Earnings Call
M&T Bank Corp (MTB)
Earnings Call Transcript - MTB Q1 2025
Operator, Operator
Welcome to the M&T Bank First Quarter 2025 Earnings Conference Call. All lines have been placed on a listen-only mode further, and the floor will be open for your questions following the presentation. Please be advised that today's conference is being recorded. And I would now like to turn the conference over to Steve Wendelboe, Senior Vice President, Investor Relations. Please go ahead.
Steve Wendelboe, Senior Vice President, Investor Relations
Thank you, Margo, and good morning. I'd like to thank everyone for participating in M&T's First Quarter 2025 Earnings Conference Call, both by telephone and through the webcast. If you have not read through the earnings release we issued this morning, you may access it along with the financial tables and schedules by going to our website at mtb.com. Once there, you can click on the Investor Relations link and then on the Events and Presentations link. Closed captioning has been provided for webcast participants. Also, before we start, I'd like to mention that today's presentation may contain forward-looking information. Cautionary statements about this information are included in today's earnings release materials and in the investor presentation, as well as our SEC filings and other investor materials. The presentation also includes non-GAAP financial measures as identified in the earnings release and investor presentation. The appropriate reconciliations to GAAP are included in the appendix. Joining me on the call today is M&T's Senior Executive Vice President and CFO, Daryl Bible. Now I'd like to turn the call over to Daryl.
Daryl Bible, CFO
Thank you, Steve, and good morning, everyone. First, I will begin with our purpose on Slide 3. Our purpose is to make a difference in people's lives. We are committed to serving not only our customers, but also supporting communities where we live and work, inspiring our 22,000 employees and delivering for our shareholders. In Rene's annual shareholder letter, he notes that we operate in an environment in which change is the only constant. In these uncertain times, M&T starts from a position of strength with a strong liquidity, capital levels and capital generation. This position of strength reflects our consistent adherence to the fundamentals of liquidity management, capital allocation and transparency. The strength of this operating model allows M&T to continue to perform through the peaks and valleys of the macroeconomic cycles and support our customers and communities in the moments that matter most. As highlighted on Slide 4, we continue to receive notable recognition, including 13 Greenwich Coalition awards for our small business and middle market segments, and we were included in Fortune's most admired and most innovative company list. Turning to Slide 6, which shows the results for the first quarter. Our first quarter results represent a strong start to the year with several successes to highlight. Net interest margin increased by 8 basis points, reflecting our efficient balance sheet and the strength of our deposit franchise. We executed $662 million in share repurchases, as we continue toward an 11% CET1 ratio in 2025, while also growing tangible book value per share by 2%. Fee income grew 5% since the first quarter of 24% or 10% if you exclude last year's BOG distribution. Asset quality continued to improve with a $516 million reduction in commercial criticized balances and a $150 million reduction in nonaccrual loans. Our net charge-offs of 34 basis points were below our full-year expectations of 40 basis points. Now let's look at the specifics for the first quarter. Diluted GAAP earnings per share were $3.32, down from $3.86 in the prior quarter. Net income was $584 million compared to $681 million in the linked quarter. M&T's first quarter results produced an ROA and ROCE of 1.14% and 8.36%, respectively. Slide 7 includes supplemental reporting of M&T's results on a net operating or tangible basis, M&T's net operating income was $594 million compared to $691 million in the linked quarter. Diluted net operating earnings per share were $3.38 down from $3.92 in the prior quarter. Net operating income muted an ROTA and ROTCE of 1.21% and 12.53%. Next, let's look a little deeper into the underlying trends that generated our first quarter results. Please turn to Slide 8. Taxable equivalent net interest income was $1.71 billion, a decrease of $33 million or 2% from the linked quarter. The lower NII was primarily driven by two fewer days and lower average returning assets, partially offset by favorable deposit costs. Net interest margin was 3.66%, an increase of 8 basis points from the prior quarter. The primary drivers of the increase in margin include continued securities growth and lower wholesale funding and time deposits and favorable deposit pricing with interest-bearing deposit costs declining by 27 basis points. Turning to Slide 10 to talk about average loans. Average loans and leases decreased by $0.9 million to $134.8 billion. Lower CRE balances were partially offset by growth in C&I, consumer and residential mortgage. C&I loans grew 1% to $61 billion, driven by continued strength in the corporate institutional and fund banking. CRE loans declined 6% to $26.3 billion, reflecting payoffs and paydowns and muted origination activity with increased market competition. Residential mortgage loans were relatively unchanged at $23.2 billion. Consumer loans grew 1% to $24.3 billion, reflecting increases in recreational finance and indirect auto loans. Loan yields decreased by 11 basis points to 6.06%, as lower rates on variable loans and lower non-accrual interest were partially offset by fixed rate loan repricing and a smaller drag on our cash flow hedges. Turning to Slide 11. Our liquidity remains strong. At the end of the first quarter, investment securities and cash, including cash held at the Fed totaled $57.9 billion, representing 28% of total assets. Average investment securities increased by $0.8 billion. The yield on the investment securities increased by 12 basis points to 4%, as the yield for new purchases exceeded the yield on maturing securities. In the first quarter, we purchased $2.6 billion in debt securities at an average yield of 4.9%. The duration of the portfolio at the end of the quarter was 3.6 years, and the unrealized pretax loss on the available-for-sale portfolio was $8 million or less than 1 basis point CET1 drag if included in regulatory capital. Turning to Slide 12. Average total deposits declined by $3.4 billion or 2% to $161.2 billion. A sequential decline included a $0.7 billion decline in broker deposits, where the remainder of the decline was concentrated in commercial and business banking, partially reflecting seasonal lower balances. Average noninterest-bearing deposits declined by $1.1 billion to $45.4 billion. Excluding broker deposits, average noninterest-bearing deposit mix in the first quarter was relatively unchanged at 30.2%. Interest-bearing deposit costs decreased by 27 basis points to 2.37%. We saw favorable deposit declines across business lines, and a higher level of broker and retail time deposit maturities in the quarter also contributed to the deposit cost decline. Continuing on Slide 13. Non-interest income was $611 million compared to $657 million in the linked quarter. We saw continued strength across fee income categories with increases in mortgage banking, service charges, trust, and brokerage fee income. Recall that the fourth quarter included an $18 million net gain from the sale of noncore securities and a $23 million BOG distribution. Excluding these items from the prior quarter, non-interest income declined by $5 million sequentially. Mortgage banking revenues were $118 million compared to $117 million in the fourth quarter. Residential mortgage banking revenues increased by $6 million sequentially to $82 million, reflecting the partial quarter benefit from new subservicing. We expect to reach the full run rate on this subservicing in the second quarter. Commercial mortgage banking revenues decreased by $5 million to $36 million, reflecting lower gains on the sale of commercial mortgage loans. Other revenues from operations decreased by $34 million to $142 million, mostly reflecting the fourth quarter $23 million BOG distribution. Turning to Slide 14. We continue to execute on our expense plans. Non-interest expenses were $1.42 billion, an increase of $52 million from the prior quarter. Last year's fourth quarter included $35 million in notable expenses related to the redemption of certain M&T Trust preferred obligations, expenses associated with corporate real estate optimization, partially offset by pension-related credit. Salary and benefits increased by $97 million to $887 million, mostly reflecting $110 million of seasonally higher compensation expense related to stock-based compensation, payroll-related taxes, and other employee benefit expenses. As usual, we expect those seasonal factors to decline significantly as we enter the second quarter. Other cost of operations decreased by $50 million to $118 million, primarily reflecting the previously mentioned fourth quarter notable items. The efficiency ratio was 60.5% compared to 56.8% in the linked quarter. Next, let's turn to Slide 15 for credit. Net charge-offs for the quarter totaled $114 million or 34 basis points, decreasing from 47 basis points in the linked quarter. Charge-offs were relatively granular in the first quarter, with the five largest charges amounting to less than $30 million in total, representing both C&I and CRE credits. Nonaccrual loans decreased by $150 million or 9% to $1.5 billion. The nonaccrual ratio decreased by 11 basis points to 1.14% driven largely by payoffs, charge-offs, and upgrades out of nonaccrual. In the fourth quarter, we reported a provision of $130 million compared to the net charge-offs of $114 million. The allowance to loan ratio increased by 2 basis points to 1.63%, reflecting growth in certain consumer loan portfolios, as well as a modest deterioration in the macroeconomic forecast. The increase was not related to changes in the underlying credit performance, which is mostly in line with expectations. Please turn to Slide 16. We estimate that the level of criticized loans will be $9.4 billion compared to $9.9 billion at the end of December. The improvement from the linked quarter was driven by a $667 million decline in CRE criticized balances, partially offset by a $150 million increase in C&I. Within C&I, the increase in criticized was concentrated in a motor vehicle and recreational finance dealers. The CRE criticized decline was primarily within multifamily, office, health care, construction and was driven by payoffs, paydowns, and upgrades to past status. Improved leasing, occupancy, and cash flows and healthcare and multifamily helped drive the improvement in the CRE criticized. Turning to Slide 19 for capital. M&T's CET1 ratio at the end of the first quarter was an estimated 11.5% compared to 11.68% at the end of the fourth quarter. The decline in the CET1 ratio reflects increased capital distributions, including $662 million in share repurchases, partially offset by continued strong capital generation. AOCI impact on the CET1 ratio from available-for-sale securities and pension-related components combined would be approximately a positive 6 basis points if included in regulatory capital. Now turning to Slide 20 for the outlook. First, let's begin with the economic backdrop. The economic backdrop remains dynamic in light of the developments over the past several weeks. Recent economic data is mixed with strong job gains and moderating wage growth. Our recent readings show weakening business and consumer sentiment and easing inflation. The ultimate impact on tariffs on the broader economy remains unknown at this point. That uncertainty is reflected in recent equity market and rate volatility. We ended the first quarter well positioned for a dynamic economic environment of strong liquidity, strong capital generation, and a CET1 ratio at 11.5%. With that economic backdrop, let us review our net interest income outlook. We expect taxable equivalent net interest income to be $7.05 billion to $7.15 billion, with net interest margin increasing through the year and averaging in the mid-to-high 3.60s. We expect the full year average loan and lease balances to be $135 billion to $137 billion. The lower loan outlook reflects lower CRE balances with elevated payoffs and paydowns and muted originations. Full year average deposit balances are expected to be $162 billion to $164 billion. We remain focused on growing customer deposits at a reasonable cost while also considering loan growth. Turning to fee income, we expect noninterest income to be at the high end of the $2.5 billion to $2.6 billion range. The environment remains dynamic. However, our diversified product set should help provide relative stability from our fee income businesses. Continuing with expenses, we anticipate total noninterest expense, including intangible amortization, to be $5.4 billion to $5.5 billion. Our business lines remain focused on closely managing their expenses, allowing the bank to continue to target investments in projects and business opportunities that support our enterprise priorities. Regarding credit, we continue to expect net charge-offs for the full year to be near 40 basis points. We also expect criticized loans to continue to decline in 2025. As it relates to capital, we expect the CET1 ratio to reach 11% in 2025, but we'll monitor the economic backdrop and adjust as needed. The level of share repurchases will vary with RWA growth. As shown on Slide 21, we remain committed to our four priorities, including growing our New England and Long Island markets, optimizing our resources through simplification, making our systems resilient and scalable and continuing to scale and develop our risk management capabilities. To conclude on Slide 22, our results underscore an optimistic investment thesis. M&T has always been a purpose-driven organization with a successful business model that benefits all stakeholders, including shareholders. We have a long track record of credit outperforming through all economic cycles while growing within the markets we serve. We remain focused on shareholder returns and consistent dividend growth. Finally, we are a disciplined acquirer and prudent steward of our shareholder capital. Now let's open the call up to questions before which Margo will briefly review the instructions.
Operator, Operator
We'll take our first question from Ken Houston with Autonomous Research. Please go ahead.
Ken Houston, Analyst
Hey. Good morning, Daryl. So one question just on the NII. You mentioned that the environment has meaningfully changed. And we see a smaller balance sheet here, offset by a little bit better of a NIM output. Are you noticing anything in terms of the deposit flow activity, more specifically in terms of how much more mix shift you might expect and how much more you might be able to also continue to work down that higher cost liability side? Thanks.
Daryl Bible, CFO
Yes, Ken, we definitely lowered the guidance on deposits, but I think we feel pretty comfortable that we'll probably be at the higher end of the deposit range. So having really good growth of our businesses across the board, whether it's commercial, small business, consumer. Our ICS business kind of grows as activity in the marketplace is growing. So I think where we feel pretty positive on the deposit growth. And we'll use those additional deposits if we don't have loan growth to either pay off higher liabilities in the marketplace that we have on the balance sheet cheaper funding or we'll put it at the Fed and just got more liquidity on hand, one or the other. But we feel good about on the deposit side.
Ken Houston, Analyst
Okay. Regarding fees, the first quarter was somewhat unclear, but you're still indicating a focus on the upper end of 2.6. I noticed there wasn’t a Bayview distribution in the first quarter; was that delayed? Can you discuss the growth potential from this point onward and your assurance in reaching that higher fee range?
Daryl Bible, CFO
Yes. So you are right, Bayview, we did not get a distribution in the first quarter. We kind of took it out for the rest of the year. We may or may not get a distribution from Bayview. They're working on some things internally. However, if you look at all of our other businesses, we have been having really good growth. I would expect our fee businesses to grow from where we are in the first quarter significantly in the second, third, and first quarters. We have a lot of momentum across all of our businesses. Our trust businesses are strong. If you look at ICS, they are doing really well and they are structured loan agency businesses and activity, also bringing in deposit activity. So that's really positive. Our service charges are actually performing really well right now. From a mortgage banking perspective, if rates come down, and then who knows which way the yield curve is going to go. But we are positioned to have really good mortgage revenues, both on the commercial and residential side from originations. You did see the increase in our numbers now this quarter from additional subservicing that could provide other opportunities for growth, potentially as that kind of continues to grow. All services are strong. So I think net-net, overall, I think we're pretty positive on our fees.
Ken Houston, Analyst
Okay, thanks Daryl.
Daryl Bible, CFO
Thank you.
Operator, Operator
We'll take our next question from Ebrahim Poonawala with Bank of America. Please go ahead.
Ebrahim Poonawala, Analyst
Hi, good morning Daryl.
Daryl Bible, CFO
Good morning.
Ebrahim Poonawala, Analyst
Good morning. I guess, in your remarks, you mentioned tariff uncertainties were reflected in the stock markets and in interest rates. Just if you don't mind, talk to us about any anecdotal sort of feedback from your customers over the last week or two around tariffs? Are you seeing CapEx decisions being pulled back? Just would love any color there? And then how is that informing your outlook on C&I growth?
Daryl Bible, CFO
Yes, that's accurate. Overall, the sentiment numbers were weak for both consumers and businesses. Looking at consumers, our debit card activity shows that spending patterns remain stable. We are consistent in this area, and although it may be temporary, we are seeing significant loan volume in our indirect channels for auto, marine, and RV, likely due to people acting before prices rise. However, the bottom 20% of consumers has been struggling for several years and will likely continue to do so. On the business side, our customers are eager to make investments and pursue acquisitions, but they are currently hesitant due to a lack of confidence and uncertainty regarding regulations, especially with changes coming from D.C. Until there is more clarity, I believe they will hold off on decisions. Despite this, we've seen growth in our commercial and industrial business, particularly in the middle market segment. Our corporate institutional banking and dealer commercial services have also experienced growth. However, we are facing challenges in our commercial real estate portfolio, which has led us to reduce our overall loan guidance.
Ebrahim Poonawala, Analyst
That's helpful. Regarding capital, you mentioned CET1 at 11% depending on RWA growth. How price sensitive are you? The stock has decreased quite a bit compared to where you repurchased during the first quarter. How quickly could we see M&T reach 11% if customers remain on pause? You also mentioned being an opportunistic buyer regarding capital. Are there any deals to consider given the current macro uncertainties? Thanks.
Daryl Bible, CFO
So with the volatility in the marketplace, I emphasized in the prepared remarks, we really do have strong capital and liquidity, and our capital is the real capital. Our AOCI actually is a positive 6 basis points. So we feel good about that. We will monitor market conditions. We still plan to start our share repurchase back on Wednesday when we come out of blackout. We are just monitoring if we see the economy go into a negative spending down, we might slow down or pause. But until we see that, right now the trends for the most part are pretty uneventful. And we'll just kind of play it by ear. I know it's not good guidance for you, but we got to kind of just see how things play out, but we're prepared to start with share repurchases on Wednesday and just monitor economic conditions.
Ebrahim Poonawala, Analyst
Very good. Thank you.
Operator, Operator
We'll take our next question from Gerard Cassidy with RBC. Please go ahead.
Gerard Cassidy, Analyst
Hi, Daryl.
Daryl Bible, CFO
Hi, Gerard. How are you doing?
Gerard Cassidy, Analyst
Good, thank you. Can you give us some color on your insights regarding the regulatory environment? We are reading a lot about the regulators looking to ease up, if you will on some of the regulatory requirements. There's a lot of talk about the supplementary leverage ratio and the leverage ratio. But they seem to pertain to our biggest banks, the trillionaire banks. Are you seeing anything on the horizon that would be very beneficial to the regional banks like yourself from the regulatory stuff that you are hearing and seeing?
Daryl Bible, CFO
I want to emphasize that it doesn't matter to us whether the administration in D.C. is Republican or Democrat; we deliver strong performance regardless. For instance, our acquisitions under the Biden administration illustrate this. We can thrive in any political environment. From a regulatory standpoint, those stepping into leadership roles seem to be more committed to having our industry contribute to economic growth and create a positive impact. This was evident when the acting chair of the FDIC recently announced a reduction in some of the RRP measures. We were already prepared for this change since we are in the first wave of adjustments, so it's encouraging for us. The Head of Supervision, Bowman, is focusing on tailoring regulations, which I see as a great opportunity for us. Additionally, I view the OCC and CFPB developments positively. Overall, there appears to be a more pro-business approach aimed at fostering economic growth. We may see some adjustments regarding the Tier 1 leverage ratio, SLR stress testing, Basel III, LCR, long-term debt, and RRP, and hopefully, some reductions in regulatory reporting. We produce thousands of reports for government officials, and there is definitely room to streamline some of that process. I believe this is a chance for us to enhance efficiency and make meaningful improvements.
Gerard Cassidy, Analyst
Very good. Thank you. And then a follow-up to your comment about loan growth and how the commercial real estate portfolio is making it more challenging. Can you dive into that a little further? Is it your choice to kind of continue to shrink it? Or is there just not your customers are paying off, and you can't grow it? What's some of the color behind the challenges within the commercial real estate portfolio?
Daryl Bible, CFO
So what we've seen in the last quarter or two is that there's a lot more active lenders in this space. So you have a lot more people providing loan capital. And if you look at it, it's very competitive. So people are already being very aggressive on pricing and on structure. At M&T, we're very disciplined in how we make loans and put things on our balance sheet. And we are doing our best to support our customers in all that. But at the end of the day, we aren't going to put loans on that aren't structured properly from that perspective. In the first quarter, if you look at the payoffs that we received, it was a much higher amount than what we expected. About half of them were known maturities that were coming through in the first quarter. Another 10% was just pulling forward maturities later in '25. But 40% was really pulling in maturities from '26 and beyond. And that's really where there's a lot of impact going on from that perspective. And given that increase, it's not all bad, we've been able to remix our portfolio. So we actually have a lot less office exposure, which is good. We're also reducing a lot of the smaller credits, less than $5 million. And we are actually growing areas that we want to grow like multifamily and industrial. So it's not all bad. I would say the pipeline is building, and we feel good that it will kind of level out over the next couple of quarters and start to grow, and we just continue to do that. I mean, at the end of the day, we'll have a smaller balance sheet and probably just repurchase back more stock.
Gerard Cassidy, Analyst
And Daryl, just quickly on those maturities that were being pulled forward in '25 and '26 that were paid off. Was that due to that competition that you referenced?
Daryl Bible, CFO
Part of that was competition. Some of it was some of our REIT customers decided to prepay early and all that. It was mixed.
Operator, Operator
We'll next go to Matt O'Connor with Deutsche Bank. Please go ahead.
Matt O’Connor, Analyst
Good morning. You guys added a little bit to the loan loss reserves, even though the loans were down and the credit metrics were better. Can you just talk about how you tweak your macro outlook to support the higher reserves?
Daryl Bible, CFO
Yes, we adjusted it due to the current market conditions, Matt. That's accurate. Our provision would likely have been around 110 without these adjustments. We aimed to give more weight to factors exerting downward pressure. Consequently, we increased that aspect more significantly since there are higher unemployment rates and reduced GDP rates. We didn't forecast a recession, but we did anticipate conditions very close to it, just above a 0.1% positive. We are taking this into account. If a recession does occur, we will likely continue to build our reserves as necessary. However, we felt this approach was prudent given the ongoing uncertainties in the marketplace.
Matt O’Connor, Analyst
Okay. That's helpful. And then separately, maybe I missed it, but what are the interest rate assumptions that you have within your net interest income guide? And just remind us just sensitivity to rate changes on both the short and long run of the curve? Thank you.
Daryl Bible, CFO
Yes. So our ALCO team and treasury has been working hard because rates keep changing, and the curve keeps changing. So it is a very dynamic environment for sure. What we have as our baseline with our forecast has four drops, the last one being in December, which isn't very significant. And we have the yield curve that we had on April 7, which is a relatively lower yield curve from that. The way I would look at it, there are a lot of puts and takes here. From a net interest margin perspective, just high level, if rates on the curve continue to flatten out, if they go down, that would be negative for margin. As we get more deposits like Ken asked earlier, that could be good for NII, but maybe lower for margin if we deploy that in our liquidity portfolio. For higher margin, I'd say, obviously, a steeper curve would be helpful. And if we can maybe start to grow our loan book, again on CRE starts to come online, I think that would be possible and all that. So there's a lot of puts and takes there. That said, overall, I feel really good with margin trajectory, mid-to-high 3.60s, I think overall profitability in the company is going to be really strong capital generation. So I think we feel really good and we can weather whatever the economy gives us, I think, very well.
Matt O’Connor, Analyst
Okay. And then just to summarize that, though, like as we think about the net interest income dollars, are you asset sensitive? Are you relatively neutral? Again all things else being equal, but if rates are lower than you expect, has that impact the dollars? Just calling a parallel shift down to keep it simple. Thanks.
Daryl Bible, CFO
Yes, we are definitely neutral. The direction the Fed takes on rates doesn't significantly affect us. Our deposit betas are over 50%, which is in line with our expectations. With the yield curve flattening, we are still experiencing positive roll-on in our consumer loan portfolio, which is currently repricing about 100 to 150 basis points higher. If rates continue to flatten, it will still reprice positively but perhaps only by about 50 basis points. We continue to benefit, just to a lesser extent. It's important to note that we have many known factors in our balance sheet, which assures us of strong margins and a solid net interest income. We know we have $4 billion in securities maturing at a yield of 3.5%, and based on the yield curve, they will reprice higher, likely between 4.5% and 5.5%. The consumer loans will also continue to reprice higher, and our deposit beta remains strong. Additionally, we are confident that our swap book is set to increase, contributing around 30 basis points more over time. We expect to be in the 370s by the end of the year and into early 2026. All of these factors are accounted for in our projections, giving us the confidence that we will perform well. Minor adjustments may occur, but overall, we anticipate strong earnings.
Operator, Operator
We'll next go to Manan Gosalia with Morgan Stanley. Please go ahead.
Manan Gosalia, Analyst
Hi, good morning. Daryl, just a follow-up on your point on the security side. Just given that the long end of the curve has been so volatile, how are you thinking about putting on more securities here? And what kind of duration would you be willing to take?
Daryl Bible, CFO
We are very disciplined in our approach and focused on the long term. Our strategies have remained consistent. Last year, we refined our portfolio to include only government-backed securities, such as treasuries, agencies, and municipalities. We do not hold any non-agency securities, and our portfolio is entirely liquid, amounting to $35 billion. Approximately half of our purchases are non-convexed, consisting mainly of treasuries and CMBS. While the yields on CMBS may not be as attractive, we are confident in holding them to maturity. The other half of our investments are in shorter CMOs and seasoned MBS. Our average duration has decreased from four years to about 3.5 years, and we have maintained that duration, feeling positive about our position. Our portfolio is designed for liquidity, and we will continue to utilize it as needed.
Manan Gosalia, Analyst
Got it. And maybe on loan growth, actually the other side of the loan growth question is credit. And you've had some nice loan growth in C&I over the past few quarters. I think C&I is up 7% year-on-year, and that's clearly well above peers. So how are you thinking about the credit performance of that book if we get a weakening macro environment from here? And I ask because I noticed that the declines in CRE criticized were actually in line with last quarter, but then you had some offsets on the C&I side.
Daryl Bible, CFO
Yes. Our CRE portfolio has been performing really well. We've stress tested, looked at it backwards and forwards and feel really good on the trajectory of that portfolio. That said, we have maybe a little bit of exposure in the greater D.C. area, a couple of hundred million, nothing significant. But things to watch out for in certain areas. But net-net, overall, we feel CRE is going to perform and continue to perform very, very well from that perspective. Our C&I went up. It was really just idiosyncratic one customer, a large credit, a couple of hundred million basically had some issues with a roll-up strategy for the big trucks that you see on the road and all that. And we think that's going to play out positively as the year goes. So we don't think there are any losses there. So net-net, overall, we still think that we will continue to lower our criticized throughout the year, not at the pace that we did in '24, but still at a measured pace. If things get really bad in the economy, which I don't think is going to happen, but if they do, then we can adjust accordingly. But right now, I think we are just seeing a slowdown for the most part.
Manan Gosalia, Analyst
Great. Thank you.
Operator, Operator
And next, we'll go to John Pancari with Evercore ISI. Please go ahead.
John Pancari, Analyst
Good morning, Daryl.
Daryl Bible, CFO
Good morning John.
John Pancari, Analyst
Could you provide more details on the expected decline in commercial real estate balances and where you think they might stabilize based on current observations? Additionally, could you share your thoughts on the anticipated pace of growth in commercial and industrial loans as we move through the rest of the year? Thank you.
Daryl Bible, CFO
We currently anticipate that our commercial real estate portfolio will reach its lowest point on average by the fourth quarter. We expect the pipeline to begin to strengthen, which is already happening, and it just needs to be processed and added to our books. Much of the new production in the pipeline consists of construction loans, which likely won’t begin to significantly fund for about 12 to 15 months. However, I believe commercial real estate will work its way through the challenges and start to gain positive momentum. Our focus is on serving the best clients in the market and ensuring that the loans are well-structured, which has helped us during downturns. We will maintain this emphasis on proper structure. Additionally, we are willing to compete on price if the circumstances allow. Our commercial and industrial portfolio appears to be gaining traction, and the consumer side is performing well. We also plan to expand slightly in residential mortgage to help balance things out. Overall, we are committed to carefully selecting loans for our portfolio to ensure they will not pose issues in the coming years, as we aim for them to be solid long-term assets.
John Pancari, Analyst
Okay, great. Are you observing any line utilization or drawdowns from borrowers as a precaution due to concerns about the recessionary environment? Is there any indication of this at the moment?
Daryl Bible, CFO
No, not really. The utilization this past quarter showed a decline in commercial activity, down about 1%. We didn't see any significant factors affecting our screens, unlike during COVID when there were frequent draws. Your capital ratios decreased, but the situation is quite different now with minimal additional activity. Behaviors have remained fairly consistent compared to what we experienced during the last downturn with COVID.
John Pancari, Analyst
Right. That's good to hear. And then, I'm sorry, just one more on deposits. It looks like you saw some pretty good end-of-period growth where balances were above the average and particularly in noninterest-bearing. Any read on that? Or should we pay attention more so to the average deposit trajectory?
Daryl Bible, CFO
The first quarter is always a low seasonal quarter for us. So it always drops in January, February, then starts to build back in March. You have to also remember, we have a lot of escrow deposits because of our mortgage servicing businesses that we have. So we intend to gain through the first half of the month, and then it kind of drops off in the second half of the month. And our ICS business and trust has a lot of activity, and that kind of comes and goes depending on what we have there. And we had some ICS deposits on the balance sheet at the end of the quarter as well. But that's all good funding to have, and it helps us manage our balance sheet and helps with NII overall.
John Pancari, Analyst
Okay, great. Thanks, Daryl.
Operator, Operator
We'll next go to Christopher Spahr with Wells Fargo. Please go ahead.
Christopher Spahr, Analyst
Hi, good morning. Thanks. Just a quick question. On long-term debt, just what is your perspective on sluggish loan growth and I guess you seem to be somewhat optimistic on deposits? But like long-term loan-to-deposit ratio? And where do you see long-term debt kind of settling out?
Daryl Bible, CFO
So our long-term debt, we are really focused on trying to reduce kind of broker deposits, Federal Home Loan, bank advances. I think our broker deposits are around $7 billion or $8 billion right now. So they're down from the peak of a year and a half ago. And if you look at Federal Home Loan Bank advances $1 billion or $2 billion. So I think we are pretty much through that. Long-term debt we'll issue as needed, depending on what our customer growth is and what our loan growth is, all that being said. So we'll access it accordingly. I think there is some sub debt down the road in the next year or so that you might have to issue it down to get our total capital ratios where they need to be. But net-net, overall, we'll do long-term debt when it makes sense. We've had spreads come in for us versus our peers relatively well this past year or so. Obviously, with some volatility in the marketplace, spreads have gapped out, but it is consistent with everybody else in the marketplace from that point. And you can get deals done now just at a higher cost. With all that, and right now, we really don't need a lot of funding; our liquidity is really strong.
Christopher Spahr, Analyst
Thank you. As a follow-up on the expenses and the flexibility of your guidance range, are there specific examples of your simplification efforts and potential regulatory settings that illustrate low hanging fruit? Thank you.
Daryl Bible, CFO
Yeah. I would say for the last couple of years that I've been part of M&T, our businesses and leaders have done a great job controlling their expenses, and this year is no exception to that. They are doing a great job for that. If we actually did get into a bad recession period where revenue was really challenged, there are things we could do to pull on expenses. But right now, I'm still thinking we are going to drive positive operating leverage for the year. I think we still have a shot at that, still growing NII and fees, and we still have a modest increase on the expense side. That said, if you look at our strategic projects, there are some strategic projects that we have to just get finished because we've been doing them for so long. So like the GL, our data centers, cyber and our commercial CDA program, all those need to finish out. We are really close on a lot of these and should get those done. The other ones are more newer. So if you really had to, you could slow some of that down from an expense perspective. We're also really focusing and working on how we can just deliver our products and services and we are efficiently in the back office. So I think you'll see a lot of realignment, some automation, and some workforce strategies potentially needed if we had to do something like that. So net-net, overall, I think we have flexibility on expenses, but really don't believe we have to pull the trigger now; still have a shooting for a positive operating leverage.
Christopher Spahr, Analyst
Okay. Thank you.
Operator, Operator
We'll next go to Peter Winter with D.A. Davidson. Please go ahead.
Peter Winter, Analyst
Hi, thanks, good morning. Daryl, I was just wondering, given the increase in uncertainty, are there any loan portfolios maybe you are watching a little bit more closely? Or any portfolios causing you to tighten underwriting standards a little more?
Daryl Bible, CFO
Yes, we are closely monitoring several portfolios, including retail trade, manufacturing, construction, and wholesale trade. These are areas of particular focus for us. From the DOGE and USAID perspective, we've observed some stress among our government contractors, resulting in the downgrade of two smaller credits in those sectors. We're also keeping an eye on our nonprofit portfolio, where one organization focused on immigration has been downgraded. The areas we are funding are being adjusted based on their responses, which could have some impact. However, none of these changes have been significant so far. We will continue to monitor all these portfolios closely and see how the economy evolves.
Peter Winter, Analyst
Got it. And just one housekeeping on the margin. I just want to clarify, you said that the exit rate should be around the mid 3.60s this year. Is that correct?
Daryl Bible, CFO
No, I did not say that. I said that we are guiding for mid-3.60s to high 3.60s and that we have a good upward trajectory on our net interest margin.
Operator, Operator
We'll next go to Erika Najarian with UBS. Please go ahead.
Erika Najarian, Analyst
Hi, there. Sorry, they just took away our physical phones, and so older individuals like me have to figure out how to unmute more quickly. I have a few follow-up questions, Daryl. Clearly, there are near-term headwinds to growth. However, considering how you've described your balance sheet and everything you’ve said about growth, it seems that the net interest income trajectory should be upward from here. If we analyze your guidance and what you reported, it appears we'll regain the day count in the second quarter, which suggests we could reach the high end of your guidance. If you have a smaller balance sheet, would that imply a 3.70 exit net interest margin as well?
Daryl Bible, CFO
Yes, we discussed earlier how various factors like interest rates, the yield curve, Federal Reserve actions, and the size of the balance sheet, both loans and deposits, impact the situation. There are many variables to consider. Is it possible for us to reach the 3.70s? Yes, but that's not in our primary forecast at the moment. We're focused on balancing what we currently see with the risks and uncertainties in the market. If you provide me with a rate scenario, I can offer my best estimate regarding the margin impact. I believe your comment about net interest income is positive, and I think we should continue to see it trend upwards.
Erika Najarian, Analyst
We've certainly experienced fluctuations due to the curve and the future projections. As for your first question regarding the CECL model, can you share what unemployment assumption is factored into your current reserve? Additionally, since you opted into the stress test this year, have you noticed any changes in the process such as increased transparency or feedback, especially in light of the Fed's recent communications about reviewing the test? Lastly, if you were to receive a smaller stress capital buffer, would that impact your approach to capital allocation moving forward?
Daryl Bible, CFO
Yes. Let me start with the stress testing one. We submitted our information at the end of March, early April, and we really have not heard anything from the Fed. It is kind of a normal year from a processing perspective, at least to-date, that is what we've seen. We are optimistic, obviously, that to opt in; we thought we would have a lower stress capital buffer. We'll see if we are correct with that and all that. For us, I think it's just meaningful that we can continue to drive that. Last year, we were one of three banks out of 30 that we're able to have a decrease. We went down two tenants but we're still at the higher end of our stress capital buffer versus most of our peers in the industry. So we are just trying to see if our balance sheet basically de-risking of what we have is working and moving closer to the middle or maybe into the early or maybe top quartile or whatever of our peer group. So that is really what we're trying to do there. Obviously, other constituencies can look at that and can weigh in on what impact that has. I think long term, Erika, it might make an impact. But I don't think, immediately given all the uncertainty in the marketplace, it is going to have much of an impact on what we're trying to do from a capital perspective. We're going to just really monitor to see if we actually go into a recession or not right now. As far as CECL goes, I would tell you that our unemployment rate average now to be right around 5%, approximately. So I think that's probably 4.10.7 higher than what we were higher than that before we made the adjustment. It's obviously not a recessionary type unemployment rate, but it did move up because of the changes that we made.
Erika Najarian, Analyst
Right. Thank you.
Daryl Bible, CFO
You're welcome.
Operator, Operator
Thank you. And that does conclude our questions. I would like to now turn the call back over to Steve Wendelboe for closing remarks.
Steve Wendelboe, Senior Vice President, Investor Relations
Again, thank you all for participating today. And as always, if clarification is needed, please contact our Investor Relations department at (716)-842-5138. Thanks.
Operator, Operator
Thank you. And ladies and gentlemen, that does conclude today's program. We thank you for your participation. You may disconnect at any time.