Earnings Call
M&T Bank Corp (MTB)
Earnings Call Transcript - MTB Q4 2020
Operator, Operator
Ladies and gentlemen, thank you for joining us, and welcome to M&T Bank's Fourth Quarter 2020 Earnings Conference Call. At this time, all participants' lines are in listen-only mode. Later, we will open the floor for your questions. It is now my pleasure to turn the call over to Don MacLeod, Director of Investor Relations. Please proceed.
Don MacLeod, Director of Investor Relations
Thank you, Maria, and good morning, everyone. I'd like to thank you for participating in M&T's fourth 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 tables and schedules from our website, www.mtb.com by clicking on the Investor Relations link and then on the Events and Presentations link. 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&T encourages participants to refer to our SEC filings, including those found on Forms 8-K, 10-K, and 10-Q for a complete discussion of forward-looking statements. Now I'd like to introduce our Chief Financial Officer, Darren King.
Darren King, CFO
Thanks, Don, and good morning, everyone, and Happy New Year. Before we get into the details, I'll touch on just a few highlights from the recent quarter's results. PPP loan forgiveness increased in the fourth quarter. Average PPP loans decreased by $351 million compared to the third quarter and were down $1.1 billion on an end-of-period basis. This led to the recognition of $29 million of PPP loan fees as net interest income during the quarter. Additionally, net interest income grew due to improved deposit pricing across all customer segments. Despite the PPP forgiveness, average loans increased in the quarter, including growth in dealer floor plan loans and mortgage loans purchased from servicing pools. Fee revenues remained strong, particularly trust income due to robust capital markets and service charges from improved economic activity. Expenses were affected by costs relating to the transition of our retail brokerage platform to LPL Financial but were otherwise in line with our expectations. In terms of credit, we observed an increase in nonaccrual loans this quarter, consistent with the higher expected credit losses accounted for earlier in the year. While commercial real estate loans transitioned off COVID forbearance, net charge-offs slightly rose above our long-term average. Our capital levels stayed strong, with our CET1 ratio growing to 10% by year-end. We'll review the full-year numbers shortly, but first, let’s look at the results of the fourth quarter. Diluted GAAP earnings per common share were $3.52, compared to $2.75 in the previous quarter and $3.60 in the same quarter last year. Net income for the quarter was $471 million, up from $372 million in the linked quarter and down from $493 million in the same quarter a year ago. On a GAAP basis, the fourth quarter results showed an annualized return on average assets of 1.3% and an annualized return on average common equity of 12.07%. This is an improvement from rates of 1.06% and 9.53%, respectively, in the previous quarter. The recent quarter included after-tax expenses from amortization of intangible assets totaling $2 million or $0.02 per share, showing little change from the last quarter. As per our long-standing practice, M&T provides supplemental reporting of results on a net operating or tangible basis, excluding the after-tax effect of intangible asset amortization and any gains or losses associated with mergers and acquisitions. M&T's net operating income for the fourth quarter, excluding intangible amortization, was $473 million compared with $375 million in the previous quarter and $496 million from last year's fourth quarter. Diluted net operating earnings per common share for the recent quarter were $3.54 compared with $2.77 the previous quarter and $3.62 in the fourth quarter of 2019. The net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholders' equity of 1.35% and 17.53%, respectively. The comparable returns were 1.1% and 13.94% in the prior quarter. According to SEC guidelines, this morning's press release includes a table reconciling GAAP and non-GAAP results, including tangible assets and equity. The results for the recent quarter included a $30 million distribution from Bayview Lending Group, which amounted to a $23 million after-tax effect and $0.18 per common share. We anticipate that this distribution replaced the usual distribution we have received from Bayview Lending Group in the first quarter of previous years. Looking at the balance sheet and income statement, taxable equivalent net interest income was $993 million in the fourth quarter, representing an increase of $46 million or 5% from the linked quarter. The primary driver of this increase was the accelerated recognition of $29 million of fees from PPP loans after their forgiveness by the Small Business Administration. The net interest margin rose by 5 basis points to 3% compared with 2.95% in the previous quarter, with the accelerated PPP fees contributing an estimated 9 basis points. A 5 basis point decline in interest-bearing deposits’ cost, repayment of outstanding debt, and slightly higher income from our hedge portfolio contributed an estimated 4 basis points to the margin. Continued cash inflows, including demand deposit accounts and interest checking, led to a $4.5 billion increase in cash on deposit with the Federal Reserve, which had a negligible effect on net interest income but exerted about 10 basis points of pressure on the net interest margin. Other factors, including lower premium amortization on acquired mortgage loans and mortgage-backed securities, provided about a 2 basis point benefit to the margin. Average total loans grew by $456 million, or about 0.5%, compared to the previous quarter. In terms of loan categories, commercial and industrial loans decreased by $620 million or about 2%, mostly due to a $351 million drop in PPP loans reflecting loan forgiveness. However, there was a $231 million increase in floor plan loans as dealers started to replenish inventories after a robust sales year. Other C&I loans declined by $500 million, mainly from lower line utilization. Notably, dealer loans were up $800 million on an end-of-period basis, and all other C&I loans were roughly flat, excluding the PPP forgiveness. Commercial real estate loans increased by just over 1% compared to the third quarter, mainly due to further draws on existing loans. New originations in the CRE space remained subdued. Residential real estate loans increased by $204 million, or 1%, reflecting purchases from Ginnie Mae servicing pools, partially offset by repayments. Consumer loans saw a 3% increase, driven by higher indirect auto and recreation finance loans, while home equity lines of credit decreased. Average core customer deposits, excluding deposits from M&T's Cayman Islands office and CDs over $250,000, grew by $4.5 billion, or 4%, compared to the third quarter, reflecting an increase in interest and noninterest checking, as well as money market deposit accounts. Turning to noninterest income, total noninterest income was $551 million in the fourth quarter, compared to $521 million in the prior quarter, reflecting the $30 million distribution from Bayview Lending Group previously mentioned. The recent quarter also saw $2 million in valuation gains on equity securities, mainly from our remaining holdings of GSE preferred stock, while the prior quarter included $3 million in such gains. Mortgage banking revenues totaled $140 million in the recent quarter compared with $153 million in the previous quarter. Residential mortgage loans originated for sale were $1.2 billion in the quarter, unchanged from the third quarter. Total residential mortgage banking revenues from both origination and servicing activities amounted to $95 million in the fourth quarter compared with $119 million the previous quarter, primarily due to a lower gain on sale margin and a slight decrease in residential servicing revenues. Commercial mortgage banking revenues were $45 million, reflecting higher origination volumes compared to the prior quarter. Trust income for the recent quarter was $151 million, slightly up from $150 million in the previous quarter. Business remained solid with minor increases in money market fund fee waivers offset by higher levels of managed assets and continued strong capital markets activity. Service charges on deposit accounts increased to $96 million from $91 million in the third quarter, mainly due to increased economic activity driving growth in payments-related income. Excluding the Bayview Lending Group distribution, the improvement in other revenues from operations compared to the previous quarter also reflected an increase in credit card-related activity. Operating expenses for the fourth quarter were $842 million, compared to $823 million in the third quarter, excluding the amortization of intangible assets. Salaries and benefits were reduced by $3 million from the prior quarter. As part of the previously announced agreement with LPL Financial, M&T began transitioning its retail brokerage and advisory business to the LPL platform, incurring $14 million in transition expenses, which included severance payments reflected in salaries and benefits as well as a contract termination payment included in other operational costs. Additionally, there was a $3 million addition to the valuation allowance for our mortgage servicing asset, following previous additions of $10 million in the first and second quarters of 2020. The efficiency ratio, excluding intangible amortization from the numerator and securities gains or losses from the denominator, was 54.6% in the recent quarter, improved from 56.2% in the third quarter and compared to 53.2% in the fourth quarter of 2019. Transitioning to credit, under CECL and due to the pandemic-induced economic slowdown, M&T added $800 million to its allowance for credit losses throughout 2020, while delinquencies, nonaccrual loans, and net charge-offs remained relatively mild until recently. In the CECL environment, statistical models forecast expected loss content needing reserves well in advance of defaults, unlike the old loss reserving process which didn’t allow for reserves until losses were incurred. Therefore, reserves and charge-offs generally increased as delinquencies and nonaccruals grew. We're beginning to see the anticipated rise in nonaccrual loans and charge-offs that we've already reserved for under the CECL methodology. Net charge-offs for the recent quarter were $97 million, with annualized net charge-offs as a percentage of total loans at 39 basis points for the fourth quarter, up from 12 basis points in the third quarter. Interestingly, the charge-off rate in the fourth quarter approximated our long-term average. During the quarter, we restructured most of our limited exposure to regional mall operators who have faced deterioration leading to defaults. The provision for loan losses in the fourth quarter was $75 million, which was $22 million less than net charge-offs. The allowance for credit losses slightly declined to $1.7 billion, or 1.76% of loans, compared to 1.79% at the end of September. As has been the case since early 2020, the allowance at the end of the fourth quarter reflects an updated macroeconomic scenario that is less severe than those used at the end of the first and second quarters and only slightly less severe than the third-quarter scenario, all of which modeled the uncertainty from the COVID-19 impact on the economy. The allowance and the related provision for the recent quarter continued to account for impacts from the ongoing pandemic on economic activity, including uncertainty regarding additional economic stimulus and the collectibility of commercial real estate loans, particularly in hospitality and retail sectors excluding regional mall exposure. Our macroeconomic forecast relies on several economic variables, primarily the unemployment rate and GDP. It assumes an average national unemployment rate of 6.9% through 2021, with a gradual return to long-term averages by the end of 2022. The forecast also anticipates a GDP growth of 4.1% annually during 2021, with GDP returning to pre-recession levels by the end of 2021. This forecast considers government stimulus without assuming further fiscal or monetary actions. Nonaccrual loans as of December 31 rose to $1.9 billion, reflecting an increase of $653 million from the end of September, mainly due to a handful of hotel relationships totaling $530 million moving to nonaccrual status. At the end of the quarter, nonaccrual loans represented 1.92% of total loans. It's important to remember that some usual credit metrics have been influenced by PPP loans on the balance sheet, which are risk-weighted at 0 and carry minimal credit risk. Excluding the impact of PPP loans, the allowance for credit losses ratio would be 1.86%. Similarly, the ratio of nonaccrual loans to total loans would be 2.03%, with annualized net charge-offs as a percentage of total loans at 42 basis points. Loans 90 days past due, which continue to accrue interest, were at $859 million at the end of the quarter, with $798 million, or 93%, guaranteed by government-related entities. Government-guaranteed loans under COVID forbearance are generally not included in these figures. As mentioned in the October conference call, total loans under COVID-related modifications reduced from $9.4 billion as of September 30 to $5.3 billion by the end of the fourth quarter. Commercial and industrial loans under modification decreased from $850 million to $433 million by year-end 2020, with less than $100 million still having some form of payment deferral. COVID forbearances can also involve fee waivers and, in some cases, covenant waivers. Similarly, commercial real estate loans under modifications dropped from $5.1 billion at the end of the third quarter to $2 billion as of December 31, with approximately $600 million receiving payment deferrals. Mortgage-related loans under COVID-related modifications fell from $3.3 billion at the end of the third quarter to $2.7 billion by the end of the fourth quarter. Consumer loan modifications also decreased to under $100 million. The modification or forbearance status has not stopped us from updating loan grades within our commercial portfolio. The pace of downgrades into criticized status increased by about 5% from the end of the prior quarter. Moving on to capital, M&T's common equity Tier 1 ratio was around 10% as of December 31, up from 9.81% at the end of the third quarter, reflecting earnings exceeding dividends paid and slightly higher risk-weighted assets. Now, let's take a moment to review some highlights from the past year. Overall, we believe 2020 illustrated the resilience of M&T's franchise. Our colleagues adapted quickly to a work-from-home environment, helping clients navigate the challenges of lockdowns and facilitating $7 billion in PPP loan originations. The severe economic conditions due to the COVID-19 pandemic and the resulting low interest rate environment significantly impacted our financial results, showing a 6% decline in pre-provision net revenue and a 30% drop in net income, partly due to CECL accounting. Key financial highlights for the year included GAAP-based diluted earnings per common share of $9.94, down from $13.75 in 2019, and net income of $1.35 billion compared to $1.93 billion the prior year. These results produced returns on average assets and average common equity of 1% and 8.72%, respectively. Net operating income stood at $1.36 billion against $1.94 billion from the last year. Expressed as a rate of return, net operating income for 2020 was 1.04% and 12.79% on average tangible assets and average tangible common shareholders' equity, respectively. Average diluted common shares declined by 4% due to repurchase activity in 2019 and limited repurchases in the first quarter of 2020 before the pandemic. The total payout ratio for the year, including common stock dividends, was about 73%. Tangible book value per share increased to $80.52 at the end of 2020, up 7% from the end of 2019. Despite the year's challenges, our CET1 ratio rose to 10% at the close of 2020 from 9.73% at the end of 2019. Now, let's discuss the outlook. We're pleased to see ongoing economic improvement. The vaccine rollout brings hope for a return to normalcy, although challenges remain. Starting with the balance sheet, there are more variables than we typically see in a standard year. PPP loans on our balance sheet were $5.4 billion at year-end, and we expect most to be repaid or forgiven in 2021, mainly in the first half. This process will positively affect net interest income and margin in the quarters following the forgiveness, similar to our experience in the fourth quarter. This week, we began accepting customer applications for round two of PPP loans, which we expect to mitigate the decline in original PPP balances. Another unusual aspect of the balance sheet entering 2021 is the high level of cash and securities, resulting from various stimulus programs that led to M&T carrying higher cash levels than usual. We estimate that at year-end, we held approximately $20 billion more in cash and securities than needed under normal conditions. This excess cash has minimal effect on net interest income but significantly impacts the net interest margin, where every $1 billion in cash affects the margin by 2 to 3 basis points. One way we've chosen to deploy the excess cash is through purchasing Ginnie Mae mortgages from loan pools we service or subservice, generating net interest income short term and fee income long term when these loans return to performing status and are sold to investors. Our active cash flow hedge position on our floating-rate loan portfolio increased to $17.4 billion in the fourth quarter and will remain at that level until late this year, although the fixed receive rate will decline as older swaps mature and newer swaps come into effect. Ignoring the unusual aspects of the balance sheet, we anticipate total loans will remain relatively flat in 2021. Commercial and industrial loans, excluding PPP, are expected to be stable to slightly increase as economic activity rises and leads to greater line utilization. CRE loans are expected to be flat to slightly down, with a subdued outlook for new originations and diminishing draws on pre-pandemic loans. Consumer loans are projected to grow at a mid-single-digit pace. Overall, we expect low to mid-single-digit year-over-year decline in net interest income, mainly due to the continued challenging interest rate environment. Regarding fees, we foresee low single-digit year-over-year growth in noninterest revenues, similar to 2020. We anticipate strong originations in mortgage banking to continue, though with ongoing pressures on gain on sale margins, which also depends on our ability to resell loans purchased from servicing pools, delay depending on state and federal payment and foreclosure holidays. Trust income should remain stable, factoring in the full-year impact of Money Fund fee waivers, alongside growth in other categories. We also expect service charges to align with the run rate from the fourth quarter while improving year-over-year. The BayView Lending Group distribution in this quarter advanced $30 million of revenue we anticipated for 2021. In terms of expenses, we expect expenses related to businesses with anticipated fee revenue growth, particularly in mortgage banking and trust income. Outside of those increases, we expect other expense categories collectively to remain flat compared to the prior year. Overall, we anticipate expenses will be flat or increase by less than 1%. The trend in credit provisioning should improve in line with macroeconomic expectations. Charge-offs will likely be lumpy due to the portfolio's nature and the pandemic's most impacted sectors, and we project charge-offs will be higher in 2021, possibly exceeding our long-term average. Given the uncertainties, we will focus on the near-term credit outlook; for the first quarter of 2021, we don’t currently expect charge-offs to exceed fourth-quarter levels. Lastly, on capital, the Board has authorized us to repurchase up to $800 million of our common stock. We will continue to operate within Federal Reserve guidelines, balancing the economic environment, earnings outlook, capital position, and other capital deployment opportunities. As you're aware, our projections are subject to various uncertainties and assumptions regarding national and regional economic growth, interest rate changes, political events, and other macroeconomic factors that may differ significantly from what actually occurs in the future.
Operator, Operator
Our first question comes from Ken Zerbe of Morgan Stanley.
Ken Zerbe, Analyst
All right. Great. 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-yielding securities or keep it in cash. How are you guys balancing that debate? And where do you come out on it?
Darren King, CFO
Yes. 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 nearly 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 work 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 taking on 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 PPP 2 goes and what the net change in loan balances is. 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 on 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.
Ken Zerbe, Analyst
All right. Great. Helpful. And then maybe just a follow-up question. Can you talk a little bit more about the $530 million worth of hotel credits that were transferred to nonaccrual? I would love to learn more about the credit quality of those.
Darren King, CFO
I'm glad to discuss that. Regarding the credits, we know exactly how many there are and their locations, and we have long-standing relationships with all of our clients. Looking at the loan-to-values of the top 10, most are 60% or below, based mainly on at-origination numbers. We haven't observed a significant decline in asset prices in the market, and the CMBS market has shown some recovery towards the end of the year, which should help maintain asset prices. A few downgrades involve full relationships with larger clients, not just single properties, meaning there's solid collateral and established relationships behind them. We see some occupancy in hotels, generally located in larger cities, which should improve as business travel and tourism pick up. Currently, we feel confident that we have a good grasp on these assets, allowing us close observation. I would characterize this as a normal progression in economic cycles, where we start to see delinquency signs. Some have moved from forbearance to nonaccrual. It's notable that in the new CECL environment, reserves are set up before accounts move to nonaccrual, and these are simply catching up with that provisioning. We specifically mentioned hotels, but outside of that sector, many CRE trends appear solid. There's currently little concern in multifamily, and the retail portfolio has performed reasonably well. We've also seen some impressive upgrades in parts of the portfolio, like the dealer book, which had a fantastic year with record profits. That's a crucial sector we're monitoring, which is why we classified those loans as nonaccrual.
Ken Zerbe, Analyst
Did you build any additional reserve related to those credits when they mentioned nonaccrual?
Darren King, CFO
No, there wasn't anything material. Those were already accounted for in the provisioning that we had done through the prior three quarters of the year.
Operator, Operator
Our next question comes from the line of John Pancari of Evercore ISI.
John Pancari, Analyst
On the back to that $530 million, was that a result of a deeper dive into those credits this quarter that led to all of them moving to nonaccrual this quarter? Or was it simply how it played out as they came off of forbearance?
Darren King, CFO
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. We thought the appropriate thing to do, the most conservative thing to do, was to start to move them into nonaccrual and not continue down that forbearance path.
John Pancari, Analyst
Got it. Okay. It seems that your 90-day past dues increased by more than 60% during the quarter. Was this also related to hotels? Additionally, could you comment on your office exposure and how it has been performing?
Darren King, CFO
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 our customers have been able to receive from the tenants. 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 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. Retail, after our concerns early on, is also doing well. When you look at the over-90-day to answer that question and 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. They're largely government-guaranteed, so it's kind of the way they're classified, but not something that we worry about from a credit perspective.
Operator, Operator
Our next question comes from the line of Bill Carcache of Wolfe Research.
Bill Carcache, Analyst
Darren, following up on comments that you've made on credit, specifically the hotel credits that you moved to 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 1 level of about 1.3% on the other side of the pandemic? And maybe you could just discuss how soon we'd get there in light of some of the longer tail concerns that you guys have cited in CRE in particular?
Darren King, CFO
Absolutely. Over the past six months, we have observed significant trends. Back in June, forbearance was prevalent across many industries and customers. However, we have since witnessed stability and improvements. Notably, the dealer book, which had around $4.2 billion in forbearance, is now completely off forbearance and all accounts are current, indicating that they have not only resumed payments but have also made up for missed ones. Regarding the overall portfolio, despite forbearance being in effect, we continue to assess the book based on our grading system, which evaluates cash flows, collateral, ability and intent to repay. We have seen a slowdown in the movement of accounts into troubled statuses, with criticized assets rising just above 5% this quarter, reflecting a declining rate of increase. Nonaccruals represent those transitioning from criticized status. Our portfolio primarily consists of hotels, with some exposure to retail and multifamily sectors. While retail has generally performed well, hotels, particularly in major cities, are facing significant challenges. However, some hotels in less populated areas, such as retreats and spas, have experienced occupancy rates exceeding 70%. We take pride in assisting many customers to remain operational and continue making payments during this time. Although some parts of the portfolio are still facing difficulties, we have clear visibility on these accounts and can provide necessary support to protect their value and ensure they stay in business. As for reserve rates, returning to pre-CECL levels, around 1.3%, seems like a reasonable expectation given a similar mix of business. It's crucial to recognize that various segments of the portfolio have different loss rates under CECL. While it’s challenging to predict if we will achieve this by 2021, I believe it’s possible to reach that goal by the end of 2022.
Bill Carcache, Analyst
That's super helpful color. If I could squeeze in another one. And just broadly, if you could discuss your thoughts around back book repricing dynamics for you guys? And really across the industry in the last cycle, loan yields continued to decline throughout the cycle until we got our first rate hike in late 2015. I was wondering if you could just discuss whether you expect to see a similar dynamic in the cycle?
Darren King, CFO
Yes. There are a few points regarding the back book. On the deposit side, we have observed significant repricing and responsiveness in our deposit book as well as in the industry, particularly due to the rapid excess liquidity. When examining deposit pricing and yields, especially in most interest-bearing categories excluding time deposits, we are nearing the lowest levels seen in the past decade. Although there is still some room for adjustment, it's minimal at this point. Regarding loans and loan yields, we view it through the lens of loan margin. The yield remains tied to the benchmark rate as there are still variable rate products. When comparing the spread on new originations to what is rolling off, we are actually witnessing better spreads on new originations, a trend consistent over the last two quarters. This spread is in the range of approximately 40 to 60 basis points higher than what we experienced before the pandemic. A positive aspect is that, over time, as the hedge benefit diminishes, a larger portion of our book is aligning with the new pricing, which is more favorable than the pricing rolling off. We are optimistic about this trend, particularly in the commercial real estate and commercial and industrial sectors.
Bill Carcache, Analyst
Great. I mean how does that better spreads on new originations compare to the last trip cycle? Just to follow up on that.
Darren King, CFO
I would say it aligns reasonably well with typical cycle behavior. Generally, leading into these cycles, margins tend to decline due to an abundance of liquidity and investment, with many seeking growth. You'll notice compressed margins in that context. As economic challenges arise, there’s often a slight improvement in pricing as people become more protective of their capital, which leads to increased pricing power. This time, the level of liquidity may not lead to severe price increases as seen previously, but we are definitely experiencing some short-term improvements. Overall, this trend during and after such economic conditions is consistent with historical observations.
Operator, Operator
Our next question comes from the line of Steven Alexopoulos of JPMorgan.
Steven Alexopoulos, Analyst
So, the follow-up, not to beat a dead horse on the hotel nonaccruals. But I know you said there was no provision taken as you moved these into nonaccrual. But were there any charge-offs taken?
Darren King, CFO
There were no charge-offs taken on that part of the portfolio. If you examine the charge-offs for the fourth quarter, three major relationships significantly contributed to that increase. Two of these involved closed malls and regional mall operators. By recording those charge-offs, we effectively eliminated our remaining exposure to any closed malls. The third company was described as a delivery service closely tied to the travel industry, and the lack of travel caused the necessity for that charge-off. Aside from these, there were a variety of smaller items, but they were generally minor compared to the three I mentioned.
Steven Alexopoulos, Analyst
Okay. Darren, in terms of what you do now with these hotel loans on nonaccrual, I 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 principle to move them back to current? Or do you plan on going into the hotel business and taking these collateral over?
Darren King, CFO
Well, not the latter. The latter is always our last resort. We're bankers, not hotel operators, so we prefer to let the experts handle that. It's generally the first two options you mentioned. We'll collaborate with the borrower to determine if they have any outside liquidity and if they can provide something in addition to the interest reserve. This could involve a combination of that plus some extended payment relief. We might consider restructuring into something resembling an A note, B note structure, where credit is split and there might be a partial charge-off, but not a complete one. There are various ways we can assist clients to help them stay in business and continue operating for as long as possible. Clearly, our involvement in that business would be the absolute last resort.
Steven Alexopoulos, Analyst
Okay. And if I could squeeze one more in. On dealer floor plan, I think you said it was up $800 million in the quarter. What was the balance at year-end? And can you talk about expectations for that business, right? It seems dealers have gone a lot more efficient with managing inventory levels during the pandemic. So can you talk about what you expect from the business?
Darren King, CFO
Yes. I guess when you look at the number of cars on lots, we bottomed out. In the summer to early fall, inventories have been building since then. There are a bunch of factors that go into the inventory that are sitting on the lots. 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 manufacturers shut down, there was tremendous demand from the dealers to put used cars on their lots. We expect to 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 $16.5 million, $17 million range, but we will see some pickup. To give a magnitude looking at 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 $800 million to $1 billion difference in what's outstanding at that point in time. 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. We think there's still some room for that segment to show some growth.
Operator, Operator
Our next question comes from the line of Matt O'Connor of Deutsche Bank.
Matt O'Connor, Analyst
Did I miss any comments on the outlook for the tax rate in '21?
Darren King, CFO
You did not miss that. Our expectation for the tax rate for next year is 24%, kind of plus or minus 0.5 point.
Matt O'Connor, Analyst
Okay. And are there opportunities to lower that? Like we're seeing some other banks heavy 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. Is that kind of another way to maybe deploy capital if there's not a lot of loans, can't really 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 think differently about what you can do with your capital, given everything I just said?
Darren King, CFO
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. We've been doing a little bit more of that. It's absolutely part of how we do it. It's also an important part of your CRE rating. For all of those reasons, that's 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.
Matt O'Connor, Analyst
And then anything new specifically on some of these ESG initiatives that other banks seem to be kind of leaning into pretty heavily that reduced tax rate?
Darren King, CFO
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. One of the questions as we go forward is, even with the tax rate where it is, how much tax using capacity will there be with us making less money than we did a year ago? Maybe there will be more capacity to use taxes depending on if there are any changes with the new administration. It's a space that we're familiar with, and we do some business in, but it's selective at the moment.
Operator, Operator
Our next question comes from the line of Ken Usdin of Jefferies.
Ken Usdin, Analyst
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 capital? And does it lead you to think about participating in this year's stress test process as a result?
Darren King, CFO
Yes. The CCAR stress test results in December indicated a considerably harsher economic environment than what we have experienced previously. It is significantly more severe than the current situation. The positive aspect is that we are not functioning under those conditions. However, we gained valuable insights from those results, and we continue to engage with the Federal Reserve to better understand the factors influencing those outcomes. We are using this information to shape our perspective. As we progress in this process and gather more insights from the Fed, we will be better positioned to decide whether or not to participate in this year's CCAR. Considering the implications and where we stand at the year's end, it is reassuring to note that our CET1 ratio finished the year at 10%. This provides a comfortable cushion between our position and what the test results might suggest. Given the existing capital constraints with our CET1 ratio at 10% and the reserves we have established, we feel well protected. We certainly don’t see a need for the CET1 ratio to drop significantly to 9% under the current restrictions; that wouldn’t be feasible. We also don't foresee a need or concern to significantly increase our capital ratios from this point. As we evaluate these tests and the accompanying feedback, we will take these factors into consideration when determining whether and how much to repurchase shares.
Operator, Operator
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.
Erika Najarian, Analyst
Just a follow-up to Ken's question. Should we think about your DFAS 2.0 results with the 5% SCB 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 DFAS 1.0 results were sort of the binding results. DFAS 2.0 wasn't binding, but I'm wondering, especially rolls have your $800 million buyback announcing your thoughts there?
Darren King, CFO
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. We're paying attention to it. I think by the letter of the law, the Feds 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. We'll learn a little bit more about that over the course of the coming days. Until that point, it's our understanding that the SCB that was calculated in the June results is the binding one. When you look at the earnings and some of the restrictions on distributions relative to earnings in the forecast, moving the CET1 ratio down significantly would be pretty difficult. The announced buyback kind of takes into account our current capital position, our forecasted earnings, our forecasted balance sheet growth, and contemplates some of the restrictions that have been in place. That was really what got us to that amount at this point. As we mentioned before, we think that we're still not through the challenges of the pandemic. It doesn't seem prudent to us to lower those ratios dramatically. On the flip side, we don't think that we need to be higher, much higher than where we are. We'll manage that in the short term. As we go through the year and see how the recovery unfolds, we'll continue to update our thinking and share that with you.
Erika Najarian, Analyst
And if I could just squeeze in one more question on the NII guide. Darren, in the NII guide for down low to mid-single digits, what are you assuming, if any, in terms of cash deployment relative to $22.6 billion on average in the fourth quarter, and if you could remind us what the swap income realized in 2020 versus what's embedded in your guide for '21?
Darren King, CFO
Yes. Within that projection, we expect cash balances to decrease slightly. The fluctuations in cash balances are primarily due to volatility rather than investments in higher-yielding securities or loan growth. The guidance still includes a relatively high cash position. We are actively looking for opportunities to invest that cash into higher-yielding assets, which could provide some upside. The income from the hedge portfolio remained consistent this quarter compared to last quarter in terms of net interest income, and we anticipate similar results in the first quarter. However, we expect that to decline throughout 2021. There will still be some benefits from the hedges in 2021, but that will decrease as the year progresses. I've got it in front of me by quarter, so I'm just looking at it. It was around $300 million in 2020 and down to about $275 million in 2021.
Operator, Operator
And that was our final question. I'd like to turn the floor back over to management for any additional or closing remarks.
Don MacLeod, Director of Investor Relations
Again, thank you all for participating today. 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.
Operator, Operator
Thank you. Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.