M&T Bank Corporation (MTB) Q4 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the People’s United Financial, Inc. Fourth Quarter and Full Year 2019 Earnings Conference Call. My name is Shri and I will be your coordinator for today. At this time, all participant lines are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the presentation over to Mr. Andrew Hersom, Senior Vice President of Investor Relations for People’s United Financial, Inc. Please proceed, sir.

Good afternoon and thank you for joining us today. Here with me to review our fourth quarter and full year 2019 results are Jack Barnes, Chairman and Chief Executive Officer; David Rosato, Chief Financial Officer; Kirk Walters, Corporate Development and Strategic Planning; Jeff Tengel, President; and Jeff Hoyt, Chief Accounting Officer. Please remember to refer to our forward-looking statements on slide one of this presentation, which is posted on our website, peoples.com, under Investor Relations. With that, I’ll turn the call over to Jack.

Thank you, Andrew. Good afternoon. We appreciate everyone joining us today. Let’s begin by turning to the full year overview on slide two. We are very pleased with the Company’s financial and operating performance in 2019. It was another noteworthy year for People’s United as we acquired two banks and a specialty finance company, enhanced our suite of banking technology and strengthened core capabilities. As a result, we continued to build the earnings power of the Company while further solidifying its foundation to generate consistent and sustainable growth in the years ahead. Commitment to our strategy of balancing organic growth and thoughtful M&A was evident during 2019. We began the year by acquiring VAR Technology, an innovative specialty finance company with an exclusive focus on the technology sector. VAR has been successful, integrated into LEAF Capital, and transitioned from an origination for sale model to an origination to hold model. In April, we closed the acquisition of BSB Bancorp, the holding company for Belmont Bank, and completed the [co] [ph] conversion in July. Belmont has added to the momentum our franchise is generating in the Greater Boston area. We are particularly pleased with the synergies provided by Belmont’s commercial real estate team, which continues to generate strong production. In November, we also closed the acquisition of United Financial Bancorp, the holding company for United Bank. The addition of United bolsters our already significant share of retail households and commercial clients across Central Connecticut and Western Massachusetts. The integration is progressing well. The core systems conversion will take place early in the second quarter. And we are on track to realize projected cost base. Our strong results this year are a testament to the efforts of our employees who successfully integrated VAR, completed the core system conversion for Belmont, and advanced the integration of United, while continuing to deliver organic growth and enhanced profitability. This performance is further evidence that the integration of acquisitions is a significant core competency of People’s United. Throughout 2019 we made further investments in technology platforms, as consumers continue to shift to digital channels. We’ve launched several mobile device and online driven offerings this year, including our most recent offering of a digital small business solution for loans $250,000 or less. Looking ahead, we remain committed to providing enhanced digital access as we aim to deliver an integrated service model that blends the best in customer service with digital solutions. As such, we will continue to partner with fintech companies to bring greater efficiency, ease of use and scale to meet the evolving needs of our customers. Looking at the full year financial performance. Operating earnings increased 20% from a year ago to $552 million, the highest in the Company’s history. In addition, operating earnings of $1.39 per common share grew for the 10th consecutive year. These strong results generated an operating return on average tangible common equity of 14.7%, an increase of 10 basis points compared to the prior year. Total revenues of $1.8 billion increased 15% year-over-year, driven by both organic growth and recent acquisitions. This increase reflects improvement in both net interest income and net non-interest income. Net interest income of $1.4 billion was up 14% from 2018 or 11%, excluding United, within our full-year growth goal range of 11% to 13%. As you will recall, we updated our full-year goals earlier this year to include Belmont but did not incorporate United as the acquisition had yet to close. Despite the interest rate environment during the year and the easing of monetary policy by the Federal Reserve, our full-year net interest margin expanded 2 basis points to 3.14%. Excluding United, the margin was 3.13%, which is within our 3.05% to 3.15% goal range. Non-interest income had a terrific year with an especially strong fourth quarter. Full-year results of $431 million increased 18% or 13% on an operating basis, which far exceeded our 2% to 4% growth expectation. This increase was driven by a variety of lines, including a particularly high level of customer swap income. Operating non-interest income, excluding United, increased 11%. From an operating perspective, total expenses of $1.097 billion were up $112 million from a year ago. We are pleased with these results, given the inclusion of United, Belmont and VAR into the franchise during the year and having Farmington on the books for a full 12 months. Excluding United, operating expenses were $1.074 billion, well within our full-year goal range of $1.06 billion to $1.08 billion. As a result of our revenue growth and the ability to control costs, while still making improvements and investments in the franchise, we continued to enhance operating leverage, as demonstrated by a 160 basis-point improvement from the prior year in the efficiency ratio to 55.8%. Period-end loans and deposits increased 24% and 21%, respectively from a year ago, driven both by recent acquisitions and organic growth. Excluding United and the transactional portion of our New York multifamily portfolio, period-end loan balances were $38 billion, up 11% from year-end 2018, right in the middle of our 10% to 12% growth expectations for the year. In addition to the inclusion of Belmont, these results were driven by strong results in mortgage warehouse lending, equipment finance, and our specialized industry verticals within C&I, partially offset by continued headwinds within commercial real estate and home equity. Period-end deposit balances excluding United were $38.3 billion, an increase of 6%, which was below our full-year goal of 10% to 12% growth. While we achieved meaningful growth in commercial deposits, retail balances declined modestly from 2018 due to some managed run-offs of higher cost deposits from Belmont and standalone People’s United. Furthermore, a managed decline in brokered deposits also impacted the balances at year-end. Before looking ahead, it is important to briefly reflect on the significant progress of our franchise. Over the last 10 years, we have almost tripled total assets to nearly $60 billion, increased full-year operating earnings per share at an average annual rate of 16%. Strengthened our presence in Metro New York and Greater Boston, deepened already strong positions within our heritage markets and expanded our national businesses. At the same time, we have remained true to our roots of delivering superior service at a local level, maintaining exceptional asset quality and supporting our communities. As we start a new decade, already filled with economic and competitive uncertainties, we are confident our long-term approach to managing the business will enable us to generate value for customers and shareholders, regardless of the operating environment. With that background in mind, let me outline our goals for the full-year 2020, as listed on slide three. It is important to note the following goals incorporate a full year of Belmont and United. The first goal is to grow our core loan portfolio in the range of 2% to 4% on a period-end basis. The core loan portfolio excludes the runoff of select United loan portfolios, which ended 2019 with an aggregate balance of $1.346 billion. This balance is less than the approximately $1.8 billion in runoff we referenced at the acquisition’s announcement, due to a subsequent decision to sell $492 million of these loans. As such, these balances are included in the loans held for sale line on the balance sheet. We expect the runoff of the select United portfolios to be in the range of $300 million to $400 million for the full year. Core loans also excludes the transactional portion of our New York multifamily portfolio, which is in runoff mode. Period-end balances for this portfolio finished 2019 at $737 million. We expect the runoff in the transactional New York multifamily portfolio to be in the range of $300 million to $400 million for the full year. After excluding these portfolios, the balance at year-end 2019 for core loans was $41.513 billion. Included in the 2% to 4% core loan growth is an assumption that residential mortgage balances will be unchanged from year-end 2019 as we continue to remix the balance sheet to focus on higher yielding portfolios. Secondly, period-end deposit growth is anticipated to be in a range of 2% to 4% as we continue to focus on gathering core customer deposits while managing down higher cost portfolios. The next goal is for net interest income to increase in the range of 9% to 11%. Embedded in this goal is the expectation for the net interest margin to be in the range of 3% to 3.1%. This net interest margin range is derived from many different factors, one of which is an assumption of no change in the Fed funds rate during the year. Moving on to noninterest income. As I mentioned earlier, total noninterest income had -- we hard a terrific year in 2019, including a very strong fourth quarter. The results were driven by a variety of lines including some that have inherently lumpy results period-to-period. Our assumption is for a level of normalization to occur in 2020. As such, we expect noninterest income on an operating basis to grow in the range of 2% to 4% from $424 million in 2019. Operating noninterest expenses, which exclude merger-related costs, are anticipated to be in the range of $1.19 billion to $1.22 billion, as compared to the $1.097 billion in 2019. As a reminder, this range includes a full year of results from Belmont and United. It is also important to note, the core system conversion for United is not expected until early in the second quarter. We also expect to maintain excellent credit quality with a provision in the range of $40 million to $50 million. The higher provision level reflects expected loan growth and the impact of CECL. In addition, we anticipate our effective tax rate for the year to be in the range of 20% to 22%. Finally, we plan to maintain strong capital levels with an expectation that at year-end, holding company common equity Tier 1 capital ratio will be in the range of 10% to 10.5%. This goal does not contemplate any share repurchases during the year. As you’ll recall, we positioned the buyback program announced in July as an opportunistic capital management tool. As such, any decision to repurchase shares will be subject to market conditions. With that, I’ll pass it to David to discuss the fourth quarter results.

Thank you, Jack. We concluded 2019 with strong financial performance as demonstrated by another quarter of record earnings. Operating earnings of $158.8 million increased 17% linked quarter and reflected the acquisition of United, improved net interest margin and positive operating leverage. It is important to note, the fourth quarter included the following items which were deemed non-operated: Merger-related costs of $22.6 million pretax or $17.8 million after tax; an intangible asset write-off of $16.5 million pretax or $13 million after tax related to the liquidation of our public mutual funds; a gain net of expenses of $7.6 million pretax or $6 million after tax, related to the sale of eight branches in Central Maine; the transaction closed in October and included approximately $104 million in loans, $262 million in deposits and $240 million of assets under management. Turning to slide five. Net interest income of $382.7 million, increased $34 million or 10% from the third quarter. The loan portfolio contributed $23.2 million to the increase, due to higher balances. Lower deposit and borrowing costs benefitted net interest income by $5.3 million and $2.7 million, respectively. In addition, higher balances in the securities portfolio added $2.8 million. Overall, the inclusion of United added approximately $35 million to net interest income for the quarter. As displayed on slide six, net interest margin of 3.14% expanded two basis points linked quarter. The margin benefited from continued disciplined management of deposit costs, remixing of the loan portfolio and the net effect of purchase accounting adjustments related to the United transaction. Excluding these purchase accounting adjustments, the margin was 3.09% or 3 basis points less than the third quarter. Lower borrowing costs favorably impacted net interest margin by 2 basis points, while lower loan yields reduced the margin by 5 basis points. Turning to loans on slide seven. Average balances of $42 billion increased by $3.7 billion or 10% from the third quarter, driven primarily by the addition of United. On an organic basis, average balances increased $40 million or less than 1%. Period-end balances of $43.6 billion increased $4.8 billion linked quarter, but were essentially flat excluding United. Organic commercial loan growth of $314 million was driven by solid results in commercial real estate, equipment finance, and C&I, partially offset by seasonally lower mortgage warehouse lending balances. The increase in commercial loans was offset by a $343 million decline in retail loans, mostly due to our planned reduction of residential mortgages, as we continue to remix the balance sheet with a focus on higher yielding portfolios. Commercial Real Estate organic growth was driven primarily by strong performance in Northern New England, particularly in Massachusetts. All three of our equipment finance businesses grew balances during the quarter with LEAF once again generating excellent production. C&I continues to benefit from our specialized industry verticals, with especially good results in fund banking, healthcare and franchise lending during the quarter. Moving on to deposits on slide eight. Average balances of $42.2 billion increased $3.5 billion, or 9% from the third quarter, while period-end balances of $43.6 billion were up $5 billion or 13%. The higher balances were driven by the inclusion of United. Excluding the acquisition, average and period-end balances decreased $97 million and $287 million respectively or less than 1% on each basis. While we achieved solid growth in commercial deposits, retail balances declined modestly due to some managed runoff of higher cost deposits. In addition, a managed reduction in brokered deposits also impacted balances. We remained focused on controlling pricing as evidenced by a 13 basis-point reduction in deposit costs during the quarter. Similar to the third quarter, we remain disciplined in managing costs across the franchise. Looking to slide nine. We continued to achieve strong non-interest income with $124.2 million in the fourth quarter. This result marks an increase of $18.2 million or 17% on a linked quarter basis. Operating non-interest income, which excludes the $7.6 million gain, net of expenses from the sale of 8 Central Maine branches, was $116.6 million, up $10.6 million or 10% from the third quarter. The inclusion of United added approximately $5 million to non-interest income in the quarter. By non-interest income category, the $10.6 million linked quarter increased was primarily driven by $3.3 million in higher customer interest rate swap income, a $1.9 million increase in bank service charges, primarily attributable to the addition of United, $1.1 million in higher commercial banking fees, and a $7.7 million increase in other non-interest income. This increase was driven by several items, including a $3.3 million gain on the sale leaseback of our office building in Burlington, Vermont, and a $1.6 million benefit to non-interest income from the mark-to-market of one equity security position. These increases were partially offset by a $2.8 million decrease in insurance revenues, reflecting the seasonality of commercial insurance renewals, and a $600,000 decline in investment management fees, which was partially related to the $240 million of assets under management sold as part of the Central Maine branch sale. On slide 10, non-interest expense of $325.7 million increased $44.3 million linked quarter. Included in the fourth quarter were $39.1 million of non-operating costs in the following categories: $25.5 million in other expenses; $7.5 million in compensation and benefits; $5.6 million in professional and outside services; and the remaining $500,000 in occupancy and equipment. In comparison, the third quarter incurred $5 million of non-operating costs. Excluding non-operating costs, non-interest expense of $286.6 million was up $10.2 million or 4% linked quarter. This increase was driven by the inclusion of United, which added approximately $24 million to operating non-interest expense in the quarter. By expense category, the $10.2 million linked quarter increase was mostly due to $7 million in higher occupancy and equipment expenses; a $6.6 million increase in compensation and benefits; an additional $4 million in professional and outside service costs; and a $2 million increase in regulatory assessments. This variance was due to a lower third quarter assessment resulting from an FDIC credit. The largest driver offsetting these increases was $10.9 million in lower other expenses. As a reminder, third quarter other expenses were unfavorably impacted by certain legal and other onetime operational costs. Turning to slide 11. The efficiency ratio of 53.7% improved 310 basis points from the third quarter and 140 basis points year-over-year, reflecting well-controlled expenses and higher revenues. Asset quality was once again exceptional across each of our portfolios, as demonstrated on slide 12. Originated nonperforming assets as a percentage of originated loans and REO at 55 basis points is a 1 basis point improvement from the third quarter and below our peer group and top 50 banks. Net charge-offs of 6 basis points were unchanged from Q3 and continue to reflect the minimal loss content in our nonperforming assets. Briefly on slides 13 and 14. Return on average assets and return on average tangible common equity declined 7 basis points and 120 basis points respectively from the third quarter. On an operating basis, both metrics improved. Operating return on average assets was up 8 basis points to 113 basis points, while operating return on average tangible common equity increased 80 basis points to 15.2%. Finally, capital ratios remained strong, given our diversified business mix and long history of exceptional risk management. This concludes our prepared remarks. We’ll be happy to answer any questions you may have. Operator, we’re ready for questions.

Thank you. [Operator Instructions] Our first question comes from Mark Fitzgibbon with Piper Sandler.

Hey, guys. Good afternoon. First question I had is just to clarify a comment Jack you made about the loan balances. So, if we take the year-end loan balances of call it $43.6 billion and that grows sort of 2% to 4% -- and did I hear correctly that you’re going to see runoff of $300 million to $400 million on the United portfolio this year and another $300 million to $400 million from New York multifamily runoff?

Yes. That’s correct, Mark.

So, [indiscernible] you split the difference on the growth 2 to 4, say it’s $1.3 billion, less somewhere between $600 million and $800 million of loan growth or runoff I should say?

Okay. Loan growth excludes the runoff.

Correct. So, if you take the ending total loans of 43.6, reduce the $1.346 billion of United and the multifamily of 737 brings you down to 41.5. So, that’s the base that the loan growth is off of. Then additionally, we expect those two portfolios to run off between $300 million and $400 million each during the year.

Got you. Okay. And then secondly, can you help us think about the purchase accounting impact on the margin over the next maybe quarter or two?

Yes. So, we called out, Mark, the 5 basis points in Q4. That is a good number, the way I think about kind of two components obviously, the loan side and the deposit side. The loan purchase accounting will be with us for about four years. On the deposit side, most of that, Mark, is around the CD portfolio, which is about a year. So, you’re going to see first half benefit larger than the second half. But, the second half will be a run rate for a couple years.

Okay. And then, the $16.5 million write-off for intangible asset, what is the asset that the write-off is on? I didn’t see it in the release anyway.

So, that was the value that we attributed to the mutual fund business at acquisition of Gerstein Fisher.

Okay. And then lastly, Jack, I wondered if you could comment on your outlook for M&A in the Northeast, and has your view on bigger deals changed in light of how the market has received so well some of the larger transactions?

So, I really don’t see the pace of M&A generally changing dramatically one way or the other in the Northeast, I would say at this point. And in terms appetite for larger deals, we’ve been willing to consider larger deals if appropriate, the right fix, et cetera. So, again, I don’t think our view has changed. There is not many larger deals across our footprint. I will say that, if you look at our footprint and what’s out there.

Thank you. Our next question comes from Ken Zerbe with Morgan Stanley.

Great. Thanks. Actually, I had a similar questions line of thought here. Could you just give us the base that you are using for both the NII and the fees that you are growing off of? I just want to make sure we’re on the same page.

Starting with the fees, the base is the $424 million that we referenced, the base for the NII is just what is in the press release, which is $1.412 billion.

Got you. Okay, perfect. That’s helpful. And then, obviously, your CET1 target, the 10% to 10.5% does not include any buybacks. Could you just talk about how aggressive you might potentially be with buybacks? I mean, is it -- could you get down to 9%, 9.5%? I’m trying to think how of how to think about layering in buybacks on top of that base number.

So, Ken, what I would say is, when we announced the buyback, and then -- in the call on the third quarter and today for the third time we’ve used the term opportunistic. The 10% to 10.5% is consistent capital level that we put out as a goal for last year as well. We managed within that last year. And our intention would be to manage within it this year as well.

Okay. So, I guess, given zero buybacks this whole year, then when you say opportunistic, it would not be a crazy assumption to assume zero buybacks next year as well that that’s one possibility. Is that correct?

Well, there’s a whole range of possibilities from no buybacks to the full completion of the 5%, based on our views of the equity markets and obviously our stock in particular.

Okay, understood. Thank you very much.

You’re welcome.

Thank you. Our next question comes from Casey Haire with Jefferies.

I wanted to touch on the loan growth, so the 2% to 4%. Which buckets are going to be driving that? And should we -- it sounds like you guys are still happy to run down resi mortgage. Like, what sort of headwinds should we expect from resi mortgage in 2020?

As we said in the script, we’re expecting resi to basically stay flat year end to year end. There’s actually a lot of activity in there, as you can imagine, given amortization and payoffs. So, one of the things that I guess, I hope it’s clear to everybody, we’re very committed to resi mortgage in terms of delivering the product to our customer base, important part of the retail -- part of our bank. So, it’s -- there are some wholesale channels where we can do less. And as we’ve been saying, our focus is trying to remix gradually so that we’re booking more higher yield portfolios and a softening, if you will, the percentage of -- reducing the percentage of residential mortgages overall on the balance sheet. So, that’s where the resi is. I’d ask Jeff Tengel to talk about the loan growth in the other business lines.

Yes. In the commercial business, we think it’s going to be very similar to what we experienced this year. We’re not expecting a lot of growth, if any, in our commercial real estate portfolio for all the reasons we’ve talked about in the past. And so, across the rest of our franchise, our core middle market business, particularly in our larger markets like Connecticut and Massachusetts have had growth in 2019. And we think that will continue in 2020. We’ve seen a lot of good growth across a number of the industry specialization, businesses that David referenced. We think that momentum will continue into 2019. And our equipment finance businesses also had good growth in ‘19 and we expect that to continue in 2020. So, we feel really good about all of those commercial businesses, and think that the pipelines are in pretty good shape and feel pretty confident going into the year.

Okay, great.

Hey, Casey. Just to put a number around our thinking about resi mortgages. If you go back to like June of ‘17, so before the last three acquisitions, we had about 21% of the loan book in resi mortgages. At June of ‘19, it was up to almost 25%. And so, we’re just trying to bring that number down a few percentage points without selling anything out of it, do it on a natural basis and not obviously bring up the commercial side, which yields more.

Understood, got it. Okay. And then, just switching to the reserve side of things with a lot of moving parts here, but just given all the ups and downs within the loan portfolio. But, as we think about CECL and your adoption of it, how do you guys see -- what do you see the go forward provision rate, the loan loss reserve ratio settling out, as you adopt CECL?

Well, so we gave a provision guidance of $40 million to $50 million that that was inclusive of United. So, that’s $10 million to $12.5 million dollars a quarter is the way we’re thinking about it and you should as well.

Our next question comes from Jared Shaw with Wells Fargo Securities.

Just a couple questions I guess on the margin. So, I hear you with the lower accretion as we go into the second half of the year. But, are you -- with the focus on the higher yielding loans as the area of growth, I guess, where are you seeing more of that incremental pressure on the margin? Is it repricing of the loan portfolio or is there really just not much more room to move on the deposit side?

I would say it’s a little bit of both. So, we had three quick Fed moves in kind of a compressed period of time in the third and fourth quarter. I would say by the time the quarter was over, the loan portfolio has kind of repriced, any lags in there had kind of come down. Remember, about 44% at this point of that -- of our loan portfolio is really one month LIBOR driven. And one month LIBOR came down 34 basis points, I think it was in Q4. We telegraphed our guidance around steady interest rates, steady Fed funds rate. So, I think as the fixed piece of the portfolio rolls, you’ll see some downward pressure there. I think, if the Fed does not do anything all year, it will be harder to bring down deposit pricing; there will be some positive role in our CD books. And the other piece of that is we’re seeing good restraint across the industry on deposit prices. So, I just think, in a steadier environment, the ability to make moves will be a little bit muted.

And then, on the securities portfolio, I know United had some CLOs, were those completely gone by the end of the year? And as a secondary part of that, what I guess drove that 5 basis-point growth in the securities portfolio, is that a purchase effort on your part or is that more just a mark-to-market on the portfolio that was acquired?

No. So, they did have a CLO portfolio. That portfolio never hit our books, meaning that it was gone before we acquired that. We did exactly like we said we would, when we announced the deal. All those securities were liquidated. All that came over from their portfolio was a little over $300 million of securities that we would say are very much like the stuff that we own. Within the quarter, you saw, I believe, a 5 basis-point improvement in the yield on the securities portfolio, driven by the addition of some municipal bonds, which -- in that portfolio, as well as really good low levels of prepayment activity across the mortgage backed. So, the amount of amortization that went through the portfolio was really well-controlled in the fourth quarter, resulting in a higher yield.

And then, just finally for me, with the branches that were sold up in Maine and a more compact branch footprint now I guess in southern New England, are there other areas where you could actually see -- or we could see the bank do some de novo expansion, whether it’s South Shore Mass or more infill in the Boston area or would any future footprint expansion really be driven by M&A?

I would say, we just opened a de novo branch, in the Seaport area in Boston. And we certainly would consider looking at other opportunities there. That branch by the way is really off to a great start. And we also did Penn Station in New York. And again, we’re encouraged by that, it’s off to a great start and a lot of activity there. So, we definitely are open to de novo, love to build out the South Shore Boston and kind of considering and looking at our options there. And, so we’re open to it. We actually are also closing, continue to close branches. So, kind of working to optimize the branch footprint all the time.

Thank you. Our next question comes from Steven Alexopoulos with JP Morgan.

Just a first follow-up on NIM. What’s the assumed purchase accounting accretion benefit that’s in the 2020 guidance, is that around 5 basis points?

Yes, just slightly below that, for the full year.

Okay. And then, quite a few moving parts of the loan growth guidance. What are the expectations for reported total loans, not making any adjustments? Where do you see total loan balances moving in 2020?

Well, it really is off -- it’s that growth off that base that we gave, that 43.5 base.

That 2% to 4% loan growth, but we’ve excluded some runoff in that...

Yes. I’m sorry. I gave the wrong number, off the base of 41.5.

Right. I guess, I’m trying to figure out when the Company’s positioned to start showing total loan growth that’s more material, ex all of these runoff items. Doesn’t sound like it’s 2020.

Yes. I mean, I think, one thing is when the commercial real estate market, however you want to describe it as, it’s clearly frothy. And it hits us in many different ways as largest portfolio. So, we’ve been -- we did -- what was it, Jeff? $2 billion in originations, right?

Yes.

In ‘19, and we’re basically flat. So, we’re active in the business. We’re taking care of our customers, but we’re getting payoffs from shadow banking companies, we are getting sale of properties. So, it’s hard to predict, Steve, when that changes other than some kind of a change -- in my mind, a change in -- like a cycle change for instance, maybe a change in rate environment where that changes the dynamics. That’s why, I think when Jeff kind of referred to whether it’s middle-market business banking, the leasing companies, the verticals, we’re actually doing quite well in a lot of our businesses, and moving ourselves forward. But, that’s a challenge.

Okay. Thanks. And then, finally on expenses, for the guidance, are you guys still assuming 75% phase in of UBNK cost saves in 2020, is that still the assumption?

Yes. No change.

Okay. And then, expense picture has been a little bit muddled because of all the deals. Dave, how do you think about just organic expense growth for the franchise, ex any acquisitions?

Yes. I think about that as about a 2% growth -- 2% rate. And we’ve -- I know every year, there has been M&A activity in there, but that’s really what it works out to be.

Thank you. Our next question comes from Collyn Gilbert with KBW.

Just a few just sort of housekeeping items. David, what was the balance of the mortgage warehouse portfolio this quarter?

It was $1.4 billion.

Okay. And is your expectation for that in -- I mean for balances to drop as you are kind of thinking about the book in total -- the total loan book that you could balances drop in 2020 for that line?

Yes, a small amount. I mean, they came off a little bit in Q4 about $180 million or so. We expect a little bit of decline next year, subject -- once again, I mean the mortgage book was completely different than we thought at the beginning of the year, subject to level of interest rates and refi activity.

Okay. And then, on the loans that you have in the held for sale, the resi mortgages that you guys are selling, what’s the blended yield on those?

Well. So, just to be clear, the $0.5 billion that you see that showed up on the loans held for sale are United Bank portfolios that subsequent to the deal we decided to sell, and that work is in process.

Okay. So, does that mean you can’t offer what the yield was on those loans?

Yes, we’d rather not.

Okay. And then, just going back to the dynamics of the NIM, so David, understand you’re saying that just if we’re in a steady rate environment, there is probably less movement to see here. But, can you just talk a little bit about what you’re doing with your deposit offering rates right now? And then, is there -- would there be a catalyst that putting rate aside that would cause you to kind of drop your deposit rates again? Just trying to think about the flow-through of potentially lower funding going forward.

Sure. So, I would say, number one, the -- I would stress that since the Fed started moving down, since the end of July, we’ve been very disciplined around deposit pricing across all of our businesses. But, we also would say that the industry has been well-disciplined as well, which is important because when we have one or two players who aren’t, it’s difficult. So, for example, today, our best CD offer out there is a six-month CD at a 1.70, right? So, slightly below the top end of the Fed target range. The other thing that we did on the retail side is become less aggressive on money market promotions. So, those offer rates are lower relative to where Fed funds target is, and that’s been another dynamic in the last six months. I don’t see those type of -- that type of behavior changing in 2020, at least in the near term. So, I think it’s that day to day our frontline folks being in front of customers trying to generate growth in new accounts and serving our customers. But, we’re able to do it in a slightly less promo environment.

And then, the other thing I would add Collyn is we’re really pleased with the work that our relationship mangers have done, going out proactively and having the conversation with customers about the Fed raised rates and we raised deposit pricing. Now, the Fed has lowered rates and we need to lower pricing. And because of relationships and good communication, we feel really good that we’ve had nice success.

Okay. That’s helpful. And I guess, along those lines, if we think about -- recognizing obviously the incremental growth in the portfolio is going to be fairly low. But, just the margin on the new business that’s coming on in the wake of well, yes, we saw the curve steepen, it’s still obviously very narrow. But, are you kind of structurally seeing kind of a NIM benefit longer term that you’re -- the incremental spread that you’re putting on in the balance sheet is more than that 3%, or is it less?

I would say, actually Collyn, a little bit the other way. So, last quarter we referenced that that differential came down from about 50 basis points in the second quarter to about 30 basis points in the third. That has moved down a bit in the fourth quarter. Subject to mix and shape of the yield curve, I think that’s going -- that dynamic will slowly come in, not expand.

Okay. And then...

Collyn, just to finish that thought. So, there’s two components to that. Right? There’s interest rate -- benchmark interest rates and credit spreads. And what I would say is the driver is benchmark interest rates. Our credit spreads have been pretty steady in the back half of last year, and we don’t expect that to change.

Okay. All right. That’s helpful. And then, the decision around selling the mutual fund -- some of the mutual funds, can you just walk through that, or is that like specifically tied to the bridge, just trying to understand what you guys are doing there?

Well, we did not sell the mutual fund. So, we -- they were public mutual funds. It’s a little over $550 million that were in Gerstein Fisher. We just stopped using public mutual funds as the vehicle for those customers to invest. We’re still managing that money. We just are doing it back in what we call our managed account group. So, same customers, same investment strategies, just not in a public mutual fund format where we have higher cost to serve those customers.

And then, just as we think about the initial accretion targets for UBNK, I think, it was like $0.07 a share that you guys were looking for, for EPS accretion. How do you sort of see that folding in? Because I think if we align what your -- some of the targets are -- well, let me just ask that question. How do you see that $0.07 folding in?

So, that $0.07, which was on a fully phased in cost basis. Right? And as Jack referenced, the conversion will be done early in the second quarter. And then, there is a little bit of time before we get everything out, all the cost out and get to the permanent, if you will, run rate. So, everything around that transaction from purchase accounting, accretion, it’s all on target. So, no change in our expectations. The only change really is the rather than running off $1.8 billion of loans, we decided to take that $0.5 billion and sell them. So that means that $0.5 billion of assets will be gone sooner than we originally thought, but it’s actually not going to be material to the financial projections that we gave.

Okay. So, that doesn’t change that. Okay. That is -- that’s helpful. All right. I will leave it there. Thanks, guys.

Thank you.

Thank you. Our next question comes from Matthew Breese with Stephens.

I just wanted to confirm quick on CECL, the initial reserve guidance increase $40 million to $60 million, does that still hold? And is that -- should we expect a similar impact to capital?

So, that’s -- just for everyone’s benefit, that’s what we referenced on the third quarter call. As a reminder, that did not include United Bank. Our work around CECL continues. We now think that we’ll actually be just around the lower end of that number when all is said and done. So, plus or minus $40 million. And then, there will be some additional to United but that work is still in progress as well.

Could you give us some sort of a range perhaps? Is it significantly less or more than the $40 million, just for ballpark purposes?

Just for United?

Yes.

It’s below that.

Okay. And then, considering -- once we true it up, considering the moving parts, you’ll be running off some of the UBNK, you are mix shifting more towards commercial, the overall reserve level relative to loans, is that an increasing or decreasing number?

I think, it’s about the same. The credit discipline of the Company is unchanged. The changing nature or complexion of the credit risk on the balance sheet is not significantly different from where we have been historically.

Okay. So, despite the mix shift, it will stay flat. Understood.

Yes.

Your securities portfolio, just going back to Jared’s question, just wanted to confirm, because prior commentary was that you would sell roughly $550 million. Should we expect the $7.8 billion securities portfolio, should we expect that to hold flat through 2020? Is that a good modeling estimate?

Yes. That’s fine. As I said, everything we said we would sell out of United, we did. And actually some of it, was as I referenced on the CLOs, they actually did it prior to acquisition. And so, today the securities portfolio is about 13% of total assets. We’ve been there for a while. That’s less than -- some years we are running 15%, but where the level of interest rates pretty modest, steepness of the yield curve, we’re pretty much going to keep things where they are as we see it today.

And then, my last one, just concerning your actions on the branch network, your comments on taking a look at the physical branch network, could you just remind us of the Stop & Shop supermarket branches? How many are there? How are they performing? Are they performing up to expectations? If there is a contract associated with them? When is that up for renewal? Just wanted to get a sense for as you consider the branch network, whether or not the supermarket branches are part of the long-term story.

Sure. I’ll give you a couple of numbers. And then, if Jack wants to make any other comment. So, today at year-end, we had about -- we have 450 branches across the franchise, the Stop & Shops across New York and Connecticut are about 150 million -- 150 of the 450 branches. They are a critical part today and have been of our branch network, they are a low-cost delivery source for us. And then, the contract that we talked about before is up in about two years. We also own an option to extend that if we want.

I would say, just to add that we’re working with Stop & Shop to look to the future and kind of, if you will, the model that we’re using and we’re having some very constructive conversations with that. [Indiscernible] but just work our way through that period and determine where we go.

And then, just my last one ticky-tacky, really. Just considering the loan yields quarter-over-quarter, the equipment financing bucket only decreased 5 basis points. I was a little surprised by the movement there. Could you just give us a reminder of the typical equipment finance loan structure, variable floating versus fixed? And how much LEAF with the higher yielding component played into what was relatively a small move in that bucket?

So, I will interpret your question as you were pleasantly surprised by the performance. The LEAF is the highest yielding portfolio of the three. So, everything across our three equipment platforms is fixed rate production. Right? Unlike our mortgage warehouse or ABL, which is 100% one month LIBOR, these are our fixed rate cash flows or a predominant amount of our fixed rate cash flows. And spreads and yield, spreads don’t change that often and they’re not -- the business especially in LEAF and PUEFC, the old former fin Fed are -- it’s a rate-driven business, and they don’t move that often. So, that’s how that yield, even in a down 75 basis-point Fed funds environment holds up. The largest of our three platforms, PCLC is lower yielding and more market-sensitive, but that is the business that we have held flat from an outstandings perspective for the last three years or so. And then, don’t forget, this was the year that at the beginning of the year, we bought VAR Technologies and we brought them into the fold. And they are a really nice high yield originator as well.

Understood. Could you give us an idea what the LEAF yield is? And that’s my last question.

Sure. So, that yield -- just on a coupon yield, ignoring a nice fee income is yields from, call it 7.25% to about 8%.

Thank you. And our next question will come from David Bishop with D.A. Davidson.

Most of my questions have been answered, but...

Sorry. We’re having a hard time hearing you, David.

Yes. Most of my questions have been answered. But, from a housekeeping perspective, the buyback, the current authorization, where does that stand again, could you remind us?

We really have only bought a de minimis amount of shares back. So, essentially zero.

Got it. And then, from a purchase accounting accretion impact this quarter, do you have that from a dollar amount perspective what that benefit was in the fourth quarter relative to the third quarter?

Fourth quarter pertaining to United was about $6.5 million.

And then, the core legacy purchase accounting interest income from Belmont and others?

Those numbers have gotten quite a bit smaller at this point. David, we’d have to come back and give you the details on that. We can take that offline. I can’t remember exactly where Belmont was, at this point.

Got it. Will follow up offline. Okay. Thank you, guys.

Thank you.

You are welcome.

Ladies and gentlemen, this will conclude the time we have for questions. I would now like to turn the call over to Mr. Barnes for closing remarks.

Thank you. In closing, another quarter of record earnings provided a great finish to a strong 2019 for People’s United. We were pleased with our performance during the fourth quarter, which was highlighted by improved net interest margin, lower deposit costs, continued remixing of the balance sheet with a focus on higher yielding portfolios, solid organic commercial loan growth, positive operating leverage, strong noninterest income, and sustained excellent asset quality. Thank you for your interest in People’s United. Have a good night.

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.