M&T Bank Corporation (NYSE:MTB) Q4 2022 Earnings Conference Call January 19, 2023 11:00 AM ET

Company Participants

Brian Klock - Head of Markets & Investor Relations
Darren King - Chief Financial Officer

Conference Call Participants

Matthew O'Connor - Deutsche Bank
John Pancari - Evercore ISI
Ebrahim Poonawala - BofA Securities
Manan Gosalia - Morgan Stanley
Ken Usdin - Jefferies
Steven Alexopoulos - JPMorgan
Gerard Cassidy - RBC Capital Markets

Operator

Welcome to the M&T Bank Fourth Quarter and Full Year 2022 Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded.

I would now like to hand the conference over to Brian Klock, Head of Market and Investor Relations. Please go ahead.

Brian Klock

Thank you, Gretchen, and good morning. I'd like to thank everyone for participating in M&T's fourth quarter and full year 2022 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 & 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 also 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?

Darren King

Thank you, Brian, and good morning, everyone. As we reflect on 2022, we want to start by taking a moment to recognize the hard work and dedication of our more than 22,000 colleagues, your tireless efforts to support our customers and communities during challenging times are the heartbeat of M&T. We also give a shout out to #3 and the early responders who saved his life, you remind us all about the bigger game of life.

A year ago, we outlined three key objectives for 2022: complete our long-awaited merger with People's United; deploy excess liquidity to reduce asset sensitivity while protecting shareholder value; and to distribute capital that isn't required to support lending in our communities. Achieving those objectives, we believe, aligns with our goal to build a customer-focused bank and resultant balance sheet that produces consistent, predictable earnings over long periods of time.

Against those objectives, here are a few key highlights of the work done in 2022. We closed the acquisition of People's United, the largest in our history. We also completed the systems conversion and continue the process of integrating this valuable franchise. The financial benefits of this combination are consistent to slightly better than our expectations at announcement. We repositioned the balance sheet to deploy excess liquidity, reducing our interest-bearing deposits held at banks from $41.9 billion at the end of 2021 to under $25 billion at the end of 2022.

In deploying that excess liquidity, we reduced costly wholesale funding. We organically, that is, excluding the impact of People???s, grew loans by $4.1 billion and added $7 billion in net investment securities growth. These efforts, which also included the retention of most of the residential mortgage production as well as the acquired People???s United $12 billion longer-duration securities portfolio have led to a reduction in asset sensitivity, helping to protect our net interest margin from future rate shocks.

In terms of capital, we resumed common share repurchases in last year's second quarter now having repurchased $1.8 billion in common stock, representing 6% of outstanding shares, and our common dividend grew by 7% in 2022 representing the sixth year of consecutive increases.

And despite the impact from the acquisition and the rapid rise in long bond yields, our CET1 ratio remained strong at 10.4% which continues to exceed our median peer bank.

Our hard work translated into strong full year financial results. GAAP-based diluted earnings per common share, which include merger-related charges, were $11.53 compared to $13.80 in 2021, down 16%.

Net income was $1.99 billion compared with $1.86 billion in the prior year, improved by 7%. These results produced returns on average assets and average common equity of 1.05% and 8.67% compared to 1.22% and 11.4%, respectively, in 2021. We note that these results were impacted by merger-related expenses associated with the People's United transaction. Such expenses amounted to $580 million in 2022 or $2.63 per share. Those same expenses were $44 million or $0.25 per share in 2021.

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 combined institution. Net operating income which excludes the after-tax impact from the amortization of intangible assets as well as merger-related expenses was $2.47 billion during 2022, up 30% compared to what was $1.9 billion in the prior year. Net operating income per diluted common share was $14.42 compared with $14.11 in 2021, up 2%. Net operating income for 2022 expressed as a rate of return on average tangible assets and average tangible common shareholders' equity was 1.35% and 16.7%. This compares with 1.28% and 16.8%, respectively, in the prior year.

On a net operating basis, we generated 4% positive operating leverage and 43% growth in pre-tax pre-provision net revenue. This was due in large part to the $2 billion or 53% increase in taxable equivalent net interest income as the net interest margin increased some 63 basis points year-over-year.

We are pleased with the results we achieved in 2022 in the face of many challenges, not the least of which was a rapid shift in monetary policy. But our work is not done. We will continue to recognize the value created by our merger while building a more capital-efficient, less asset-sensitive balance sheet that will produce stable and predictable revenue and earnings over the long term.

Let's take a look at the results for the fourth quarter. Diluted GAAP earnings per common share were $4.29 in the fourth quarter of 2022, up 22% compared to $3.53 in the third quarter of 2022. Net income for the quarter was $765 million, 18% higher than the $647 million in the linked quarter. On a GAAP basis, M&T's fourth quarter results produced an annualized rate of return on average assets of 1.53% and an annualized return on average common equity of 12.59%. This compares with rates of 1.28% and 10.43%, respectively, in the previous quarter. Included in GAAP results were after-tax expenses from the amortization of intangible assets amounting to $14 million in each of the two most recent quarters, representing $0.08 per common share in both quarters.

Pre-tax merger-related expenses of $45 million related to the People's United acquisition were included in the fourth quarter's GAAP results. These merger charges translate to $33 million after tax or $0.20 per common share.

M&T's net operating income for the fourth quarter, which excludes intangible amortization and the merger-related expenses, was $812 million, up 16% from the $700 million in the linked quarter. Diluted net operating earnings per common share were $4.57 for the recent quarter compared to $3.83 in 2022's third quarter. Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholders' equity of 1.7% and 21.3% in the recent quarter. The comparable returns were 1.44% and 17.89% in the third quarter of 2022. Both GAAP and net operating earnings for the fourth quarter of '22 were impacted by certain noteworthy items.

Fourth quarter results included a $136 million gain related to the sale of M&T Insurance Agency reported in other revenue from operations as well as a $135 million contribution to M&T's Charitable Foundation reported in other costs of operations. These items collectively net and did not materially impact net income.

Let's take a deeper dive into the balance sheet and the net interest margin. Taxable equivalent net interest income was $1.84 billion in the fourth quarter of 2022, an increase of $150 million or 9% from the linked quarter. The increase was driven largely by the $143 million impact from higher rates on interest-earning assets, inclusive of the effect from interest rate hedges, an incremental $19 million from volume and mix of earning assets, partially offset by a $12 million reduction in interest received on nonaccrual loans. Net interest margin for the past quarter was 4.06%, up 38 basis points from the 3.68% in the linked quarter. The primary driver of the increase to the margin was higher interest rates, which we estimate boosted the margin by 32 basis points.

In addition, the margin benefited from a reduced level of cash held on deposit at the Federal Reserve, which we estimate added 6 basis points. Total average loans and leases were $129.4 billion during the fourth quarter of 2022, up 1.5% compared to the linked quarter.

Looking at the loans by category. On an average basis compared with the third quarter, commercial and industrial loans and leases increased by $1.7 billion or 4.5% to $40 billion, with $1.2 billion or 4% growth being broad-based across our core commercial banking clients and $542 million or 22% growth in average dealer floor plan balances. During the fourth quarter, average commercial real estate loans decreased by $592 million or 1% to $45.7 billion, driven largely by declines in average construction loans. On an end-of-period basis, construction balances increased slightly from the linked quarter. Permanent average commercial mortgage balances were nearly flat quarter-over-quarter. Residential real estate loans increased $372 million or about 2% to $23.3 billion due to the continued retention of new mortgage originations retained for investments, partially offset by normal amortization. Average consumer loans were up $384 million or about 2% to $20.3 billion. Recreational finance loan growth continues to be the main driver. These average loans grew $325 million or 4%.

Average earning assets, excluding interest-bearing cash on deposit at the Federal Reserve increased by $3.2 billion or 2% due to the $1.9 billion growth in average loans and $1.4 billion increase in average investment securities. Average interest-bearing cash balances decreased by $5.7 billion to $25.1 billion during the fourth quarter of this year, essentially in line with our projections. The sequential quarter decline was due to the drop in deposit balances and the cash deployed to fund loan growth and to purchase investment securities. Average deposits decreased $3.8 billion or 2% compared with the third quarter.

Our efforts to grow and retain deposits has helped reduce the rate of decline compared to recent quarters. However, due to the rapidly rising rate environment and increased competition for deposits, there has been a mix shift within the deposit base to higher cost deposits. Average demand deposits declined $2.6 billion. Savings and interest-bearing checking deposits declined by $2.3 billion, partially offset by a $1.1 billion increase in time deposits. Average commercial deposits declined $4.8 billion as business owners shifted money into both off and on balance sheet sweep accounts, paid down debt and made distributions. On balance sheet sweep, average balances increased $2.5 billion during the fourth quarter of 2022.

Turning to noninterest income. Noninterest income, excluding the $136 million gain from the sale of the M&T Insurance Agency, totaled $546 million in the fourth quarter compared with $563 million in the linked quarter. Trust income was $195 million in the recent quarter, up 4% from the $187 million in the third quarter. The increase was due largely to the impact of better market valuations on assets under management and administration. Service charges on deposit accounts were $106 million compared with $115 million in the third quarter. The decline primarily reflects the waiver of service charges in October and November on acquired customer deposit accounts. These service charges were also waived in September.

Mortgage banking revenues were $82 million in the recent quarter, down 2% from the linked quarter. Revenues from our residential mortgage business were $54 million in the fourth quarter compared with $55 million in the prior quarter. Both figures reflect our decision to retain the substantial majority of the mortgage originations for investment on our balance sheet. Commercial mortgage banking revenues were $28 million in both the third and fourth quarters. That figure was $49 million in the year ago quarter.

Other revenue from operations, excluding the gain from the sale of the M&T Insurance Agency were $131 million, down $22 million sequentially. The decrease was due to the impact of two fewer months of revenues related to the M&T Insurance Agency, which was sold in October, lower commercial loan fees, reflecting lower capital markets activities and a write-down on the underlying assets in certain bank-owned life insurance contracts.

Turning to expenses. Operating expenses for the fourth quarter, which exclude the amortization of intangible assets and merger-related expenses, were $1.35 billion or $138 million higher than the linked quarter. This increase was largely due to the $135 million charitable donation in the fourth quarter. Excluding merger-related expenses, salary and benefits expense decreased by $30 million due to one less business day, the realization of acquisition synergies and the impact of the sale of the M&T Insurance Agency. The quarter included $21 million in higher sequential advertising and outside data processing and software expenses. Both of these categories tend to show some degree of seasonality. The efficiency ratio, which excludes intangible amortization and merger-related expenses from the numerator and securities gains or losses from the denominator, was 53.3% in the recent quarter compared with 53.6% in 2022's third quarter and 59.7% in the fourth quarter of last year.

Next, let's turn to credit. Despite the challenges of labor shortages and persistent inflation, credit remained stable. The allowance for credit losses amounted to $1.93 billion at the end of the fourth quarter, up $50 million from the end of the linked quarter. In the fourth quarter, we recorded a $90 million provision for credit losses compared to the $115 million provision in the third quarter. Net charge-offs were $40 million in the fourth quarter compared to $63 million in last year's third quarter. The reserve build was largely due to growth in our C&I and consumer portfolios. The baseline macroeconomic forecast experienced nominal deterioration during the fourth quarter for those indicators that our reserve methodology is most sensitive to, including the unemployment rate, GDP growth and residential and commercial real estate values. At the end of the fourth quarter, nonaccrual loans were $2.4 billion and represented 1.9% of loans, essentially unchanged from the end of the linked quarter. As noted, net charge-offs for the recent quarter amounted to $40 million. Annualized net charge-offs as a percentage of total loans were 12 basis points for the fourth quarter compared to 20 basis points in the third quarter. Loans 90 days past due on which we continue to accrue interest, were $491 million at the end of the recent quarter compared to $477 million sequentially. In total, 74% of these 90 days past due loans were guaranteed by government-related entities.

Turning to capital. M&T???s common equity Tier 1 ratio was an estimated 10.4% compared with 10.7% at the end of the third quarter. The decrease was due in part to the impact of the repurchase of $600 million in common shares which represented 2% of our outstanding common stock as well as growth in risk-weighted assets. Tangible common equity totaled $14.7 billion, up slightly from the end of the period of the prior quarter. Tangible common equity per share amounted to $86.59, up 3% from the end of the third quarter.

Now, turning to the outlook. As we look forward into 2023, we expect that inflation and higher interest rates will continue to impact the bank and our customers. We believe we are well positioned to sustain a strong net interest margin and pre-tax pre-provision net revenue to risk-weighted assets with our goal to generate top quartile return on average tangible common equity. As a reminder, the acquisition of People???s United closed on April 1, 2022. Thus, the outlook for 2023 includes four quarters of operations and balances from the acquired company compared to only three quarters during 2022. This 2023 outlook also reflects the sale of M&T Insurance Agency that closed in October of 2022. During the first nine months in 2022, this business recorded revenues of $31 million and the results of its operations were not material to M&T's net income.

Additionally, in December, our subsidiary, Wilmington Trust NA announced the sale of its Collective Investment Trust business. Trust income associated with this business totaled $165 million in 2022. And after considering expenses, the results of operations from this business were not material to M&T's net income. Sale of this business is expected to close in the first half of 2023. Since the timing of the closing is uncertain, this outlook includes the full year of the Collective Investment Trust business.

First, let's talk about our net interest income outlook. We expect taxable equivalent net interest income to grow in the 23% to 26% 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 Fed funds hikes in the first quarter of 2023 and one 25 basis point cut in the fourth quarter. 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 during 2022. In order to offset deposit declines and to ensure a stable liquidity profile, we plan to issue senior debt during 2023. We continue to expect deposit mix to shift toward higher cost deposits with declines expected in demand deposits and growth in time deposits as well as on balance sheet sweeps. This is expected to translate into a through-the-cycle deposit beta in the high 30% to low 40% range.

Next, let's discuss the drivers of earning asset growth. We currently plan to grow the securities portfolio by $4 billion compared to the $25 billion balance at the end of 2022 with the addition of longer duration mortgage-backed securities throughout the year.

Next, turning to the outlook for average loans. We expect average loan and lease balances during 2023 to grow in the 8% to 9% range when compared to the 2022 full year average of $119.3 billion. This implies total average loan and lease balances in the fourth quarter of 2023 to be flat to slightly up from the $129.4 billion average during the fourth quarter of 2022.

Mix of C&I, CRE and consumer loans, inclusive of consumer real estate loans is almost 1/3 each at the end of 2022. We expect this trend to shift slightly as C&I growth outpaces CRE. As we've seen during the second half of 2022, higher levels of interest rates are expected to slow down the growth in our consumer loan book in 2023.

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 5% to 7% range compared to 2022. The outlook for 2023 reflects approximately 10 months of foregone income from M&T Insurance Agency as a result of the sale. Overall, mortgage banking revenues are expected to be up 5% to 7% compared to 2022. Commercial mortgage banking revenues are expected to rebound in 2023, and we will return to a gain on sale residential mortgage banking model in 2023. However, with the high level of interest rates, we expect muted origination volumes and thus, anticipate total residential mortgage banking revenues to be relatively stable compared to 2022. We expect service charges on deposit accounts to be 3% to 6% higher than 2022 and anticipate trust income to be 8% to 10% higher in 2023.

Turning to expenses. We anticipate expenses, excluding merger-related costs, the charitable contribution and intangible amortization to be up 10% to 12% and when compared to the $4.52 billion we experienced during 2022. Approximately half of this increase reflects an extra quarter of People's United expenses. This outlook also incorporates the impact from the sale of the M&T Insurance Agency. 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.

As a reminder, first quarter expenses will be elevated as a result of our typical seasonal increase in compensation expense. For the first quarter of 2023, we anticipate an uptick in the range of $90 million to $95 million. That amount last year was approximately $74 million.

Turning to credit. We expect credit losses to be higher than the strong results in 2022, but to remain below M&T's legacy long-term average of 33 basis points. Provision expense over the year will follow the CECL methodology and will be affected by changes in the macroeconomic outlook as well as changes in loan balances. For 2023, we expect taxable equivalent tax rate to be in the 25% range.

Finally, turning to capital. 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. M&T's common equity Tier 1 ratio of 10.4% at December 31, 2022 comfortably exceeds the required regulatory minimum threshold which takes into account our stress capital buffer or SCB. With a solid starting CET1 ratio and the potential to generate additional amounts of capital over the next few years, we don't expect to change our capital distribution plans. We anticipate continuing to repurchase common shares at a pace of $600 million per quarter under our current capital plan.

Before we go to Q&A, I wanted to take a moment and reflect back on some comments made at the beginning of the call, where we reference #3 and how he is winning the game of life. Sometimes numbers can be simple with deeper meaning than what meets the eye like the divine proportion. I'd like to take a moment and share what I see with some of these numbers. The first game after #3 went to the hospital. Our team returned a kickoff, the first time it has done so in three years and three months. First playoff game was won by 3 points. #14 and 17 are key leaders on our team. The difference between 14 and 17 is 3. That number seems to come up quite often. If you look at those key leaders and you drop the 1 from 14 and the 1 in front of 7, you're left with 4, 7. 47 is an interesting number. I know you're all thinking about the periodic table of elements. 47 is the atomic number of silver. The Vince Lombardi Trophy is made out of silver. That interesting? But it gets even weirder. The symbol for silver is Ag. If you reverse those letters, you get GA which is the abbreviation for Georgia, the potential site of the AFC Championship. And all of this is happening in 2023. There's that number again. Probably just a set of random coincidences or is it?

With that, let's open it up to questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Matt O'Connor from Deutsche Bank.

Matthew O'Connor

I guess, sticking with the 3s, I think at one point you talked about a long-term NIM of 3.6 to 3.9. So those 3s involved there and they're divisible by 3. And so why don't we kick it off with that.

Darren King

All right. I guess our outlook for the net interest margin over the long term hasn't changed, Matt. And the question is, what's the long term? And when we look at the structure of an average bank balance sheet and the mix of funding that is deposits or wholesale funding, those costs tend to be pretty competitive, and it's the mix that ultimately drives the margin over the long run. And when you look at where we see our balance sheet going in that of the industry, we think that's -- we're in a unique time right now where pricing has not kept -- deposit pricing has not kept up to rates on loans. And that's ultimately going to close. And so will we see that in 2023, those numbers? Unlikely. But as we go into '24 and '25, will we start to see the margin move back down into those normal historic ranges? We think so. And the most important thing about why we talk about that is, we don't want to set up the bank and the expense structure, assuming that margins like that are going to hold because recent history suggests that's just not likely. If it happens to, that's great. But we don't want to build the bank so that we're counting on those kinds of margins for the expense run rate that we have.

Matthew O'Connor

Okay. So 3 years, once again, 3 popping up to normalize on the NIM. But did I miss any comments on the NIM for '23? Or most importantly, what you're modeling for the fourth quarter this year?

Darren King

For the first or the fourth, Matt, sorry?

Matthew O'Connor

Both on the full year and then most importantly, the fourth quarter of '23, what are you thinking on the NIM? And then I think that would assume both the forward curve and then I think commercial loans tend to reprice a little bit sooner than maybe funds move. So if you have a 4Q '23 estimate and then framing of puts and takes, which it's helpful, including with the repricing earlier the commercial loans?

Darren King

Yes, sure. If you look at the year, based on our current outlook, we think the average NIM for the year stays above 4%. You probably see a little move up in the first quarter just because of the impact of day count. And so you'll see it pop up. But actually, it's quite likely that net interest income in dollars might actually be lower -- will likely be lower in the first quarter of '23 than it was in the fourth quarter of 2022. Taking into account that forward curve that's relatively flat, but starts to see some cuts at the end of the year, we think the margin will be higher in the first half of the year than in the second half of the year and probably heads down towards 4% as we get to the fourth quarter of 2023.

Operator

Our next question comes from John Pancari from Evercore ISI.

John Pancari

And if you could talk a little bit about any efforts here to protect the NIM at that level, particularly as we look at potential cuts in the third pivot anything in terms of balance sheet positioning that we should be considering in terms of what you're already doing to protect the NIM at these levels?

Darren King

Yes. There's a few things John, that we've been working on all this year to start to protect the NIM. First, you've seen us increase the size of the securities portfolio, and we've talked a little bit about growing that a little bit further in 2023. Within there, we also anticipate shifting the duration a little bit. We've taken some duration so far in -- on the balance sheet, in the mortgage portfolio, we'll slow that down and we'll take that duration in the securities portfolio with some MBS -- we'll also be doing -- we mentioned some term funding, which we'll lock that in, which will also help. And then the thing that ultimately is the biggest benefit to maintaining the margin and reducing asset sensitivity is deposit pricing, right? And so it's a little bit painful when it's compressing on the way up, when it's catching up to the loan pricing. But ultimately, the best way to combat declining rates is through repricing of deposits. And so those three things would be the biggest help. We will and continue to have a hedge portfolio that helps reduce some of the asset sensitivity in the short term, might help the NIM of some of the earlier hedges that were put on that are a lower received fixed rate roll off. And so those are kind of the three major things that will have helped us reduce our asset sensitivity, and will help us protect the NIM at these kind of higher levels as time goes on.

John Pancari

Okay. So no major change in terms of the hedging swaps other than what is rolling off, correct?

Darren King

Yes. We'll see how much we grow from where we are at the end of the first quarter because of the position of the balance sheet and what we'll do will likely not be to add to outstanding notional but to add to forward starting is likely what we would do.

John Pancari

Right. Got it. Okay. And then just one other follow-up on the commercial real estate front, could you maybe give us an update on what you're seeing there in terms of credit trends, maybe trends in delinquencies and criticized assets and any time distress in the office portfolio, that would help?

Darren King

Yes, sure. Within -- in the commercial real estate portfolio, the biggest trend that we've had going on for probably the last four quarters is just the reduction in the construction portfolio. And so a large number of construction projects were originated in late '18 and during 2019. And as the pandemic went, they continued but at a slower pace, and those have been coming to completion this year. And as those have come to completion, they've turned into permanent mortgage financing oftentimes not on our balance sheet. And so you've seen the decline in commercial real estate largely being construction related.

When we look underneath at some of the major categories and we look at the criticized, we actually have seen hotel criticized balances peak probably about two or three quarters ago. It got as high as about 86% of our hotel portfolio. It's now down below 50%. And if we're seeing remixing in the criticized, there's two categories. One is healthcare, which we've talked about a little bit before, and that's typically assisted living and senior housing. And that's not from a lack of demand that we're seeing some challenges in that portfolio. It's their ability to staff.

And so we've seen occupancy rates in these portfolios come up post pandemic but they're not able to get all the way back to pre-pandemic levels because there's not enough staff to adequately care for the folks that want to live there. And then the other place, obviously, we're looking at is office, and we're paying a lot of attention to office. The portfolio, I think, is as of the end of the year, right around 20% criticized, we're watching lease expirations and lease sign-ups. The vast majority of our real estate portfolio has lease expirations out 2024 and later. So far, what we've seen is decent renewing. We are seeing some movement down in price per square foot. But what we've been doing is going through all of the lease portfolios -- sorry, the office portfolios and stressing both vacancy rates and lease rates to see what the debt service coverage ratio is and what making sure that we've got adequate coverage.

If we talk about our expectations for charge-offs, in -- as we go into this year. That's the place where we'd have the most concern. When we talk about charge-offs moving up from the levels we've seen in 2022. It will be some of those portfolios that is still a place where we've really got our eye.

Operator

Our next question comes from Frank Schiraldi from Piper Sandler.

Frank Schiraldi

Hi, Darren. Just wanted to ask about -- just, I guess, a follow-up on the office book. If you could just remind us where that total office exposure is and then specifically the exposure in New York City?

Darren King

Probably you should -- you'll see this when the K comes out. But the office exposure in total is right around $5 billion. When you look at what's in New York City, it's about 15% that would be New York City. It's pretty widespread across predominantly the Northeast.

Frank Schiraldi

Okay. And then just a follow-up on CRE. In terms of -- I think you mentioned that the permanent CRE book was sort of flattish linked quarter with construction balances rolling off. And it sounded like -- I just want to make sure I understand that for 2023, is the expectation that, that permanent CRE book will grow just to a lesser extent than the C&I book? Or do you still -- are you still looking for outflows in that or thinking about outflows in that CRE book?

Darren King

Yes. Yes. Overall, Frank, we're thinking that the overall CRE book does continue to drift down, but at a much slower rate than what we've seen in 2022. It will be a modest decline -- well, on average, it's actually going to be up because of the People's United. But if you look versus the fourth quarter, the permanent book on average is relatively flat compared to where the fourth quarter was. And most of the decline would continue to be in the construction side of things. Remind you the construction portfolio is the one that -- is one of the ones that tends to carry higher loss rates in the stress test, which is part of the reason why we've been working to obviously support our customers so that they can finish the projects, but then to not add meaningfully to that once those reach their completion and find permanent financing.

Operator

Our next question comes from Ken from Jefferies. Go ahead, Ken.

Darren King

Maybe we'll continue on, and we'll catch Ken in a little bit.

Operator

Our next question comes from Ebrahim Poonawala from Bank of America.

Ebrahim Poonawala

I guess just maybe on the balance sheet. So you mentioned about $4 billion in securities purchases from $25 billion at year-end. If you don't mind reminding us like what that implies for the cash balance as we think about -- on a steady state, I think cash was about $25 billion over the fourth quarter. Is $20 billion the right place for you or where the bank expects to be? And how much of that might go away from like deposit runoff. So just thought process around that?

Darren King

Yes. There will be some movement, Ebrahim, between cash and securities over the course of the year. If you look at the as-at the end of the year, probably down in the $9 billion range. If you look at the average for the year, probably think in the slightly below $20 billion, between $20 billion and $19 billion is probably the spot. That number is going to move around a little bit, obviously, depending on outflows in deposits, as well as our funding needs to support loan growth as well as to make sure we're managing the bank's liquidity profile. And so those will move around a little bit over the course of the year, but those are kind of round numbers where we're forecasting 2023.

Ebrahim Poonawala

Got it. And I'm sorry if I missed it, you talked about issuing some debt. Did you quantify how much in debt do you expect to issue through the course of the year?

Darren King

I didn't mention a number, obviously, that this is dynamic, right? And that the amount is going to be a function of what's happening with deposit funding and runoff and whatnot. But right now, we think it's in the $3 billion to $4 billion range over the course of 2023.

Ebrahim Poonawala

And what would be the cost of the debt today given just the shape of the yield curve? I'm just wondering if it's better to lock in term funding relative to short term right now based on the market?

Darren King

Well, it's a great question. There's -- obviously, the rate isn't depending on the tenor, right? And right now, there's a -- you like the opportunity to reprice the shorter-dated notes but they're trading higher than the longer-term debt. And so we think low to mid-5s is the range of yield on that depending on the term. And what we'll be trying to do since we've really brought down the level of wholesale funding at the bank will be to not lock in all-in-one tenor, but to start to build a more balanced maturity profile as we think about the funding of the bank, so that we don't have massive amounts coming due all at the same time. And so I think as you think about it, think about not being all one tenor and one type of but something that starts to build a little bit of a profile that is spread out over the next few years.

Ebrahim Poonawala

Got it. And just on a separate note, the CRE book or the CRE office, do you have the debt service coverage ratios handy in terms of where they were at the end of the year?

Darren King

I don't know that I have that right off the top of my -- at the tip of my fingers here. Give me one second and let me see if I can find it. But it has -- in aggregate, that portfolio has still been above 1. And when we look at the LTVs in that portfolio, they still run below 60% on a weighted average basis. Now obviously, there are some above that and some below. But as we look at it right now and we look at the clients' ability to support the asset either with cash flow or with how much equity they have in the property where we feel pretty comfortable with where we sit, but we're watching it. As we've talked about, there's -- it's one of the places where we see the most risk and where we're focusing a lot of our attention from a credit perspective.

Operator

Next question comes from Manan Gosalia from Morgan Stanley.

Manan Gosalia

I was hoping you can break down your loan growth guidance for next year. In the past, you've spoken about the lending synergies from the People???s acquisition and the footprint there. I think you mentioned small business card and equipment finance. So just if you can break down how you see that contributing to loan growth in '23? And how you see that evolving?

Darren King

I guess as we look at People's impact on 2023 from a loan perspective, it's certainly additive. But it's one of those things where the loan balances take a little bit of time to build and to show up in a material way. So when we look at 2023, we continue our focus on C&I, and we expect to see strong growth in the C&I portfolio over 2023. On an average basis, it prints a big number because it's four quarters of People???s and not just three, and so 20-ish percent over the average in 2022. But outside of that, it comes down a little bit more like into the 3% to 5% range.

There's a bunch of pieces in there. One of the ones that we talked about that impacted the fourth quarter was our dealer floor plan business. And what we've seen is, is some inventory builds as supply chains open up and consumer purchases slowed down a little bit with rising rates, and so we saw some movement there. We did see some broad-based movement in our core commercial customer. The leasing business where we prefer to call it our equipment finance business continues to show steady growth, which would show up in the C&I balances. And then the other thing where we'll be intensely focused is on building out our small business and business banking segment. That's one of the places where we see a great opportunity in the New England franchise and to deploy our methods of banking.

When you look at the other portfolio CRE, we talked about relatively flat to slight somewhat down, the consumer real estate also flat to down, and that's really -- that's the consumer mortgage business, and that's really just a reflection of normal amortization. And because we will stop holding the originations, we will go back to gain on sale. And then we think the consumer portfolio slows down a little bit, again, just because of the interest rates and the pace of activity in terms of car buying as well as recreational vehicle purchases. The one offset there, which is also a People's related thing. But unfortunately, it doesn't grow the balances that much as we expect to launch our credit card into the People's United markets, which will help grow credit card balances. But as I mentioned, they are still relatively small, and so hard to see in the bond growth but nice from a margin perspective.

One of the other things that is in the People's franchise, which we like is, we've talked about it before, the mortgage warehouse lending business, but it's a tough part of the cycle for the mortgage warehouse lending business that -- with refinance activity almost not exist and purchase a little bit low, but the balance is there, are likely to still be a headwind. We don't think that they go down materially from here, but they won't go back to where they were in 2020 and 2021 without a decrease in the long-term mortgage rates.

Manan Gosalia

That's really helpful. And I think you've also mentioned in the past that C&I is benefiting now because of less capital markets activity. Are you assuming some sort of reversal in your '23 guide?

Darren King

We're just -- we're cautious about the level of economic activity and seeing some slowdown in inflation, in GDP and what that translates into in terms of demand from our clients. It's really not much more than that. There isn't any sign that we see that we're seeing a material slowdown -- or we're not seeing credit concerns, we're just seeing cautiousness while people wait to see how the economy plays out in 2023. And so we're cautious on it as well.

Manan Gosalia

Got it. And then just a follow-up on one of the prior questions. On the stress test, you've spoken about the adverse effects of the excess cash balances and of course, the Fed has been stressing CRE more than the other asset classes. Just given that December 31 will be used as a starting point for the next stress test, do you think you've done it now for how well do you think you're positioned going into that?

Darren King

We've certainly made a meaningful shift in the balance sheet this year. Cash balances, we mentioned, are down the better part of $17 billion from where they were at the end of last year. The mix of C&I and CRE when we focus just on commercial balances is almost 50-50, where it was 60-40 before CRE. And when we look at the -- or the construction balances, they're down a couple of billion dollars. And so -- and not to mention the margin is up and so the PPNR start point is higher. Things that we've got our eye on, and we're not -- we're uncertain a little bit is how the merger expenses will be treated in the stress test this year. But once we get through 2023, it should be clean. And so that will be helpful.

And then the other question is, what's the Fed scenario, right? We haven't seen it yet. It's very likely that it will continue to focus in the real estate sector. Previously it focused on hotel and retail. Those seem to be doing a little bit better. So it wouldn't surprise us if the new focus is office and healthcare. And so it just depends on where the emphasis is from that perspective as well. But we start from a really strong capital position. We've got the current SCB covered, which is pretty high. And we continue to move the balance sheet in a positive direction, which if it doesn't get us all the way where we want to be in 2023, it should carry us a long ways towards where we want to be in 2024.

Operator

And our next question comes from Ken Usdin from Jefferies.

Ken Usdin

Darren, on the cost side, you mentioned, obviously, the conversions being passed. Can you give us an update on what proportion of the initially expected $330 million of saves from People???s were in the fourth quarter run rate; and if not fully there, when do you expect to get there?

Darren King

Yes. Ken, the vast majority of the saves are in there through the end of the fourth quarter. We're probably -- if you think about we were targeting 30% of the cost base, we???re like 27% or something in that range, is what we've achieved so far. When you look at it on a percentage basis, we're almost there. When we look at it on a dollar basis, the run rate is actually a little bit higher than we thought it would be because of inflation. When we talk about the percent save, it's still the same. And so, some of that will come out over the course of the year. We're running -- we???re carrying a little bit higher staffing in the branches as we stabilize a little bit higher staffing in some of the call centers. And so those things will normalize themselves over the course of the year.

But when we look at where we sit, from my perspective, we pretty much closed the book on the cost saves that we expected to achieve. A couple of other things that have worked out very positive is the onetime expenses turned out to be a little bit less than we thought. We incurred a little bit less in severance expense. We also incurred a little bit less in some contract terminations than we thought at due diligence. And the nice thing is the People???s was an asset-sensitive franchise. And with rates going up, the NII is coming in better than we thought. And so the PPNR is a little bit higher than we expected.

So overall, the numbers that we thought we would realize post close and post conversion are in line to slightly better than what we thought, and we're almost back to breakeven on tangible book value.

So overall, we're very, very positive about where things sit early on. And as we mentioned before, excited to go to work in New England and bring M&T's branded banking into that new market.

Ken Usdin

Got it. Great. So then one follow-up to that is then if that's the case that you're pretty run rate, then we can all take a look at the kind of implied underlying expense growth off of this fourth quarter and knowing that you have the seasonal step-up in the first. So can you just kind of frame that for us, just what do you think about that organic side, what's driving it in terms of the initiatives that you're focusing the most in terms of incremental expense growth from here?

Darren King

Yes. The biggest driver of that is compensation. And when you look at 2022, we made some meaningful adjustments to our associates' compensation. We raised the minimum wage. We've been dealing with competition for talent like everyone has, and compensation expense is about 55% of our total expense base. And so when you look at the driver of that growth, it's really that compensation cost that's driving it. Outside of that, the other line item, you'll see where we'll be investing and have been is in outside data processing and software, that I think for us and for the industry, you see more and more reliance on purchased software. And with those future software contracts come licenses and maintenance fees, which tend to go up, every year. And the other place, we'll probably see a little bit of growth in advertising and promotion. As we continue to stabilize the franchise and introduce ourselves in New England, we'll see an uptick in that as we go forward and then kind of normalize into what I would describe as a normal percentage of our operating expense over time.

Operator

Our next question comes from Steven Alexopoulos from JPMorgan.

Steven Alexopoulos

I want to start. So looking at this quarter with the second quarter where you funded loan growth with excess liquidity, talking about issuing sub debt, when do you think you'll start growing deposits again? Is this back half '23? And where do you see the loan-to-deposit ratio trending through the year or maybe ending the year?

Darren King

There's always an ability to grow deposits. It's just at what cost, right? And so we're always looking at -- number one, our focus is on customers and customer relationships. And so for situations where we would have single-service time deposits or money market accounts, we may not choose pay rate there because we can fund the bank more efficiently in the wholesale markets. But for customers who are operating account customers, which is our core funding base and part of our long-term strategy, then we're more willing to pay rate. And so we're always making that trade-off. And so to say that it's going to officially end in the second half of the year, I think would be would be a little foolhardy. But our idea is, obviously, there will be a spot you get to where customers maintain balances in their checking accounts, if you're a consumer or your operating account, if you're a business and you kind of hit that floor. And when will that floor hit, I think we start to see it as rates stabilize, and you'll see that as we go through 2023. But also, we know that the deposit pricing lags movements in Fed funds and moves -- lags movements in loans. And so our goal will be to stabilize it as we go through the year. But obviously, making those trade-offs that I mentioned as we work with clients.

Steven Alexopoulos

Okay. And then -- so where do you see the loan-to-deposit ratio moving?

Darren King

Oh, sorry. Right. The -- I think over time -- and again, time, maybe, let's call it, 3 years, aha, just to pick on our #3 is, over the long term, loan-to-deposit ratios for us and for the industry will trend back to their long-term average. And when we think about those loan-to-deposit ratios and those long-term averages, that's also part of the reason why we talk about that net interest margin over the long run, normalizing back to where it's been historically. And so we're kind of, we think, maybe around 80-ish a little bit above as we get to the end of 2024 -- sorry, 2023. But it's obviously a function of how we choose to pay and fund the bank.

Operator

And our last question comes from Gerard Cassidy from RBC Capital Markets.

Gerard Cassidy

I was going to say, and I know the 3 was in the middle of the call, your stock was up 3%, but now it's up over that, so I can't use that.

Darren King

Well, we appreciate that and the 3 reference. There's something that happens in every call and it kind of seems to run its course. So 3 is this one.

Gerard Cassidy

There you go. A question for you regarding your comments about the commercial real estate portfolio. When you look at it, particularly for office, there's a concern, of course, with the work-from-home possibly being more permanent and there'll be less space needed, possibly vacancy rates go up in the office space. What do you think is the greater risk? The occupancy rates going higher because of that trend or the refinancing risk where your customers having to refinance because their mortgages are terming out, they have to refinance it and the rates are just so much higher today than when people took down these mortgages maybe 5 years ago?

Darren King

Right. So I think it's hard, Gerard to pinpoint it on one or the other because they work together, right? I mean if occupancy and price per square foot was okay, are holding up, then you probably got the coverage to refinance when your loan is due. I remind you, when we underwrite whether it's multifamily, office or hotel, we underwrite to long-term interest rates and long-term occupancy rates. And so we've got some protection built in with our clients when we underwrite. So there's a little bit of room there. But as we look at it, I think in the short term, it's the refinance risk, it's a little bit bigger. Over the long run, we debate this a lot internally, and we go back and forth with our Chief Credit Officer, that this trend of more remote work, hard to handicap where that's going to end up, right? You can see some changes in the economy. You see some movements with some of the tech firms with employment. That may or may not drive people back into the office, we don't know.

But when you see younger people early in their professional career, you can see the benefits to being co-located with their co-workers. And so that trend, I think, ultimately starts to come back. Is it five days a week probably not, but it's not going to be zero, at least this is Darren's opinion. So take it for what it's worth.

To me, the bigger issue is when you look long term at the population, there's a big chunk of the population called the baby boomers that are approaching retirement age. They're not enough of them to come in up in the next wave to use all the space that they needed to sit in to be employed. And that's a longer-term cyclical trend, which will affect these things. And so there's going to be some pain in the short term, no doubt. Over time, rates will move up and down and refinancings will happen. There will be some movement in and out. But to me, the longer-term trend is what's happening with the population and the working population and what's the capacity that exists today versus what the likely future looks like, absent any other changes in politics. And I will leave it at that before we get into a discussion I don't want to get into.

Gerard Cassidy

Sure. As a follow-up question, based upon your experience and your conversations with your colleagues at M&T, what do you think is driving what we're seeing today where the CECL reserve build -- you and your peers obviously have to take a look at the economic forecast. Many people use Moody's, which is weaker this quarter than last quarter, which drove up reserves. But at the same time, I think you mentioned your net charge-off numbers are expected this year to be below your through the cycle levels. Spreads in many areas, high-yield securities or even one of your peers that their corporate loan spreads haven't widened out yet. What's going on where we're not seeing -- we -- I don't think, some metrics telling us we're going to have a tough downturn, whereas the reserve build is pointing to a weaker economy?

Darren King

Yes. I think, Gerard, to me, when I think about the way we all set aside reserves. We've got -- it's weighted heavily on your economic forecast and your R&S period, your reasonable and supportable period, which for a lot of the industry is the first couple of years and then there's a reversion to the long-term average. And so what you're seeing today is the current view where the charge-offs are well below the long-term average. And so the allowance is always going to take that the long term into account. And then you're forecasting and bringing forward those losses based on the assumptions that go into the R&S period. And the expectation for unemployment to go up and for GDP to come down is there. It's in the baseline for Moody's. It's moved a little bit. Most People like us will not just look at the baseline, but look at a more severe economic scenario as well as a better one. And you kind of weight those. And it doesn't necessarily need to be what you see today in the pricing and the spreads versus what's in the forecast.

They should be connected, but they're not always, right? And there's always going to be points in time where these disconnects exist. And so we look at it and we think about the provision is keeping the bank safe. It's capital by another form. But as we underwrite business, we're always looking at each individual relationship and its ability to pay back. And the spreads are going to be a reflection of the expectation of that credit risk through the cycle. And so for us, we've had so many long-term relationships where we've seen the behavior of these clients through the cycle and their willingness to step up and many times bring outside resources to help maintain their payments and stay accruing. And so each organization is different, but that to me is a little bit of why you might see a disconnect between what's actually pricing today versus what's in the CECL outlook.

Gerard Cassidy

And just quickly on the CECL outlook, what was the weighted unemployment rate that you guys came up with in your analysis? You mentioned you used the base case, but you also took into account the more severe case as well.

Darren King

Yes. We're kind of in the 4-1 range on unemployment in the base. And that's during the R&S period, obviously, right? And so you're -- once you get past that, then you're reverting to the long term.

Operator

We have reached our allotted time for the question-and-answer session. I will now turn the call back over to Brian Klock for closing remarks. .

Brian Klock

Again, thank you all for participating today. And as always, a clarification of any of the items on the call or news release is necessary, please contact our Investor Relations department at area code (716) 842-5138. Thank you and have a good day

Operator

Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect, and have a wonderful day.