People's United Financial, Inc. (PBCT) Q4 2020 Earnings Conference Call January 21, 2021 5:00 PM ET

Company Participants

Andrew Hersom - Senior Vice President of Investor Relations
Jack Barnes - Chairman and Chief Executive Officer
David Rosato - Chief Financial Officer
Kirk Walters - Corporate Development and Strategic Planning
Jeff Tengel - President
Jeff Hoyt - Chief Accounting Officer

Conference Call Participants

Elan Zanger - Jefferies
Dave Rochester - Compass Point
Mark Fitzgibbon - Piper Sandler
Chris McGratty - KBW
Ken Zerbe - Morgan Stanley
Steven Duong - RBC Capital Markets
Matthew Breese - Stephens
David Bishop - Seaport Global Securities

Operator

Good day, ladies and gentlemen. And welcome to the People's United Financial, Inc. Fourth Quarter and Full Year 2020 Earnings Conference Call. My name is Joelle, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session [Operator Instructions]. As a reminder, this conference is being recorded for replay purposes.

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 go ahead, sir.

Andrew Hersom

Good afternoon, and thank you for joining us today. On the call to review our fourth quarter and full year 2020 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 statement on Slide 1 of this presentation, which is posted on the Investor Relations Web site www.peoples.com/investors.

With that, I'll turn the call over to Jack.

Jack Barnes

Thank you, Andrew, and good afternoon. We appreciate everyone joining us today and hope you and your loved ones are remaining safe and healthy. Let's begin by turning to the full year overview on Slide 2. We are pleased with our performance in 2020, especially in light of the uncertain economic environment caused by the pandemic. Full year financial and operating results were strong and reflect the resilience of People's United, its employees and customers.

Net income of $573 million increased 10% from a year ago and on a per common share basis, net income was up $0.05 to $1.32. Operating earnings of $535 million or $1.27 per common share declined 3% and $0.12 respectively. It is important to note we completed the sale of People's United Insurance Agency in November and realized the pretax gain net of expenses of $75.9 million, which is not included in operating earnings. Preprovision net revenue of $827 million increased $89 million or 12% from a year ago, reflecting the success of recent acquisitions and solid execution across core operations.

Total operating revenues of nearly $2 billion increased 8.5%, driven by higher net interest income, partially offset by modestly lower fee revenues. Operating expenses of $1.165 billion, which includes a full year of United and Belmont's results, were up 6%. Notably, operating expenses ended the year below the level -- the lower end of the 2021 outlook range we provided a year ago of $1.19 billion. The increase in revenues along with our continued emphasis on controlling expenses and realizing projected cost savings from acquisitions lowered the full year efficiency ratio 160 basis points to 54.2%, marking the seventh consecutive year of improvement.

Turning to the balance sheet. Period end loans and deposits increased 1% and 20% respectively from year end 2019. Excluding PPP, the loan portfolio decreased approximately $2 billion or 5%, driven by lower retail balances of approximately $2.3 billion, modestly offset by commercial loan growth of $251 million. The decline in retail balances was mostly due to our planned reduction of residential mortgages as we remixed the balance sheet with a focus on higher yielding portfolios. The impact of the pandemic on the economy was evident in the commercial portfolio throughout the year. Demand within the commercial real estate and C&I and middle market business was limited due to reduced economic activity and funding provided by PPP loans.

Conversely, our mortgage warehouse and lease businesses experienced strong growth. Mortgage warehouse ended 2020 with a record balance of $3.4 billion, which more than doubled from 2019, while lease period end balances increased 19% from the prior year. LEAF, which we acquired in 2017, has been a terrific addition to People's United franchise. LEAF has successfully leveraged the liquidity and funding provided by the bank and other synergies to achieve significant growth, while maintaining both excellent asset quality and high yields. LEAF???s balances ended 2020 at nearly $2 billion, up from approximately $730 million at the time of the acquisition.

Asset quality remained excellent as the net charge offs to average total loans were 11 basis points for the full year. These results are indicative of the company's conservative approach to underwriting, diversified loan portfolios and deep customer relationships. We are particularly pleased by the continued reduction in loan deferrals, which ended the year at $271 million or 0.6% of total loans, down from $1.6 billion or 3.5% of total loans at the close of the third quarter.

Additionally, deferrals have continued to decline since year end. As of January 15th, total deferrals were down to $110 million or less than 0.3% of total loans. We remain committed to supporting our high quality customer base and help them navigate these difficult economic times. Consistent with our intentions discussed past quarter, we provided post second deferral modifications to customers in need of further assistance. Approximately $1 billion in loans received modifications. The majority of the modifications are in commercial real estate with the largest concentration within the hospitality sector as expected.

Moving on to Slide 3. As consumer preferences evolve to more digitally driven experiences, we have continually enhanced our technology capabilities to deliver value, provide convenience and create efficiencies. As a result, customers are increasingly utilizing our online and mobile platforms for their banking needs. Given these accelerating digital banking trends and shifts in retail shopping behaviors, we announced today the decision not to renew our existing in-store branch contracts with Stop & Shop in Connecticut and New York upon expiration. We operate 140 Stop & Shop branches, 84 in Connecticut and 56 in New York. Our contract in Connecticut expires at the end of January 2022 while the New York contract goes to mid year 2022.

Currently, discussions with Stop & Shop on renewal terms are ongoing. Although, our Stop & Shop relationship has provided meaningful value to the bank and its customers over more than two decades, this decision provides us the opportunity to further optimize our branch network, while providing the same level of personalized services across each of our channels. In addition, cost savings achieved overtime by not renewing these contracts will enable further investment in our digital capabilities and traditional branch network.

We remain committed to serving customers in the manner in which they wants to interact with us, whether it???d be in-person, at a branch, virtually through our online and mobile platforms or a combination of both. We are confident customer and deposit retention will be very strong due to the customer portfolio profile of our Stop & Shop branches, increasing adoption of digital platforms, expanded traditional branch footprint proximity between in store and traditional locations and trends in retail shopping behavior.

While in store branches comprise approximately half of our total branches in Connecticut and New York, only 40% of the customers and 30% of the deposit balances are domiciled in these locations. In addition, in store customers carry balances that are only 64% of traditional branch customers. Furthermore, only 20% of our branch deposit balances in these two states are associated with customers that actually visited an in-store branch in 2020.

As previously mentioned, customers are increasingly utilizing our online and mobile platforms. Digital engagement has increased significantly year-over-year. For example, mobile log-ons are up 40%, digital enrollments have increased 25%, mobile wallet transactions are up 162% and we have experienced the 66% increase in active mobile deposit customers. Notably, our in store customers are 13% more digitally active than those at traditional branches and only 10% of deposit balances are associated with customers that used Stop & Shop branches in 2020 but did not utilize a digital channel. Importantly, the strength of our hub and spoke branch model we built overtime created a high level of overlap between our in-store and traditional branches. As such, 75% of our Stop & Shop branches and 77% of our Stop & Shop branch deposits are domiciled within five miles of one of our traditional locations.

In addition, recent bank acquisitions of Suffolk in New York and Farmington and United in Connecticut, have expanded and better optimized our traditional branch footprint in these states, as well as providing customers a greater number of convenient drive up facilities. Finally, changing trends in retail shopping behavior has become apparent. The availability of delivery and curbside pickup options, which have become more prominent during the pandemic, have impacted foot traffic inside stores. Additionally, discount stores in wholesale clubs and convenience stores have increased their share of grocery spend, while share of the traditional grocery stores has declined.

With that, here is David to discuss the fourth quarter results.

David Rosato

Thank you, Jack. I will begin on Slide 4 with an overview of the fourth quarter. We concluded the year with a solid financial performance in the fourth quarter. Operating earnings of $147.7 million increased 2% linked quarter. On a per common share basis, operating earnings were $0.35, up $0.01. Provision for credit losses on loans decreased for the second consecutive quarter to $14.7 million and further strengthened the allowance for credit losses to total loans by 3 basis points to 97 basis points or 102 basis points excluding PPP loans. Operating preprovision net revenue of $196.6 million declined 3% from the third quarter due to modestly lower net interest income, partially offset by slightly higher fee income and lower expenses. Finally, it is important to note the effective tax rate in the fourth quarter reflected a $7.1 million benefit related to the revaluation of certain state deferred tax assets.

Moving to Slide 5. Net interest income of $382.8 million decreased $8.6 million or 2% from the third quarter. The decline was driven by the loan portfolio, which unfavorably impacted net interest income by $15.5 million. This headwind was partially offset by lower deposit costs, which benefited net interest income by $6.4 million. Lower borrowings and higher balances in the securities portfolio also collectively benefited net interest income by $500,000. Notably, during 2020, we have reduced borrowings by over $4 billion on a period end basis as a result of $8.5 billion of deposit growth since the beginning of the year. Net interest income included $20 million from PPP during the quarter, which consists of $15.4 million in fees and $4.6 million in net interest income. These results reflect $6 million related to loans forgiven in the quarter.

As displayed on Slide 6, net interest margin of 284 was 13 basis points lower than the third quarter, primarily due to increased excess liquidity, which unfavorably impacted the margin by 9 basis points. Lower yields in the loan and securities portfolios also unfavorably impacted the margin by 7 basis points and 2 basis points respectively. In the loan portfolio, new business yields remained lower than the total portfolio yield. However, new business yields and credit spreads modestly improved in the quarter. The largest offset to these negative effects was our continued discipline in managing deposit pricing, which benefited the margin by 5 basis points. Average deposit costs were 24 basis points in the fourth quarter compared to 29 basis points in the third quarter, marking the 6th consecutive quarter of lower deposit costs. Finally, PPP had a 2 basis point favorable impact on net interest margin for the quarter.

Turning to loans on Slide 7. Average balances were down $792 million or 2% from the third quarter, while period end loans decreased approximately $1.4 billion or 3%. The loan portfolio continues to be impacted by reduced retail balances and a low demand for our commercial real estate and middle market C&I businesses due to limited economic activity. On a period end basis, retail loans decreased $715 million, mostly attributable to our planned reduction in residential mortgages, which lowered balances by $577 million from the close of the third quarter. Commercial loans were down $647 million, which included a $289 million decline in PPP balances due to forgiveness and a combined $107 million reduction in our run-off portfolios.

Conversely, loans benefited from record mortgage warehouse balances and strong growth by LEAF. Mortgage warehouse period end balances closed the quarter at $3.4 billion, up $161 million from September 30th as results continue to be driven by robust mortgage origination activity and the addition of new customer relationships. LEAF???s average and period end balances grew 5% and 6% respectively from the third quarter. Balances in the transactional portion of the New York multifamily portfolio, which is in run-off mode, ended the quarter at $512 million, down $47 million linked quarter and $225 million for the year. In addition, the period-end balance for the United loans we have chosen to run-off was $845 million, a decline of $60 million from September 30th and $268 million since year end 2019.

Moving to deposits on Slide 8. Average balances were up $1.1 billion or 2% from the third quarter, while period end balances grew $2.5 billion or 5%. The growth, which helped to lower the loan to deposit ratio to 84%, was broad based as balances increased across our retail commercial and municipal businesses. Both average and period end balances were up across all categories with the exception of time deposits as higher costs CDs rolled off. Average time balances decreased $865 million linked quarter, while on a period end basis balances were down $668 million. The decrease in time deposits is a reflection of customer preference for liquidity during this uncertain economic and low interest rate environment. Importantly, period end non-interest bearing deposits increased for the seventh consecutive quarter. Balances of $15.9 billion were up $18 billion from the end of the third quarter and $6.1 billion for the year. Non-interest bearing deposits now account for more than 30% of total period end balances, up from 22% a year ago.

Turning to Slide 9. Noninterest income of $178.2 million increased $77.1 million or 76% linked quarter. As referenced earlier, we completed the sale of People's United Insurance Agency realizing a $75.9 million gain. Excluding this gain, operating noninterest income of $102.3 million grew $1.2 million or 1% from the third quarter. This increase was driven by commercial bank lending fees, which were up $2.8 million, primarily driven by higher preloan prepayment, an increase in customer interest rate swap income of $1 million and higher operating lease income and cash management fees, which collectively benefited noninterest income by $800,000. In addition, other noninterest income was up $2.2 million, primarily due to the mark to market of one equity security position. The largest offset to these increases was a $5.6 million reduction in insurance revenues due to the sale of PUIA in early November.

On Slide 10, noninterest expense of $293.4 million decreased $200,000 linked quarter. The fourth quarter included $4.9 million of nonoperating costs, an increase of $300,000 compared to the third quarter, and they were in the following categories; $3.8 million in other non-interest expense; 800,000 in professional and outside services; and $300,000 in occupancy and equipment. Excluding nonoperating costs, noninterest expense of $288.5 million decreased $500,000 compared to the previous quarter. Noninterest expense benefited from lower regulatory assessments and operating lease expense, which were down $1.5 million and $800,000 respectively in the third quarter. Conversely, noninterest expense was unfavorably impacted by higher costs and occupancy and equipment of $2.4 million due to seasonality and professional and outside services of $1.4 million related to the timing of projects.

Briefly on Slide 11. The efficiency ratio of 55.5% increased 170 basis points linked quarter, primarily due to modestly lower revenues. As I stated last quarter, we will remain very diligent in our management of expenses and continue to be focused on enhancing operating leverage as we move forward in this current low interest rate environment. As Jack mentioned earlier, our asset quality remains excellent. As displayed on Slide 12, net loan charge-offs to average total of was 12 basis points improved 3 basis points linked quarter. Nonperforming assets as a percentage of loans and REO of 78 basis points was 7 basis points higher compared to the third quarter. This increase was attributable to our motor coach portfolio and the People's Capital and Leasing business within equipment finance. The motor coach segment has been significantly impacted by the pandemic, primarily due to the decline in tourism.

Looking at Slide 13, it is evidenced the gain related to the PUIA sale had a significant favorable impact on fourth quarter returns. However, on an operating basis, returns were generally consistent with the third quarter. Operating return on average assets of 95 basis points increased 1 basis point, while operating return on average tangible equity of 13.3% was down slightly from 13.4%. Finally on Slide 14, capital ratios continue to be strong given our diversified business mix and long history of exceptional risk management. It is again important to note, adjusting for PPP loans, the pro-forma Tier 1 leverage ratio at quarter end is 8.7% for the holding company compared to 8.4%, and 9.1% for the Bank compared to 8.7%. Additionally, the TCE ratio excluding PPP is approximately 7.8% compared to the reported 7.5%.

Before turning the call over to Jack to go over our 2021 outlook, I wanted to mention that we are still in the process of performing our annual goodwill impairment assessment. Additional time is necessary to complete the analysis given the complexities brought about by the macroeconomic effects of the pandemic, particularly the current and projected low interest rate environment and a decline in Bank's stock valuations last fall, including on the company's annual assessment date of October 1st. Any potential goodwill impairment charge could be material to recorded earnings, but would represent a non-cash charge and have no effect on cash balances, liquidity or tangible equity. In addition, because goodwill and other intangible assets are not included in the calculation of regulatory capital, our well-capitalized regulatory capital ratios would not be affected by this potential non-cash expense. The analysis will be completed prior to the filing of our annual report on Form 10-K with the SEC.

With that, I'd like to turn it over to Jack.

Jack Barnes

Thank you, David. Looking forward, we are cautiously optimistic about the economy as society continues to adjust to the pandemic. In particular, we are pleased banking activity trends continue to improve despite ongoing social distancing protocols. We are also hopeful the vaccines will help restore a bit of normalcy and potentially help to accelerate economic improvement in the latter half of the year. However, a lot of uncertainty remains. While we entered 2021 in a position of strength, the recent surge in the virus nationwide and the prolonged low interest rate environment present a challenging backdrop for loan growth, net interest income and margin. Despite these headwinds, we are very confident in the resilience of our franchise to maintain strong execution across our operations, further invest in digital capabilities and deliver exceptional service to customers.

With that backdrop in mind, let me outline our full year outlook for 2021 as listed on Slide 15. It is important to note our announcement today on the decision not to renew our existing in store branch contracts with Stop & Shop will not have an impact on 2021 financial results. We expect to grow loans excluding PPP balances in the range of zero to 3% on period end basis, PPP balances totaling $2.3 billion at year end. Our current expectation is these loans will be forgiven in the first half of 2021. Secondly, we anticipated period end deposit balances to change in the range of down 2% to up 2%. This expectation is reflective of a significant deposit growth in 2020 and uncertainty of additional government stimulus measures. We expect net interest income to decrease in the range of 2% to 4%. Embedded in this outlook is the expectation for net interest margin to be in the range of 285 to 295. This net interest margin range is derived from many different factors, one of which is an assumption of no change in the Fed funds raise during the year.

Operating noninterest income is expected to grow in the range of 1% to 3% from an adjusted 2020 operating base of $372 million, which excludes $28 million of noninterest income from the PUIA and $17 million gains from the sale of loans acquired in the United transaction. Operating noninterest expense, which excludes merger related costs, is anticipated to be in the range of $1.15 billion to $1.18 billion as compared to $1.142 billion in 2020, which excludes $23 million of People's United Insurance expense. This expense outlook reflects our continued commitment to invest in digital capabilities to further enhance efficiencies and convenience of customers. We also expect to maintain excellent credit quality with a provision in the range of $60 million to $80 million. The wider range compared to prior year's outlook is indicative of continued uncertainty caused by the pandemic. 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%.

That concludes our prepared remarks. We'll be happy to answer any questions that you may have. Operator, you please proceed to the Q&A portion of call.

Question-and-Answer Session

Operator

[Operator Instructions] First question comes from Casey Haire with Jefferies.

Elan Zanger

This is Elan Zanger on for Casey. Just following up on the Stop & Shop commentary, I understand it's a '22 event. Maybe could you help us think about some of the financial impacts, like the deposit attrition, maybe season expenses. Granted, I think you mentioned earlier that there will be expense kind of reallocated in some of the investment side, but just trying to get a feel for how '22 can shake out? Thanks.

David Rosato

Thank you for recognizing. This is a big strategic decision for us, but it really doesn't have much of an impact in -- or it doesn't have an impact in 2021. When we look out, the total cost to run the combined states, Stop & Shops, including rent, comp and equipment, et cetera, is a number in the $60 million to $70 million range. So there's a large opportunity for us over time in that. And as Jack said in his comments, there's contractual rundown periods for this. So from a financial perspective, there's a large opportunity for us over time. We spent a lot of time on this decision thinking about it. And Jack went through a lot of statistics in his prepared comments about seeing substantially higher levels of digital engagement. The fact that some of the recent acquisitions have changed the complexion of our traditional branch network, which gives us confidence that we can do this with a very reasonable and small risk of deposit attrition over time.

Jack Barnes

We have a pretty long track record of closing branches, optimizing the branch system over time, and we've been really successful at retaining customers, basically redirecting them to nearby branches. And so that gives us a lot of confidence. We've described over the years kind of a hub and spoke approach to the way we've established our branch system in Connecticut and we were able to replicate that some in New York. And it really is that many of our Stop & Shop branches are fairly close to a traditional branch. So we've always recognized that as a business model risk going into the in stores, and we intentionally created that hub and spoke approach. And as the world has changed and customers' preferences have changed, we now feel we need to take advantage of the expiration of these contracts and take this strategic step.

Elan Zanger

And just switching over to the loan growth side. There are some headwinds. There's expected runoffs still going on in resi and multifamily in the United book. I guess, what are the key drivers for kind of the net loan growth as we look at '21?

David Rosato

Growth is -- as they go down the balance sheet is the continued success that we've had in equipment finance and I would say, particularly led by some of the specialized industry verticals that we've talked about in the past, whether it's our franchise lending, fund banking, et cetera. In 2020, we, as a planned strategy when we were remixing the balance sheet, we also faced a headwind of a declining residential mortgage portfolio. That process, from our perspective, we've gotten to where we want to be for an allocation of the balance sheet. So as we look forward, we'll start to see some growth in the residential mortgage line. Mortgage warehouse had a banner year, obviously, in 2020, but rates are low, refinance opportunities are still out there for a large part of the mortgage universe. So we think we will be able to hold balances fairly well in that business. Those positives, I would say, are offset by continued reduced activity in our commercial real estate book.

Operator

Our next question comes from Dave Rochester with Compass Point.

Dave Rochester

Just on that last question, in terms of runoff in acquired loans and runoff in New York City multifamily. What you guys have left in that or what are you expecting for this year maybe?

David Rosato

So the New York multifamily was ended the year at $512 million. So that came down $225 million in '20. We think runoff next year will probably be $100 million to $150 million. And then in the United portfolio, we ended the year in the runoff section of that portfolio of $845 million. So that came down $268 million last year. We think the runoff there will be about $200 million to $300 million.

Dave Rochester

And the loan guide includes the net of all that?

DavidRosato

Yes, it does.

DaveRochester

And then just on the NIM guide. I was wondering what you're assuming for the shape of the curve. I know you talked about not assuming rate hikes. And then it looks like the guide assumes upside from the 4Q NIM. So just wondering what you see driving that if it's just an unwind of some of this excess liquidity build, or maybe the PPP forgiveness fees or something like that?

David Rosato

Well, I think you hit on most of what I was going to bring up, Dave. So the 285 to 295 million is, as Jack said, is predicated on no change in the Fed funds rate for the year. We have seen a modest steepening of the yield curve and think we'll see a bit more as the year unfolds. Some of the components that we're thinking about, the one that really came to bear on the margin in the fourth quarter was the excess liquidity, right? So we had, if you look on the short term investment line in the press release, you'll see that we were up $3.3 billion in the fourth quarter. The reality is that money is sitting at the Fed right now at 10 basis points. So that had in '20, in the fourth quarter, a 9 basis point negative impact to the margin. We grew the securities portfolio about $1 billion in the fourth quarter and we are continuing to deploy some of that excess liquidity into the securities market.

So we'll be able to reverse some of that 9 basis point drag there. I think that will probably offset some of the positive benefit we think we'll get in the payoff of the PPP fees, which as, in Jack's comments, talked about in the first half of the year. So about half of our loan book is floating and it's really not going to change much, but half of the loan book is fixed rate, and there's about $5 billion in equipment finance in there that cash flows fairly nicely. And each quarter, we expect to get a little better reinvestment yield on that half of the loan portfolio. So that and deploying some of that excess liquidity and picking up a little over 100 to 120 basis points on that excess liquidity are some of the major drivers we're thinking about around that margin guidance.

Dave Rochester

And so for the NII guide, how much in way securities growth does that bake in for the year at this point roughly?

David Rosato

For '20, there's, call it, about another billion dollar's net growth.

Dave Rochester

And then maybe just switching to capital real quick. It looks like you're already at the top of your target CET1 range. So I was just wondering what you're thinking about in terms of maybe buybacks or M&A. You've got loan growth in your guide so you'll need some to support that. But if you're already at the top of your range and you're making more money, you may have some extra to do something with.

David Rosato

Yes, true, we are at the top of the range, and we didn't feel we wanted to change the range in guidance or from an outlook perspective. The reality is, and we talked about this, I think last quarter when we announced the insurance sale, that was about 15 points boost to equity levels. We continue to think about and once in a while talk to our board about buybacks and that is certainly something that might happen over the course of the year. It's not planned today. It's not in our guidance. But it is definitely just one of those capital management tools that we have regular periodic discussions with our board around.

Dave Rochester

And then on M&A, any updated thoughts there?

Jack Barnes

I would say no updated thoughts. And I think we continue to look at the environment and have discussions with people. And obviously, there's been a lot that's happened out there. I think the challenges around the environment certainly causing people to at least look at their strategic alternatives and consider that as opposed to continuing to fight away here.

Operator

Your next question comes from Mark Fitzgibbon with Piper Sandler.

Mark Fitzgibbon

Just a couple of quick follow-ups on the in-store thing. And I apologize if you mentioned this, but how many of the in-store locations can you exit in 2022?

Jack Barnes

How many can we close in 2022?

Mark Fitzgibbon

Yes.

JackBarnes

By the end of 2022, they will all have been closed. And Mark, there is an original agreed upon schedule, I think it's '23, all through '23. And that's well laid out and that's kind of agreed 10 years ago, that was actually 20 years ago with both parties that an orderly unwind, if there was one, would kind of go by county, and we don???t fingertips on that summary right here, but we'll begin to share that as we move through this. But we indicated we're actively talking with Stop & Shop, and we are about both those schedules and also where we might continue working with them. It won't be a big footprint but we believe that we will reach some agreement with them following those discussions.

Mark Fitzgibbon

Presumably, Jack, they'll bring in another partner. So I guess I'm curious, do these branches have to stay dark for a period of time after you close them before somebody else could sort of move in there?

Jack Barnes

No. We watch in-store market pretty closely, Mark, as you can imagine. And in-store presence across the industry is spending decline for some time. That will be an awfully big thing for anybody to take on and we're not expecting they will, so that's our view on that. And we have traditional branches closed by. So we said we're confident we'll move those customers to the traditional branches and be successful.

Jack Barnes

And then, David, I'm curious you had touched upon the $3 billion of short term investments. Did I hear correctly that you expect to put about $1 billion of that to work in the securities portfolio?

David Rosato

Yes, Mark. So we grew the securities portfolio about $1 billion on a net basis in Q4. At the end of the year, we were sitting on $3.7 billion in change of liquidity, and that was up in the quarter, $3.3 billion. So about half -- our current thinking is about $1 billion of that $3.3 billion, at least right now, we will deploy in the first half of 2021.

Mark Fitzgibbon

And then just lastly, to follow-up on the M&A question. Jack, it sounds like there's a lot of things going on out there. Could you envision doing a bigger sort of MOE kind of transaction? Is that something that you would consider?

Jack Barnes

I would say that we look at the landscape all the time and there's at least some potential eventually that we would consider that with the right partner, I would say, I definitely would not say absolutely not. But those are difficult and -- but certainly, possible. I guess I would say it this way as well, we're really confident in our track record on execution on M&A. And if we felt like there was an appropriate thing that I wouldn't -- I would feel very good about our talented focus going and taking something on it but those are low probabilities.

Operator

Our next question comes from Chris McGratty with KBW.

Chris McGratty

I am sorry for going back to the Stop & Shop, I just want to make sure I get the impact right. I think you guys said $60 million to $70 million of expenses related to this action, nothing this year but next year before any reinvestment, that would be the savings from that. I guess, number one, is that the right way to think about it? And we've seen others do branch closures and maybe 50% gets reinvested. Am I in the zip code about how you're thinking about potential net savings in 2022?

David Rosato

So that $60 million to $70 million is our all-in cost for the totality of Stop & Shop branches in both states. So that???s comp and benefits, occupancy, all in. We did not say what percentage of that would be reinvested specifically but that is the opportunity from a cost savings.

Jack Barnes

Yes, we're already investing in our digital capabilities very steadily for years, and we've certainly committed again in 2021 to follow this year. We're simply making the point is it's going to give us the capabilities to use some of it, but I wouldn't use the thought of 50%. I don't think as I sit here today that we would feel like we would need that much.

Chris McGratty

So that net benefit would be a '22 event. I got it.

Jack Barnes

We only think about that more as a '23 event, not a '22 event.

Chris McGratty

Just one more on the PPP. I think you gave the numbers of what was in the quarter, about $20 million. What's left on the fees and then secondarily, what are the thoughts on the round two participation?

David Rosato

Sure . So in 2020, the total net interest impact of fees and interest income was $47 million. Now that was over three quarters, obviously, second, third, and it was ramping up over that period of time. We're making the assumption that what remains on the books will all be forgiven in the first two quarters of the year '20. That number is just about the same amount, it's about $50 million.

Chris McGratty

Net total between the 1% and the fees, correct? Okay.

David Rosato

Yes, yes. That's the total. So, we're actually calling what's going on right now PPP III internally, and that's just starting to ramp up. It's not we've only been at it two days now. And we're -- our thoughts around that are not embedded in the outlook we're sharing today.

Jack Barnes

I'll just share, I think it was this morning, approximately 2,500 applications already mostly on the small size, less than 150,000 and good utilization of our technology in our portal, customers are actually making the applications themselves and not needing to engage with our bankers. So it's early but seems to be active. We're not expecting it's going to be anywhere near PPP I, but we don't know.

Operator

So, our next question comes from Ken Zerbe with Morgan Stanley.

Ken Zerbe

Maybe just a little more theoretical question for you, if you don't mind. When I always think about banks and branches, obviously, people have not been going into them as much, but they're definitely used as a marketing tool. And it's great to just have that brand presence out there, because I shop at Stop & Shop, I see peoples, it's definitely very helpful. Like how are you guys thinking about that aspect of it? Like where I say more specifically, how do you think about growing the business without sort of that, I might say, free marketing of having branches in many more locations.

Jack Barnes

Yes. Well, I appreciate what you're saying and noting that. And I think traditional branches do that for us as well, right, has historically always have and even a bigger presence. I mean we're very much committed to that, meaning bigger signage and more cars going by, et cetera. And the other thing in terms of growing the business, we are doing so much more in digital marketing space, it's just ramping up incredibly fast. And so our messaging to people is coming more through the technology and the cell phone and the computer with offers and visibility on products and what the brand is doing, also what we're doing in the community. We use digital a lot to talk about our community activities and the foundation as well.

Ken Zerbe

And then just a separate question. In terms of the goodwill write-down or the goodwill impairment test that you're doing, I guess maybe that caught me a little bit off guard. I wouldn't expect in this environment that we would see any goodwill write-downs. Can you just talk about what parts of your business are potentially subject that might be most at risk of a write down?

David Rosato

So, what we tried to say in those prepared remarks and the press release is, this is an accounting exercise. The date that we do this happens to be October 1st. So, a part of that process, a complicated process has to do with market cap on the day of assessment, which for us, we had a $10.17 stock price, $4.3 billion market cap. Also, there is analysis relative to peers, us and the peers were all trading at about 1 to 1 point -- 0.8 to 1.1 times tangible book value. So that is a piece of it.

So you run that assessment, that accounting exercise over the units that we report in our public documents. So that's just commercial, retail and wealth management, our three operating businesses. So, it's complicated. It's a difficult evaluation date but it is the date that's these assessments happen every year. Sometimes more often, but at a minimum.

What's somewhat interesting by this is at year-end, we had a market cap that was up another $1.2 billion to $1.3 billion from that point. If we were doing this at 12/31, it wouldn't be an issue, right? There wouldn't be the possibility of an impairment charge. But we're dealing and working with our outside auditors and valuation team that we work with. And we're doing it around the date that we have to. It's proven to be a difficult date for us.

Operator

Your next question comes from Steven Duong with RBC Capital Markets.

Steven Duong

I just wanted to touch on the margin, your cost of total deposits, it continues to climb lower. Do you think that by the end of this year, you'd fall below 20 basis points?

David Rosato

Yes, I think that is possible. If we continue to see these -- my word, massive inflows of deposits into our company, and we're not obviously the only one who's experiencing that, then I think the industry needs to do what it can to preserve margin. So it's possible. We know what the role is on our CD book, that's the part of the book that there's contractual pricing on. But there's a large differential between those CDs that are rolling off in our current offering rates, and that's why that book is going down and the money is -- because rates are so low, is going to noninterest bearing accounts with us or money market rates even lower. There's a clear preference for liquidity amongst customers. And because the industry is -- this is an industry issue. There's really very little opportunities for customers to go elsewhere for any wait pickup that's meaningful enough to make it worthwhile. So that's the long answer to, yes, I think it's possible.

Steven Duong

And with all these deposits, I know you guys have taken your FHLB borrowings down considerably. Do you still -- is it going to be stable now going forward or can we expect that to go down further?

David Rosato

The home loan advances that are on the book now are all term advances at this point and they're at relatively good rates. So we really haven't spent a lot of time thinking about prepaying them and incurring any modest charge to do that. So I don't know the exact term structure of how much might come off this year. But whatever it is, that's probably all the change will be and it will be relatively modest.

Steven Duong

And if I could just squeeze one last one in, just on your NIM guidance. Is that -- that's not assuming a further steepening in the yield curve?

David Rosato

Well, it's just based on current forwards. What I was trying to say is short rates are not going to move this year. That's what the market is telling us. That's what the Fed is coming up. But we have seen a modest steepening of the yield curve in the last call it two months. And I would say market expectation is for a little bit more steepening but it's relatively modest.

Operator

Our next question comes from Matthew Breese with Stephens, Inc.

Matthew Breese

Maybe just going to the provision and the credit outlook. I appreciate the guidance on the provision for this year. Just curious given the sharp reduction in deferrals and the clear comfort on the credit front. Could you give us just a little bit more color or insight as to how you think charge-offs might trend this year?

Jack Barnes

Right now, we're we're not looking at a dramatic shift at all. The performance has been really good. Actually, it's really pleasing when you think about what we've all been through here in the last 10 months to think about where delinquency has gone, and how we and banks have dealt with people that were, I would say anomaly hit. But from a charge-off perspective, our experience this year is really on unique situations. Most of them pre pandemic kind of troubled situations. And like the past, we get those once in a while but not at a high level.

MatthewBreese

And then with that in mind, considering where the reserve is. How long might it take for you to get back to that CECL day one level as the pandemic is increasingly put in the rearview mirror?

David Rosato

That's a tough one to guess on.

Jack Barnes

Yes, I clearly agree with that. We put a provision estimate out there. We spread it $20 million, which is the first time we've ever done that as the company. And normally, we're always comfortable with 10 and we're always within that range. We just spread an extra 10 from the perspectivethat things are getting better. That's clear. Charge-offs for us for the last couple of quarters have been relatively low and steady. We've been able to bring provision expense down. You've seen some banks start to release reserves. We've been a little reluctant to do that yet. We think that will probably unfold. We hope that unfolds in 2021 but we just want to be conservative in our viewpoint at this point. And it's really CECL scenario driven, which is another way of saying is economic forecast driven.

Matthew Breese

And then just going back to M&A. Maybe I was hoping you could provide some color on the markets across your footprint that you want to be bigger in, you want to be better in. If you had a stack order where there was a target and you would take advantage of it, what are those markets?

Jack Barnes

Well, not ready to go there. You could look at our whole footprint and know that we're aware of it. And as we've always said and we've always done, we will look across our markets for opportunities to do in market deals and also look at markets adjacent.

Matthew Breese

And then just last one for me. With all the digital discussion, I just wanted to ask and get your thoughts on the OCC letter from a couple of weeks ago. It pertained the blockchain, stable coins for payments, as you made all these investments in digital technology. Is that something you've been pursuing? We don't hear a lot of regional banks, certainly not a lot of community banks talking about this. And just curious what your thoughts were there?

Jack Barnes

Yes. We have not been pursuing it. Certainly pay attention like others. I don't know how that's all developing, but it's not anything that we're working on.

Operator

Your next question comes from David Bishop with Seaport Global Securities.

David Bishop

First question, you'd mentioned it that you're expecting some benefit from the roll-off of CDs at a higher rate to a lower rate. Just curious what that differential is in terms of offering yields on the CD portfolio?

David Rosato

Top of my head, Dave, I don't have the exact numbers, but I think that current differential is about 150 basis points or so. It's quite significant. Our offering rates are dependent on term probably only gets up to maybe 30 or 40 basis point.

David Bishop

And then noted the strength, and I know it's been building across the year on the commercial lending fee side in terms of fee income. Just maybe some commentary in terms of the outlook for commercial banking fees into 2021? Thanks.

David Rosato

Yes. I mean, thank you for recognizing. Even in a pandemic year, the commercial banking lending fees were up. There's some good news and bad news in there. I'd say the bad news is we did benefit from commercial real estate, mostly payoff fees. We like the prepayment fee. We hate to lose the balance. So that's the one that's hard to call and that's the good news, bad news piece that we experienced that every year. The good news, when I think about commercial banking fees is, even in this year we've seen nice syndication fees out of our efforts to build those capabilities. We're leading more credit deals. We're earning servicing fees on some of those deals, whether it's in our healthcare, our fund banking group or even our mortgage warehouse group. So the commercial fee activity and generation capabilities continue to get stronger. Last year was a tough year for our interest rate swap business. We were down about $9 million in aggregate year-over-year. And we stand ready for every customer interest we have. It's just when origination activities are subdued, those activities are also subdued. As soon as activity levels come back, we'll see a resumption of those fees. And they are the type of fees that will come back strongly and quickly.

Operator

Sir, at this time, there are no questions in the queue [Operator Instructions]. Ladies and gentlemen, since there are no further questions in the queue, I'd now like to turn the call over to Mr. Barnes for closing remarks.

Jack Barnes

In closing, we are pleased with our fourth quarter performance, which provided a solid finish to a strong 2020 for People's United, especially in light of the uncertain economic environment caused by the pandemic. These results reflect the strength and resilience of our franchise. Looking ahead, we are cautiously optimistic about economic trends in 2021 and continue to be confident in our ability to successfully execute in any operating environment. Most importantly, we remain committed to providing personalized service and delivering value and convenience to customers across both our branch network and digital platforms. Thank you, all, stay healthy and have a good evening.

Operator

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