Darren J. King
Executive Vice President and Chief Financial Officer at M&T Bank
Before we get into the details of the recent quarter's results, I'd like to pause and reflect on a few highlights of the past year. While the impact of the pandemic is still being felt by M&T and the rest of the banking industry, the turnaround in 2021 has been remarkable. We've seen a transition from economic contraction and a zero balance interest rate environment to the prospect of persistent inflation and higher interest rates in 2022. Against that backdrop, GAAP-based diluted earnings per common share worth $13.80 compared with $9.94 in 2020 up 39%. Net income was $1.86 billion compared with $1.35 billion in the prior year, improved by 37%. Those results produced returns on average assets and average common equity of 1.22% and 11.54% respectively.
Net operating income which excludes the after-tax impact from the amortization of intangible assets as well as merger-related expenses was $1.9 billion up 39% compared with $1.36 billion in the prior year. Net operating income for diluted common share was $14.11 compared to $10.02 in 2020 up 41%. Net operating income for 2021 expressed as a rate of return on average tangible assets and average tangible common shareholders' equity was 1.28% and 16.8% respectively. We increased the common stock dividend for the fifth consecutive year to an annual rate of $4.80 per share per year. Tangible book value per share grew to $89.80 at the end of 2021 up 11.5% from the end of 2020. And as we build capital in anticipation of the merger with people's United financial, our CET1 ratio increased to an estimated 11.4% at the end of 2021 from 10% at the end of 2020. Although season, pardon me, the year had its ups and downs it sure felt like another division championship.
Now let's turn to the results for the quarter. Diluted GAAP earnings per common share were $3.37 for the fourth quarter of 2021 compared to $3.69 in the third quarter of 2021 and $3.52 in the fourth quarter of 2020. Net income for the quarter was $458 million compared with $495 million in the linked quarter and $471 million in the year-ago quarter. On a GAAP basis M&T's fourth quarter results produced an annualized rate of return on average assets of 1.15% and an annualized return on average common equity of 10.91%. This compares with rates of 1.28% and 12.16% respectively in the previous quarter. Including GAAP results in the recent quarter or after-tax expenses from the amortization of intangible assets amounting to $1 million or $0.01 per common share, little change from the prior quarter. Also included in the quarter's results were merger-related expenses of $21 million related to M&T's proposed acquisition of Peoples United Financial. This amounted $16 million after-tax or $0.12 per common share. Results for 2021 third quarter included $9 million of such charges amounting to $7 million after-tax or $0.05 per common share.
Consistent with our long-term practice M&T provides supplemental reporting of its results on a net operating or tangible basis from which we've 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&T's net operating income for the fourth quarter which excludes intangible amortization and merger-related expenses was $475 million that compares with $504 million in the linked quarter and $473 million in last year's fourth quarter. Diluted net operating earnings per common share were $3.50 for the recent quarter compared with $3.76 in 2021 third quarter and $3.54 in the fourth quarter of 2020. Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholder's equity of 1.23% and 15.98% for the recent quarter. The comparable returns were 1.34% and 17.54% in the third quarter of 2021.
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 quarters GAAP and net operating results was a $30 million distribution from Bayview lending group. This amounted to $22 million after-tax effect and $0.17 per common share. We received a light distribution in the fourth quarter of 2020. Prior to 2020 we had generally received such distributions in the first quarter of each year.
Turning to the balance sheet and the income statement. Taxable equivalent net interest income was $937 million in the fourth quarter of 2021, marking a decrease of $34 million or 3% from the linked quarter. The primary driver of that decrease was a $30 million decline in interest income and fees from PPP loans as that portfolio continues to decline following forgiveness of those loans by the small business administration. The net interest margin decreased by 16 basis points to 2.58% that compares with 2.74% in the linked quarter. We estimate that the higher balance of low-yielding cash on deposit at the federal reserve diluted the margin by about 9 basis points in the quarter.
The lower income from PPP loans including declines in the scheduled amortization and accelerated recognition of fees from forgiven loans contributed about 5 basis points of the margin pressure. All other factors including lower benefit from hedges accounted for an estimated 2 basis points of the decline. Average earning assets increased by $4 billion compared with the third quarter. This includes a $5.3 billion increase in cash on deposit with the Federal Reserve and a $785 million increase in investment securities. On an average total loans decreased by $2.1 billion or about 2% compared with the previous quarter.
Looking at the loans by category on an average basis compared with the linked quarter. Commercial and industrial loans declined by $1.4 billion or about 6%. That reflects a $1.6 billion decline in PPP loans primarily reflecting loan forgiveness. Our floor plan loans to vehicle dealers declined by $58 million on an average basis but grew by $554 million on an end-of-period basis. All other C&I loans grew about 1% compared with the prior quarter. Commercial real estate loans declined $830 million or about 2% compared with the third quarter. We've seen a higher level of pay downs and payoffs of some of the troubled loans often being refinanced by other lenders.
Residential real estate loans declined by $89 million or less than 1%, as a result of principal repayments, as well as the ongoing repooling of loans previously purchased from Ginnie Mae servicing pools. That was largely offset by the retention of new loans originated and held for investment. Consumer loans were up over 1%, reflecting growth in indirect auto loans and positive but seasonally slower growth in recreation finance loans partially offset by lower home equity lines of credit. Average core customer deposits, which excludes CDs over $250,000 grew by $3.6 billion, or 3% compared with the third quarter, primarily reflecting non-interest-bearing products.
Turning to net interest income, sorry, non-interest income. Non-interest income totaled $579 million in the fourth quarter, compared with $569 million in the prior quarter. The increase reflects the $30 million distribution from Bayview Lending Group that I previously mentioned. Mortgage banking revenues were $139 million in the recent quarter compared with $160 million in the linked quarter. As we noted on the October call, we have begun to retain a significant majority, around 85% of residential mortgage originations to hold for investment on the balance sheet, which utilizes a portion of the excess liquidity we currently have, this includes the roughly 20% normally held for investment.
As a result of increasing mortgage rates and the holiday slowdown, residential mortgage loan applications during the most recent quarter amounted to $1.7 billion, compared with $2.2 billion in the third quarter. Of those, we recorded gains on sale on the $191 million that were locked for sale in the fourth quarter versus gain on sale on the $1.1 billion that were locked in the third quarter. Total residential mortgage banking revenues, including origination and servicing activities were $91 million in the fourth quarter, compared with $110 million in the prior quarter. The decrease reflects the lower level of loans originated for sale, partially offset by gains from the sale of loans previously purchased from Ginnie Mae servicing pools that, based on borrower re-performance, recently became salable. Residential servicing revenues improved slightly.
Commercial mortgage banking revenues totaled $48 million, encompassing both originations and servicing, compared with $50 million in the third quarter. Recall that in the third quarter's commercial servicing results they included an $11 million fee for yield maintenance as a result of prepayment of previously securitized commercial mortgage loans. Trust income was $169 million in the recent quarter, improved from $157 million in the previous quarter. Business remains solid, with very strong capital markets activity, continued growth in retirement plan assets, and higher asset values. Service charges on deposits were $105 million in the recent quarter, unchanged from the third quarter.
Turning to expenses, operating expenses for the fourth quarter, which exclude the amortization of intangible assets and the merger-related expenses, were $904 million compared with $888 million in the third quarter. Salaries and benefits increased by $5 million from the prior quarter. This reflects, in part higher levels of branch staffing as customer traffic returns to normal and our ongoing program of adding on payroll IT professionals. Data processing of software increased by $6 million from the third quarter, tied in part to higher business volumes as well as the cost from software licensing and maintenance. The $6 million linked-quarter increase in advertising and marketing reflects the beginning of the winter marketing campaign, combined with incentives paid on new customer accounts. The efficiency ratio, which excludes intangible amortization and merger-related expenses from the numerator and securities gains are losses from the denominator, was 59.7% in the linked quarter, compared with 57.7% in the third quarter.
It's cliche in sports, that defense wins championships, in banking credit is the defense. Let's take a look at credit. While some sectors of the economy remain challenged by supply chain and labor constraints, credit trends overall continue to improve even in the most severely impacted sectors. The allowance for credit losses declined by $46 million to $1.47 billion at the end of the fourth quarter. That reflects a $15 million recapture of previous provisions for credit losses combined with $31 million of net charge offs in the quarter. At December 31st, the allowance for credit losses as a percentage of loans outstanding was 1.58%, compared with 1.62% at September 30th. Annualized net charge offs as a percentage of total loans were 13 basis points for the fourth quarter, down slightly from 17 basis points in the third quarter.
With the advantage of hindsight, it would appear that criticized loans did indeed peak in the third quarter of 2021, and when we file our 10-K we expect to report a noticeable decline in criticized loans reflecting both payoffs and upgrades. Non-accrual loans as of December 31st declined to $2.1 billion, a decrease of $182 million from the end of September. Non-accrual loans as a percentage of loans outstanding were 2.22%, compared with 2.4% at the end of the prior quarter. Loans 90 days past due, on which we continue to accrue interest, were $963 million at the end of the recent quarter. Of those loans, $928 million or 96% were guaranteed by government-related entities. In a difficult environment, one might argue our credit is the top-ranked defense in the league.
Turning to capital. M&T's common equity Tier One ratio was an estimated 11.4% as of December 31st, compared with 11.1% at the end of the third quarter. This reflects the impact of earnings in excess of dividends paid and a slightly higher risk-weighted assets. As previously noted, we increased the quarterly common stock dividend by 9% this quarter to $1.20 per share per quarter, raising the annual dividend rate to $4.80 per share.
Now turning to the outlook. As we look forward into 2022, we are pleased to see that the economy is improving, evidenced by the fact that GDP is growing and unemployment is falling. However, these conditions are driving inflation which is impacting our cost structure as well as that of our customers. It has also changed the outlook for interest rates as the forward curve now has embedded a number of increases in both 2022 and 2023. Our outlook considers these macro factors. Also, as we are still awaiting regulatory approval for our merger with Peoples United, we will focus our comments on M&T standalone. That said, there are no material changes to our expectations for the financial impact and benefits of the merger. Of course, the timing of those benefits will depend on the date we close the merger and complete the conversion.
Starting with the balance sheet, there are a number of moving parts that will impact where we're headed. We don't expect the $42 billion of cash on the balance sheet at the end of 2021 to endure through 2022. We are managing deposit balances both brokered and customer relationships that don't make economic sense in this rate and liquidity environment. We'd expect interest checking and MMDA accounts -- balances, excuse me, to decline over the course of the year. Our current plan is to continue securities purchases to increase the proportion of our liquid assets that are held in longer duration assets and have higher yields. We expect to do this by replacing maturities and principal amortization and to increase investment securities by an incremental billion dollars by the end of the year.
On the commercial side PPP loans on our balance sheet amounted to $1.2 billion at year-end. We expect that a significant majority of those loans will be largely repaid or forgiven in the first half of 2022. We've seen a meaningful turnaround in vehicle inventory financing and we believe we're past the low point and expect growth in 2022 although not fully back to pre-pandemic levels. The remainder of our C&I portfolio experienced growth this past quarter and we believe we've also reached the inflection point in these balances. We expect this growth to continue.
The pandemic resulted in a slow pace of new commercial real estate transactions over the past two years, putting pressure on balance growth. This leads us to expect low single-digit declines in CRE balances in 2022. Our efforts to make this portfolio more capital efficient should result in a transition to more fee income, less interest income, less use of the balance sheet, and higher returns over time. In connection with those efforts, we may seek to participate CRE loan exposures to third parties while retaining the customer relationships and loan servicing. These factors are reflected in our outlook for interest and fee income.
As noted earlier, we're retaining a large majority of the mortgage loans we originate, which we expect will grow balances by approximately $2.5 billion in 2022 depending on the level of refinance activity. Offsetting that growth, our $2.8 billion of mortgage loans purchased from Ginnie Mae servicing pools on our balance sheet at the end of 2021 more than half of which we believe will qualify for repooling over the course of 2022. On average, we expect the residential real estate loan portfolio will contract during 2022. We expect more of the same in the consumer portfolios, with growth in indirect vehicle financing being partially offset by continued pressures on home equity balance. Taking all of this into account, our balance headwinds from PPP and Ginnie Mae buyouts will lead to average balance declines in 2022. However, excluding those impacts we expect aggregate loan growth to be in the low to mid-single digits.
We expect net interest income to be down in the low to mid-single digits on a year-over-year basis. Growth in securities, retention of mortgage loan originations, and a return to growth in C&I loans will help but not fully offset the lower benefits from the PPP loans and our interest rate hedging program. We continue to expect net interest income to trough in the first quarter of the year and grow from there. That should result in a net interest margin, little change from full year 2021 in the area of 2.75%. Our forecast incorporates three increases in short-term interest rates, although the third increase occurs late enough in the year to not have a meaningful impact on either net interest income or margin.
Turning to fees. As we noted residential mortgage gain on sale revenues will be diminished in 2022 by our programs to retain for investment a large portion of originations although repooling of Ginnie Mae buyouts should be a partial asset. Commercial originations and servicing as well as residential mortgage servicing should still be solid. We see continued momentum in trust income based on the capital markets activity, continued growth in retirement plan assets, and possibly higher asset values. We would need to see short-term interest rates rise by 50 to 75 basis points before we can fully recover the money fund fees we are currently waiving. Those amounts to an annual run rate of approximately $50 million. We expect service charges on deposit accounts to be down with modest growth in commercial offset by declines in consumer largely related to changes in our overdraft practices. All in we're looking for low single digit growth in non-interest revenues in 2022.
Turning to expenses. Non-interest operating expenses in 2021 grew at an uncharacteristically high rate rising 5.6% over prior years. Lower profitability and growth led to decreased compensation costs in 2020. The recovery and profitability in 2021 carried with it a return to more normal compensation cost which accounted for over half of the increase. Our current estimate contemplates low to mid-single digit operating expense growth in 2022. And like 2021 salaries and benefits, data processing and software, and advertising are the categories that will drive the majority of the increase. We would expect to see our typical seasonal surge in compensation expense during the year's first quarter. That amount last year was approximately $69 million. And we're encouraged by the improvement in credit conditions over the past several quarters. Overall, we expect net charge offs to be consistent with the average of the past two years although it could be somewhat lumpy from quarter-to-quarter. We expect loss provisioning to normalize as loan growth offsets potential declines in trouble credits.
Lastly, turning to capital. We've paused our buyback program while we wait to close the merger with Peoples United. Since that pause, our CET1 ratio has increased by 140 basis points to 11.4% leaving us positioned well in excess of what we believe we need to run the combined Company. Our focus, as always will be on deploying excess -- the excess capital we have beyond that needed to support growth in the business. Of course, as you're 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 Brittany will briefly review the instructions.
