Ladies and gentlemen, thank you for standing by, and welcome to the M&T Bank 4th Quarter 2020 Earnings Conference Call. At this time, all participant lines have been placed in a listen only mode. And later, the floor will be open for your questions. It is now my pleasure to turn the call over to Don McLeod, Director of Investor Relations. Please go ahead.
Thank you, Maria, and good morning, everyone. I'd like to thank you for participating in M&T's 4th quarter and Full year 2020 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 Also before we start, I'd like to mention that comments made during this call might contain forward looking statements relating to the banking industry and to M&T Bank Corporation. M and T encourages participants to refer to our SEC filings, including those found on Forms 8 ks, 10 ks and 10 Q for a complete discussion of forward looking statements. Now I'd like to introduce our Chief Financial Officer, Darren King.
Thanks, Don, and good morning, everyone, and Happy New Year. Before we get into the details, I'll touch on just a few highlights in the recent quarter's results. PPP loan forgiveness ramped up in the 4th quarter. Average PPP loans declined by $351,000,000 compared with the 3rd quarter and were down $1,100,000,000 on an end of period basis. This resulted in the accelerated recognition of $29,000,000 of PPP loan fees into net interest income during the quarter.
In addition to the impact of accelerated PPP loan fees, Net interest income increased as a result of improved deposit pricing across all customer segments. Notwithstanding the PPP forgiveness, Average loans were up during the quarter, including growth in dealer floor plan loans and mortgage loans purchased from servicing pools. Fee revenues held up well, particularly trust income due to continued strong capital markets and service charges due to the improved economic activity. Expenses were impacted by costs relating to the migration of our retail brokerage platform to LPL Financial and were otherwise in line with our expectations. As to credit, we saw an increase in non accrual loans this quarter that is consistent with the higher expected credit losses that we provided for earlier in the year.
While CRE loans came off, COVID forbearance and net charge offs rose to a level just above our long term average. Capital levels remained strong with our CET1 ratio growing to 10% at year end. We'll review the numbers for the full year in a moment, but first, Let's turn to the results of the Q4. Diluted GAAP earnings per common share were $3.52 in the Q4 of 2020 compared with $2.75 in the Q3 of $2,023.60 in the Q4 of 2019. Net income for the quarter was $471,000,000 compared with $372,000,000 in the linked quarter and $493,000,000 in the year ago quarter.
On a GAAP basis, M and T's 4th quarter results Produced an annualized rate of return on average assets of 1.3% and an annualized return on average common equity of 12.07%. This compares with rates of 1.06% and 9.53% respectively in the previous quarter. Included in GAAP results in the recent quarter were after tax expenses from the amortization of intangible assets amounting to $2,000,000 or $0.02 per common share, little change from the prior quarter. Consistent with our long term practice, M and 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 when they occur. M and T's net operating income for the 4th quarter, which excludes intangible amortization, was $473,000,000 compared with $375,000,000 in the linked quarter and 496 $1,000,000 in last year's 4th quarter.
Diluted net operating earnings per common share were $3.54 for the recent quarter compared with $2.77 in 20 20's Q3 and $3.62 in the Q4 of 2019. Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholders' equity of 1.35 percent 17.53 percent for the recent quarter. The comparable returns were 1.1% and 13.94% in the Q3 of 2020. In accordance with the SEC's guidelines, This morning's press release contains a tabular reconciliation of GAAP and non GAAP results, including tangible assets and equity. Included in the recent quarter's results was a $30,000,000 distribution from Baby Lending Group.
This amounted to $23,000,000 after tax effect and $0.18 per common share. We expect that this distribution occurred in place of the usual distribution we have received from Bayview Lending Group in the Q1 of the past few years. Turning to the balance sheet and the income statement. Taxable equivalent net interest income was $993,000,000 in the Q4 of 2020, marking an increase of $46,000,000 or 5 percent from the linked quarter. The primary driver of that increase was the accelerated recognition of $29,000,000 of fees on PPP loans following forgiveness of those loans by the Small Business Administration.
The net interest margin increased by 5 basis points to 3% compared with 2.95% in the linked quarter. The accelerated recognition of PPP fees added an estimated 9 basis points to the margin, A 5 basis point decline in the cost of interest bearing deposits, repayment of debt outstanding and slightly higher income from our hedge portfolio boosted the margin by an estimated 4 basis points. Continued inflows of excess liquidity, including DDA and interest checking, resulted in a $4,500,000,000 increase in cash on deposit with the Federal Reserve. While this had a negligible impact on net interest income, It contributed to about 10 basis points of pressure on the net interest margin. All other factors, including lower premium amortization on acquired mortgage loans and Mortgage Backed Securities provided an approximate 2 basis point benefit to the margin.
Average Total loans increased by $456,000,000 or about 1.5% compared to the previous quarter. Looking at loans by category, on an average basis compared with the linked quarter, Commercial and industrial loans declined by $620,000,000 or about 2%. Contributing to that decline was a $351,000,000 decline in PPP loans, primarily reflecting loan forgiveness. Partially offsetting that was a $231,000,000 increase in floorplan loans as dealers seek to rebuild inventories following a very robust sales year. All other C and I loans declined by $500,000,000 largely from lower line utilization.
We'd note that on an end of period basis, dealer loans were up $800,000,000 and all other C and I loans were roughly flat excluding the PPP forgiveness. Commercial real estate loans grew just over 1% Compared with the Q3, primarily the result of further draws on pre existing loans, new originations in the CRE space remain subdued. Residential real estate loans increased by $204,000,000 or 1%, reflecting loans purchased from Ginnie Mae servicing pools pending resolution, partially offset by repayments. Consumer loans were up 3%, reflecting higher indirect auto and recreation finance loans, partially Debt by lower home equity lines of credit. Average core customer deposits, which exclude deposits received at M East Cayman Islands office as well as CDs over $250,000 grew by $4,500,000,000 or 4% compared with the Q3, reflecting higher interest and non interest checking as well as money market deposit accounts.
Turning to noninterest income. Noninterest income totaled $551,000,000 in the 4th quarter compared with $521,000,000 in the prior quarter. That increase reflects the $30,000,000 distribution from Bayview Lending Group that I previously mentioned. The recent quarter also included $2,000,000 of valuation gains on equity securities, largely on our remaining holdings of GSE preferred stock, while the Q3 included $3,000,000 of such gains. Mortgage banking revenues were $140,000,000 in the recent quarter compared with $153,000,000 in the linked quarter.
Residential mortgage loans originated for sale were $1,200,000,000 in the quarter, Unchanged from the Q3. Total residential mortgage banking revenues, including origination and servicing activities, were $95,000,000 in the 4th quarter compared with $119,000,000 in the prior quarter. The decrease reflects lower gain on sale margin And residential servicing revenues declined very slightly. Commercial mortgage banking revenues totaled $45,000,000 encompassing both originations and servicing. The improvement from the 3rd quarter was mainly a result of higher origination volumes.
Trust income was $151,000,000 in the recent quarter, up slightly from $150,000,000 in the previous quarter. Business remains solid with slightly higher money market fund fee waivers more than offset by higher levels of assets managed and continued good capital markets activity. Service charges on deposit accounts were $96,000,000 improved from $91,000,000 in the 3rd quarter. The improvement is largely the result of increased economic activity that resulted in growth in payments related income. Excluding the BLG distribution, the improvement in other revenues from operations compared with the linked quarter also reflected an uptick in card Credit card related activity.
Turning to expenses. Operating expenses for the 4th quarter, which exclude the amortization of intangible assets were $842,000,000 compared with $823,000,000 in the 3rd quarter. Salaries and benefits declined by $3,000,000 from the prior quarter. In accordance With the previously announced contract with LPL Financial, M and T took its first steps to transition its retail brokerage and advisory business to the LPL platform. In doing so, M and T incurred $14,000,000 of transition expenses, including severance payments included in salaries and benefits and a contract termination payment that is included in other cost of operations.
Also included in other cost of operations is a $3,000,000 addition to the valuation allowance for our mortgage servicing asset. This follows additions of $10,000,000 to the allowance in each of the first and second quarters of 2020. The efficiency ratio, which excludes Intangible amortization from the numerator and securities gains or losses from the denominator was 54.6% in the recent quarter compared with 56.2% in the 3rd quarter and 53.2% in the Q4 of 2019. Next, let's turn to credit. Under CECL and as a result of the pandemic driven economic Slow down.
M and T added $800,000,000 to its allowance for credit losses over the course of 2020, while delinquencies, non accrual loans and net charge offs have until recently remained relatively benign. In the CECL environment, Statistical models help predict expected loss content, which must be reserved for well in advance of default. The old loss reserving process Didn't permit establishment of an allowance until loss content became incurred. Thus, loss reserves and charge offs generally rose as delinquencies and non accruals increased. We're beginning to see the expected rise in non accrual loans and charge offs that have already been reserved for under the CECL methodology.
Net charge offs for the recent quarter amounted to $97,000,000 Annualized net charge offs as a percentage of total loans were 39 basis points for the 4th quarter compared with 12 basis points in the 3rd quarter. It's interesting to note that the charge off rate in the 4th quarter approximated our long term average. During the quarter, We restructured substantially all of our limited exposure to the operators of regional malls. These had been under stress prior $75,000,000 which was $22,000,000 less than net charge offs. The allowance for credit losses declined slightly to $1,700,000,000 or 1.76 percent of loans.
That ratio was 1.79 percent of loans at the end of September. As has been the case since the beginning of 2020, the allowance At the end of the 4th quarter reflects an updated macroeconomic scenario. The scenario is different and less severe than those used at the end of the first and second quarters and modestly less severe than that used at the end of the Q3, each of which model the uncertainty of the COVID-nineteen driven damage to the economy. In addition to losses that may be expected from newly originated loans, the allowance and the related provision for the recent quarter Continue to reflect the ongoing impacts of the COVID-nineteen pandemic on economic activity, the uncertainty over additional economic stimulus and the ultimate collectibility of commercial real estate loans, most notably in the hospitality sector and retail sectors outside of the regional mall exposure. Our macroeconomic forecast uses a number of economic variables with the largest drivers being the unemployment rate and GDP.
Our forecast assumes the national unemployment rate continues to be at elevated levels on average 6.9% through 2021, followed by a gradual return to long term historical averages by the end of 2022. The forecast assumes that GDP grows at a 4.1% annual rate during 2021, resulting in GDP returning to pre recession levels by the end of 2021. Our forecast considers government stimulus, but not any further fiscal or monetary actions. Non accrual loans as of December 31 rose to $1,900,000,000 an increase of $653,000,000 from the end of September. That increase came primarily from the transfer to non accrual status of a handful of hotel relationships totaling $530,000,000 At the end of the quarter, non accrual loans as a percentage of loans was 1.92%.
It is important to keep in mind that some of the usual credit metrics have been affected by the PPP loans on the balance sheet, which are 0 risk weighted and carry little or no credit risk. Excluding the impact of PPP loans, the ratio of the allowance for credit losses to loans would be 1.86%. Similarly, the ratio of non accrual loans to total loans would be 2.03% and annualized net charge offs as a percentage of total loans would be 42 basis Loans 90 days past due, on which we continue to accrue interest, were $859,000,000 at the end of the recent quarter. Of these loans, $798,000,000 or 93% were government guaranteed by government related entities. Government guaranteed loans under COVID forbearance and which we have purchased from servicing pools are generally not reflected in these figures.
As we noted on the October conference call and in the Q3 10 Q, Total loans under COVID related modifications declined to $9,400,000,000 as of September 30. Those figures declined further to $5,300,000,000 at the end of the 4th quarter. Commercial and industrial loans With COVID related modifications declined from $815,000,000 to $433,000,000 at the end of 2020. Of that figure, less than $100,000,000 of those loans still have a form of payment deferral. COVID forbearances other than payment deferrals relate to things such as fee waivers and in some cases covenant waivers.
Similarly, commercial real estate loans under COVID related modification declined from $5,100,000,000 at the end of the 3rd quarter to $2,000,000,000 at December 31. Some $600,000,000 of those loans have received a payment deferral. Mortgage related loans under COVID related modifications were $3,300,000,000 at the end of the 3rd quarter. That figure declined to $2,700,000,000 as of the end of the 4th quarter. Remaining consumer loan modifications also declined to less than $100,000,000 Modification or forbearance status has not prevented us from updating loan grades within our commercial portfolio.
The pace of downgrades in the criticized slowed meaningfully in the 4th quarter, rising about 5% from the end of the prior quarter. Turning to capital. M and T's common equity Tier 1 ratio was an estimated 10% as of December 31 compared to 9.81% at the end of the 3rd quarter. This reflects the impact of earnings in excess of dividends Paid and slightly higher risk weighted assets. Next, I'd like to take a moment to cover some of M&T's highlights of the past year.
Overall, we believe the events of 2020 provided an illustration of the operational and financial resilience of M&T's franchise. Our colleagues perform like champions, Dare I say like division champions, switching with barely a ripple to the work from home environment, helping clients Through the extraordinary challenges presented by the lockdowns that all but brought the economy to a standstill and helping customers navigate the PPP loan process that resulted in $7,000,000,000 of originations. The severe economic conditions brought about by the COVID-nineteen pandemic And the resultant zero interest rate environment had a material impact on our financial results, including a 6% decline in pre provision net revenue and a 30% decline in net income, partly the result of CECL accounting. Key financial highlights for the year were as follows. GAAP based diluted earnings per common share were $9.94 compared with $13.75 in 2019.
Net income was $1,350,000,000 compared with $1,930,000,000 in the prior year. These results produce returns on average assets An average common equity of 1% and 8.72%, respectively. Net operating income was $1,360,000,000 compared with $1,940,000,000 in the prior year. Net operating income for 2020 expressed as a rate of return on average tangible assets And average tangible common shareholders' equity was 1.04% and 12.79%, respectively. Average diluted common shares declined by 4%, the result of repurchase activity in 2019 as well as the limited repurchases in the Q1 of 2020 prior to the pandemic.
The total payout ratio for the year, including common stock dividends, was approximately 73%. Tangible book value per share grew to $80.52 at the end of 2020, up 7% from the end of 2019. And despite the challenges for the year, our CET1 ratio increased to 10% at the end of 2020 from 9.73% at the end of 2019. Now let's turn to the outlook. We're all pleased to see that the economy has continued to improve.
The rollout of the vaccine holds the promise of a return to normalcy, but we continue to face pressures. Starting with the balance sheet, there are more moving parts than we would see in a typical year. PPP loans on our balance sheet amounted to $5,400,000,000 at the end of the year. We expect that Substantially all of those loans will be repaid or forgiven in 2021 with the bulk of that occurring in the first half of the year. That process will be beneficial to net interest income and net interest margin in the quarters in which the Small Business Administration Actually forgives the loans similar to what we experienced in the Q4.
This week, we began accepting customer applications For PPP Round 2, we expect these new loans to offset the decline in the original PPP balances to a certain extent. Another atypical element of the balance sheet as we enter 2021 is the level of cash and securities. It is our practice to maintain cash and securities such that we maintain sufficient liquidity in HQLA to meet our internal liquidity governance. The various stimulus programs enacted in 2020 have resulted in M and T, along with our peers, carrying higher levels of cash than normal. We believe that at year end, we were holding close to $20,000,000,000 more in cash and securities than we would need under normal circumstances.
The excess cash has little impact on net interest income, but significantly impacts the net interest margin. Every $1,000,000,000 in cash impacts the margin by 1 to 2 sorry, 2 to 3 basis points. One of the ways we've chosen to deploy the excess cash is through buyouts of Ginnie Mae mortgages from the pools of loans that we service or sub service. Those buyouts create net interest income in the short term and fee income in the long term when those loans return to performing status and may be sold to investors. As previously discussed, the active cash flow hedge position on our floating rate loan portfolio has increased to $17,400,000,000 in the 4th quarter and remains at that level until late this year.
However, the fixed receive rate will decline as older swaps mature and newer forward starting swaps become active. Holding the unusual aspects of the balance sheet to the side, we expect total loans to be relatively flat in 2021. Commercial and Industrial Loans, excluding PPP, are expected to be flat to up slightly as increased economic activity Leased to increase line utilization. CRE loans are expected to be flat to slightly down with the subdued outlook for new originations and Slowing draws on pre pandemic loans. Consumer loans are expected to grow at a mid single digit pace.
All in, We expect low to mid single digit year over year decline in net interest income, primarily the result of the challenging year over year rate environment. Turning to fees. We expect low single digit year over year growth in non interest revenues Similar to 2020, we believe the strong originations trends in mortgage banking will continue, but with continued pressures on gain on sale margins. That outlook also reflects our ability to resell the loans purchased from servicing pools, which could be delayed pending on state and federal payment and foreclosure holidays. Trust income should be flattish with the full year impact of money fund fee waivers offset by growth in other categories.
This also assumes some growth in assets managed combined with some stability in market values. We expect service charges to reflect the run rate in the 4th quarter and to improve on a full year over year basis. Receipt of the Bayview Lending Group distribution this quarter Pulled forward $30,000,000 of revenue we previously expected to receive in 2021. Turning to expenses. Based on our expectations for growth in some fee revenue categories, primarily mortgage banking revenues and trust income, We expect expenses tied directly to those businesses will grow as well.
Outside of those increases, We expect all other expense categories in the aggregate to be generally flat with the prior year. Overall, we expect expenses to be flat to up less than 1%. The trend in credit provisioning should show improvement in line with the macroeconomic outlook. Charge offs, given the nature of the portfolio and the sectors most impacted by the pandemic, will be lumpy and will likely take longer to emerge. That said, we anticipate charge offs will be higher in 2021 and likely higher than our long term average.
Given the uncertainty, we will focus our credit outlook on the near term. And for the Q1 of 2021, We don't currently foresee charge offs higher than what we saw in the 4th quarter. Lastly, turning to capital. The Board has authorized us to repurchase up to $800,000,000 of our common stock. We will continue to operate within the guidelines currently in effect by the Federal Reserve as well as taking into account the economic environment, our earnings outlook and capital position and any alternate capital deployment opportunities.
Of course, as you are aware, our projections are subject to a number of uncertainties and various assumptions regarding national and regional economic growth, Changes in interest rates, political events and other macroeconomic factors, which may differ materially from what actually unfolds in the future. Now let's open up the call to questions, before which Maria will briefly review the instructions.
Thank you. The floor is now open for questions.
Our
first question comes from the line of Ken Zerbe of Morgan Stanley.
All right, great. Thank you. I guess maybe starting off, you mentioned that you're certainly sitting on a huge amount of excess cash versus kind of where you normally have been. There's obviously a lot of debate around whether it's prudent to invest the excess deposits in low rates or low rate low yielding securities or keep it in cash. How are you guys balancing that debate and where do you come out on it?
Thanks.
Yes. Good morning, Ken, and thanks for the question. It's a discussion that we have every other week at our ALCO meetings. And Our debate is always how long the cash will hang around, given the way it showed up on the balance sheet. It just It really exploded in the second half of the year.
And that impacts our decision and thought process about what kind of duration to take on. And so in the short term, As we worked our way through that thought process, holding it in cash versus investing it in short term treasuries, there really isn't much of a basis point gain from doing that. And so we're looking at alternative ways where we can get maybe a little bit better spread or yield on that cash Without setting up a tremendous amount of duration risk. One of the things we mentioned in the prepared remarks was We've been using that cash for buyouts of Ginnie Mae securities, and we've found that to be an attractive use of cash in the short term Because it offsets an expense, the spread on those is better than what we would get on 1 year treasuries and it creates the opportunity for some fee income. So we'll look for other opportunities like that.
We'll watch and see how the PPP2 goes and what the net change in loan balances is. And And then we'll continue to watch the rate curve and the environment. And we'll keep our powder dry. It's something we continue to look at a regular basis to see where we can put some of that money to work because obviously we're not paid to hold cash. So that's always our objective, but we're trying to be prudent with how much duration risk we might be taking on.
All right, great, helpful. And then maybe just a follow-up question.
Can you just talk a
little bit more about the I think you mentioned $530,000,000 worth of hotel credits that were transferred to non accrual. I'd love to learn more about the credit quality
Yes. Sure. I'm happy to discuss that. When we look at those credits, I guess, it's I don't need to take off my shoes and socks to count the number of them, which is a good thing. So we know Exactly how many there are.
We know exactly where they are and we've had a long standing relationship with many of these all of these clients. When I look at the loan to values of the top, let's say, we looked at the top 10, most are 60% or below. Now that 60% obviously is primarily based on ad origination, but we still haven't seen a material decrease in asset prices in the market with anything that's traded. We've seen the CMBS market come back a little bit as we got to the end of the year, which also should help Sustained asset prices. And a couple of the downgrades are full relationships.
And so There's a couple of larger ones, but it's not just one single property, it's multiple properties. And so there's good collateral behind these and Good long standing relationships. We can see some level of occupancy in the hotels. They tend to be in the larger cities. And so as the larger cities start to see more either business travel or tourism, they'll start to come back.
But Where we sit right now, we feel comfortable that we have our arms around these and we have good visibility into them and are able to watch And so, I would just view this as what would be the normal progression when you're in one of these economic cycles, right, You start to see signs of delinquency. Some of these were in the forbearance and now they've gone to non accrual. And What's interesting about the new CECL environment is that you kind of take the provision and set up the reserve before you see So these are just kind of catching up to that provisioning. And generally, we called out hotels because when you look outside of hotels, A lot of the CRE trends are actually pretty solid. Outside of that, there's really not a lot of Concern today in multifamily, retail portfolio has actually done reasonably well.
And then we're actually seeing some parts of the portfolio, not necessarily CRE related, but seeing some upgrades like in the dealer book And that the dealers have done have just had a fantastic year and in some cases had record profits. And so That's really the sector that we're watching and that's obviously why we did made that move With those loans and classifying them as non accrual.
Got it. Did you have to take
did you build any incremental reserve associated with those
No, there wasn't anything material. Those that was in effect accounted for in the provisioning that we had done Through the prior three quarters of the year.
All right, perfect. Thank you very much.
Our next question comes from the line of John Pancari of Evercore ISI.
Good morning.
Good morning, John.
On the back to that $530,000,000 Was that a result of more of a deeper dive into those credits this quarter that resulted them all moving to Non accrual this quarter or was it just how it played out in terms of them coming off of forbearance?
Yes. John, it's really the latter. We've been able to identify in the hotel portfolio on a credit by credit basis right from the start and being able to pay attention to Each one of these relationships, working with them, understanding what their NOI is and how it's moving and what kind of situation they're in. These would largely be folks that got to the end of that forbearance period. And We thought the appropriate thing to do, the most conservative thing to do was to start to move them into non accrual and not continue down that forbearance path.
Got it. Okay.
And then the it looks like your 90 day past dues also increased about Looks like more than 60% in the quarter. Was that also related to hotels? And then also maybe if you can comment on your office exposure And just how that's been holding up? Thanks.
Yes. I guess I'll start with the office exposure. When we look at what's been happening in office, the trends in rent collection have been pretty solid. We haven't seen a big decrease in what the our customers have been able to Steve, from the tenants and obviously a bunch of that is with the leases that are signed, they tend to be longer term and oftentimes with larger corporations. So It's been pretty steady.
When I look at that space and I look at how many modifications there are in there that are outstanding, it's like 1% Of the portfolio. And so overall, the office space is doing very well. Again, I would say The multifamily space is also holding up quite well. And retail, after our concerns early on, We're is also doing well. When you look at the over 90 day, To answer that question, what's going on?
The bulk of that is driven by the residential mortgage loans and the things that we're buying out of the pools and they're largely government guaranteed. It's kind of the way they're classified, but not something that we worry about from a credit perspective.
Got it. Okay. Thanks for taking my questions.
Our next Question comes from the line of Bill Carcache of Wolfe Research.
Thank you. Good morning. Darren, following up on comments that you've made on credit, specifically the hotel credits that you moved into nonaccrual and are No longer applying forbearance, can you just give a bigger picture view of What the trajectory is across the loan portfolio of downgrades And then along those lines, is it reasonable to expect that we could see your reserve rate revert to the day one level of about 1.3% on the other side of the pandemic and maybe you could just discuss how soon we get there in light of some of the longer tail concerns that you guys have cited in CRE in particular?
Yes, sure. So I guess just watching the trends and what we've been seeing over the course of the last Yes, I would describe it as 6 months. When we were in June in the thick of things, forbearance was quite Bidespread, there was a it was across a number of industries and across quite a number of customers. And what's happened over the course of the last 6 months We've seen stability and we've seen improvement. I mean, probably the most remarkable turnaround was in the dealer book that was, If my memory is correct, about $4,200,000,000 of forbearance and all of those are off of forbearance.
In fact, all of those are current. They've not just they're not just off forbearance, but they've recovered what they had skipped. And when we look through the rest of the portfolio and what was in forbearance, I think I mentioned that First, talking about criticized trends. So we've been even though forbearance has been on, we go through and we grade the book following our grading system and looking at our Credit review process, looking at cash flows, looking at collateral, looking at ability to repay, intend to repay and grading the book. And so what you're seeing is a slowdown in the migration to criticize, right?
So we talked about That being up about 5% this quarter. And so the rate of increase in criticized is declining. And the non accruals is really just that progression of And what's really in the book is Hotel, there's a little bit of retail, but retail has performed quite well, and a little bit of multifamily. And those are really the big three industries, but hotel is far and away the largest one. And what's interesting is when we look within the hotel portfolio, it's larger city hotels that Struggling.
We have some hotels throughout our footprint that tend to be in less densely populated areas and perhaps Are more like retreats or spas. And through this pandemic, they're actually seeing occupancy rates north of 70%. And so There's a real range and skewness to occupancy rates within the hotel portfolio. And so the part that, I guess, we feel good about is we've been able to help a lot of customers Stay in business and stay paying and work them through the process. And we've got a segment of the portfolio that still has some struggles.
But we've got very clear visibility into who those are and what the issues are and are in a position to be able to work with them as much as possible to I'll protect the value of the assets and try and keep them in business. The question about the portfolio and the long term Average, I think it's fair to say that going back to the pre the post CECL allowance or reserve rate, Subject to a similar mix of business is a fair assumption. It's important to keep in mind that some parts of the portfolio carry different loss Rates under CECL and others. And so all else equal, that's a good place to be, or at least a good starting point as you think forward. Do we get there in 2021?
Probably a little hard to see that at this point. But right now, we think that that's Possible by the end of 2022. I would think that's possible by the end of 2022.
That's super Helpful color. Thank you. If I could squeeze in another one on just broadly, if you could discuss your thoughts around back book repricing dynamics For you guys and really across the industry in the last SERP cycle, loan yields continued to decline throughout The reserve cycle until we got our first rate hike in late 2015. And I was wondering if you could just Discuss whether you expect to see a similar dynamic in the cycle.
Yes. I guess, a couple of things on the back book. On the deposit side, We've seen a tremendous amount of repricing and the reactivity in the deposit book for us and for the industry, especially given all the excess liquidity has been very rapid. And when we look at deposit pricing and yields, certainly for A lot of the interest bearing categories excluding time deposits, we're getting close to the lows that we saw over the last 10 years. And so There's some room to go there, but it's single digit low single digit basis points.
When you talk about Loans and loan yields, we think about it as loan margin. And the yield is always off In reference to the benchmark rate, because there's still variable rates driven product. But when you look at what the spread is On the new originations versus what's rolling off, we're actually seeing better spreads on new originations. And we've been seeing that for the last two quarters. And it's in the range of, call it 40 to 60 basis points over where we had been pre pandemic.
And so What's nice about that is, obviously, over time, as the hedge benefit rolls off, we're Starting to see we'll see a larger percentage of the book at the new pricing, which is a little bit better than the roll off pricing. And so We actually were quite positive on that part of what's happening in the portfolio, especially in the consumer Sorry, commercial, real estate and C and I space. Great. I mean, how does that better spreads on new originations compared to the last And usually what you see is you see, leading into the cycles, you see margins drop, because usually there's lots of Liquidity and lots of capital, lots of people looking for growth. And then you will see margins compress When you're in that environment.
And then as you see a little challenge in the economy, then you tend to see and people protecting capital, You tend to see a little bit of an improvement in pricing because there's a little more pricing power. Obviously, with the liquidity this time, probably not quite as severe as last time. And so there might not be the same Level of increase in pricing, but we're certainly seeing it in the short term. And I would say that, that general trend In an economic environment like this and as you come out of it is actually pretty consistent with what you see. Got it.
Thank you so much
for taking my questions.
Our next question comes from the line of Steven Alexopoulos of JPMorgan.
Hey, Darren. Good morning.
Good morning, Steven. How are you?
Good. How are you? Good. How are you?
Good. Thank you.
The follow-up, not to beat a dead horse on the hotel non accruals, but I know you said there was no provision taken as you move these into non accrual, but Were there any charge offs taken?
There were no charge offs taken on that part of the portfolio. If you look at the Charge offs for the Q4, there was really 3 large relationships that really drove that increase. 2 of them were What we would describe as enclosed malls and regional mall operators. And by taking those charge offs, that pretty much Eliminates our outstanding exposure to enclosed malls. And then there was one company that was in the That's described as delivery service, highly related to the travel industry and with no travel going on That necessitated the charge off there.
Outside of those, it was a variety of things, but Generally relatively small compared to those 3 that I mentioned.
Okay. Darren, in terms of what you do now with these hotel loans on non accrual, know you said they're long term relationships. Are you planning to offer deferrals until maybe better days ahead? Do you plan to modify the principal to move them back to current? Or You plan on going into the hotel business and taking these the collateral over?
Well, not the latter. The latter is always our last resort. We're bankers, not hotel operators, and so we'd rather let the experts Do that. But it's generally the first two things that you talked about. So we'll work with the borrower and see whether we think that First question is, do they have any outside liquidity?
And can they bring something to the table to be an addition to the interest reserve? It could be some combination of that plus some extended payment relief. You could see some restructuring into something that looks More like an A note, B note kind of structure where you split the credit and might have a partial charge off on those, but not a complete. And so there's a bunch of different options about of ways that we can work with the clients to try and keep them in business and keep them operating As long as possible, because obviously us being in that business is absolutely the last resort.
Okay. And if I could squeeze one more in. On dealer floor plan, I think you said it was up $800,000,000 in the quarter. What was the balance at year end? And can you talk about Expectations for that business, right?
It seems dealers have gotten a lot more efficient with managing inventory levels during the pandemic. So can you talk about What you expect from the business?
Yes. I guess, when you look at the number of cars on lots, We bottomed out in I want to say it was in the summer to early fall and Inventories have been building since then. There's a bunch of factors that go into the inventory that are sitting on the lots. I mean, not the least of which is What the car rental companies are doing, with the challenges in travel, there's been less demand for Cars from that sector in the economy, in the early part of this year, As the manufacturer shut down, there was tremendous demand from the dealers to put used cars on their lots and so they were buying up some of the Inventory that was coming off of the rental agencies. And so what we expect is that we'll see An uptick in inventories as we go through 2021.
We don't believe we'll go all the way back to what we saw Pre pandemic or in 2019 that the SAAR won't go all the way back into that $16,500,000 $17,000,000 range, but we will see some pickup. And just I guess to give a little bit of sense of magnitude, looking at as that balances, From where we are at the end of the year to where we were at the end of the year last year, there's roughly, call it, 800 $1,000,000 to $1,000,000,000 difference in what's outstanding at that point in time. So how quickly we get back there? I don't know that we'll get all the way back there in 2021, but we should be approaching that as we get to the end of the year, assuming the economy continues to operate the way it was. But we think there's still some room for that segment to show some growth.
Okay, terrific. Thanks for taking my questions.
Our next question comes from the line of Matt O'Connor of Deutsche Bank.
Hey, guys. Hi, guys. Did I miss any comments on the outlook for the tax rate in 2021?
You did not miss that. Our expectation for the tax rate for next year is 24%, Kind of plus or minus half a point. Okay.
And are there opportunities to lower that? Like we're seeing some other banks, Have these ESG kind of partnerships? I think some might be actually buying low income housing credits, but some also seem to be Doing some other things, structures, partnerships with customers or clients. And is that kind of another way to maybe deploy capital if There's not a lot of loans, can't really don't want to grow securities and buying back stock after it's doubled is maybe less appealing Just theoretically, so are there opportunities there? Or are you trying to just think differently of what you can do with your capital given everything I just said?
Yes. No, LITEC is a part of the sector that we've always been in. We've actually kind of increased it in the last 18 to 24 months. It's part of being a community bank that being in the community, Supporting those kinds of projects is critical. We found that over time to be effective in that space, You need to be not just on the loan, but in the equity side of those deals as well.
And so we've been doing a little bit more of that. And so it's absolutely part of how we do. It's also an important part of your CRA rating. And so for all of those reasons, that's absolutely A space that we have been in and will continue to be. And as opportunities present themselves, we'll certainly be there for the communities and for the clients.
And then anything that was specifically on some of these like ESG initiatives that other banks seem to be kind of leaning Pretty heavily that reduced tax rate?
Yes. We've done some of that. We're in the space. We see opportunity for there to be a little bit more. We haven't discussed it because it's not been a huge part of our portfolio.
And I guess one of the questions as we go forward is Even with the tax rate where it is, how much tax using capacity will it be with us making less money than we did a year ago. And Maybe there'll be more capacity to use taxes depending on if there's any changes with the new administration. So it's a space that we're familiar with And we do do some business in, but it's selective at the moment.
Okay. Thank you.
Our next question comes from the line of Ken Usdin of Jefferies.
Thanks. Good morning. Hey, Darren. Just good to see that buyback announcement this morning. I was just wondering if you can just walk us through the December Stress test results and the implied SCB that was brought forth in that document, does it mean anything in terms of how you have to think about And does it lead you to think about participating in this year's stress test process as a result?
Thanks.
Yes. So the CCAR stress test results in December Obviously, reflected a much more severe economic environment than anything we've seen before and is Meaningfully more severe than what the current environment looks like. And so the good news is we're not operating in that environment. That said, we learned a lot from that output, and we continue to work and talk with the Federal Reserve to understand a little bit more what is behind some of the outputs there. So we're using it to inform our thinking.
We haven't as we go through that process and learn more from the Fed, that will help inform our decision about whether or not to participate in this year's CCAR. I guess if you look at the implications of that and where we are at the end of the year, the nice thing is When you look at where our CET1 ratio ended the year, we ended the year at 10%. And so there's a comfortable amount of space Between where we sit and what might be implied by the outcome of that test And with the restrictions that have been in place, with capital sitting at 10%, We would feel given also the reserving that we've done that we're well protected and that we certainly don't need To see the CET1 ratio drop dramatically to 9% in the environment that we're in today with the restrictions, that wouldn't be possible. But we equally don't see a need or a concern that we would want to run the capital ratios up materially from here. And so as we think about those tests, we think about the feedback that came with them and we think about As we go forward, we'll be taking that those things into account as we determine when and if and how much shares Stock to repurchase.
And ladies and gentlemen, we have time for one final question. Our final question will come from the line of Erika Najarian of Bank of America.
Yes. Hi, Darrin. Just a follow-up to Ken's question. Is that should we think about your d pass 2.0 results with the 5% SPV is binding Relative to how you think about buybacks, I guess I was under the impression that most banks were operating under the assumption that DFAST 1.0 results were sort of the binding results. And DFAST 2.0 was in binding, but I'm wondering especially relative to your $800,000,000 buyback announcement, your thoughts there?
Yes. I guess, I wouldn't consider that binding per se. It's obviously an input And an important one in our thought process, because the Federal Reserve told us something with that. And so we're paying attention to it. I think the by the letter of the law, the Fed Indicated that they would not share with the institutions if that was to become a new SCB until the end of March, if not sooner.
And so we'll learn a little bit more about that over the course of the coming days. And so until that point, it's our understanding that the SCB that was calculated in the June results is the binding one. That said, when you look at The earnings and some of the restrictions on distributions relative to earnings and the forecast, Moving the CET1 ratio down meaningfully would be pretty difficult. And so the announced buyback Kind of takes into account our current capital position, our forecasted earnings, our forecasted balance sheet growth And contemplate some of the restrictions that have been in place. And that was really what got us to that amount at this point.
And as we mentioned before, we think that we're still not through the challenges of the pandemic. And so we wouldn't see It doesn't seem prudent to us to lower those ratios dramatically. But on the flip side, we don't think that we need to be Higher, much higher than where we are. And so we'll kind of manage to that in the short term. And as we go through the year and see how the recovery unfolds, We'll continue to update our thinking and share that with you.
And if I could just squeeze in one more question on the NII guide. Darrin, in the NII guide for down low to mid single digits, what are you assuming, if any, in terms of cash deployment relative to $22,600,000,000 on average in the Q4. And if you could remind us what the swap income Realize in 2020 versus what's embedded in your guide for 2021?
Yes. So Within that projection, there is some expectation that the cash balances come down a little bit. And Generally, it's the volatility in the cash balances as opposed to them going into higher Yielding securities or loan growth. And so I guess embedded in that guide is still a relatively elevated cash position. So To the extent that we find ways to deploy that into higher yielding assets, which we're always on the lookout for, there's some upside to that.
When you look at the income from the hedge portfolio, What we earned this quarter was very similar to what we earned last quarter in terms of NII. And what we should See in Q1 is also in line with that and then it starts to decline as we talked about on prior calls over the course of 2021. There's still some benefit in 2021 from The hedges, but it's declining as we go through the year.
Okay. Can you care to quantify in dollars?
I've got it in front of me by quarter, so I'm just looking at it. It's it was around $300,000,000 in 2020 and drops to about $275,000,000 in 2021.
Thank you so much.
And that was our final question. I'd like to turn the floor back over to management for any additional or closing remarks.
Again, thank you all for participating today. And as always, if Clarification of any of the items on the call or news release is necessary, please contact our Investor Relations department at 716 842-5138. Thank you and goodbye.
Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.