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Welcome to the M&T Bank second quarter 2026 conference call. All lines have been placed on listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star, then one on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star two. When posing your question, we ask that you please pick up your handset to allow for optimal sound quality. Lastly, if you should require operator assistance, please press star zero. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Steven Wendelboe, Senior Vice President of Investor Relations. Please go ahead.
Thank you, Chelsea, and good morning. I'd like to thank everyone for participating in M&T's second quarter 2026 earnings conference call. 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 investor relations website at ir.mtb.com. Also, before we start, I'd like to mention that today's presentation may contain forward-looking information. Cautionary statements about this information are included in today's earnings release materials and in the investor presentation, as well as our SEC filings and other investor materials. The presentation also includes non-GAAP financial measures as identified in the earnings release and investor presentation. The appropriate reconciliations to GAAP are included in the appendix. Joining me on the call this morning is M&T's Senior Executive Vice President and CFO, Daryl Bible. Now I'd like to turn the call over to Daryl.
Thank you, Steve, and good morning, everyone. Before we discuss our results, I'd like to begin with what continues to define M&T, our purpose: to make a difference in people's lives by knowing them, growing with them, and connecting them with everything they need to thrive. That purpose continues to guide how we invest in our business and in the communities we serve. During the quarter, we helped launch new initiatives to strengthen Boston's position as a premier partner hub for innovation in partnership with the city and The Boston Foundation as part of the You Can't Beat Boston initiative. We also expanded our work with the Spanish government and ICEX to help support and connect international life science companies with Boston's innovation ecosystem. Together, these efforts strengthen relationships among businesses, institutions, and communities while supporting long-term economic growth in one of the most dynamic markets we serve. We also celebrated the fifth anniversary of our tech hub at Seneca One in Buffalo. We started with an investment in technology talent that has become an important part of both Buffalo's innovation ecosystem and M&T's transformation. Today, the hub serves as a center for technologists, designers, and business leaders working together to improve how we serve customers and operate the company. Put simply, we are using technology to scale what has always differentiated M&T: strong relationships, local knowledge, and disciplined execution. Turning to slide five. We are pleased to receive continued recognition for our company and our people, reflecting the strength of our talent and the trust we have earned in the communities we serve. Now let's turn to slide seven and our second quarter results. Diluted GAAP earnings per share were $5.32, up from $4.13 in the prior quarter. Net income was $818 million compared to $664 million in the linked quarter. M&T's second quarter results produced an ROA and ROCE of 1.51% and 12.3%, respectively. Our results reflect the highest quarterly diluted earnings per share in M&T's history. Our earnings strength was broad-based. We reported the highest quarterly NII since 2023 and record fee income excluding the impact of notable items from prior periods. NII was supported by the strongest quarterly loan growth since 2012, excluding acquisitions and PPP during COVID. We also returned to CRE growth, with average balances increasing for the first time since 2021, excluding acquisitions. We remain disciplined in our profitability, maintaining our strong and stable net interest margin at 3.70% against the backdrop of strong loan growth. Asset quality continued to improve. Net charge-offs were 23 basis points, and commercial criticized loans declined by $0.7 billion, making it the ninth consecutive quarterly decline. While the recent stress test results do not affect our required capital levels, we are pleased with the outcome, which reflected an implied stress capital buffer of less than 2.5% at 2.2%. Slide eight includes supplemental reporting of M&T's results on a net operating or tangible basis. Net operating income was $823 million, up from $671 million in the linked quarter. Diluted operating earnings per share were $5.35 compared to $4.18 in the prior quarter. Net operating income yielded an ROTA and ROTCE of 1.59% and 18.57%. Next, we'll look a little deeper into the underlying trends that drove our second quarter results. Please turn to slide nine. Taxable equivalent net interest income was $1.8 billion, an increase of $41 million or 2% from the linked quarter. Net interest margin was 3.7%, unchanged from the prior quarter, as the earning asset yield increase was offset by higher funding levels in support of loan growth. In conjunction with the recent implementation of our new general ledger, we refined our methodology for calculating annualized taxable equivalent rates for earning assets and interest-bearing liabilities. Previously reported amounts have been adjusted to conform to the current presentation. This adjustment provides a more consistent way of annualizing balance sheet yields. Turning to slide 11 to talk about average loans. Average loans increased $3 billion to $141.4 billion. Growth was broad-based across each of our portfolios, led by our commercial lending. Commercial loans increased $2.3 billion to $66 billion, aided by growth in middle market, business banking, and several of our specialty businesses. Middle market balances benefited from higher utilization rates. Average CRE loans increased $57 million to $23.6 billion, reflecting strong origination volume. While not shown on the page, end-of-period CRE balances increased $1.1 billion since March to $24.5 billion, driven primarily by growth in multifamily and industrial. Average residential mortgage loans increased 1% to $25.1 billion. Consumer loans increased 2% to $26.7 billion with growth in the recreational finance and HELOC portfolios. Loan yields increased 4 basis points to 5.89%, mostly reflecting higher CRE yields, including a benefit from higher non-accrual related interest. This quarter, our earnings release was enhanced to include additional loan balance detail, including industry breakouts for C&I, property type for CRE, and additional detail on the consumer portfolios. These details can be found on page 16 of the earnings release. Turning to slide 12, our liquidity remains strong. At the end of the second quarter, investment securities and cash held at the Fed totaled $53.9 billion, representing 25% of total assets. Average investment securities increased $0.9 billion to $38.7 billion. The yield on investment securities increased 7 basis points to 4.29%. In the second quarter, we purchased $1.1 billion in debt securities with a yield of 5.02%. At quarter end, the investment portfolio had a duration of 3.6 years, and the unrealized pretax loss on available-for-sale was $125 million. While not subject to the LCR requirements, M&T estimates that its LCR at quarter end was 106%, exceeding the regulatory minimum standards that would be applicable if M&T was a Category 3 bank. Turning to slide 13. Average total deposits declined $0.7 billion to $163.5 billion. Non-interest-bearing deposits decreased $0.6 billion to $43.9 billion, with lower institutional services and commercial partially offset by growth in consumer and business banking deposits. Interest-bearing deposits were largely unchanged at $119.6 billion. However, we remixed the portfolio by shedding the highest cost money market deposits and replacing them with lower cost time deposits. Interest-bearing deposit cost decreased 2 basis points to 1.95%, with deposit costs improving across most of our businesses. We remain disciplined in our deposit pricing with a 56% cumulative interest-bearing deposit beta since the start of the cutting cycle in 2024. We saw encouraging deposit trends later in the quarter with end-of-period deposits increasing to $168.9 billion, driven by commercial, business banking, and trust demand deposits. Though end-of-period trust demand deposits can vary each quarter, we usually see more deposit growth in the second half of the year and expect the trend to continue. This focus on deposits should normalize borrowings in the coming quarters. Continuing on slide 14. Non-interest income was $740 million compared to $689 million in the linked quarter. Mortgage banking revenues were unchanged at $127 million. Residential mortgage revenues increased $7 million to $96 million from higher servicing fee income. Commercial mortgage decreased $7 million to $31 million, primarily from lower origination volume than the first quarter. Service charges increased $5 million to $144 million, reflecting higher consumer service charges, mostly from higher transaction volume. Trust income increased $14 million to $197 million from a $4 million increase in seasonal tax prep fees and growth in institutional services and wealth fee income. Derivatives and trading increased $8 million to $22 million from revenues from the interest rate swap transactions with commercial customers. Other revenues from operations increased $26 million to $213 million, reflecting a $47 million Bayview distribution compared to $33 million in the prior quarter and higher credit card and merchant discount income. While the timing of Bayview distributions can vary over the course of the year, the investment remains a meaningful and recurring contributor to our annual earnings profile. New this quarter on pages 17 and 18 of our earnings release include additional details on the underlying drivers of our residential and commercial mortgage and other fee income. Turning to slide 15. Non-interest expense for the quarter was $1.35 billion, a decrease of $89 million from the prior quarter. Salaries and benefits decreased $88 million to $826 million from lower seasonal compensation and staffing levels, partially offset by one additional working day and a full quarter impact on the annual merit increases. Outside data processing and software costs increased $10 million, reflecting continued investments in technology infrastructure and cybersecurity. The efficiency ratio improved to 52.8% compared to 58.3% in the linked quarter. Next, let's turn to slides 16 and 17 for credit. Asset quality remained strong in the quarter, with lower net charge-offs and continued improvement in non-accrual and criticized loans. Criticized commercial loans were $5.9 billion, down from $6.6 billion at the end of March. The improvement from the linked quarter was driven by a $590 million decline in CRE, primarily from upgrades in multifamily and office, and a $110 million decline in C&I criticized loans. Non-accrual loans decreased 3% to $1.2 billion, and the non-accrual ratio decreased 5 basis points to 84 basis points. Net charge-offs for the quarter totaled $80 million or 23 basis points, decreasing from 31 basis points in the linked quarter. Net charge-offs were granular with no single net charge-off greater than $10 million. In the second quarter, we reported a provision for credit losses of $120 million compared to net charge-offs of $80 million. The allowance for loan losses as a percent of total loans declined 1 basis point to 1.52%. Turning to slide 18 for capital. M&T's estimated CET1 ratio was 10.19%, a decline of 14 basis points from the first quarter. The lower CET1 ratio reflected $465 million in share repurchases and higher risk-weighted assets associated with $3.3 billion of loan growth. These factors were partially offset by continued strong capital generation. If included in regulatory capital, AFS and pension-related AOCI would decrease the CET1 ratio by 2 basis points. Tangible book value per share grew 1% from the first quarter. Now turning to slide 19 for outlook. First, let's begin with the economic backdrop. The U.S. economy has held up well thus far through the energy shock, though we remain cautious. The increase in gasoline prices has been challenging for households. We see households handling the shock by reducing spending in other areas and aided by a boost in tax refunds this year. Although the geopolitical conflict has not been fully resolved, we are cautiously optimistic with an outlook of continued growth. U.S. GDP has slowed, reflecting slowing consumer spending. We do not see evidence of an energy shock seeping into core inflation, and we expect overall inflation to decelerate going forward. Encouragingly, job growth accelerated again in the second quarter as it did in the first. We remain well-positioned for a dynamic economic environment. Now turning to outlook. We expect NII in the lower half of the $7.2 billion to $7.35 billion range and the full-year NIM in the high 3.60% range. We expect continued loan and deposit growth in the second half of the year with full average loans of $141 billion to $143 billion. This reflects the strength we've seen in the commercial loans, reflecting CRE balances and continued growth in consumer. Our deposit outlook remains in the $165 billion to $167 billion range with a cumulative interest-bearing deposit beta in the low to mid 50% range. NII will continue to depend on the shape of the yield curve and loan and deposit balances. We remain neutral on the short end of the curve. At the same time, our naturally asset-sensitive balance sheet provides flexibility, and we can adjust our sensitivity as warranted through maturities of cash flow swaps, shifts in cash and securities mix, and the addition of pay-fixed swaps. We expect fee income to be $2.8 billion to $2.85 billion, reflecting broad-based strength in fee income year to date, the second quarter Bayview distribution, and the higher sub-servicing fee income beginning in the third quarter. Expenses are expected to be at the high end of the $5.5 billion to $5.6 billion range as we continue with our enterprise investments while maintaining overall expense discipline. Given the strong credit performance in the first half of the year and our favorable collateral positions, we now expect full-year net charge-offs of 37 basis points. We expect to operate the CET1 ratio in the lower part of the 10% to 10.5% range unless market conditions start to deteriorate. To conclude on slide 20, 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 shareholder capital. The strength and diversification of M&T's balance sheet, capital, asset quality, and revenue will continue to allow M&T to outperform consistently across cycles. As we close, I want to thank all of my M&T colleagues whose dedication and hard work make a difference every day for our customers, communities, and one another. Because of all of your commitment, M&T continues to create lasting value for everyone we serve. Now let's open the call up for questions, for which Chelsea will briefly review instructions.
分析師問答
Thank you. At this time, if you would like to ask a question, please press star one on your keypad. To leave the queue at any time, press star two. Once again, we ask that you please pick up your handset when posing your question to allow for optimal sound quality. We also ask that you please limit yourself to one question and one follow-up. Our first question will come from Manan Gosalia with Morgan Stanley. Please go ahead.
Hi, good morning.
Good morning, Manan.
Good morning. Daryl, in the NII guide, I guess you're still pointing to the low end of the range. You upped the loan growth guide. I think you're guiding to some NIM compression here in the second half relative to the 3.70% or so in the first half. Can you talk about what's baked into that outlook in terms of deposit pricing and loan pricing?
Yeah. Happy to. As far as how we expect the balance sheet to go out, we have a lot of momentum in the loan area. If you look at the loan growth that we had this past quarter, it was very robust. We had growth of over $800 million in our middle market regional businesses. About half of that was due to higher utilization. The other half was permanent loans. We had growth in a lot of our specialty businesses. Mortgage warehouse was up $350 million, institutional CRE $335 million, C&I corporate institutional $309 million. Fund banking was also up, business banking, LEAF, lender finance, and healthcare. It was very strong, very robust. We had a really strong finish in the quarter in CRE. On an average basis, we eked out a little bit of growth. When you look at the June numbers and what we put on the books, we're set to have really strong average balance growth in CRE in the third quarter just because of everything that happened in June. Our two consumer portfolios, mortgage and the consumer indirect and direct businesses also grew nicely. We expect all those portfolios to continue to grow in the third and fourth quarter. We may not have quite as much growth in the third and fourth as we had in the second, but we're pretty positive that these portfolios will continue to grow and have positive momentum. On the deposit side, we started the quarter off a little soft on deposit growth, but we've rebounded, and you can't really see it in averages. If you look at the growth that we had at the middle to the end of the second quarter, our deposit growth was really robust and strong. When you compare June averages to second quarter averages, we're up $3.4 billion. We have a lot of deposit momentum going forward. I know that we had a little bit elevated short-term borrowings. That short-term borrowings number is going to come back down now. It's already down a couple billion dollars, and it continues to come down as we're starting to grow deposits. Pricing-wise, our deposit betas are still in the mid-50s. It may inch down to the low-50s, but it's the right thing to do to grow our loans with core funding, which is what we're doing.
Very clear. Thank you. Maybe as a follow-up on capital. One of the things that René spoke about recently is how M&T has historically not done as many risk transfer deals as some of your peers. Now that we have the new capital proposals, is there any way you can help us think through what that opportunity is, how to think about the capital that you can free up, and over what timeframe?
The Basel III proposal for SSFA-type transactions specifically limits the downside risk that was there before. It can't get to dollar-for-dollar capital in the worst-case situation. Only it gets to the worst case of what the asset would have been if you put it on individually, not in a secured type transaction. That kind of cuts the risk off of how much capital you would have to redeploy if things deteriorated. We have some products that we have out there. We're launching new products in CRE that will take advantage of that. Growth will build slowly over time. Our CRE team is excited about that, and we'll have a little bit of growth this year, but that will grow more into the next couple of years as we move forward. In the normal C&I space, our focus is really making sure we know what asset qualities are in the deals, how we monitor these asset qualities, and make sure that we're very diversified in these. We will on occasion do some of these transactions. Growth will be more than we have today. We have hardly anything on our books today; we're coming from a very low level.
Thank you. Our next question will come from Erika Najarian with UBS. Please go ahead.
Hi. Good morning. Daryl, I heard you loud and clear in terms of anticipating seasonally stronger deposit growth in the second half of the year. Your wholesale balance sheet will come down on the liability side. In the case that loan growth continues, obviously, at this pace, you've hit an inflection point in CRE. Maybe talk to us about sort of how much you're going to potentially just market core funding versus go to the wholesale market. I'm looking at an 18-month CD at 360 on your website, which is lower, obviously, than your borrowing yield. As we think about loan growth continuing to outpace deposit growth, even with those seasonal factors, how should we think about the mix of your liability growth from here? And maybe double-click on your comments on deposit costs.
That's a good question, Erika. Back early in the second quarter when we saw the loan growth starting to come through pretty strong and the pipelines building, we met with all of our businesses in the company and really had them focus. We have both oars in the water. Loans are growing nicely, and we had to get our deposit growth up to grow nicely as well. We started with consumer and business banking. They have responded. They have promotions going on that are attractive and still at a reasonable cost that we think, and they are growing. Commercial and wealth are our focus, corporate trust, and we continue to get more escrow deposits in mortgage. All those businesses are really focused on trying to grow deposits as much as possible. If by chance it's not enough to support the loan growth that we have, we have other alternatives. We've consciously been active in putting out funding securitizations out there in auto, in RV, and small-ticket leasing to make sure the investors know our collateral. We could turn and dial that up if we had to. We could issue more debt or Federal Home Loan Bank advances. We have a lot of options, but the most important thing is to really focus and serve our clients and communities and really try to do it with core deposits to meet the core loan demand.
Got it. Just to follow up, if the Fed keeps rates where they are, do you expect deposit costs to drift higher given what you just said? Given what you said during prepared remarks about asset sensitivity, what does a 25-basis-point rate hike do to that high 3.6% NIM as we think about the go-forward and the exit rate?
For the Fed, if rates stay where they are, the way I look at it is you look at deposit growth; interest-bearing deposits are growing faster than non-interest-bearing. Non-interest-bearing deposits are a little bit higher. We actually planned for rates being down this year; we aren't meeting our expectations on DDA growth right now. For every marginal asset you put on the books, it is going to be at a lower margin than what we anticipated. That does put a little bit of pressure on net interest margin. We operate with one of the highest net interest margins in the industry. I think we're okay trading a few basis points away from that to get more growth in NII. I don't think our NII or net interest margin is going to collapse for any reason, but I think it's a fair trade-off from what we see. As far as rates going up 25 basis points, we're really neutral, and our forecast already has the steepness in the curve that we have today factored in for the rest of the year. I don't think you get much change either way with what we have. If by chance the curve gets steeper, that would be positive. If it gets flatter, it'd be negative. We have much of that factored into our forecast today.
Thank you. Our next question will come from John Pancari with Evercore. Please go ahead.
Morning. Daryl, back to the loan growth topic. The loan growth trends are definitely encouraging. It's good to see the pipelines building and higher utilization. On the commercial real estate front, also good to see the inflection. What gives you confidence that that inflection is going to be sustained here? How should we think about the pace of growth there? I mean, are you still selective in terms of your posture, and could that impact your growth? How should we think about that? Maybe break out also how we should think about the C&I side of it as well? Thanks.
Let me start with CRE. Having met with our leaders in CRE and the team, they had a very robust pipeline and had a really strong finish in the second quarter. That will definitely carry us strong into the third quarter. They still are very optimistic. We're originating in just about every segment that you can originate in except office, for the most part. Our strongest obviously are in multifamily and industrial, but we're doing retail, we're doing hotel, we're doing home building, construction. They're all adding to it. We put out a lot of construction loans over the last year or two. Those are starting to fund now, too, so that's another positive. We're pretty optimistic on CRE growth and feel good that it's going to be a good contributor to earning asset growth for the company. On the C&I front, they had an excellent quarter. Ninety percent of all the businesses grew quarter-over-quarter. That just doesn't happen very often. Peter D'Arcy and his team did an amazing job. I think third quarter they'll have to rebuild pipelines. I think we'll grow, but probably more modestly in the third quarter. Hopefully, we finish the year out strong in the fourth quarter and have momentum going into 2027. Peter's got a lot of motivated people. We have a lot of products and services out there to serve our customers, and we're making a difference.
Got it. Okay, great. Thank you. On the capital front, CET1 at 10.2% came down a bit, but you had bought back about $465 million in the quarter. How should we think about the pace of buybacks as you are now looking at a faster pace of loan growth in front of you, as well as other capital considerations? How should we think about the pace of buybacks as we look out for the rest of the year?
We're going to target the 10.2% ± range for capital. Buybacks are going to be the tail on the dog. Depending on how much RWA growth we get through lending, we'll buy back what we need to basically stay at that level that we're currently at today. It's just where we want to operate now, and we'll see as we get into next year and Basel III gets approved what changes we might consider. Right now, we feel comfortable operating in the low 10% range, and how much we buy back will be a factor of loan growth.
Thank you. Our next question will come from Gerard Cassidy with RBC Capital Markets. Please go ahead.
Hey, Daryl.
Hey, how we doing?
Good. Thank you for the additional information on pages 17 and 18 that you cited.
We have more information coming. With the new general ledger we implemented, we're going to have more information next quarter or in the next couple of quarters. This is just the start of what we are able to do these days.
That's great. You're paving the way for others to follow. Question for you. On the sub-servicing number that you disclosed at June 30th, I think it was $184 million. It's up nicely from the prior quarter. What's the driver? Is that Bayview? How should we look at that number going forward for the sub-servicing of residential mortgages?
We just closed on another 214,000 sub-servicing loans. Some of the sub-servicing comes from Bayview, and some of it comes from other customers. It's diverse from that perspective. What we just put on the books will be new revenue for the third and fourth quarter. The second half of the year is about $35 million more in revenues. Costs are pretty much already there because we've been building and hiring folks for that, so that's already in the run rate. It's really just the addition of the revenue coming in. It's a really great business that we have. We specialize in the hard-to-service, more FHA-type lending, and we do a really good job with that. People come to us to service their loans because of that.
Very good. Circling back to your answer about in your career, about the C&I loan growth you saw this quarter and all the different categories. Is there any way that you guys can get your arms around the impact that the AI industry— I don't mean just the building of the data centers, but the second derivatives of the AI industry impacting loan demand going forward? Whether it's not just the plumbers and the HVAC and the cement companies, but all the software companies. Have you guys been able to dive into the portfolio to see what kind of exposure you may have?
Given our diverse portfolio, there is some impact from that. For the most part, it's really our core customers that we've had for a long time. A lot of them are just rebuilding, putting on new equipment. If you look at our leasing businesses, both small-ticket leasing and our equipment leasing grew really nicely this past quarter. There's really just good core demand out there. The other thing is I think private credit isn't as aggressive as it was, and I think we're winning back market share in the regions, which is really what's helping us.
Thank you. Our next question will come from Ken Usdin with Autonomous Research. Please go ahead.
Thanks. Good morning, Daryl. Just one question on fees, one question on expenses. On the fee side, can you just remind us, the Bayview distributions won't repeat in the second half, then you mentioned the servicing. I think you had previously quantified that, but could you just give us an update on how much that servicing add will be, and then just how you expect some of the other fee lines to trend from here? Thanks.
Second half of the year, the new servicing is $35 million of additional revenue in that line item. As for Bayview distributions, we don't control their timing. We receive distributions when they distribute money from their company, so it's hard to know when or how much we will get. Since 2020, we've received almost $300 million of revenue from Bayview. Their business is growing nicely, and we're benefiting from that. Regarding other fee lines, one of the initiatives this year was to focus on cross-selling our commercial and business banking customers into wealth. Referrals have picked up dramatically—more than double what they were the past year—and we're getting more wins and positive flows in asset management. Corporate trust, global capital markets domestically and in Europe had a really strong second quarter. Treasury management is doing well serving our customers. Our derivatives business had a big quarter with interest rate swap activity. We have broad-based momentum in fees.
Thanks. Sorry for that. I was really focused on whether you could expect continued momentum in some of the other lines that you've seen really good growth in, like service charges and trusts, which have been notable drivers.
Yes. Service charges, trust, wealth, corporate trust, and treasury management are all showing positive momentum. The cross-sell and referral activity is driving stronger asset management growth and more fee income. Capital markets and derivatives activity also contributed meaningfully this quarter.
Thank you. Our next question will come from Ebrahim Poonawala with Bank of America. Please go ahead.
Hey, good morning.
Morning.
Daryl, you talked about expectations that the deposit betas could maybe drift lower. Talk to us a little bit around when we think about the strength on the C&I side on lending, the level of deposit generation lending is doing today. My view was that when a bank makes a C&I loan, it does create deposits, and that's a better-negotiated rate on those deposits. Is that holding in the current environment or not?
Even when private credit was more aggressive the last couple of years, we still had treasury management deposit and fee revenue. That hasn't changed. Our regional middle market businesses bring the whole relationship—loans, deposits, and fees. Those relationships are some of the most profitable businesses we have. It's harder to get DDA now because customers are more educated and place money in sweeps, but that simply shifts to fee income rather than DDA. When we go through the credit process, if we don't get the deposit relationship right away with a new client, we give them time to transition. Over time, if we can't get the deposits, we'll likely exit the relationship. It's hard to make a relationship on an asset alone.
Got it. That's helpful. Just on the fee side, you talked about the momentum on fee revenue. Specifically regarding MSR assets, talk to us in terms of how you are thinking about adding more and what the pricing backdrop looks like there.
Our MSRs that are on our books are really those we originate for our customers. Growing sub-servicing is not creating an MSR asset on our books; it's a fee-for-service relationship. We have many sub-servicing relationships where customers pay us a fee to service their loans. There's nothing that requires hedging as an MSR asset in that context.
Thank you. Our next question will come from Matt O'Connor with Deutsche Bank. Please go ahead.
Good morning. Obviously positive to see the CRE loans inflecting here. I remember a while back you guys talked about broadening out that business so that it's not just a balance sheet business—some you'll hold, some you'll facilitate out to other funders. Just remind us what that opportunity might be more broadly speaking in CRE, with the business overall inflecting strongly as it has.
Our CRE business has transformed significantly over the last four to five years. We used to be primarily a balance sheet lender in CRE. Now we have a strong securitization and distribution capability where we can originate and sell. In 2025, we had the same number of originations in our RCC business as we did on the balance sheet. To get permanent financing, we can go to agencies, insurance companies, or other investors to serve our customers' needs. We also launched a CRE Warehouse business that we're starting to deploy. We have affordability businesses that are growing and an institutional CRE business. Tim Gallagher runs those five businesses, some on balance sheet, some off balance sheet, and some fee-based. The number of customers we serve is much larger than years ago, and it continues to grow.
Okay, that's helpful. Just separately, good trends in credit. Would you say we have fully normalized here? Or is there still room for criticized to come down and potentially some lumpy items as you work through remaining credits?
There are two things I look at. Our non-accrual number went down 5 basis points to 84 basis points, which is a very low level and likely bumping along the bottom. It may not go much lower or higher from here. As for the criticized portfolio, we still have room for it to come down, though perhaps not as quickly as in prior quarters. Our office CRE portfolio still has about 24% in criticized status, but we had some office loans come off criticized this past quarter, and we expect that to continue over the next year or two. C&I criticized loans have been coming down more slowly and will likely continue to decline more modestly. Overall, we expect the commercial criticized balance to continue to trend down.
Thank you. Our next question will come from David Chiaverini with Jefferies. Please go ahead.
Hi. Thanks for taking the questions. The first one is housekeeping. On the NII front, how much did the non-accrual recovery contribute to NII in the quarter?
Great question. If you look at our average commercial non-accrual interest, it averages about $15 million a quarter. This quarter we got $20 million, so it was a bit outsized. In the first quarter, we didn't get the full $15 million; it was probably in the single digits. So this quarter's $5 million incremental was worth about 1 basis point to NIM.
Thanks for that. On the net interest margin, you alluded to the incremental margin being lower. Could you talk about a normalized NIM level over the medium term for M&T?
I would say we likely operate in the mid-to-high 3.60% range for NIM over the medium term. We're at 3.70% now and could normalize toward the high 3.60% range depending on the shape of the curve and funding and loan balances.
Thank you. We have one more question, this one from Chris McGratty with KBW. Please go ahead.
Great. Thanks. Daryl, just on the expenses, the high end of the expense guidance changed. Maybe unpack where you're putting more dollars today—revenue-producing—and how that contributes to the outlook for fee income and net interest income. Thank you.
We have expense increases in technology, cybersecurity, and related initiatives; those are real and ongoing industry costs. From a revenue perspective, we've invested heavily in our mortgage area, evidenced by the increase in sub-servicing wins. We're investing in treasury management and commercial platforms. We launched the CRE Warehouse business and are investing to expand it. These investments are intended to be revenue-producing over time, driving fee income and supporting loan growth.
Okay. Thank you. At this time, there are no further questions in the queue. I'd like to turn the call back over to our speakers for any additional or closing remarks.
Again, thank you all for participating today. As always, if any clarification is needed, please contact our investor relations department at 716-842-5138. Thank you.
Thank you, ladies and gentlemen. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.