M&T Bank Corp
NYSE:MTB
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M&T Bank Corp
Earnings Call Analysis
Q2-2024 Analysis
M&T Bank Corp
The company boasted strong performance in the second quarter of 2024 with net income reaching $655 million, marking a 23% increase from the previous quarter's $531 million. This improvement translated to diluted GAAP earnings per share of $3.73, up from $3.02 in Q1. In line with its strategy, the bank continued to grow loans while reducing its Commercial Real Estate (CRE) exposure by 4% and increasing Consumer and Industrial (C&I) loans by 2% .
Asset quality showed notable improvement with a reduction in nonaccrual loans by $278 million to $2 billion, and the nonaccrual ratio dropped 21 basis points to 1.5%. Additionally, the CET1 ratio climbed to 11.44% by the end of Q2, up from 11.08% in Q1. These figures underscore the company's robust capital position and commitment to maintaining high asset quality amidst changing market conditions .
The taxable equivalent net interest income increased by $39 million, reaching $1.73 billion in Q2. This was driven by a 7 basis points increase in net interest margin to 3.59%, primarily due to fixed rate asset repricing and higher nonaccrual interest income. However, interest-bearing deposit costs slightly decreased by 3 basis points, reflecting more rational pricing in the marketplace .
Noninterest income remained stable at $584 million, with minor increases in service charges and mortgage fees. Noninterest expenses saw a significant decrease of $99 million from the first quarter, attributed to lower compensation costs and reduced FDIC special assessment fees. This brought the adjusted efficiency ratio down to 55.1% from 59.6% in the previous quarter .
The company focused on reducing criticized loans, achieving a $987 million decrease in CRE criticized balances. Overall criticized loans fell to $12.1 billion by the end of June from $12.9 billion in March. These efforts were underpinned by favorable resolutions with borrowers and proactive risk management strategies .
For the remainder of 2024, the bank expects net interest income to range between $6.85 billion and $6.9 billion. The forecast incorporates anticipated rate cuts in September and December, although these are expected to have limited direct impact on income due to proactive measures taken to neutralize rate sensitivity. The institution projects balanced asset growth and sustained liquidity, with average cash and securities expected to stabilize around $55 billion. Additionally, the guidance predicts full-year charge-offs near 40 basis points and tax rates between 24% and 24.5% .
Reflecting strong capital generation, the company plans to resume share repurchases at a pace of $200 million per quarter starting Q3. This decision is supported by a healthy macroeconomic environment and improvements in asset quality. The bank's disciplined approach continues to emphasize shareholder returns, organic growth, and strategic management of capital and resources .
The firm reaffirmed its commitment to long-term sustainability with total sustainability finance loans and investments totaling $3.1 billion in 2023. Recognized for customer satisfaction and operational excellence, the bank aims to maintain its trajectory of growth while managing risks and delivering value to all stakeholders .
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Welcome to the M&T Bank Second Quarter 2024 Earnings Conference Call. 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 hand the conference over to Brian Klock, Head of Market of Investor Relations. Please go ahead.
Good morning. I'd like to thank everyone for participating in M&T's Second Quarter 2024 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 is M&T Senior Executive Vice President and CFO, Daryl Bible. Now I'd like to turn the call over to Daryl.
Good morning, everyone. As you will hear on today's call, the second quarter results continue M&T's strong momentum for 2024. Turning to Slide 4. This April, we released our fourth annual sustainability report. We are proud of our continued progress towards our sustainability goals. Our efforts are creating positive outcomes for our businesses, our customers and our communities. Of note, in 2023, our total sustainability finance loans and investments totaled $3.1 billion.
Turning to Slide 5. We continue to garner awards for our businesses, products and employees, including the highest customer satisfaction for mobile banking apps among regional banks according to J.D. Power and the securitization trustee of the year were willing to trust from Global Capital.
Turning to Slide 7, which shows the results for the second quarter. As noted in this morning's press release, we are pleased with the second quarter results and the performance through the first half of the year. We continue to grow loans while also shifting the composition of our loan portfolio and reducing CRE. Customer deposits increased sequentially, while total deposit costs have leveled off. Net interest income and net interest margin, both inflected off the first quarter cyclical loan.
Asset quality trends are performing as expected with reductions in nonaccrual and criticized balances and net charge-offs in line with our full year outlook. Capital continues to build with a CET1 ratio increasing to over 11.4%.
We continue to make progress on our capital return considerations, and our stress capital buffer decreased 20 basis points to 3.8% and reflecting the strength of our core earnings power and ongoing risk management work. Now let's look at the specifics for the second quarter. Diluted GAAP earnings per share were $3.73 for the second quarter, improved from $3.02 in the first quarter.
Net income for the quarter was $655 million compared to $531 million in the linked quarter, an increase of 23%. M&T's second quarter results produced an ROA and ROCE of 1.24% and 9.95%, respectively. The CET1 ratio remains strong, growing to 11.44% at the end of the second quarter and tangible book value per share grew 3%. Included in our GAAP results for the recent quarter were pretax expenses of $5 million related to the FDIC special assessment, this amounts to $4 billion after tax or $0.02 per share.
As a reminder, results for this year's first quarter included $29 million related to the FDIC special assessment, amounting to $22 million after-tax effect or $0.13 per share. Slide 8 includes supplemental reporting of M&T's results on a net operating or tangible basis, from which we have only ever excluded the after-tax effect of the amortization of intangible assets as well as any gains or expenses associated with mergers and acquisitions. M&T's net operating income for the second quarter was $660 million compared to $543 million in the linked quarter.
Diluted net operating earnings per share were $3.79 for the recent quarter, up from $3.09 in the first quarter. Net operating income muted and ROTA and an ROTCE of 1.31% and 15.27% for the recent quarter.
Next, let's look a little deeper into the underlying trends that generated our second quarter results. Please turn to Slide 9. Taxable equivalent net interest income was $1.73 billion in the second quarter an increase of $39 million or 2% from the linked quarter. Net interest margin was 3.59%, an increase of 7 basis points from the first quarter. The primary drivers for the increase to the margin were a positive 6 basis points from fixed rate asset repricing, primarily within the investment and consumer loan portfolios, positive 5 basis points from sequentially higher nonaccrual interest. Positive 1 basis point from lower interest-bearing deposit costs, partially offset by a negative 3 basis points from the impact of swaps and a negative 2 basis points from higher borrowing costs and balances.
The second quarter included nonaccrual interest of $30 million compared to an average of $14 million in the prior 5 quarters. If nonaccrual interest was at the average run rate. The second quarter NIM would have been 3.56%. In total, swaps reduced NIM by 23 basis points in the second quarter.
Turning to Slide 11 to talk about average loans. Average loans and leases increased 1% to $134.6 million compared to the linked quarter. As has been the trend for the last several quarters, C&I and consumer growth outpaced the decline in CRE. C&I loans grew 2% to $58.1 billion, driven by increases in the market. dealer commercial services, mortgage warehouse lending and fund banking. The C&I growth reflects an increase in line utilization and higher origination activity.
CRE loans declined 4% to $31.5 billion, reflecting continued low originations and elevated pay downs as we continue to manage our CRE concentration. Residential mortgage loans were relatively unchanged at $23 billion. Consumer loans grew 4% to $22 billion, reflecting growth in recreational finance and indirect auto loans.
Loan yields increased 6 basis points to 6.38% aided by sequentially higher nonaccrual interest and fixed rate loan repricing and partially offset by a higher drag on our cash flow hedges.
Turning to Slide 12. Our liquidity remains strong. At the end of the second quarter, investment securities and cash, including cash held at the Fed, totaled $56.5 billion, representing 27% of total assets. Average investment securities increased by $1.1 billion. The yield on the investment securities increased 31 basis points to 3.61% and as the yield on new purchases exceeded the yield on maturing securities.
During the second quarter, repurchased over $3 billion in securities with an average yield of 5.16%, and a duration of 2.9 years. Over the remainder of the year, we expect an additional $2.8 billion in security maturities with an average yield of 2.5%, which we intend to reinvest at higher yields. The duration of the investment portfolio at the end of the quarter was 3.7 years and the unrealized pretax loss on AFS portfolio was only $239 million or 12 basis point drag on CET1.
Turning to Slide 13. We remain focused on growing customer deposits and are pleased with the stabilization of our yields. Average total deposits declined $0.6 billion or less than 0.5% to $163.5 billion, reflecting sequential growth in average customer deposits offset by a $1.2 billion decline in broker deposits.
Average broker deposits of $12 billion reflects the decision to shrink noncustomer funding sources. Consumer mortgage business banking and institutional finance had stable to growing average deposits compared to the first quarter, while commercial deposits declined. Average noninterest-bearing deposits declined $0.9 billion to $47.7 billion, with lower commercial and business banking balances as a result of seasonally and continued but moderating disintermediation.
Noninterest-bearing deposits were relatively stable for all other business lines. Excluding broker deposits, the noninterest-bearing deposit mix in the second quarter was 31.5% compared to 32.2% in the first quarter. Interest-bearing deposit cost decreased 3 basis points to 2.9%, while the total deposit cost was unchanged at 2.06%. This reflects more rational pricing in our markets.
Continuing on Slide 14. Noninterest income was $584 million compared to $580 million in the linked quarter. Recall that the first quarter included $25 million Bayview distribution. Trust income increased $10 million to $170 million, reflecting approximately $4 million in seasonally tax preparation fees typically earned in the second quarter and strong sales performance across our institutional services business. Second quarter mortgage fees were $106 million compared to $104 million in the first quarter.
Commercial mortgage fees increased $4 million from the linked quarter to $30 million, reflecting an uptick in origination activity while our residential mortgage fees decreased $2 million to $76 million reflecting lower servicing fees. Service charges increased $3 million to $127 million from higher consumer debit interchange fees.
Other revenues from operation were unchanged at $152 million, with increases in merchant discount, credit card, letter of credit and other credit-related fees offsetting the $25 million first quarter BLG distribution. Security losses of $8 million primarily reflect realized losses on the sale of non-agency securities as we derisked our portfolio.
Turning to Slide 15. Noninterest expenses were $1.3 billion, a decrease of $99 million from the first quarter. As is typical for M&T's first quarter results, expenses in the quarter included approximately $99 million of seasonally higher compensation costs. Salaries and benefits decreased $69 million to $764 million, reflecting seasonally elevated expenses in the first quarter, offset by the full quarter impact of annual merit increases.
The second quarter included $5 million related to the FDIC special assessment compared to $29 million in the prior quarter. Other costs of operations decreased $18 million to $116 million from lower supplemental executive retirement costs and lower losses on lease terminations. The adjusted efficiency ratio, excluding the impact of the FDIC special assessment was 55.1% and compared to 59.6% in the first quarter.
Next, let's turn to Slide 16 for credit. Net charge-offs for the quarter totaled $137 million or 41 basis points down from 42 basis points in the linked quarter. The 3 largest charge-offs were $40 million combined and represent C&I loans that span industries, including services, manufacturing and retail. The CRE charge-offs, including charge-offs within the office portfolio remain at manageable levels through the first half of the year.
Nonaccrual loans decreased $278 million to $2 billion. The nonaccrual ratio decreased 21 basis points to 1.5%, driven largely by a decrease in CRE reflecting favorable resolutions with borrowers, including payoffs and paydowns. In the second quarter, we recorded a provision of $150 million compared to net charge-offs of $137 million. The allowance to loan ratio increased 1 basis point to 1.63%. The provision for credit losses decreased $50 million compared to the first quarter, reflecting lower CRE loans, including criticized loans and modest improvement in forecasted real estate prices, partially offset by growth in C&I and consumer portfolios.
Please turn to Slide 17. When we file our Form 10-Q in a few weeks, we estimate that the level of criticized loans will be $12.1 billion compared to $12.9 billion at the end of March. The improvement for the linked quarter was largely driven by $987 million decrease in CRE criticized loans. Slide 18 provides additional detail on C&I criticized balances. Total C&I criticized balances increased $98 million. The majority of the increase is concentrated within vehicle and recreational finance dealers and health care sectors, offset by declines in most other industries. We saw additional migration to criticized within non-auto dealer portfolio, continuation from trends we discussed in the first quarter. However, there has been limited incremental migration within the portfolio since early in the second quarter.
Turning to Slide 19 includes the detail on CRE criticized balances. Total CRE criticized balances decreased $987 million from the last quarter, upgrades and payoffs of criticized loans outpaced downgrades into criticized. The decline was across multifamily, retail, health services, hotel and construction, but we did see modest increases in office and industrial. The decrease reflects the effects to work with borrowers to find favorable resolutions. We are actively working through our criticized population for favorable outcomes.
Turning to Slide 20 for capital. M&T's CET1 ratio at the end of the second quarter was an estimated 11.44% compared to 11.08% at the end of the first quarter. The increase was due in part to the continued pause in repurchasing shares and capital and strong capital generation. At the end of the second quarter, the negative AOCI impact on the CET1 ratio from AFS securities and pension-related components would be approximately 19 basis points.
Now turning to Slide 20 for outlook. The economy is slowing a bit, but remains in good health, job growth, wage growth and spending have slowed to more sustainable levels. We see the so-called soft landing scenario as having the highest probability, but the possibility remains for a mild recession brought on by the lagged impact of rate hikes. Consumer spending has slowed to a pace consistent with job and wage growth, alleviating inflation pressure for many goods and services.
The labor market remains positive but has clearly slowed. In turn, keeping a lid on wage pressure and leading to longer spells of unemployment. We expect that to continue for the rest of 2024. We Inflation figures remain above the Fed's target of 2%, chiefly because of rent and home prices. We expect the weaknesses seen in rent listings to play through the official inflation data helping bring the headline inflation figures down.
Inflation in the second quarter slowed and encouraging development after higher ratings in the first quarter. Shifting to the 2024 outlook. We expect net interest income to be $6.85 billion to $6.9 billion. Our outlook incorporates the latest forward curve that has 1 rate cut in September and another in December. However, we expect the level of rates to have a limited direct effect on net interest income outlook, as we have taken steps to reduce our asset sensitivity and are now more neutral. [indiscernible] longer rates in the first half of the year allowed us to take additional actions to protect NII and from lower interest rate environment.
For example, in the first half of the year, we shifted $3 billion of cash into securities and added $5 billion in forward starting cash flow hedges which became active in 2025. During -- or further, we expect that the downside in interest-bearing deposit beta will be approximately 30% to 40% in the first couple of rate cuts.
For the remainder of the year, M&T's balance sheet will be smaller with total average assets closer to $208 billion. We expect average cash to be approximately $25 billion and securities to be $30 billion with modest growth in loans and deposits. Our outlook for fees and expenses is unchanged, with fees, excluding any security gains or losses of $2.3 billion to $2.4 billion, and expenses, excluding the amounts related to the FDIC special assessment are expected to be $5.25 billion to $5.3 billion.
We continue to expect charge-offs for the full year to be near 40 basis points. The allowance level will be dependent on many factors, including changes in the macroeconomic outlook, portfolio mix and underlying asset quality. Our outlook for the tax rate is 24% to 24.5% excludes the discrete tax benefit in the first quarter.
Preferred dividends are expected to be approximately $47 million in the third quarter and $36 million in the fourth quarter, reflecting our Series J issuance in May and the upcoming Series E redemption in August. Finally, as it relates to capital. Last quarter, we laid out 5 factors for consideration as we assessed our capital return plans for the rest of the year. The macroeconomic environment remains healthy. M&T continues to generate significant capital of the bank growing tangible common equity by over $500 million in the second quarter.
We continue to manage our CRE concentration with CRE as a percent of Tier 1 capital and allowance of 151% as of the end of the second quarter. Asset quality continues to improve with declines in nonaccrual and criticized loans and net charge-offs in line with expectations we laid out in the first quarter. M&T's preliminary stress capital buffer declined 20 basis points to 3.8%, reflecting many of the factors just mentioned.
Given the improvements in these factors, we plan to begin our share repurchase in the third quarter at a pace of $200 million per quarter through the end of the year. We expect to maintain our capital ratios at least at the current levels for the remainder of the year. We will continue to monitor the previously discussed factors as well as the revised Basel III proposal once made public, and we'll adjust our capital return plans if necessary.
Our capital will also be used to support organic growth and grow new customer relationships. Our strong balance sheet will continue to differentiate us with our clients, communities, regulators investors and rating agencies.
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 [indiscernible] of shareholder capital.
Now let's open up to questions. before which Ashley will briefly review the instructions.
[Operator Instructions]
We'll take our first question from Manan Gosalia with Morgan Stanley.
So I wanted to ask on NII. So you beat on NII this quarter. And then your new guide for NII implies that quarterly NII will be relatively flat from 2Q levels. And you did see a noticeable increase quarter-on-quarter this quarter in NII. So can you just unpack the drivers in the back half? Is there some conservatism baked in there? Or is there some timing difference in being neutral to rates but maybe perhaps being a little bit more asset sensitive with the first rate cut if you can just unpack those drivers there?
Our position from rate sensitivity is really quite neutral. It's based on assumptions, but I feel we are really neutral there. If you look on the slide deck where we had net interest income, and 1 of the bullets there, we highlight that we had a 5 basis point positive impact on nonaccrual interest. So let me explain that to you. So when our loans go into we basically -- when we still receive payments, both principal interest, all that goes to principal.
And then if the loan is basically resolved favorably and they pay us off. Obviously, we pay off the principal balance and then anything left over goes into net interest income. So what we saw in the second quarter was basically a large amount of loans that basically came out favorably out of our nonaccrual portfolio.
So what we put on there and what I talked about in the prepared remarks is that if you look at our average nonaccrual interest for the last 5 quarters has been running around $15 million. This quarter, we got double that. So I would basically say our NIM this quarter was actually on track because if you adjust the $15 million out, we were at 5.56 NIM. And I said that we would be mid 350s at the second quarter. So we're really on path to what I said, mid-350 second quarter and high 350s for third and fourth quarter is really where we wanted to be and expect to be -- so I think we're just on track.
Got it. And just to confirm that 5 basis points is where you are above normal, right? The 5 basis points isn't the total impact?
It's 3 is what I would say be normal to the run rate.
And you were 5 basis points above that?
No, no. No, we were 3. So we were 3.52.We said we'd be in the mid- I say we really came in at $3.56 if you back out the extra above nonaccrual interest that we normally get. I mean we're going to get nonaccrual interest every quarter. we've been averaging a couple of basis point benefit every quarter because of that, that's going to continue for a long time.
Perfect. And then maybe you can put this in the category of no good deed goes unpunished. But on the buyback assumption, your message in the deck is that capital level should at least stay at of around 11.5%. Just given that the SCB went lower, given the excess capital position, what do you need to see before you accelerate the base of buybacks and bring that capital ratio lower?
I think it's pretty simple. I think we are aggressively working down our asset quality, our criticized loans, nonperforming assets. I think we need to continue to make progress on that. As we make progress on that, you could see us decide to increase our repurchase shares potentially. Obviously, the economy is a factor in my prepared remarks, we said we don't think it's likely, but it's possible maybe you go into recession.
So if that were to happen, I think we'd have to view that and just be a little bit more defensive if that made sense or not. And we still want to see the impacts of [indiscernible]. I know we are hearing in more favorable things. But until we actually see it in writing, you really don't know what's going on. But those are probably the primary things that we're working on. We continue to shrink our CRE concentration made great progress there. I have no doubt we will continue to make great progress in the next couple of quarters as well there.
We'll take our next question from Matt O'Connor with Deutsche Bank.
I'm hoping to elaborate on the big drop in the commercial real estate on a trend basis, I think it's down about 9%. Obviously, a great job bringing that down. And I know you touched on some of the kind of opportunities to offload that. But it's just a bigger drop than I would have thought. And I don't know if there was any reclass into C&I as you kind of improve some of those like guarantees and things like that. So just elaborate on all of that in terms of how you're able to bring it down so much.
Yes. No, happy to answer that, Matt. So we are very focused and working really hard both the first line and second line of working hard and made tremendous progress in bringing our CRE concentration numbers down. We did see a lot more liquidity in the marketplace this quarter. when we were able to see some of our clients that we had actually in criticized multifamily be able to do government placements out into the marketplace for liquidity.
So as we continue to have that liquidity, that helps us basically cure some of our criticized loan balances. The other thing that I would tell you is that we are doing a finance transformation finance transformation is basically putting in a new general ledger system, subledgers, which we are doing really well, and we're about halfway through that process now. But it's also proving and changing processes.
So as we improve and change processes, we are putting in better controls and more ways of actually how we put loans on the books. And that is causing some grading to go from what CRE would be into C&I or occupied because it really comes down to the source of repayment, source of repayment is from an operating entity, it's basically not a CRE loan. It is a C&I owner-occupied law.
That makes sense. I think that's how I'll just do that too. And then just separately on the all other income line, you're planning to a couple of kind of positives there. Is that at a sustainable level? Or I know it can be lumpy, but how do you think about that at all other fees of $150. It is at a relatively high level.
I'd probably trim maybe 5% or 10% out of that potentially on a run rate. But it's a lot of that other revenue that we talked about is the merchant fees, and we had a good quarter there and more activity that could continue as we continue to have activity.
The other is on loan demand, and we're having loan syndication fees and all that, and that's going to be lumpy. We had a good quarter this past quarter in that area. We are seeing maybe a little bit of softening in some of the commercial areas, so it might be a little light. But yes, I'd say at that same level to maybe down 5% or 10%.
We'll take our next question from Erika Najarian with UBS.
Two follow-up questions, please. Daryl, the company clearly did a great job in terms of interest-bearing deposit costs coming down. I know some of that is a mix of broker being actively taking down in terms of exposure. Could you give us a sense before the rate cut and we appreciate the downside beta guide that you gave us, but if we don't have rate cuts, how do you feel like this level of progress is sustainable? And maybe break it down in terms of what you're observing with client deposit rates versus the continued runoff in brokered CDs.
Yes. So broker fees will continue to run off. We have another big chunk coming off in the third and fourth quarter. So we'll be pretty much out of broker deposit CDs at least by the end of the year. As far as the betas go and rates, we continue to just see more rational pricing in the marketplace, and we're able to maybe offer specials, but the specialties that we're offering just aren't as high as what they were before.
So you're still seeing that. There is still some disintermediation. It is slowing down, but there's still continued [ disimediation ]. The 1 that impacts NII the most is obviously the 1 that goes to DDA to interest-bearing deposit balances. We're capturing any disintermediation, but it's still seeing a little bit in the commercial area.
The other thing is on the retail side, as long as rates are at this level, you're going to see a little bit of a traction of money going out of the nonmaturity bucket into the CD deposits. But we feel pretty good that our deposit costs are flat and maybe down as the year progresses and into next year. I think it's just more rational pricing in the marketplace right now.
And my second question is a follow-up to [ Manan ]. So last quarter and during the quarter, I think you guys are telling us, "Oh, don't back into this 11% CET1 when thinking about buybacks, listen to what we're seeing on the total amount of what we're buying back. And then, of course, you had a pretty strong progress in terms of CET1 this quarter and the floor went up even more. And I appreciate your response to [ Manon's ] question, and I know that's part of the conservatism of this company and why long onlys value you guys so highly I guess I'm wondering, how should we think about the future?
I get that there's still uncertainty, there's still willing a desire to take on CRE concentration desire to see the economy play out. But at this level of earnings power with $200 million, you're going to continue to build capital, especially if the C&I loan growth is engulfed by CRE declines. So I guess, as your long-term shareholders think about forget buybacks for a second, returns and what that appropriate capital floor is, how would you help them frame that, Daryl?
From a [ forward ] perspective, obviously, we are much higher than where we have to run the company long term for M&T. We do have elevated criticized loan balances, and we're really working hard. Our teams are working their bets off to basically bring those balances down. And we hope and plan that to continue through the rest of this year into next year. So that is definitely 1 of the key things that we're looking at. We are conservative. What I've said in prior quarters, the capital is not going anywhere are. We will return it. We promise you that. We aren't going to be wasted or do anything stupid. It will come back to the shareholders at some point down there. We're just going to do it in a very conservative manner because that's just who we are.
So I guess compare it to how [ Jamie ] says it, I guess, the better way for your shareholders and to think about it as earnings in store.
Yes, right.
We'll take our next question from John Pancari with Evercore ISI.
On the -- back to CRE, I know you mentioned the ongoing focus to reduce the concentration of CRE. Where do you see the CRE to risk-based capital percentage going. I believe in the past, you've indicated you wanted to see it into the 150% ring. So I wanted to get that update. And then separately, in terms of the improvement that you saw in credit this quarter in terms of the past due declines, nonaccruals and the criticized, can you just talk about what specifically you saw that is driving that? And that broadly, those trends can continue in that direction.
Yes, sure. So we've made tremendous progress over the last 3-plus years on getting our CRE concentration down the plant that we put into place at that point and continue to execute. And you saw the benefits in our [indiscernible] capital buffer that and that will hopefully continue when we continue to submit the stress capital [indiscernible] I would say we're getting close, we are at 151 now. I think we're in the neighborhood of being close to where CRE will be much more normal space for us.
We're at a level that we think is -- makes sense for the size company we are and serving our communities and clients. So we're probably maybe a quarter or 2 away, but I think that's not too far off. As far as nonaccruals go, I'd tell you, this quarter, everything kind of worked came together really strong.
Our first-line credit team was working with our clients, we have a process in place. where we're looking at all the CRE loans that are maturing and trying to see where and how we can work with our clients to either get it rightsized to get it upgraded off of criticized. We are seeing some of our criticized loans getting refinanced by others in the industry. And I talked earlier that we're seeing some of our criticized loans getting placed in the agencies with our programs with the GSEs. So we're basically really focused on that. The teams are diligent working hard, and we plan to have those numbers continue to drive down. and be really positive.
Great. That helps. And then related to that, maybe could you just talk about the role that loan modifications have play here as you've addressed commercial real estate. Maybe help us with the trajectory of your financial difficulty modifications. So they continue to rise? And maybe if you could just talk about the concerns out there that they're simply kicking the can down the road, and we -- a year from now, we can see these pressures rear drug we had again.
When you look at loan modifications, when we are working with our clients, loan modifications, we are asking for more type of recourse or capital to be put into the transactions for them to get more time to work through their -- the higher interest rates that we have. So the modifications we are doing are actually enhancing our position. So we're giving them more extension on time, and they're giving us more capital, liquidity recourse for that time. So we're actually in a better spot. So yes, our modifications are going up. This is our history of M&T. We work with our clients, our clients support us, we're going to support them. That's what we do, and that's where we're going to continue to do.
We'll take our next question from Ebrahim Poonawala with Bank of America.
Just wanted to go back to the criticized C&I and CRE. So a lot of decision-making on capital evolves around how some of this plays out if you don't mind, give us a sense of when you think about criticized loans, if rates go lower, I think you mentioned soft landing base case probability, most likely for you -- is there a point in time if rates are lower, you get the financials maybe in March of next year, we could see a meaningful reset lower from this $12 billion going down by a couple of basis like I am just wondering, could there be a step function decline in criticized loans at some point in the first half of next year based on rates and macro clarity?
So Ebrahim, that's a great question. We saw a short window in the fourth quarter in December when the 10-year dropped 4% or a little bit under that. and we had huge volume that we're able to place our clients out with the agencies. Our RCC business was able to place a lot of loans out because of that. So I think our 10-year last time I looked was -- so I think we're getting closer to more of a pivot point or more volume will actually happened. So I think lower rates would definitely help us lower our criticized balances sooner and faster from that perspective. That would be even more liquidity in the marketplace than what we saw this past quarter.
That's helpful. And I guess the other question on CRE. Given all the work you've done over the past year, stress testing, et cetera, on the CRE book, just give us your perspective on the loss content in these loans as they maybe some of these go into nonaccrual based on what you know today, what's already been reserved. And as we think about like charge-offs relative to the 40 bps that you've guided for this year?
Yes. We have a long-term history of our great strong credit performance. So if you look at our LTVs that we have for the CRE portfolio, even office, we're still under 60% LTV there. So if you -- a great thing to look at it, if you look at our nonaccruals, half of our nonaccruals don't have a reserve against it. And typically, you'd have a specific reserve [indiscernible] that's because we have collateral value that's stronger than what the loan value is today. So it's really the strength of how we underwrite and that credit performance is really what shows through in times of stress. So yes, we have a higher level of criticized and nonaccrual. We're working those down, but we think the loss content is still a lot lower.
We'll take our next question from Ken Usdin with Jefferies.
Daryl, you had a great amount of securities repricing this quarter, up 31 basis points on a bigger book, and I can imagine some of that was just a switch from cash. But I think you had talked about 15 to 20 going forward. So maybe can you just give us a little back color on what drove that $31 million? And then how you're looking at what securities yields could look like from an incremental perspective going forward?
Yes. So we are being very disciplined in how we're approaching our security purchases. We're trying to keep our duration relatively short. We really don't want to have a negatively convex portfolio. So when we go to market and we buy securities, we are basically balancing our securities between positively convexed securities like treasuries and CMBS agency securities coupled with some negative Convex securities, which could be some agencies, CMOs or MBS. So we're being very balanced from there.
So we're trying to keep our duration around 3 years. Because of that, our yields, if you look at where rates are today, are blended to be around 5% that negatively [indiscernible] [indiscernible] approximately, and we're living in 3-year type duration type instruments overall is kind of what we're focused on. That said, though, we're still going to have a nice benefit. If you look at what's maturing in the third and fourth quarter, the average unit of what's maturing is about 2.5%.
So we'll -- depending on where rates go. But right now, where we get 250 basis points still increase in that yield portfolio as that churn and turns over. So I think we feel really good. We're just being very disciplined. I'm not good at timing right, so we kind of do dollars averaging over time. We've done that now for the last year. We're going to continue to do that going forward. And we're just doing over time an average in and hopefully continue to average up higher.
And then obviously, for a long time, M&T has had a really healthy amount of cash and I think cash and earning assets together is about cash is like 30-something percent, still low 30s percent. And do you still anticipate given that conservatism, keeping cash and securities at over 30% as you look forward? And what would change that, if anything?
Yes. So on the prepared call, it's what I mentioned is that right now, our investment portfolio is about $30 billion. We believe that the cash at the Fed is closer to mid-20s, so closer to $25 million. We're basically just trying to get out of some wholesale funding and just shrinking the balance sheet a little bit. So our balance sheet size is coming down as well.
So we'll have a smaller balance sheet shouldn't really impact NII just because of the cost of the borrowings and what we earned on the Fed balance kind of canceled each other out. But we just feel mid-25 is good. We do have limits in place of how well we go that be in the mid- to high teens. So we have well above that buffer that we're operating right now, but just want to be air again conservative. -- if we could go into a recession, which we don't think will happen. But if we do, this will be a really conservative balance sheet.
We'll take our next question from Gerard Cassidy with RBC.
You obviously did a good job with the DFAST and the stress capital buffer coming down I guess a couple of questions. First is when you look at the improvement and you touched on it, what you've obviously done. Do you think that improvement can be as large next year as you guys continue to reduce these risks to M&T as we look out into 2025?
Yes. So our plans right now, Gerard. We were really pleased that we were down 20 basis points. In our peer group, we were 1 of 3 banks that had a lower SCB. So we were really excited to have that outcome. But by us really focusing on and pushing down our credit besides share repurchase may be increasing, and it's also going to help us in our stress capital buffer when we go through the stress test. So we're really focused on trying to bring down our criticized levels to as much as we can, working with our clients over the next couple of quarters so that when we do CCAR next year, if we decide to do it, which we may or may not probably well now. We continue to try to get a lower stress capital buffer.
Got it. And then when you look at M&T's history, obviously, the organic growth has always been complemented very successfully with acquisitions, and when you look out over the landscape over the next 12 to 24 months, can you give us your views on depository acquisitions, not to say that you're going to do anything near term, but just how are you guys thinking about depository acquisitions. And I know those changes and we got a presidential election coming up, which could influence as well. But what have you guys been thinking in that strategy?
So M&T has a long-term history of doing acquisitions, successful acquisitions, and that is 1 of the reasons how we grow here. But to be honest with you, we haven't really been talking about acquisitions. We're working on our 4 priorities that we have in the company right now. Our 4 priorities that we have are basically building out our markets in -- from the Peoples acquisition in New England and Long Island. We think that's really important to continue to build out.
That's a great opportunity for us. And we think the M&T Bank will be really good in the markets that we serve there. I think they need a bank like us in those markets, and we want to deliver 2 of those clients. We're enhancing our risk areas throughout the company, making great progress in those areas. We will continue to focus on that. We're also improving resiliency in some of the transformations that we're doing. We're putting in data centers, putting things up into the cyber or applications into the cloud. So all that is going forward.
And then lastly, we're continuing to optimize revenue and expenses. We put some money into treasury management this past year. And we're now growing our treasury management revenues at double-digit paces 13% right now. So they're doing really good. And continue to gain more momentum there in that treasury management. As we push more into C&I, that's a huge growth opportunity for us, and that's really what we're focused on and trying to grow and serve our clients.
We'll take our next question from Chris Spahr with Wells Fargo.
So my question is just a little bit on expenses. Just wondering about head count, what are you thinking about it going forward since seller's expenses were up 4% year-over-year, which seems pretty good overall.
Yes. I mean we're right on track from our expense guidelines actually were doing a little bit better than what was in plan. So you might see a little bit of shift in that in the second half of the year. But we're right on track. We're going to hit our planned numbers on expenses. I have no doubt about that. FTEs, we are down a couple of hundred million MMTs from the start of the year.
So that's just being managed by all the leaders and their groups and all that. So I think from an expense perspective, we really have an owner's mindset at M&T. They really take the heart how we spend money and make sure how we're spending money in the right places and getting the right outcomes from that.
So I'm really fortunate to have a really great company that really understands how to run a company, both from a revenue and expense side basis. So it's all really good.
And just to clarify, down a couple of hundred a couple of hundred million, correct?
No, no, no. A couple of hundred FTEs.
And then just on the outside data processing, a big delta. And how much is that related to this upgrade that you've been talking about? And will some of that run off? Or are you kind of now at a higher operating plateau on tech expense?
I would say, second half of the year, you might see elevation and outside data processing and professional services. As we have now 7 projects in our investment account so were ramped up those probably will be areas of increase. We'll still come in to our target that we set on expenses.
So I feel really good about that. Some of the projects are just larger and it takes time to ramp up. But as we get into 25, you see some projects start to complete, and whether we reinvest in other areas or not, we'll talk to you at that time right now. But overall, the company is making tremendous progresses on many fronts. And we got a lot of momentum going, and we're going to continue to press on that.
There are no further questions at this time. I'll turn the call back over to Brian Klock for any closing remarks.
Again, thank you all for participating today. And as always, if clarification of any of the items in 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.
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