. As far as CECL goes, I would tell you that we're -- our unemployment rate average debt now to be right around 5%, approximately.
So I think that's probably [4, 10, 7] (ph) higher than what we were higher than that before we made the adjustment. It's obviously not a recessionary type unemployment rate, but it did move up because of the changes that we made.
Right. Thank you.
You’re welcome.
Thank you. And that does conclude our questions. I would like to now turn the call back over to Steve Wendelboe for closing remarks.
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