Q4 2023 M&T Bank Corp Earnings Call

Participants

Brian Paul Klock; Senior VP and Head of Markets & IR; M&T Bank Corporation

Daryl N. Bible; Senior EVP & CFO; M&T Bank Corporation

Bill Carcache; Research Analyst; Wolfe Research, LLC

Brian D. Foran; Senior Analyst of US Regional Banks; Autonomous Research US LP

Christopher James Spahr; Senior Equity Analyst; Wells Fargo Securities, LLC, Research Division

Ebrahim Huseini Poonawala; MD of United States Equity Research & Head of North American Banks Research; BofA Securities, Research Division

Erika Najarian; Analyst; UBS Investment Bank, Research Division

Frank Joseph Schiraldi; MD & Senior Research Analyst; Piper Sandler & Co., Research Division

Gerard Sean Cassidy; MD, Head of U.S. Bank Equity Strategy & Large Cap Bank Analyst; RBC Capital Markets, Research Division

John G. Pancari; Senior MD & Senior Equity Research Analyst; Evercore ISI Institutional Equities, Research Division

Kenneth Michael Usdin; MD and Senior Equity Research Analyst; Jefferies LLC, Research Division

Manan Gosalia; Equity Analyst; Morgan Stanley, Research Division

Steven A. Alexopoulos; MD and Head of Mid-Cap & Small-Cap Banks; JPMorgan Chase & Co, Research Division

Presentation

Operator

Welcome to the M&T Bank Fourth Quarter and Full Year 2023 Earnings Conference Call.
(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 and Investor Relations. Please go ahead.

Brian Paul Klock

Thank you, Michael, and good morning. I'd like to thank everyone for participating in M&T's Fourth Quarter 2023 Earnings Conference Call, both by telephone and through the webcast. If you have not read the earnings release we issued this morning, you may access it, along with the financial tables and schedules by going to our website, www.mtb.com. Once there, you can click on the Investor Relations link and then on the Events and Presentations link.
Also before we start, I'd like to mention that today's presentation may contain forward-looking information. Cautionary statements about this information are included in today's earnings release materials and in the investor presentation as well as our SEC filings and other investor materials. 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's Senior Executive Vice President and CFO, Daryl Bible.
Now I'd like to turn the call over to Daryl.

Daryl N. Bible

Thank you, Brian, and good morning, everyone. As you will hear today on the call, 2023 mark a banner year for M&T Bank. On Slide 3, I want to acknowledge that the keys to our success to what continues to drive performance remains our purpose, mission and operating principles. Our focus on making a difference in people's lives and creating a positive impact in the communities we serve is core to how we operate. It is evident in how we show up for our communities in the moments of need like in Vermont and Lewiston, Maine, where we continue to help those impacted by tragedies.
It is why we are committed to supporting small businesses that are the backbone of local economies. And it dictates how our charitable foundation, which celebrated its 30th anniversary last year, continues to uplift our partners. It is all done alongside our daily work of helping our customers achieve their financial goals.
Turning to Slide 4. We're excited to see how deeply we've embedded sustainability across the bank and into our products and services. I look forward to sharing more information on the impact of our businesses when we release our 2023 sustainability report in the spring.
Now let's turn to Slide 6. As we reflect on 2023, there are several successes to highlight. We continue to realize the benefits from the People's United franchise and are pleased with the growth in New England with M&T finishing as top SBA lender in Connecticut. C&I loans grew by over $5 billion or 11% in 2023, aided by the growth in several specialty businesses brought over by People's United. This C&I growth outpaced the reduction in CRE as we continue to optimize the way we serve these customers in the most capital-efficient manner possible. At the end 2023, CRE loans represented approximately 25% of total loans. Our capital remains strong with a CET1 ratio near 11%.
We continue to leverage our strong capital and liquidity levels to grow new customer accounts and relationships. We also reduced asset sensitivity in 2023 while protecting shareholder capital and value. However, our work is not done. We continue to recognize the value created by the merger with People's United, while also bringing more capital efficient, great neutral balance sheet that will produce stable and predictable revenue and earnings over the long term.
Now let's review the highlights for the full year. Results for the full year 2023 were strong. We generated positive operating leverage, solid loan growth, improved expense control through the year and growth in EPS and strong returns. Our pretax pre-provision revenue or PPNR, was $4.2 billion, up 22% from 2022, and we generated 3.9% positive operating leverage. Net charge-offs were 33 basis points, in line with our expectations and long-term average.
GAAP net income was $2.7 billion. Diluted earnings per share were $15.79, up 37% from the prior year. As a reminder, '22 results included merger charges, gain on sale of our insurance business and a sizable contribution to our charitable foundation. While 2023 included a gain on the sale of the CIT business and the FDIC special assessment. If you exclude these items, adjusted diluted earnings per share were $15.72 during 2023, up 11% compared to 2022. Our adjusted returns were also very strong with return on assets of 1.33% and return on common equity of 11%.
Turning to Slide 7, which shows the results of the fourth quarter were also strong. PPNR declined modestly from the linked quarter to just over $1 billion. C&I and consumer loan growth was strong. Expense control was evident as adjusted expenses declined 2% from the linked quarter and were down each consecutive quarter in 2023.
Diluted GAAP earnings per common share were $2.74 for the fourth quarter. If we exclude the FDIC special assessment, adjusted diluted earnings per common share were $3.62. On an adjusted basis, M&T's fourth quarter results produced an ROA and ROCE of 1.19% and 9.8%, respectively.
Next, we will look a little deeper into the underlying trends that generated our fourth quarter results. Please turn to Slide 8. Taxable equivalent net interest income was $1.7 billion in the fourth quarter, down 3% from linked quarter. This decline was driven by higher interest rates on customer deposit funding and changing deposit mix, partially offset by higher interest rates and earning assets.
Net interest margin was 3.61%, down 18 basis points from the linked quarter. The primary drivers of the decrease to the margin were an unfavorable deposit mix shift contributing a negative 7 basis points, the impact of higher rates on customer deposit funding, net of the benefit from higher rates on earning assets contributing a negative 5 basis points and a negative 6 basis points for carrying additional liquidity on the balance sheet.
Turning to Slide 9 to look at the average balance sheet trends. Average investment securities were $27.5 billion, decreasing modestly during the fourth quarter. Average interest-bearing deposits at the Fed increased $3.5 billion to $30.2 billion. Due to our decision to have more liquidity on the balance sheet. This was mainly funded with strong deposit growth. Average loans increased slightly to $132.8 billion and average deposits grew $2 billion to $164.7 billion.
Turning to Slide 10 to talk about average loans. Average loans and leases increased slightly. Growth in C&I and consumer loans outpaced declines in CRE and residential mortgage loans. Growth in C&I loans were driven largely by dealer, fund banking and corporate and institutional businesses.
Loan yields increased 14 basis points to 6.33% with higher yields across all loan categories. Of note, the consumer loan yield increased 26 basis points as we continue to benefit from higher yields on new originations compared to yields on runoff balances.
Turning to Slide 11. Our liquidity remains strong. At the end of the fourth quarter, investment securities and cash, including cash out at the Fed totaled $56.7 billion, representing 27% of total assets. The duration of the investment securities portfolio at the end of 2023 was about 3.7 years and the unrealized pretax loss and available-for-sale portfolio was only $251 million.
Turning to Slide 12. We continue to focus on growing customer deposits, and we're pleased with our growth in average deposits. Average deposits totaled grew $2 billion, approximately 3/4 of that quarterly growth was from customer deposits. Average demand deposits declined $3.8 billion, reflecting a continued shift toward higher-yielding products such as sweeps, money market savings and time profits. The mix of average noninterest-bearing deposits was 30% of total deposits compared to 33% sequentially. Excluding broker deposits, the noninterest-bearing deposit mix in the fourth quarter was 33%. Encouragingly, we saw the pace of deposit cost increases slow through the quarter.
Continue on Slide 13. Noninterest income was $578 million, up 3% sequentially. The increase was largely driven by a strong quarter for commercial mortgage banking revenues, growth and trust income and a small unrealized gain on certain equity securities. Other income also benefited from higher loan syndication fees. The decrease in rates towards the end of the quarter drove the increase in commercial mortgage banking revenues.
Turning to Slide 14. We continue to focus on controlling expenses. Noninterest expenses were $1.45 billion. Excluding the $197 million FDIC special assessment, noninterest expense were $1.25 billion, down 2% from linked quarter, and the adjusted efficiency ratio was 53.6%, largely unchanged from the third quarter. The decrease was driven by reductions in other expenses as a result of losses associated with certain retail banking activities in the linked quarter and lower merchant discount and credit card fees. The decrease in other expenses was partially offset by higher professional and other services. Salary and benefits decreased modestly from the third quarter as a result of lower average head count and seasonally lower benefit costs, partially offset by higher severance expenses.
Next, let's turn to Slide 15 for credit. Full year net charge-offs totaled 33 basis points, in line with our long-term historical average and expectations were set out earlier in 2023. Net charge-offs for the quarter totaled $148 million or 44 basis points. up 15 basis points over the linked quarter. This quarter's increase was largely driven by 3 office-related charge-offs located in New York City, Boston and Washington, D.C. and 2 C&I charge-offs related to an online retailer and to an RV dealer.
Nonaccrual loans have trended down each consecutive quarter since the first quarter of 2023. That trend continued in the fourth quarter with nonaccrual loans declining $176 million from linked quarter to $2.2 billion. The nonaccrual ratio declined 15 basis points from the third quarter to 1.62%. The decline was primarily driven by the transfer of certain loans to accrual, commercial payoffs and charge-offs on loans previously deemed nonaccrual.
Since the end of 2022, we have increased the allowance over $200 million, and the allowance to loan ratio was 13 basis points, ending 2023 at 1.59%. In the fourth quarter, we recorded a provision of $225 million compared to net charge-offs of $148 million. This resulted in an allowance build of $77 million this quarter and increased the allowance to loan ratio by 4 basis points. The current quarter build was primarily reflective of the commercial real estate values and higher interest rates contributing to modest deterioration in the performance of loans to commercial borrowers as well as loan growth in the C&I and consumer portfolios.
Turning to Slide 16. When we file our Form 10-K in a few weeks, we estimate that the level of criticized loans will be $12.6 billion compared to $11.1 billion at the end of September. We completed thorough reviews, covering more than 60% of all CRE loans, including maturities in the next 12 months, construction loans, watch loans and all criticized loans. The increase in criticized CRE loans was tied to these reviews and to 2024 maturities were the prospect of continued higher rates could negatively impact performance of the portfolios or create shortfalls in debt service coverage or require interest reserves for construction loans. The growth in criticized C&I loans was not tied to any specific review but rather completion of an annual review cycle and our ongoing quarterly update upon receipt of interim financials.
Generally, our reviews do not incorporate any benefit of the forward curve at potentially lower interest rates. The 10 largest downgrades accounted for half of the total C&I downgrades and represented a range of industries. Common themes include pressures from higher interest rates and labor costs. During the fourth quarter, criticized non-owner-occupied C&I loans increased $663 million, accounting for 44% of the total increase in criticized loans. Criticized permanent CRE loans increased $441 million, representing 29% of the increase and criticized construction loans increased $375 million.
Turn to Slide 17 and 18 for more details on the criticized loan portfolio. About 18% of the increase in criticized loans was driven by health care, 13% by multifamily and 9% are retail CRE loans. Loan to values remain strong for these loan types ranging from low 50% range for retail, mid-50% range for multifamily and high 50% range for health care. To date, modifications at maturity have had sponsors generally support their loans through replenishment of reserves, loan paydowns and enhanced recourse. That is why our credit size has not led to growth in nonaccruals. Our conservative underwriting and strong client selection has been supportive of these assets. Reflective of the financial strength of the portfolio diversification of our CRE borrowers, 96% of criticized accrual loan balances and 53% of nonaccruals loans are paying as agreed.
Turning to Slide 19 for capital. M&T's CET1 ratio at the end of 2023 was an estimated 10.98% compared to 10.95% at the end of the third quarter. The increase was due in part to continued pause in repurchase in shares, combined with continued strong capital generation. At the end of December, the negative AOCI impact on CET1 ratio for available-for-sale securities and pension-related components would be approximately 20 basis points.
Now turning to Slide 20 for outlook. First, let's talk about the economic outlook. We see so-called soft-landing scenario as having the highest probability but the possibility remains for mild recession brought down by lagged impact of rate hikes from last year. We are encouraged to be continued strong performance by the consumer as continued [drag] gains as well as wage growth above inflation helped drive consumer spending. Consumer spending has slowed enough to alleviate inflation pressure for many goods and services. We expect that to continue in 2024.
Inflation figures remain above the Fed target of 2%, chiefly because of rents and home prices. While the prices of many consumer goods have fallen and inflation for consumer services has slowed. We expect weakness seen in rent listings to play through to the official inflation data in 2022, helping to bring the headline inflation figures down. Our outlook incorporates the forward curve that has multiple 25 basis point Fed cuts in 2024.
With that backdrop, let's review our net interest income outlook. We expect taxable net interest income to be in the $6.7 billion to $6.8 billion range and net interest margin in the 350. This outlook reflects the impact of higher deposit funding costs and the impact of different interest rate scenarios. As we have discussed, we continue to carry a high level of liquidity. Our current level of HQLA is about $46 billion, which is 2/3 in the cash and 1/3 in investment securities. In 2024, we started to shift some cash into securities. This, combined with other potential hedging actions can help protect the downside risk for NII from lower rates but may reduce NII in 2024.
We expect full year average loan and lease balances to be in the $135 billion to $136 billion range. We expect growth in C&I and consumer but anticipate declines in CRE and residential mortgages. Average deposits are expected to be in the $163 billion to $165 billion range. We are focused on growing customer deposits at a reasonable cost. The level of broker deposits is expected to decline through the year.
Turning to fees. We expect noninterest income to be in the $2.3 billion to $2.4 billion range. We expect solid fee income across many business lines. Lower rates will help drive stronger residential and commercial mortgage banking revenue. Trust income is expected to grow from current levels from higher valuations and increasing clients.
Turning to expenses. We anticipate noninterest expenses, including intangible amortization to be in the $5.25 billion to $5.3 billion range. This outlook includes our typical first quarter seasonal salary and benefit increase, which is estimated to be $110 million. We also included the outlook to be approximately $53 million for intangible amortization.
Our business lines are focused on holding their expenses flat while allowing us to continue to invest in the franchise and our key priorities. These priorities include growing the New England and Long Island markets, optimizing resources in both expense savings and revenue generation, transferring our systems and processes, making them more resilient and scalable, and continuing to build out our risk management.
Turning to credit. We expect net charge-offs for the full year to be near 40 basis points due to the ongoing credit cost normalization in the loan portfolio and resolution of some stress credits. We expect that the taxable equivalent rate to be 24.5%, plus or minus 50 basis points.
Finally, as it relates to capital, our capital, coupled with limited investment security marks has been a clear differentiator for M&T. The strength of our balance sheet is extraordinary. We take our responsibility to manage our shareholders' capital very seriously and will return more when it is appropriate to do that. Our businesses are performing very well, and we are growing new relationships each and every day. While every economic uncertainty is improving, our share repurchase remains on hold. Our decision to resume share repurchases will consider the results of the 2024 internals and supervisory stress test, including the stress test capital buffer. Additional clarity on Basel III end game regulations and continued stabilization and economic conditions as it relates to the probability of a mild recession. That said, we continue to use our capital for organic growth and growing new customer relationships.
Buybacks have always been part of our core capital distribution strategy and well again in the future. In the meantime, our strong balance sheet will continue to differentiate us with our clients, communities, regulators, investors and rating agencies.
On Slide 21, there is a summary of 3 enhancements we made to our financial reporting. First, we reclassified the substantial majority of owner-occupied loans and related interest income from CRE to C&I loans. This better aligns with the classification with the underlying management and repayment source of the loans. Second, in the upcoming 10-K we are changing our operating segments to reflect how management organizes its businesses to make operating decisions, allocate capital resources and assess performance.
Third, as certain categories have started to attribute more or less to our expense base, we opted to include printing, postage and supplies and other costs and operations, and break out professional and other services as a distinct line item in the income statement.
To conclude, on Slide 22, our results underscore an optimistic investment thesis. While the economic uncertainty remains high, that is when M&T has historically outperformed peers. M&T has always been a purpose-driven organization with a successful business model that benefits all stakeholders, including shareholders. We have a long track record of credit outperformance through all economic cycles while growing in the markets we serve. We remain focused on shareholder returns and consistent dividend growth.
Finally, we are disciplined, inquirer and prudent steward of shareholder capital. Our integration of People's United is complete, and we are confident in the ability to realize our potential post-merger.
Now let's open up the call to questions before which Michael will briefly review the instructions.

Question and Answer Session

Operator

(Operator Instructions) Our first question comes from Gerard Cassidy with RBC.

Gerard Sean Cassidy

Hi Daryl, how are you?

Daryl N. Bible

I'm good Gerard, how are you?

Gerard Sean Cassidy

Good. Can you give us a flavor for when you guys look at the capital structure of M&T as you're putting out, it's quite strong, and we get beyond Basel III end game and you see what your new stress capital buffer will potentially be. What do you see a comfortable level of CET1 on a longer-term basis once those 2 unknowns are known and you can factor that into your thinking?

Daryl N. Bible

I would say it depends, obviously, on the environment that you're in and whether we're doing a transaction or not doing a transaction. But you typically would want to operate with a buffer of maybe 50 to 100 basis points over what's required from the regulations and what we have there would probably be a way to probably peg it.

Gerard Sean Cassidy

Okay. Very good. And then based on the experience of M&T, obviously, over a long period of time, you've guys put out in your investor deck that your credit losses generally are below peers. With the increases in your criticized loans that you've shown today, the C&I and CRE. Do you still feel comfortable that you guys can maintain that kind of long-term track record of being better than the peers on the credit losses?

Daryl N. Bible

Yes. Yes. I think it's a long history here at M&T. I mean if you look at it, we have been a disciplined selection on client selection, sponsorship and underwriting, and our loss history is really low and kind of shows that. The future remains uncertain. But if you look at it, it's not a predictor of the past, and we're going to lean in on our client selection and underwriting approach has really not changed. LTVs are strong, and we have a really good approach to our underwriting. Our largest sponsors that we have right now are supporting their credits, they're putting money into credit refinancing. And many of the charge-offs that we realized in '23 came from, what I would say, not long-term clients. They're more financial or institutional type money. But over the long term, we think that our client selection will win the day.

Gerard Sean Cassidy

Just quickly to follow up on that. Is it safe to assume that the criticized loans more a reflection of market conditions rather than a change in underwriting stand as 2 or 3 years ago that have led to these types of increases?

Daryl N. Bible

Yes. If you look at where the increases came from multifamily, it's really more interest rate driven, is really what's driving that. It might have a little bit higher operating cost. But for the most part, their NOI business models are performing very well. So eventually, over time, I think that will cure ourselves and do relatively well. If you look at construction, construction overall is actually outperforming what's going on out there. There is stress in some of the takeouts right now. But as rates come down, I think agency takeouts will actually help in that sector.
On the healthcare side, right now, it's really more of a reimbursement problem. While costs are going up, it takes a while for them to get better reimbursement costs. So I think that will help over time. There's a lot of demand in that sector. And I think as costs level off, plus there's an active takeout market through agencies like HUD from that perspective.
Office, if you look at office, the one advantage we have in office is that we have a really good distribution of maturities. Over 2/3 of our maturities start in '26 and beyond. So I think that's a positive. And the other property types we have like retail and hotel are generally stable to improving.

Operator

And our next question comes from Manan Gosalia with Morgan Stanley.

Manan Gosalia

Can you talk about the puts and takes on the NII guide? I know you're asset sensitive with the buildup in liquidity and the skew to commercial. So if we get more or fewer rate cuts and what's in the forward curve, what happens with NII? And then I think you mentioned your -- you started the year, putting some more -- or deploy some more of your cash into securities. Can you talk about what duration you're taking on there and what that would mean for the asset sensitivity?

Daryl N. Bible

Yes. So the guide that we gave at $6.7 billion to $6.8 billion. I would say with our 3 -- 25 basis point cut would be at the higher end of that range, so a closer to $6.8 billion, I think, from that perspective. If rates go maybe 5 cuts or 6 cuts maybe or [forwards] maybe a lower end of that range. We've decided that over the next couple of quarters, we're going to try to move as close as you can to a neutral position. We started to put some money into securities, and we will continue to do some hedges and interest rate swaps. We're going to average in over time, we're going to do it all at once and just kind of dollar average in to get it more neutral so that we can produce stable and predictable earnings over time and not have impact on interest rates.
So I think we feel pretty good about what we're seeing there. And from a deposit beta perspective, I would tell you that deposit betas maybe or close to peaking from that perspective. Maybe our net interest margin is close to bottoming out maybe in the next quarter or two. So I feel actually pretty good that we'll be able to start to grow NII maybe towards the second half of the year and definitely into 2025.

Manan Gosalia

Got it. And maybe just a couple of short questions on credit. I mean I think you mentioned that the reviews on commercial real estate do not bake in the forward curve. So does that mean that if the forward curve plays through that criticized assets should come down? Or as you scrubbed through the remaining 40% of the book that, that could put some upward pressure there. And then I'm sorry if I missed it, but did you give what your updated office reserves were? Because I know you built some reserves during this quarter.

Daryl N. Bible

Yes. Yes, let me take your first question first. So, we really don't take into account the forward curve when we go through the review that we're doing. A lot of the properties, like I said earlier, like multifamily is more rate driven than anything else. Their business models are intact. So you have good NOI. I would say, as rates fall, if rates go maybe 100 basis points or more, that could be and probably will be a positive impact for our credit costs.
Now it may not flow in as rates actually materialize and have to come through when we're doing our next review but with that pressure, I think, would alleviate and probably have an impact on the levels that you're seeing from that perspective.
From an office perspective, that -- part of that sector is a little bit different because it also has some structural challenges. So if you look at that, that's going to probably play out more over time. It's going to be when leases and vacancy rates kind of mature off, we're just blessed to have a longer time from a maturity perspective, which is great planning from the credit team.
The top risk that we have there are embedded in the ratings and reserves that we have. Valuations that we have, I think, takes into account the risk. I think we're around 4.4% right now. So I think we feel good at that. And if you look at the real challenge will be when leases mature and you have resizing risk, what's going to happen at that point. But we have a lot of time for that to play out.
I would tell you, if you just look at the signature transaction, there's a lot of money out on the sidelines that will definitely come in and play and be there. Right now, there's a difference between bid-ask spreads but there is money that will come into the market at some point.

Manan Gosalia

Great. Did you say the office reserve was 4.4%?

Daryl N. Bible

Yes.

Manan Gosalia

Okay. So did the reserve build come somewhere else in the portfolio because I know you built reserves this quarter?

Daryl N. Bible

We did. And I would say reserve builds were mainly driven by the increase in criticized. If you look at our page that we have in the slide deck, the actual -- office criticized numbers actually fell. Our increases in criticized were in health care and multifamily and in hotel. And those are really ones driving the increase. That was probably 2/3 of the increase. The other 1/3 was due to the loan growth that we had, which was C&I and consumer loans.
So you can kind of see that the build wasn't that large for the increases that we had. We just really don't feel we have a lot of loss component because of the loan-to-value ratios that we have and the collateral that we have on those transactions.

Operator

And we have our next question from John Pancari with Evercore ISI.

John G. Pancari

Just on the -- just back to the reserve. I know you cited that it did account for current real estate valuations and changes there. What -- and I know you gave us the LTVs, you cited a few of them. Are they refreshed LTVs? And if not, what type of valuation declines are you seeing in your -- as you work through the office portfolio specifically?

Daryl N. Bible

Yes. So when we have done these reviews, I would say we have about 60% of the CRE portfolio. That's been a very thorough review. Obviously, we're picking the larger one to ones that are in larger cities that might have more risk from a valuation decline. We're being probably on average about a 20% decrease in valuations. Our valuations are probably current within the last year or so. So we feel really good with that. We continue to have reviews every quarter and continue to be very thorough on how we're looking at that. But I think the reserves we have today, I feel pretty good about.

John G. Pancari

Okay. And one more just on that, if I could, the criticized scrub that you did. Is that -- was that just that? Was that more of a scrub of the portfolio. It sounds like the way you described it, it was. And if so, could -- do you expect less of an increase in criticized assets and related reserve build from this level?

Daryl N. Bible

John, I would love to tell you that this is the peak of our criticized. We have to finish up what we did. The majority of our construction loans, we have a little bit more construction loans to do this next quarter. And we're always subject to getting more information in as we get new financials and new vacancy information and all that. But I feel pretty good that we did a very thorough review of what we have out there. We really looked at all the spots that we thought. We'd have the most risk and really took that into account. But I can't here tell you today that we're at the top but at some point, hopefully, we will be able to say that.

Operator

And we have our next question from Ebrahim Poonawala with Bank of America.

Ebrahim Huseini Poonawala

So I guess just on this criticized, nonaccruals on credit in general, given the work you've done, I'm sorry if I missed this, like should we expect -- so far, the growth in criticized has not reflected in or been sort of translated into nonaccruals. Should we expect that to change as you see some of your customers feel more pressure given just the lagged impact of the rate cycle? Or could we still see nonaccruals trend lower? And then what drives criticized lower from where we are today? Is it just time and maturity of these loans? Or could we see a pretty decent decline over the coming quarters?

Daryl N. Bible

I think the increase that we have today was basically a review of looking at everything that we have out there. And I would tell you that interest rates probably was the biggest one. Labor cost was probably the next biggest increase. There was a little bit of increase in C&I as well. And then C&I, there was nothing idiosyncratic there. There was a mixture of, if you look at it, the largest 13 credits, 7 different industries. So it's pretty diverse from that perspective. So we feel pretty good overall with where we stand. Only 6% of our criticized has gone into nonaccrual, that's kind of what our historical numbers have been. And when I talked -- when Gerard asked the question, we really feel good about our client selection. We're seeing our sponsors and clients really stand up and really support these credits. And we think that what we haven't classified is the right direction. That doesn't mean a few may not flip into nonaccrual. But I think for the most part, we don't really see a large period of losses. If we did, we would have had to put more in the reserves, and that's what we're seeing and we're projecting.

Ebrahim Huseini Poonawala

Got it. And I guess maybe one question on capital. One another regional bank earlier this week talked about the need for scale for regional banks coming out of what happened last March. You all have been acquisitive from time to time very -- in a very deliberate way. Just talk to us in terms of, one, appetite to do bank deals as they come through over the next 12 to 18 months? And secondly, like, do you see the landscape becoming rich with deal opportunities as we move forward?

Daryl N. Bible

M&T has always done acquisitions and have grown over the years. Our business model is really to stick to the regions that we're in and to really meet the needs of those communities. And we like to grow share in those markets. So whether you need scale or not, I've been on both sides of that right now. And I would tell you that it's not something you have to have, it's something if it makes sense. I mean when you acquire somebody, you got to make sure it's a good cultural fit, first and foremost, that is critical. You have to really make sure that if you get synergies that those come through, both on the expense and revenue side.
So we closed on People's. We're starting to get -- got all the cost synergies. We're in the midst of investing now more into New England and Long Island. So we're going to continue to grow that. It usually takes, I would say, 3 to 5 years to really get the total performance from these acquisitions. So we still have a lot of work to do from that. I'm sure down the road, M&T is a favorite acquirer, somebody might want to sell to us at some point. But right now, we got a lot of work in front of us. And we're focused on really making that. It's 1 of our top 4 priorities right now, and we're going to do that and deliver that.

Operator

And we have our next question from Frank Schiraldi with Piper Sandler.

Frank Joseph Schiraldi

Daryl, you mentioned the considerations for getting back to the buyback. Is it reasonable to think that maybe the last trigger or the last consideration is the stress test is the CCAR? And so just wondering, is the second half of '24, do you think the more likely scenario for restarting repurchases?

Daryl N. Bible

Frank, I would love to be buying shares back, especially at the level that we're trading at right now. I think it's a really good value. Right now, we just want to make sure that we go through the stress tests, we find out where our limits are. We got to make sure there's a lot of uncertainty out there, and we just don't want to go into a recession and if we do that, probably would hold back for those purposes. But we're in the midst of really making a really strong bank. We're really changing it to be less relying on balance sheet, commercial real estate and really more driven through off-balance sheet products and services, and we're growing our other businesses, both on the balance sheet and in fees, and we're really excited about that.
I promise you we will do share repurchases. I can't tell you when that's going to happen but it is core to our strategy, and we will definitely do that when we think it's appropriate.

Frank Joseph Schiraldi

Okay. And then just a quick one, if I could, on the deposits, noninterest-bearing balances. Just your thoughts on -- you talked I think about deposit costs beginning to -- or beta is beginning to stabilize. Any thoughts on levels of noninterest-bearing from here? Are you starting to see stabilization in balances around this 30% of total deposit number? And then as part of that, can you just talk about how trust balances played into the linked quarter change in noninterest-bearing, if at all?

Daryl N. Bible

Yes. Now, these are good questions. So we did see through the quarter -- in the fourth quarter that our DDA balances were starting to stabilize. That's one of the biggest components of what's impacting net interest income is that migration from DDA into sweeps. Hopefully, that will kind of play out in the next quarter or 2 as that kind of stabilizes. I think when you look at the retail side of the chain, we still grow our CD book, that will probably continue though rates really start to fall. You didn't really see growth in CDs till we got over 3%. So we'll probably have to go down a little bit before that growth following slows down a bit. But it's important that we price that correctly.
In our disclosures, we combine our retail CDs with our broker CDs and I did say in the prepared remarks that we probably plan to shrink our broker CDs over time. So that category will probably fall throughout the year but it's probably driven more by nonclients. From a trust perspective, it had a modest impact on it. I would say it wasn't that big of an impact from that. It was really just drop in more in the commercial space for the most part.

Operator

And we have our next question from Erika Najarian with UBS.

Erika Najarian

Daryl, just a few follow-up questions, please. On the (inaudible) of questioning, I'm wondering, what is your current assumption for downside beta for the first 100 basis points of cuts? And is there anything about this cycle where we can't look at historical precedents in terms of volume reaction or cumulative beta reaction to the Fed easing?

Daryl N. Bible

Yes. So if you look at our betas on a cumulative basis going up. We're now in the low 50% range but that includes the broker piece of that. So if you take that away, we're probably in the mid-40s. And on the downside, I'd probably say early on, we'll start probably in the 40s on the way down as well. And as it goes down, though, you won't be able to sustain that because while we increased a lot of our rates higher in the commercial area and our wealth area and some of our institutional areas. So those will come down as they went up.
The retail side really did not come down, it didn't go up as much, so it won't come down as much. So if you were down 100 or 200 basis points, you're actually going to have a declining beta impact is probably what you're going to see play out depending on how much the Fed actually lowers rates. But I think early on, you're going to see something similar to that on the way down in the 40s would be my best guess.

Erika Najarian

Got it. And a follow-up question on credit. How should we think about the progression of your ACL ratio from here? I know you mentioned in the prepared remarks, you'd already built up your reserve pretty significantly. As we think about normalization and whatever maturity walls you have in the CRE, should we expect that your ACL ratios to continue to build from here? I mean this is sort of our first go at CECL with charge-offs actually going up.

Daryl N. Bible

All right. I know, it is. We feel really good where our reserve is right now. I can't promise you it's not going to go up. But we've been done a very thorough review of all of our, what we think are, higher risk type credits in the CRE space in the commercial space as well. So no promises that it can't go up anymore, but we feel really good where we are today and where we're reserved.

Operator

And our next question comes from Bill Carcache with Wolfe Research.

Bill Carcache

Daryl, can you take us inside some of the discussions that you're having with your commercial clients? And how confident are you that the ingredients are in place for a reacceleration in loan growth, if indeed, the soft-landing scenario plays out?

Daryl N. Bible

I -- if you look at what our clients have been saying, for the most part, they've been more on the sidelines and really been leery of investing in their businesses. I think it's actually -- I get kind of excited. If the Fed just lowers rates just a little bit, I think the markets will get excited and you're going to have some things take off, and there'll be a lot more investment, which will help the lending side.
I actually will get more excited on the fee side as well. We saw a fair amount of activity just in December with the move that we had in the yield curve in treasuries, where there was a lot of pent-up demand and we were able to do some placements in our commercial mortgage area, and you saw that flow through with some fee income. So I get kind of excited that if the Fed just -- lowers rates just a little bit, I think we're going to have more momentum come through than what you're actually seeing maybe in the guide that we have.

Bill Carcache

That's really helpful. And then following up on Erika's question on the reserve rate trajectory within CRE. Some has indicated that in this environment, they'd be more likely to maintain reserve rates in office CRE as charge-offs occur. Is it reasonable to expect that there would be a lag between when we see peak losses in CRE and when you actually start to release reserves?

Daryl N. Bible

We go through the analysis. I mean it's a model, right? And it's based on our variables. So if you look at the variables we had this past quarter, the variables for like GDP and unemployment were basically unchanged. And they actually got a little bit better on (inaudible) and on HPI. So that actually helped in the reserve calculation. So we're using the macro variables coupled with what -- how we think that the credits are rated from a credit perspective and it all comes together.
From a timing perspective, I think it's hard to say exactly when reserves will get adjusted. Right now, we feel good with what we have given what our risk is that we know right now on the credit side. But over time, probably, there will be some reserves but it releases by you just don't know when that's going to happen. So it's more model-driven.

Operator

And our next question comes from Brian Foran with Autonomous.

Brian D. Foran

So one question going back to this beta on the way down that I sometimes get from investors and I never have a very good answer. And you guys historically been pretty good about thinking about normalized margins and drivers. So hopefully, you can do better than me. We all talk about deposit costs as the problem. But if I think about deposit margins over time, and I know there's different ways to measure them but relative to Fed funds, the spread between deposits and Fed funds is basically at an all-time high for you in the industry. It's a little less extreme relative to 2- and 5-year treasuries but it's still elevated or even just more simplistically, like your deposit costs today are still a little bit lower than they were. I know said in the last time the Fed was here.
So I know a lot has changed over time but just have you thought about that? Does it make sense that deposit margins or liability margins more broadly or kind of higher than they have been historically and where on your worry list is the idea that because they're pretty high to start with, maybe as the Fed cuts, betas aren't 40% or 50% there, 20% or 30%?

Daryl N. Bible

Yes. I would say -- I think it was Erika's question for when I was saying as rates fall, the beta will start to come down just because the consumer side did not go up as much. So I think we'll start off at a higher pace. But as that comes down, that will be less from that. If you look at it, I actually like the level of interest rates where we are today. I mean we're in the low 5s is where the Fed is. If we stay, let's say, in the 4% range or maybe even as low as 3%. As long as we price our assets and deposits appropriately, to getting back to basic business and we get good spreads on that. There is no reason we can have very healthy net interest margins for a very long period of time. It's all about pricing your assets and deposits frankly making sure you're putting prepayment language in on your fixed loans and making sure you're pricing deposits appropriately.
But it's a great environment for banking and margins. I feel really good from that. Would we trend higher than where we are today, probably over time but it really comes down to discipline. You really work on the asset mix change at that time in times like that, when rates tend to be in that time period, economy seems to be growing pretty well. So you probably have good loan growth out there and pretty decent deposit growth. So I actually get excited once rates come down a little bit, and we can really operate the bank. Historically, I think we'll have good -- really good returns.

Brian D. Foran

And maybe as a follow-up, your predecessor has the theme of kicking off this whole deposit and margin [worry] cycle at the Barclays conference a couple of years ago. I think at that time, the original message was the NIM was 4% or 4.1% and through the cycle, you thought 3.6% to 3.9% was a normalized range. Is that still the thinking like we'll be at 3.5% or so in '24, but normalized at some point in the future is 3.6% to 3.9%.

Daryl N. Bible

I think that's pretty much spot on, Brian, is that I would say. Darren did a great job in this role and he also called exactly what our charge-offs were going to be in the beginning of the year, and they came in pretty much spot on. So he did a great job in this role. But when I look at it and see what's happening, if I call it right, maybe we bottom in the next quarter or 2 and then it just margin then we can start growing from there. So I'm pretty much in that camp as well.

Operator

And our next question comes from Steven Alexopoulos with JPMorgan.

Steven A. Alexopoulos

Daryl, maybe to start -- to actually start where you just ended. So that normalized NIM range, 3.6% to 3.9%. If we think about your commentary right, you want to move the balance sheet to a more neutral position. Is there any reason in whatever a normal curve looks like, we haven't seen it in a while, that you couldn't move to the upper end of that range. I think most would be disappointed if you were 3.6%, like why wouldn't you move to the very upper end of that range?

Daryl N. Bible

Steve, I don't know.

Steven A. Alexopoulos

I'm not going to hear about it. I am just talking about 2025, 2026. Because is there a reason that you're not going to be 3.75% margin bank?

Daryl N. Bible

I feel really good at the way we are positioned. What makes us so strong is we are really good at how we price our assets. But what really makes it is that we are great at growing operating accounts. And that funding source is really starting to come back on and growing nicely. So we always have and probably will have a top quartile net interest margin. So I feel really good about that. We may operate a little bit lower just because we're going to carry a little bit more liquidity. Right now, we're carrying about $4 billion more liquidity just because we increased our internal stress liquidity scenarios based upon some of the learnings that we had from earlier in the year from that perspective. So that cost us 6 basis points this quarter. It doesn't really impact NII a whole lot but it impacts your margin just because you were (inaudible) on assets and liabilities that don't make anything.
But I feel really good in this rate environment, managing a balance sheet and doing the right thing for our customers and for our communities is really what banking is all about, and I think we'll be able to execute and perform really well in that environment.

Steven A. Alexopoulos

Got it. Okay. And just as a follow-up. So I know you've had 10 questions already on commercial real estate. But if we look at this deep dive you did covering 60% of all commercial real estate loans, one, what are you learning? I don't know if you're talking to building owners as you work through that process. But as these come due, you have $1 billion or so in criticized. What's the expected work out? Will they put more equity in? What are you expecting? And then when you called out the 4.4% office reserve, is that a general reserve on the office portfolio? Are those specific credits coming due where you're anticipating losses?

Daryl N. Bible

Yes. I mean the 4.4% is really a general amount. There could be a little bit of specific embedded in that. But it's -- the bulk of it is more of a general reserve from what we're seeing from that perspective. We are seeing our clients, our sponsors really step up and really support these credits. We think that with charge-offs that we had this past year were really more financial and institutional oriented. But our sponsors because they're long-term real estate owners of the property.
I mean, they basically own properties where they want to own them in a certain block and city of where they have it. So it's really long-term oriented. They tend to have really low tax basis in these properties, and they're going to support these credits over time. So that's really what we're seeing there. When we go through and look at whether we should grade it as criticized or not, you're seeing some pressure on the debt service coverage ratio. Once it falls under [1.1], it goes into the [11] , which is criticized camp. But the vast majority of what we have in criticized is between 1 and 1.1. Yes, we had 1s under 1 in that level, but the vast majority we have there. So over time, I think those will cure and won't result in loss for the most part.
We did raise losses up a little bit for '24. Some of that was really normalization on the consumer portfolio. And then some of it is maybe working out a few more credits off. But for the most part, what we have in criticized is not materializing into losses.

Operator

Our next question comes from Ken Usdin with Jefferies.

Kenneth Michael Usdin

Daryl, first question on the securities book. Trunk a little bit but also the yield was flattish, let's call it. I'm just wondering how you could tell us through how you're thinking about both the size of the securities book going forward? And also, what are you picking up on maturities as they're going back in if we're starting to see this kind of flattish type of yield situation?

Daryl N. Bible

Yes. So we had a couple of things going on there. So if you look at what we have right now, we're probably going to take anywhere from $3 billion to $5 billion this year and move from cash into the securities book over time. We're going to really focus on non-convex type securities. We don't have extension. So if we buy something at a duration of 3 years, it stays in a 3 years perspective. Yields that we're seeing right now are probably in the mid floors, plus or minus. So I think that's going on pretty well.
The other good benefit that we have is we have about $9 billion of U.S. treasuries. Those U.S. treasuries average a yield close to 2%. So those are going to reprice and we're going to put those back out and probably 2-, 3-, 4-year type duration or maturity treasuries and we're going to reprice up over 200 basis points there. So I think that's a real positive. So we're seeing a nice uplift in the securities portfolio.
The other thing to note, and I'll just switch over to the loan book, Ken, if you don't mind, is that on the consumer book, our auto didn't really grow but the volume we put on in our auto lending was like 250 basis points higher than what it was rolling off at. If you look at the RV portfolio, and that did grow some this past quarter, that was also up a couple of hundred basis points with a higher yield. So we're -- from a reactivity perspective, our fixed portfolios are starting to really show and perform and to have much higher yields.

Kenneth Michael Usdin

Yes, that's great. Actually, it was going to be my follow-up on the loan side. Do you have a broader way of helping us think through either the proportion of that book that's fixed and reprices over the next year or two?

Daryl N. Bible

It's -- I would say, it's mainly in the consumer book is the book that's probably going to reprice higher. From C&I and CRE perspective, most of that is more floating because we're more like 60% floating, 40% fixed. So if you look at it like that, mortgage portfolio, for the volume we put on in mortgage will be I think probably at attractive yields. There's not a lot of activity. We're going to originate and sell all conforming. So we generate fee income and not put it on the balance sheet but we will support our clients and wealth. We will support our customers that we have for moderate- and low-income housing. So there will be some volumes that go on in those portfolios. So that will reprice higher. That would just be a little bit slower because the volumes won't be as high.

Kenneth Michael Usdin

And sorry, one more final one. Just you mentioned earlier the ongoing thought process of getting more of the production off balance sheet and kind of switching NII into fees. I'm just wondering where you are in that process and build out and infrastructure? And within that, do you have an idea of where you think that the right commercial real estate on balance sheet concentration of the loan book should be versus the current 25%?

Daryl N. Bible

Yes. So I would say our plans right now are to bring our CRE portfolio down probably another $3 billion. If you look in the last couple of years, we've been shrinking CRE, about $3 billion a year. That gives us time to basically work with our clients and meet their needs with more off-balance sheet alternatives. So we're doing it on a measured pace so we can do it and still meet the needs of our good long-term clients from that perspective.
As far as what percentage we're going to head for, I know it's going to be lower than 25%. I can't tell you. You got a couple of things going on, CRE shrinking and the other portfolio increasing. So my guess is, you'll probably see it drop a little bit faster than you might expect. If we're successful or growing C&I and some of our consumer book.

Operator

And we have our next question from Chris Spahr with Wells Fargo Securities.

Christopher James Spahr

Daryl, this is about expenses and the efficiency ratio. I mean, this is going back a while ago that you, at one point, M&T had a 50% to 55% efficiency target. I know you haven't been updated in some time. I'm just wondering what do you think -- given that the efficiency will creep higher in '24 based on the guide, what do you think the efficiency will settle in? What's your normalized NIM?

Daryl N. Bible

Yes. So when you look at efficiency ratio, it's all about growing revenues faster than expenses. That's really what I kind of look at from that perspective. We really have a challenging time in '24 growing revenue so much just because we got net interest margin coming down some. My hope is that it levels off '24 and starts to grow later in '24. So we can start in '25 and start to have positive operating leverage from that perspective. I'd tell you I'm very pleased with working with the leadership team that we have here at M&T. We all agreed to come in and all business lines came in with flat expenses and basically finding cost cuts to cover their merit increases, and they kind of did that in their own businesses. So I think that was really well done from that perspective.
We're guiding up a couple of percent just because we're making some investments and some really key projects like digital, like data. We have 2 transformations going on right now, one in finance, the other in commercial. We're investing in our treasury management businesses. So we've got a lot of investments. But given our leadership team, I feel good that we'll be able to contain what growth we need there and that we won't have -- the goal would be to have revenue real faster than expenses is really what we try to shoot for, and that will kind of drive good positive operating leverage.

Christopher James Spahr

So as a follow-up, so do you think you can manage like a few percent growth in expenses in '25 and '26 kind of just based on kind of your budgeting experience. Notwithstanding like kind of activity or volume-driven expenses.

Daryl N. Bible

Yes. I mean when I look at the levers that we have on the expense side, there's a lot of opportunities. If you look at it, our procurement and sourcing ores are continuing to improve and get better in that area. I think we still have opportunities in our corporate real estate area to get more square feet down over time. We're really working with workforce management and really how to do our operations the most efficiently possible. I think our call centers have a lot of opportunity from an automation perspective. One of our themes that we have in 2024 is simplification, really trying to simplify what we are doing today. So on the transformations that are going on, how we do this, we'll have less processes and much more simple way, getting things done in a much more efficient way of getting them done from that perspective.
For me, it always comes down to how we prioritize. We're going to prioritize in the priorities that we have in this company, and I talked about those projects. If we can focus on those and really not have any other -- of the other investments kind of play out, we can control expenses really well and to continue to generate positive operating leverage as we get revenues to start to grow again.

Christopher James Spahr

Sorry. And one last ticky-tack question. Bayview, what is the -- do you have any estimate on what that would be for this year?

Daryl N. Bible

We aren't 100% sure but I would say 20 plus or minus would be our best estimate right now.

Operator

And that does conclude today's question-and-answer session. I will now turn the call back over to Brian Klock for closing remarks.

Brian Paul Klock

Thanks, Michael, and thanks, everyone, for participating in our call today. If there are any follow-up questions, you can call our Investor Relations department at (716) 842-5138.
Thank you again, and have a good day.

Operator

This does conclude today's program. Thank you for your participation. You may now disconnect.