M&T Bank Corporation (MTB) Earnings Call Transcript & Summary

Welcome to the M&T Bank First Quarter 2025 Earnings Conference Call. [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 & Presentations link. Close 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 René's annual shareholder letter, he notes 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 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 (sic) [ Coalition Greenwich Awards ] for our Small Business and Middle-Market segments. And we were included in Fortune's Most Admired and Most Innovative Companies 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 BLG distribution. Asset quality continued to improve with a $516 million reduction in commercial criticized balances and $150 million reduction in nonaccrual loans, while 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 from 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 yielded 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 earning 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 to margin include continued securities growth and lower wholesale funding and time deposits and favorable deposit pricing with interest-bearing deposit costs declining 27 basis points. Turning to Slide 10 to talk about average loans. Average loans and leases decreased $0.9 billion 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, driven by continued strength in the corporate and 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 nonaccrual 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. The sequential decline included $0.7 billion decline in broker deposits, while 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 saw 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. Noninterest 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 on the sale of noncore securities and a $23 million BLG distribution. Excluding these items from the prior quarter, noninterest 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 sub-servicing. We expect to reach the full run rate on this sub-servicing 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 plan. Noninterest 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 5 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 recorded a provision of $130 million compared to the net charge-offs of $114 million. 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 in CRE criticized balances, partially offset by $150 million increase in C&I. Within C&I, the increase in criticized was concentrated in the 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 in health care and multifamily helped drive the improvement in the CRE criticized. Turning to Slide 19 for capital. M&T's 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 if 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 but moderating wage growth, while 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 with strong liquidity, strong capital generation and a CET1 ratio at 11.5%. With that economic backdrop, let's 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 360s. 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 paydowns 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 4 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, 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 Usdin with Autonomous Research.

So one question just on the NII. You mentioned that the environment is 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?

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 that deposit range, still 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 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, just cheaper funding, or we'll put it at the Fed and just have more liquidity on hand, one or the other. But we feel good about it on the deposit side.

Okay. And second one on fees. The first quarter, $611 million or so, but you're still talking about the high end of $2.6 billion. I noticed -- 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, we're 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 fourth quarters. We have a lot of momentum across all of our businesses. Our trust businesses are strong. If you look at ICS, they're doing really well in their structured loan agency businesses and activity, also bringing in deposits from activity. So all of that is 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 the additional sub-servicing. That could have other opportunities for growth potentially as that kind of continues to grow. Brokerage services are strong. So I think net-net, overall, I think we're pretty positive on our fees.

We'll take our next question from Ebrahim Poonawala with Bank of America.

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 2 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. Yes, I think all that is 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're 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 are rushing before higher prices. So -- but that's really good volume there. But in the 20 -- the bottom 20% consumer has been struggling for the last several years and will 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. And 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 D.C. 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 and institutional. Our dealer commercial services grew. So we're growing really well in that space. It's really our CRE portfolio is really where the challenges are, and that's really the 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 has 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 given just all the macro uncertainties right now?

So with the volatility in the marketplace, I emphasized in the prepared remarks, we really do have strong capital and liquidity. Our capital is the real capital. Our AOCI actually is a positive 6 basis points. So we really 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're just monitoring. If we see the economy go into a negative spin 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 play it as we go. I know it's not good guidance for you, but we kind of just have to see how things play out. But we're prepared to start with share repurchases on Wednesday and just monitor the economic conditions.

We'll take our next question from Gerard Cassidy with RBC.

Can you give us some color on your insights regarding the regulatory environment? We're 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're hearing and seeing?

Yes. 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 the acting Chair in the FDIC. He 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 the stuff already prepared and completed, and we're pulling back on that. So that's a positive. But the Head of Supervision, Bowman, 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, they're more pro-business, more 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 pull 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 I think it's an opportunity-rich environment to actually make some improvements and be more efficient.

Very good. And then as 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 it just not -- your customers are paying you 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 2 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 you know at M&T, we are very disciplined in how we make loans and put things on our balance sheet. And we're 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. Given that down 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 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'll 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 it was competition. Some of it was some of our REIT customers decided to prepay early and all that. It was mixed.

We'll next go to Matt O'Connor with Deutsche Bank.

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 tweaked 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 million if we did not have the tweaks. But we just wanted to wait the lower -- we have 3 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. It was at 0.1% positive. So we're reflecting it. Obviously, if we do go into a recession, we 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.

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 then just remind us your sensitivity to rate changes on both the short and longer end of the curve.

Yes. So our ALCO team and treasury has been working hard because rates keep changing, the curve keeps changing. So it's a very dynamic environment for sure. What we have as our baseline with our forecast has 4 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's 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 a 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 continue to maybe start to grow our loan book, again once 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 I think overall profitability in the company is going to be really strong, really strong capital generation. So I think we feel really good, and we can weather whatever the economy gives us, I think, very well.

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 a little bit lower than you expect, how does that impact the dollars? Just call it a parallel shift down to keep it simple.

Yes. So our short end, 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're 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, the -- 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's 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's going to reprice higher, maybe 4.5%, maybe 5.5%, but it's 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 3.70s 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 tweak it 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.

Daryl, just a follow-up on your point on the securities 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're 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's all liquid, the $35 billion. We've been buying -- about half of our purchases are basically non-convex. 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 is going into shorter CMOs and seasoned MBS. Our average duration, if you go back maybe 2 years ago, we were 4. 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 -- or 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's 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're just seeing a slowdown for the most part.

And next, we'll go to John Pancari with Evercore ISI.

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 $135 billion to $137 billion, 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.

Yes. So we expect right now our CRE portfolio to bottom out on an average basis probably by the fourth quarter. We think that our pipeline is going to start to build and is building now and just has to go through and basically get on the books. A lot of the new production in the pipeline is construction. So our construction loans won't actually start to fund up meaningfully for probably 12 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's 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 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're 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. They're going to be good long-term assets for us.

Okay. Great. And then it sounds like it's 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 and down about 1%, and really nothing hit our screens that showed any big draws or anything from that. It's not like COVID where it was having draws every day and 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. Right, well, 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 and 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 tend 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.

We'll next go to Christopher Spahr with Wells Fargo.

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 from 1.5 years ago. And if you look at Federal Home Loan Bank advances, they're only $1 billion or $2 billion. So I think we're 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's some sub-debt down the road in the next year or so that you might have to issue 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's consistent with everybody else in the marketplace from that point. And you can get deals done now just at a higher cost and all that. And right now, we really don't need a lot of funding. Our liquidity is really strong.

Okay. And as a follow-up on the expenses and what degree of flexibility on your guide range, I think there's low-hanging fruit with some specific examples of your simplification efforts. And maybe also then some potential savings on regulation.

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're 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're 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're 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 more 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 and still have a shooting for positive operating leverage.

We'll next go to Peter Winter with D.A. Davidson.

Daryl, I was just wondering, given the increase in uncertainty, are there any loan portfolios maybe you're 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 the U.S.A perspective, we have seen some stress in our government contractors. Actually, we've had 2 smaller credits get downgraded in those areas. And we're also monitoring our nonprofit portfolio. Nonprofits, we've had one that got downgraded that focused especially on immigration and all that. So areas that where funding is adjusted for and how they're reacting to it could have some impacts 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% 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 and that we have a good upward trajectory on our net interest margin.

We'll next go to Erika Najarian with UBS.

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 with your balance sheet to be positioned and everything that you've said about growth, it does feel like -- again, as 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 $1.8 billion -- we have to get to the $1.8 billion for the low end of your guidance to be achieved. And if you have a smaller balance sheet, that would imply a 3.70s exit NIM as well.

Yes. I mean as 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 into 3.70s? Yes, but it's not in our base forecast right now. We're basically just trying to balance what we see today with all the risks and uncertainty we have in the marketplace. And if you 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 -- NII 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 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 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're also thinking about capital allocation in the go forward?

Yes. Let me start with the stress testing one. We submitted our information at the end of March, early April and really have not heard anything from the Fed. It's 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're correct with that. And all that, for us, I think it just is meaningful that we can continue to drive that. Last year, we were 1 of 3 banks out of 30 that were able to have a decrease. We went down 0.2. But we're still at the higher end of our stress capital buffer versus most of our peers in the industry. So we're just trying to see if our balance sheet and our basically derisking of what we have is working, and we're moving closer to the middle or maybe into the early or maybe top quartile or whatever of our peer group. So that's 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's 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 averaged up now to be right around 5% approximately. So I think that's probably 0.4% 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.

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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Thank you. And ladies and gentlemen, that does conclude today's program. We thank you for your participation. You may disconnect at any time.