M&T Bank Corp Q1 FY2023 Earnings Call

Thank you, Shelby, and good morning. I'd like to thank everyone for participating in M&T's First 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 as well as reconciliations of non-GAAP financial measures are included in today's earnings release materials as well as our SEC filings and other investor materials. These materials are available on our Investor Relations web page, and we encourage participants to refer to them for a complete discussion of forward-looking statements and risk factors. These statements speak only as of the date made, and M&T undertakes no obligation to update them. Now I'd like to turn the call over to our Chief Financial Officer, Darren King.

Thank you, Brian, and good morning, everyone. Our first quarter results reflect the strength of our balance sheet and liquidity position as well as the impact of our merger with People's United Bank. Compared to last year's first quarter, revenues have grown over $970 million or 67%, translating into 24% positive operating leverage year-over-year. Pre-provision net revenues have more than doubled since last year to $1.1 billion. Credit remained solid with net charge-offs still below our long-term average. Capital levels remained strong with the CET1 ratio estimated to end the first quarter at 10.15%. During the quarter, we repurchased $600 million in common shares which represented 2% of our outstanding common stock, and the Board approved an 8% or $0.10 per share increase in the quarterly common dividend to $1.30 per share. Tangible common equity per share increased 3% to $88.81 per share. In addition, April 1 marked the one-year anniversary of the closing of the People's United acquisition. We're pleased with the results of the largest acquisition in our company's history. The tangible book value dilution was only 4% and has been earned back already. Merger costs were less than anticipated at the time of announcement. Targeted expense synergies have largely been realized and are now in the run rate. As a result of these, the above, the return on investment and EPS accretion have exceeded those expected at the time the deal was announced. Let's take a look at the first quarter results. Diluted GAAP earnings per common share were $4.01 for the first quarter of 2023, down 7% compared with $4.29 in the fourth quarter of 2022. Net income for the quarter was $702 million, 8% lower than the $765 million in the linked quarter. On a GAAP basis, M&T's first quarter results produced an annualized rate of return on average assets of 1.4%, and an annualized rate of return on average common equity of 11.74%. This compares with rates of 1.53% and 12.59%, respectively, in the previous quarter. Included in GAAP results were after-tax expenses from the amortization of intangible assets amounting to $13 million in the first quarter and $14 million in the sequential quarter, representing $0.08 per common share in both quarters. Pretax merger-related expenses of $45 million related to the People's United acquisition were included in the fourth quarter's GAAP results. These merger-related charges translate to $33 million after tax or $0.20 per common share. There were no merger-related expenses in this year's first quarter. In accordance with the SEC's guidelines, this morning's press release contains a reconciliation of GAAP and non-GAAP results including tangible assets and equity. Consistent with our long-term practice, M&T provides supplemental reporting of its results on a net operating or tangible basis, from which we have only ever excluded the after-tax effect of amortization of intangible assets as well as any gains or expenses associated with mergers and acquisitions. We believe this information provides investors with a better picture of the long-term earnings power of the institution. M&T's net operating income for the first quarter, which excludes intangible amortization and the merger-related expenses, was $715 million, down 12% from the $812 million in the linked quarter. Diluted net operating earnings per common share were $4.09 for the recent quarter compared with $4.57 in 2022's fourth quarter. Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholders' equity of 1.49% and 19% in the recent quarter. The comparable returns were 1.7% and 21.3% in the fourth quarter of 2022. As a reminder, GAAP and net operating earnings for the fourth quarter of 2022 were impacted by certain noteworthy events. This included a $136 million gain related to the sale of the M&T Insurance Agency as well as a $135 million contribution to M&T's charitable foundation. These items collectively netted and did not materially impact net income. Next, we'll take a deeper dive into the underlying trends that generated our first quarter results... ...Taxable net interest income was $1.83 billion for the first quarter of 2023, slightly below the linked quarter. The $9 million decrease was driven largely by a $30 million decrease in net interest income, reflecting the two-day shorter calendar quarter, partially offset by a $13 million positive impact from our hedging program and $8 million from higher average earning asset volumes net of higher average interest-bearing liability volumes. The net interest margin for the past quarter was 4.04%, down 2 basis points from the 4.06% in the linked quarter. The primary driver of the decrease to the margin was the impact from a higher level of borrowing, which we estimate reduced the margin by 19 basis points. This was partially offset by the impact from higher rates on earning assets, net of deposit funding, which we estimate added 18 basis points. All other factors had a negligible impact on the margin. Total average loans and leases were $132 billion during the quarter, up $2.6 billion or 2% compared to the linked quarter. Looking at the loans by category on an average basis compared to the fourth quarter, commercial and industrial loans and leases increased $2.4 billion or 6% to $42.4 billion with $1.9 billion being broadly based and $453 million of growth in average dealer floor plan balances. During the first quarter, average commercial real estate loans decreased by $363 million or 1% to $45.3 billion. The decline was driven largely by lower permanent mortgages as average construction loan balances were essentially flat. Residential real estate loans increased by $435 million or about 2% to $23.8 billion due largely to the timing of the retention of originations throughout the prior quarter. End-of-period balances were essentially flat sequentially. Average consumer loans were up $144 million or about 1% to $20.5 billion. Recreational finance loan growth continues to be the main driver of increased balances and these average loans grew $178 million or 2%. Average earning assets, excluding interest-bearing cash on deposit at the Federal Reserve, increased $4.9 billion or 3% due to the $2.6 billion growth in average loans and $2.3 billion increase in average investment securities. Although average interest-bearing cash balances have decreased $777 million to $24.3 billion during the first quarter of this year, they came in higher than our initial projections. The sequential quarterly decline in cash reflects loan growth and the drop in deposit balances, partially offset by the proceeds from long-term borrowings issued during the quarter. Consistent with our expectations and normal seasonal outflows, deposits declined sequentially. However, the $1.9 billion or 1% sequential average decline was slightly better than our expectations from the January earnings call. We remain focused on growing and retaining deposits... ...Our experience in prior rising rate environments reminds us to expect increased competition for deposits and changing customer behavior, leading to a mix shift within the deposit base. During the first quarter, average demand deposits declined $8.4 billion. Savings and interest-bearing checking deposits increased $1 billion and time deposits increased $5.4 billion. Average commercial deposits declined a net $2.4 billion as business owners shifted $6.3 billion out of operating demand deposit accounts and into both on and off balance sheet sweep accounts to earn a higher return on their excess balances as well as to make distributions. Almost two-thirds of the decline in noninterest-bearing deposits was offset by movement into on-balance sheet sweep accounts where those average balances increased $3.8 billion during the first quarter of 2023. Turning to consumer deposits, they declined a net $758 million in the first quarter as $2.5 billion in outflows were partially offset by a $1.7 billion increase in average time deposits. Lower levels of activity in the capital markets and seasonal factors also impacted average balances for the following lines of business. Trust fund demand balances declined $1.2 billion. Municipal deposits declined $789 million and escrow deposits declined $684 million. Average brokered CDs increased $3.8 billion sequentially and due almost entirely from growth during the previous quarter. Turning to noninterest income, noninterest income totaled $587 million in the first quarter compared with $682 million in the linked quarter. M&T normally receives an annual distribution from the Bayview Lending Group during the first quarter of the year; this distribution was $20 million in 2023 and $30 million in last year's first quarter. As noted earlier, the fourth quarter of last year included a $136 million gain from the sale of the M&T Insurance Agency... ...Excluding these two items, noninterest income was up $21 million or 4% sequentially. Trust income of $194 million in the recent quarter was flat sequentially. Service charges on deposit accounts were $114 million compared to $106 million in the fourth quarter. The increase primarily reflects a full quarter of service charges on acquired customer deposit accounts after these fees were waived in October and November of last year. Mortgage banking revenues were $85 million in the recent quarter, up 4% from the linked quarter. Revenues from our residential mortgage business were $55 million in the first quarter compared with $54 million in the prior quarter. Commercial mortgage banking revenues were $30 million in the first quarter compared to $28 million in the final quarter of 2022. Other revenue from operations, excluding the distribution from the Bayview Lending Group in this year's first quarter and the gain from the sale of the M&T Insurance Agency in the sequential quarter, were $140 million, up $9 million sequentially. Turning to expenses, operating expenses, which exclude the amortization of intangible assets and merger-related expenses, were $134 billion in the first quarter of this year, little changed from the fourth quarter of last year. As is typical for M&T's first quarter results, operating expenses for the recent quarter included approximately a portion of seasonally higher compensation costs relating to accelerated recognition of equity compensation expense for certain retirement-eligible employees. The HSA contribution, the impact of annual incentive compensation payouts on the 401(k) match and FICA payments as well as the annual reset in FICA payments and unemployment insurance. Those same items amounted to an increase in salaries and benefits of approximately $74 million in last year's first quarter. As usual, we expect those seasonal factors to decline significantly as we enter the second quarter. Excluding the charitable donation in the fourth quarter of last year and the seasonally higher compensation in the first quarter, operating expenses increased $32 million sequentially. The increase was due largely to higher compensation and benefits costs, largely related to higher headcount in the first quarter, $6 million in higher FDIC insurance expense, reflecting a higher assessment rate for the industry, $4 million in higher advertising and marketing expenses and $5 million in professional services expenses directly attributable to the pending sale of M&T's collective investment trust business. Given the prospect for slowing revenue growth, we remain focused on diligently managing expenses and continuing to generate positive operating leverage. The efficiency ratio, which excludes intangible amortization and merger-related expenses from the numerator and securities gains or losses from the denominator, was 55.5% in the recent quarter, compared with 53.3% in 2022's fourth quarter and 64.9% in the first quarter of last year... ...Next, let's turn to credit. The allowance for credit losses amounted to $1.98 billion at the end of the first quarter, up $50 million from the end of the linked quarter. In the first quarter, we recorded a $120 million provision for credit losses compared to $90 million in the fourth quarter. Net charge for the recent quarter amounted to $70 million in the first quarter compared to $40 million in last year's fourth quarter. The reserve build was largely due to a combination of loan growth and the anticipation of declining values for office and health care properties, partially offset by improved expectations for hotel, retail, and multifamily property prices. At the end of the first quarter, nonaccrual loans were $2.6 billion, an increase of $118 million compared to the prior quarter, and that represented 1.92% of loans, up 7 basis points sequentially. As noted, net charge-offs for the recent quarter amounted to $70 million, including amounts that reflect updated appraisals of nonaccrual office loans. Annualized net charge-offs as a percentage of total loans were 22 basis points for the first quarter compared to 12 basis points in the fourth quarter. Loans 90 days past due, on which we continue to accrue interest, were $407 million at the end of the recent quarter compared to $491 million sequentially. In total, 75% of these 90-day past due loans were guaranteed by government-related entities. Turning to capital, M&T's common equity Tier 1 ratio was an estimated 10.15% compared with 10.4% at the end of the fourth quarter. The decrease was due in part to growth in risk-weighted assets and the impact of the repurchase of $600 million in common shares, which represented 2% of our outstanding common stock. Tangible common equity totaled $14.7 billion, up slightly from the end of the prior quarter. Tangible common equity per share amounted to $88.81 per share, up 3% from the end of the year... ...Turning to the outlook. As we look forward to the rest of this year, we believe we are well positioned to navigate through the challenging economic conditions. However, the rapidly changing interest rate expectations combined with continued pressure on funding affect our outlook for the full year of 2023. As a reminder, the acquisition of People's United closed on April 1, 2022, and thus the outlook for 2023 includes four quarters of operations and balances from the acquired company compared to only three quarters during 2022. Our 2023 outlook also reflects the sale of the M&T Insurance Agency that closed in October of last year. And even though the sale of the Collective Investment Trust business is expected to close in the first half of this year, our outlook includes the full year of operations from this business. First, let's talk about net interest income outlook. The outlook for interest rates in the economy continues to change frequently. Since March 8th, the 10-year U.S. government bond yield has dropped 46 basis points and the forward curve has changed meaningfully as well. We expect taxable net interest income to grow in the 20% to 23% range when compared to the $5.86 billion during 2022. This range reflects different rates of deposit balance growth, deposit pricing, and loan growth. Consistent with the current forward curve, our forecast incorporates two 25 basis point cuts in the final quarter of this year. As we noted on the first quarter call, a key driver of net interest income in 2023 will be the ability to efficiently fund earning asset growth. We expect continued intense competition for deposits in the face of industry-wide outflows... ...Full year average total deposit balances are expected to be down low single digits compared to the $158.5 billion average during 2022. During the first quarter, we issued $3.5 billion in senior debt, and we'll utilize the combination of FHLB funding and senior debt over the course of this year as needed to ensure that we can continue to meet the loan demands of our customers. We continue to expect the deposit mix to shift toward higher cost deposits with declines expected in demand deposits and growth in time and on-balance sheet sweep. This is expected to translate to a through-the-cycle interest-bearing deposit beta in the high 30% to low 40% range. Taking all of these factors into account, we anticipate the net interest margin to be slightly below 4% for the full year of 2023 and to continue to migrate towards the long-term range we have been discussing for the past couple of quarters. Next, let's discuss the drivers of earning asset growth. We currently plan to grow the securities portfolio by $2 billion compared to the $28 billion balance at the end of March of this year with the addition of longer duration mortgage-backed securities throughout the year. Looking at average loans, we expect average loan and lease balances during 2023 to grow in the 10% to 12% range when compared to the 2022 full year average of $119.3 billion. We anticipate growth to continue in the second quarter and then for average balances to be flat to slightly down over the second half of the year. This implies total average loan and lease balances in the fourth quarter of 2023 to be up 1% to 3% and from the $129.4 billion average during fourth quarter of 2022. The mix of C&I, CRE and consumer loans, inclusive of consumer real estate, is almost one-third each as of the end of March. We expect this trend to shift slightly as C&I growth outpaces CRE. As we have seen over the past three quarters, higher levels of interest rates are expected to slow down the growth in our consumer loan book in 2023. After these average loans grew 2% in the first quarter, we expect the indirect portfolio to be relatively flat over the remainder of the year. Turning to fees, excluding the $136 million gain on the sale of the M&T Insurance Agency in the fourth quarter of 2022 as well as securities losses, noninterest income was $2.23 billion in 2022. We expect 2023 noninterest income growth to be in the 7% to 9% range compared to the $2.23 billion in 2022. This outlook for noninterest income includes the impact of a bulk purchase of residential mortgage servicing rights that we completed at the end of this year's first quarter. Turning to expenses, we anticipate expenses, excluding merger-related costs, the charitable contribution and intangible amortization to be up 11% to 13% when compared to the $4.52 billion during 2022. Recall that approximately half of this increase reflects an extra quarter of People's United expenses. In addition, this outlook for net operating expenses includes the impact of the previously noted mortgage servicing rights purchase. We do not anticipate incurring any material merger-related costs in 2023 and intangible amortization is expected to be in the $60 million to $65 million range during 2023. Turning to credit, we expect credit losses to migrate towards M&T's long-term average of 33 basis points, although the quarterly cadence could be lumpy. Provision expense over the year will follow the CECL methodology and will be affected by changes in the macroeconomic outlook as well as loan balances. For 2023, we expect the taxable equivalent tax rate to be in the 25% range. Finally, turning to capital, M&T's common equity Tier 1 ratio of 10.15% at March 31, 2023, comfortably exceeds the required regulatory minimum threshold, which takes into account our stress capital buffer or SCB. We believe the current level of core capital exceeds that needed to safely run the company and to support lending in our communities. We plan to return excess capital to shareholders at a measured pace over the long term. However, in the near term, we plan to maintain a CET1 ratio slightly above the current level until the current economic uncertainty abates. With that, let's open up the call to questions before which Shelby will briefly review the instructions.

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

Hi, good morning. I guess I just wanted to go back to the deposit beta and the NII guidance. So high 30s to low 40s deposit beta if you can unpack that a little bit in terms of how has your view around deposit pricing behavior changed today relative to January? And that could be because fed funds at 5%, events of the last month post-SVB. Just give us a flavor of commercial versus retail? Are you seeing differences? And has one changed a lot more than the other? Would appreciate any color there.

Sure, Ebrahim. The deposit betas are largely moving as we expected. Our view on the cumulative through-the-cycle beta hasn't changed. Each quarter, the rate at which we reach the terminal cumulative beta may vary slightly due to competition. The first quarter saw significant disruption in the market. Generally, the most responsive deposits are commercial and wealth deposits. When we analyze them, commercial deposit betas are around the mid-60s to low 70s, which tends to be higher for commercial businesses. For small businesses, the betas are slightly lower because these deposits are less price sensitive. In the consumer sector, we see deposit betas in the mid-teens, which includes time deposits. If we excluded time deposits, the consumer deposit betas would be quite low. We consider time deposits significant because they serve as substitutes for money market savings and savings accounts when interest rates rise. We think about the overall funding cost, including time deposits, which is why we account for them. Looking at this quarter, the decline in deposits compared to last year's first quarter is nearly identical. Since last year was more typical and this year experienced significant activity, having similar figures gives us confidence. Additionally, there is a normal seasonal decline in the first quarter due to commercial customers making tax distributions. However, several factors influenced our deposit flows this quarter. One factor was a drop of about $1.2 billion in trust demand balances, which represent around 20% of those balances and fluctuate with economic activity. Another factor was approximately $700 million in escrow balances, which decreased due to lower activity in the mortgage market. Aside from these issues, we observed a standard seasonal decline in commercial balances, counterbalanced by some commercial clients transferring their balances to on-balance sheet sweep accounts or interest-bearing accounts. We regard these two categories together. Typically, when rates decrease, deposits move to noninterest-bearing accounts, while rate increases lead to a various mixture of interest-bearing and noninterest-bearing accounts. Nonetheless, the trends we're observing align with our historical expectations. I hope my explanation provides you with some clarity.

It was significant. Regarding a separate question, I believe you mentioned making some reserves against office commercial real estate. There is obviously a lot of attention on this topic. Can you provide insight into whether there is a portion of your office commercial real estate portfolio that you consider to be at higher risk? How do you assess the potential losses if some of these buildings were to go into foreclosure and you faced a distressed sale? Is it possible to evaluate that easily at this time? Additionally, what is your approach to managing that portfolio?

Sure. The office sector is certainly receiving significant attention, and we have been monitoring it for quite a while. When evaluating the potential losses, it's somewhat challenging to make accurate estimates at the moment due to the limited number of asset sales. Before this call, our team mentioned that there were four properties sold outside of Manhattan and three within Manhattan in the first quarter, which is not enough activity to determine a market price. Thus, the focus remains on cash flows and net operating incomes. It's important to note that about two-thirds of our real estate clients have transitioned from floating to fixed-rate swaps on their loans. As a result, rising interest rates have not substantially impacted their loan carrying capacity. Looking ahead, we are also concerned about upcoming debt maturities and the likelihood of refinancing, as well as the timeline for these loans maturing. In the next two quarters, we have approximately $200 million in office loans maturing each quarter, with a decrease expected in the fourth quarter. Regarding the loan-to-value ratios of these maturing loans, around 80% have an LTV of 60% or lower. While some of these ratios are based on older appraisals, there is still a cushion remaining. That said, there is the possibility of losses, as evidenced by our quarterly results where we recorded some partial charge-offs on a few underperforming office properties based on new appraisals. Nonetheless, we continue to monitor the maturation timeline of these loans and anticipate that the office sector will take time to work through, potentially spanning several quarters or even years. Many borrowers have hedged their floating rate notes, and office leases typically have longer durations compared to residential leases. Currently, about 75% of our office leases do not mature until after 2024. Overall, while we are concerned and actively monitoring the situation, our portfolio is well-diversified across our locations, and we expect this to evolve over the coming quarters.

And we'll take our next question from Manan Gosalia with Morgan Stanley.

Hi, good morning. Regarding deposits, it's not surprising that they ended the quarter below average. Can you discuss the trend of deposits in the latter half of March? How much did deposit balances shift from February 28 due to the impact from SVB until the end of the quarter? Additionally, what has been happening so far this quarter?

Sure. I guess I would just caution on drawing cause and effect. The numbers are the numbers, but whether the decline that happened in March was specifically attributable to the SVB or Signature challenges is difficult to say just because there's normal activity that happens in the first quarter, right? As we mentioned, the trust demand balances move based on capital markets and not necessarily because of an exogenous event. When you look at the decline in total deposits over the quarter, about 60% happened before March and 40% happened in March. So, a little bit heavier in March. But as you get into that March time frame, that's when we got our distribution from Bayview, which is when distributions often get paid right in front of taxes for commercial clients. And so, when we look at the effect on the bank of the changes that happen, what we tended to see was we opened up more accounts in our business and middle market space than we would typically in a month. And we saw balances come on to our balance sheet as people sought to diversify. And there were some cases where that went the other way. But net-net, we were flat to slightly up from what our expectations were, given all the activity that was happening in the marketplace. From our perspective, we were in line with what we thought for the quarter and pleased with how the client base and our teams reacted to everything that was going on in the world in the month of March.

Got it. How confident are you at this stage that deposit balances have stabilized? We noticed that the SCB essentially doubled on a quarter-over-quarter basis. So, how confident are you that the deposit balances have stabilized? Also, since you've maintained your deposit beta assumptions, what factors would lead you to raise your deposit rates as we move into the middle of the year? Additionally, if you have the information, what were your spot deposit rates as of March 31? Thanks.

I don't have the spot deposit rates available right now, but we can follow up on that later. Regarding the stability of deposits, it's important to note that the current activity is primarily in noninterest-bearing deposits, which is largely driven by commercial accounts. For consumer balances, aside from some outflow in January, noninterest-bearing deposits have remained relatively stable through February and March. In the consumer sector, there is a trend of moving funds between interest-bearing categories. We’re seeing a shift from savings and money market accounts into time deposits, which is typical during periods of rising interest rates. Consequently, there has been some small increase in demand deposit accounts, which is common in the first quarter. In the commercial sector, aside from seasonal changes, noninterest-bearing deposits will stabilize as clients maintain the necessary funds in their operational accounts for payroll and other expenses, with excess funds transitioning into interest-bearing accounts. We anticipate a decline in noninterest-bearing deposits, which has historically occurred for us in similar environments. Historically, when rates decrease to zero, the proportion of our deposits that are noninterest-bearing increases by around four to five percentage points, and as rates rise, that percentage declines, which is what we’re currently observing. Looking back to before the global financial crisis, noninterest-bearing deposits represented about 20% of total deposits, peaking at 45% for us and around 30% for the industry. When interest rates were similar to today’s, time deposits made up a significant portion, around 25% to 30%, but have now decreased to 5% to 10%. This context suggests we expect to see further outflows of deposits, but stabilization will occur as rates level off. We anticipate less movement of deposits and more shifts between categories, with consumers likely transitioning from money market and savings products into time deposits, while commercial clients may move from noninterest-bearing accounts into interest-bearing accounts such as sweeps and commercial checking. For the remainder of the year, we expect stabilization to begin in the second quarter, and we foresee a buildup in commercial checking balances in anticipation of the first quarter of next year, which is a predictable cycle we experience annually.

Great. Thanks, so much. Very helpful.

And we'll take our next question from John Pancari with Evercore.

Good morning.

Good morning, John. How are you doing?

All right. I want to see if you can give us a little more color on the updated loan growth guidance, the 10% to 12%. Where are you seeing some of the better trends coming from because it looks like it upwardly revised from where you had expected it coming out of last quarter? Thanks.

Yes. John, it's important to remember that the 10% to 12% growth forecast includes four quarters of People's this year compared to three quarters last year. Some of that is reflected in the numbers. We mentioned in the outlook that if you consider the average loan balances from just the fourth quarter of last year, our growth is more in the 1% to 3% range. A lot of the activity has already occurred in the first quarter, and given where first quarter loan balances ended, that averaging effect should contribute to some growth in the second quarter. We anticipate things will stabilize somewhat as we move into the second half of the year. The math supports that average growth range. The challenge we’re facing is that while the pipelines have been strong, they are beginning to slow down, and we're prioritizing our liquidity for our best and relationship customers. Additionally, in the consumer sector, particularly in indirect lending and refinancing with rising rates, there's been a slight decline in client demand, leading to flat or slightly reduced balances in that area since the portfolio has a short duration. This means we need to continue generating new loans to maintain or grow those balances. In the commercial segment, there isn’t much activity happening in commercial real estate, with limited new construction. Therefore, we expect that as loans mature, we will focus our capital and liquidity on retaining those clients. In the commercial and industrial segment, we have observed growth across various geographies and industries. We noted that dealer floor plan balances have increased, although they are still about half of their long-term average, showing some potential for growth. A slowdown in indirect lending could lead to an increase in dealer floor plan balances. These are the areas we're seeing activity in and our expectations for how the year will progress.

Got it. All right. And then just secondly, back to the office portfolio, just a few things around that. What percentage of the office book is criticized? I believe last quarter, you indicated about 20% of it was criticized? And in that 60% LTV that you mentioned for what is maturing coming up, do you have some granularity on what the refreshed LTVs look like as part of that? And then lastly, did you add to the commercial real estate reserve this quarter?

Okay. A lot in there. Let me try and make sure I get it all. So, the office criticized is still right around 20%. It's up slightly, but not up dramatically. And the hotel criticized continues to come down. So, it's important to keep that in mind because as we talk about the CRE increase that you're asking about, there's an offset within the whole CRE allowance, right? We've seen some improvement in the hotel and retail, offset by some decline in office. But we did add to the allowance in the quarter. If you think about dollar amount, it's probably half to two-thirds of the $50 million provision was allocated towards the net towards the CRE portfolio. The rest would be driven by growth in other portfolios. When you look at the LTVs, what we've seen in the ones that we have updated so far is we're seeing somewhere between a 15% and 20% decline in some of the updated values of the properties that we've reappraised. And so that's why you didn't hear me talk much about 80% or 70% LTVs because those ones are getting closer perhaps to where these properties might reappraise, but 60% LTVs and sub-50% LTVs would seem to still have a lot of cushion before you're into any material loss content. And so, when we look at that we feel good about where we are. It doesn't mean that we're taking our eye off the ball, but we feel good about where we are. And again, just to give a little more color on New York City office next quarter, this quarter we're in right now, there's five loans that are maturing with a principal balance of $30 million. And we'll take our next question from Dave Rochester with Compass Point.

Hi, good morning, guys. On capital, the buyback going forward, it sounds like you're pretty much saying no buyback for 2Q? Or is that too strong a statement? Or is the thought just that you'll wait to get your CCAR results and then hope that the market is more stable at that point and go from there?

Yes, I believe that's a significant point. As we review the quarter and observe the pace of risk-weighted asset growth, we see the potential for a favorable situation. We expect some growth in risk-weighted assets. With rising rates and limited liquidity, we anticipate an increase in margin and profitability from new lending activity, which typically occurs at this stage in the cycle. Therefore, we will prioritize deploying capital to those opportunities first. We also expect to finalize the sale of the CIT business this quarter, which will generate a gain and improve our capital ratios, allowing us to enter the market to repurchase some shares. Simultaneously, we aim to maintain a strong capital level that provides a good buffer amid market uncertainty while awaiting the SCB. From our perspective, if we experience a slight shortfall for a quarter, it doesn’t indicate that the capital is depleted; it simply means it will return later in the year. Ultimately, we believe we are well-positioned to pursue all three objectives: increasing risk-weighted assets, returning capital, and enhancing capital ratios concurrently. And we'll take our next question from Dave Rochester with Compass Point. We expected to close this quarter with some safety in mind, and I assume it's aligned with our run rate for the second half of the year. Although the revenue and expenses are not precisely the same, they are quite close, which is one of the reasons we are considering this move. Yes, we expected to close this quarter for safety. I would assume that it's out of the run rate for the second half of the year. While the expenses are not quite the same as the revenue, they are not far off, and this is one of the reasons why we are considering this move.

We are going to miss you. Congratulations on your run as CFO. I guess, when you started in 2016. So, I know you've got a heavy hit of replacing you, but good luck in the new role.

Thank you. I appreciate it. It's been a run. There's a lot that we've seen. We've navigated through a pandemic at the largest bank and gone through a couple of bank failures. So, it's been an eventful time.

Helping the new role, your spot rate on the money market account is 3 basis points for balances under $10,000, and for balances over $10,000, it adjusts to 2.96%.

I'm just trying to help out the new CFO, so that he has good numbers to report. They will be chastising me about what balances are leaving, but don't forget, that's the offer rate, not the portfolio rate, but I appreciate it.

Oh, God, yes. No, no, I know. Absolutely. But here's my question. Speaking of deposit rates, can you share with us, and that you've alluded to this in some of your answers, if the Fed reaches its terminal rate on Fed funds in June, let's say, 5%, 5.5%. And does not cut even though I know you're looking at the forward curve that includes two cuts in the fourth quarter. Say they don't cut until maybe the first half of '24. When does your deposit betas go flat after reaching the terminal rate, and second, if they go at 60 days afterwards or whatever you think the number would be, do you then benefit from reinvesting the cash flows off of the securities portfolio into a higher rate environment, assuming the Fed doesn't cut the Fed funds rate?

When you stop observing a slowdown in deposit repricing, historically it tends to occur one to two quarters after the Federal Reserve halts changes. Therefore, even if the Fed pauses in the summer and makes cuts in the fourth quarter, changes in deposit betas are unlikely to be visible until sometime next year. If the Fed holds steady into 2024, the same pattern applies; deposit betas may increase for a quarter or two before stabilizing. In all of these aspects, such as pricing and the overall beta, there are several factors to consider. We've consistently discussed this in relation to the Fed funds rate. However, when we examine the bank and the balance sheet, numerous trade-offs are involved. For interest-bearing deposits, there's a cost that must be passed on to customers. Yet, there are alternative options to satisfy those funding requirements, like brokered money market accounts, brokered CDs, or self-funding. Our preference is to offer rates to our customers rather than to the capital markets. Ultimately, we are always making these trade-offs. Additionally, the changes that occur among our clients mirror the economy, just as they do for any bank's clients. Consumers will retain a certain amount in their accounts that they feel secure with, and each individual has their own threshold that they won't dip below unless absolutely necessary. Businesses behave similarly, which results in a specific level of deposits on each bank's balance sheet. Within each category, the market is relatively efficient, and we cannot pay significantly less for money market savings in Buffalo than our competitors. The same applies to the other categories. Therefore, there is a natural limit in the market that aligns these deposit categories with what I would consider their normal pricing. The differentiation between banks is often based on their deposit mix. Our strength has always been our focus on operating accounts, whether for consumers or commercial clients, leading to a higher proportion of those in our funding, which ultimately benefits our cost of funds. These factors will influence our outcomes and the extent of our beta compared to others. We believe that betas will persist even after Fed funds hold steady for a while, and the final amount is influenced as much by the mix of deposits as by the peak rate reached.

And we'll take our last question from Steven Alexopoulos with JPMorgan.

I'm curious about what you're hearing from your large deposit customers in the wake of SVB making headlines. Are they considering diversifying their deposits to avoid losing balances to larger banks? Has the situation stabilized now? Any insights you can share on how this is affecting a bank like yours would be greatly appreciated. Thanks.

Yes. No, happy to. The long story short was that the change was a positive for us for adding clients and adding accounts. And so, we're hopeful that we were able to serve as a source of strength and to help some of these folks out when these changes happened. And we were, I would say, a net slightly positive as a result of all the disruption that happened in these various markets. For our clients, when we look at particularly our commercial clients and the average tenure, 20, 25-year relationships. And so, they know us well, and they tend to worry a little bit less. That said, there were some people who chose to move some money into some of the money funds for diversification for rates, as well as some of their comfort level. We didn't lose a ton, to be honest with you to the larger organizations. But what I would say is, in some of those shifts, we were a recipient of balances as much as we saw an outflow. And so, when you add in some of the accounts that we opened during the crisis, the net was a slight positive. And so, for us, it wasn't the big shift in balances that many were anticipating; more, I would say, as much a continuation of the trend that we've been talking about of as quantitative tightening happens as rates are moving up in the money, the rates paid on the money funds, always moves faster than the deposit accounts on the balance sheet. That normal migration is happening, and over time, we expect it will come back as those other rates start to match what you can get in the funds.

And we’ll take our last question from Brian Foran with Autonomous Research.

I guess just quickly on lending, it sounds like any underwriting changes on your end are only marginal if I got that comment about focusing liquidity on our best customers. So, I just wanted to confirm that. And then just more broadly, definitely appreciate the point that the rollover in commercial real estate in particulars is fairly slow. But do you think some of your peers will change underwriting more significantly, as people worry about a credit crunch and lending and care in particular? Do you think that's a valid concern or do you think that's overblown right now?

I can't speak to what others will do. I think there's a big difference between the banks and the REITs and the CMBS in how they underwrite and how they've underwritten, and how they think about things. For us, in particular, we don't move our credit standards very much at all. And I think we've talked about this for a while that we've had two Chief Credit Officers since 1983. Our viewpoint on underwriting is pretty consistent. And we try to be the same through good times and bad, right, because what our clients value is consistency and knowing what they need to have, in terms of a profile of the loan for us to be there. I think for us and the industry, as you look at what's maturing, there's a question of how many alternative sources of funds are available for those loans, particularly in the real estate space. And so, as long as they mature, one of the questions will be, is there another bank or a fund or someone out there who is ready to take that loan on, which obviously will be a function of the debt service coverage and the loan to value? What likely happens though is, as prices are challenged in the short term is, you will see some sponsors will have the ability to put in some extra equity, which will help with the underwriting. You might see some A node and B node structures. You might see some outside private equity money come in the form of efforts or mezzanine debt to help with some of those shortfalls. So, I think what's typical within real estate is its nuance, right? It's hard to give a blanket statement about what will happen. It's more client-by-client and property-by-property that you work through these things. And so, like I said for us, we preserve our capital and our liquidity for our best customers, and many of these ones, particularly in real estate, have been around for a long time. Like we are in the second or third generation of supporting them and we will continue to do that. But there is always opportunity when this kind of disruption occurs, and we will be paying close attention to that as well.

I appreciate all that. Thank you very much.

And it appears that, we have no further questions at this time. I will now turn the program back over to Brian Klock for closing remarks.

And 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.

That concludes today's teleconference. Thank you for your participation. You may now disconnect.