M&T Bank Corporation (MTB) Earnings Call Transcript & Summary

Good morning, and welcome to the M&T Bank, People's United Bank merger announcement. Today's call is being recorded. [Operator Instructions] It is now my pleasure to introduce Don MacLeod, Head of Investor Relations for M&T Bank Corporation. Please go ahead.

Good morning, and welcome to our investor conference call to discuss the merger of M&T Bank Corporation and People's United Financial. Leading the call this morning are René Jones, Chairman and CEO of M&T; and Darren King, M&T's Chief Financial Officer. Following our prepared remarks, we will have a question-and-answer session. The joint press release issued earlier this morning and a slide presentation we will be referring to today are available on both the M&T and People's United websites in the Investor Relation sections. A replay of this call will also be available on the website after the call. During this conference call, some of the information discussed will contain forward-looking statements within the meaning of the federal securities laws. Those forward-looking statements, which M&T and People's United do not assume any obligation to update, are not guarantees, and management cautions that a number of factors could cause actual results to differ materially from those statements. I also refer you to M&T's and People's United's filings with the SEC, including the risk factor disclosures and their respective Form 10-Ks and 10-Qs. M&T and People's United will also be filing materials related to the proposed merger with the SEC. Investors are urged to read those materials once they are available. These additional materials can be obtained free from the SEC's website and from their respective company's websites. In addition, M&T, People's United and their respective directors and executive officers may be deemed to be participants in any solicitation of proxies in connection with the proposed merger. Information regarding their interest can be found in each company's most recent proxy statement, and additional information will be contained in the joint proxy statement and prospectus to be filed with the SEC. For more information, please see Slide 1 of the investor presentation. At this time, I'd like to introduce René Jones. René?

Thank you, Don, and good morning, everyone. Earlier this morning, we announced a definitive merger agreement between M&T Bank Corporation and People's United Financial. To start this call, I'd like to offer a few thoughts as to why we believe this merger is compelling. The combination of M&T and People's United will benefit both firms, providing additional growth opportunities beyond what either firm could achieve independently. First, stepping back, this partnership has many similar characteristics our 2003 merger with Allfirst Financial, where we added a new top 20 MSA, complemented by many MSAs and communities outside of the top 20, where our brand of banking resonates with customers. In addition to new geographies, we expanded the talent and capabilities in our organization as well as the product set available to our combined customers. We see People's United as a larger version of what we were able to accomplish with Allfirst. On a pro forma basis, our combined company would be the 11th largest U.S. commercial bank holding company by both assets and market capitalization, and our combined geographic footprint is concentrated, offering a distribution system across the Northeast and the Mid-Atlantic states that represents over 20% of the U.S. population and over 25% of GDP and has attractive levels of household income. The density of this combined franchise lets us leverage local market knowledge and scale, our recently bolstered technology, talent and infrastructure and our nationally recognized brands. We enjoy complementary top-tier deposit share. Both firms have at least the #3 share in most of our respective top 10 markets, maybe more important, People's United's outside proportion of core operating accounts, making it among the most attractive franchises in New England. In our view, this is the most important characteristic of a stable, well-run franchise. Not only are our geographies complementary, so, too, are the talent, the product sets and the credit cultures, creating a solid platform that we can collectively build upon. Finally, both M&T and People's United deliver top-quartile return on assets and return on tangible common equity on a stand-alone basis, and this transaction will further generate incremental capital that can be invested to remain competitive for years to come. We trust that you'll share our enthusiasm for the potential this combination offers, not just for our shareholders, but for our customers, our employees and certainly our community. Bridgeport, Connecticut will become M&T's New England regional headquarters, not unlike Baltimore office for us in the Mid-Atlantic today. And now I'd like to turn the call over to Darren, who will review the transaction in more detail.

Great. Thanks, René, and good morning, everyone. Well, let's jump into the slide presentation where I will pause briefly on Slide 1. Just as a reminder to everyone, as Don noted in his opening remarks, please review the disclaimer slide for information on forward-looking statements and where to find additional information when it becomes available. Looking at Slide 2. As René mentioned in his remarks, there are many reasons both we and the team of People's United are excited about this combination. Starting off, both firms share a long history of being deeply committed to the customers and communities they serve with longstanding track records of strong CRE ratings, charitable contributions and employee volunteerism. Those cultural characteristics are important because, together, we would achieve top-tier deposit share in many of the top 100 markets in the country. While expanding the geographic reach for each organization, the combination brings new capabilities to each customer base. Notably, the People's team brings equipment finance, mortgage warehouse lending and fund lending to the table, while M&T brings enhanced treasury management, cash management and payments capabilities, along with GSE multifamily lending and debt capital markets to the union. As René points out, both organizations have a disciplined approach to credit, expense management and capital allocation, generating top-quartile ROA and ROTCE and the capital needed to invest to remain competitive. The economics are compelling: immediately, tangible book value per share accretion at closing, double-digit EPS accretion on a fully phased-in basis and an IRR above 18%. Flipping to Slide 3. Just to summarize the key terms of the transaction. The merger agreement calls for a 100% stock consideration with People's United shareholders receiving 0.118 shares of M&T common stock for each People's United share they own at closing. On a pro forma basis, M&T shareholders will own approximately 72% of the combined company with People's United shareholders owning 28%. Five members of the People's United Board of Directors, including Jack Barnes and Kirk Walters, will join M&T's Board. Assuming approval of the merger by M&T and People's United shareholders and receipt of the customary regulatory approvals, we would expect the deal to close in the fourth quarter of 2021. Based on our expected fourth quarter closing, our target for the operations and systems conversions is in the first quarter of 2022. Turning to Slide 4. We thought it made sense to spend a moment to introduce People's United to those M&T shareholders who might not be as familiar with them. Founded in 1842, People's United is a diversified, community-focused financial services company. People's has a leading market position in the best commercial banking markets in New England. That market position consists of 419 branches that represent $52 billion in deposits, primarily in the states of Connecticut, Massachusetts, New York and Vermont. The leadership team at People's has a solid track record of exceptional risk management and asset quality. The loan portfolio is well diversified,with loans to small and middle-market businesses, including equipment finance, representing approximately 38% of the balances. While not noted on the slide, we would be remiss not to acknowledge the significant depth of experience and local market knowledge represented by the People's management team right through to all the customer-facing staff. On Slide 5, looking at the footprints of the 2 organizations. As René mentioned in his opening remarks, the combination of M&T Bank and People's United will create a leading community-focused bank in the Northeast and Mid-Atlantic. The footprint spans an economically diverse region that accounts for over 20% of the population and 25% of GDP. Despite the size of the population and economic punch, the footprint is relatively compact. In fact, the radius from the center of the footprint to the most distant branch is just under 300 miles. At close, the combined organization will have the second largest branch network in the East -- Northeastern United States and notably well ahead of the next largest super regional bank. As was noted earlier, M&T enjoys the #1 or #2 deposit market share in 7 of our 10 largest markets, while People's United enjoys the top 3 share in 6 of their 10 largest MSAs. The merger will produce a bank with a leadership position in small and midsized markets throughout the Northeast, complemented by a strong presence in 4 of the 20 largest MSAs in the country, ranging from Washington, D.C. to Boston, Massachusetts. Many of the People's United markets, which are new to M&T, offer access to an affluent customer base where leading wealth management capabilities can be leveraged through Wilmington Trust. Turning to Slide 6. The transaction is immediately accretive to tangible book value per share. Factors that drive tangible book value accretion are the relatively modest credit mark, reflecting People's outstanding credit quality and M&T's own strong price to tangible book value ratio, combined with a positive interest rate mark and a markup of the securities portfolio. We expect double-digit percentage earnings accretion when the merger synergies are fully realized by early 2023. We expect mid-single digit 5% to 6%, that is, earnings accretion in 2022, the transition year for the conversion and cost rationalization. We calculate an IRR of over 18%. The transaction enhances M&T's annual capital generation by some $600 million, reflecting People's United's current run rate, plus the fully phased-in merger synergies, less the dividends on the shares issued as merger consideration. Turning to Slide 7. Both M&T and People's United maintain business models that are among the most efficient and profitable in the regional banking sector. The combination of the 2 franchises, through realization of merger synergies alone, will improve our already top-quartile operating efficiency and profitability, as measured by return on tangible assets and return on tangible common equity. The difference in the 2 banks' PPNR to risk-weighted assets ratios illustrates the opportunity for repricing and/or remixing certain loan and deposit categories as well as the opportunity to increase the penetration of fee businesses within the customer base. The result will be enhanced PPNR through time. Flipping to Slide 8. The combined company's total loan portfolios are well diversified with a good balance among commercial and industrial loans, commercial real estate loans and consumer loans, which include residential mortgages. On the deposit side, the company will have a stable, solidly core funded deposit base with a high proportion of transaction accounts. We see opportunity to improve the net interest margin over time by deploying our full breadth of products and services and by remixing the loan portfolio to better yields, consistent with M&T credit risk policy and while repricing or not renewing higher-cost brokered deposits and time deposits. Turning to Slide 9 -- and I'll comment that, as I talk about Slide 9, I'll also refer to Slide 10 since these 2 slides kind of go together. When looking at the 2 organizations combined, we get substantial opportunity to improve our pace of revenue growth, although not factored into our estimates of pro forma earnings accretion. The combined company starts with about 1/3 of revenue in fee income and 2/3 in spread income. From the M&T side, we see opportunity in small business banking, both through loan growth and through garnering more operating account relationships which bring payment and treasury management fees, along with low-cost deposits. M&T's more robust treasury management capability and capital markets product suite represent opportunity with People's United's large commercial customer base. M&T Realty Capital Corporation's ability to place multifamily loans with GSE and other investors represents a new fee opportunity for People's lenders. M&T's Trust operations bring a wide set of wealth and investment products to the affluent markets where people's United operates. On the People side, they offer M&T's small and middle-market business customers more equipment financing options, ranging from small ticket to larger commercial transactions, and they also bring a well-run mortgage warehouse lending operation. On the consumer side, we expect to introduce the M&T owned and branded credit card to the People's United customer base using M&T's credit criteria. In addition, M&T's products for underserved or under-banked customers, notably Myway checking, and a secured credit card offering, will be presented to People's United customer base as well. As we execute on these opportunities, this should lead to improved PPNR over time and result in the enhancement of our combined PPNR to risk-weighted assets, as presented on Slide 7. Slide 11 highlights the consistent credit cultures between in our 2 organizations. Both M&T and People's United have experienced lower credit losses than the regional bank group since the start of the financial crisis which illustrates our cared conservative underwriting cultures. As a result, it shouldn't be surprising that the credit mark is somewhat more modest than many of the other recently announced regional bank mergers. Purchase accounting results in a small 25% increase in the allowance for credit losses versus increases as high as 50% being in other mergers. Turning to Slide 12 and focusing on commercial real estate. Both firms have about 30% of their loans in investor-owned commercial real estate, but the collateral mix is very different. People's United has a much lower concentration in construction loans and a lesser concentration in hotels as well as New York City exposure. The combination enhances the diversity of the combined CRE portfolio and reduces risk. From an underwriting perspective, our standards are well aligned, featuring low LTV for hotels and more broadly for the whole portfolio. On Slide 13, we highlight some of the key components of the due diligence that's been performed over the last several weeks. Both M&T and People's United have extensive experience in executing and integrating with merger partners. In fact, this will be M&T's 25th merger since 1987. Consistent with our historical practice, M&T dedicated over 200 employees to examining over 3,000 documents in a virtual data room. 2,000 loan files were examined by M&T's experienced credit teams. Some highlights of those credit reviews include the 100 largest loans, 77% of the construction portfolio, 94% of the hospitality portfolio, 77% of the senior housing portfolio and 68% of the health care portfolio overall. Our review also included 100% of the criticized and watch-list credits over $5 million. We believe this accurately inform the analysis behind our estimated credit market. Slide 14 provides an overview of the integration experience of our organizations, and this merger is a little bit unique compared to many in the past as both companies bring teams with extensive merger and integration experience to the process. A combined dedicated team will be assembled to complete the conversion process early in 2022. M&T already operates on single core systems and has experience with conversions from People's United's current IT provider onto M&T's infrastructure. We think our meaningful investments in both technology and technology talent will serve us well in this integration effort. We take comfort in our knowledge of People's United markets given the contiguous, or in some cases, overlapping nature of the branch networks. Turning to Slide 15. M&T has maintained the highest possible CRA rating from the Federal Reserve since 1982. M&T support -- provides support to underserved communities across our footprint through participation in community development and affordable housing investments and loans, mortgages and low-income housing tax credit investments. Both firms encourage employees to get back to the communities where they work and live, and the 2 firms' employees combine for some 270,000 hours of volunteering with local community organizations in 2019 prior to the isolation required as a result of the pandemic. The M&T Bank Charitable Foundation made grants totaling $34.9 million to not-for-profit agencies across our footprint in 2020, and such grants have totaled $263 million over the past decade. Similarly, 2 People's United Charitable Foundations have collectively made grants totaling $40 million since 2007. Through the foundations, M&T will use $90 million to support shareable activities in the communities currently served by People's United. Finally, both M&T and People's United share a commitment to serving the needs of small business in our respective communities. During the first round of PPP lending, together, we supported over 75,000 business customers who were challenged by the economic impacts of the pandemic. I'm going to turn the floor back to René for closing remarks before we open up the line for Q&A.

Thanks, Darren. So in summary, we're truly excited to join forces with People's United team. This transaction, which is immediately accretive to tangible book value per share and meaningfully EPS accretive when the merger synergies have been realized, will create the 11th largest U.S. bank holding company -- commercial U.S. bank holding company by assets and market capitalization and will be operating in states that represent over 20% of the U.S. population and 25% of the U.S. GDP. That tight radius will allow us to leverage local management and market knowledge, technology infrastructure and investment in branding. Our franchises are highly complementary beyond geography. We both have top-tier deposit share; complementary product sets; credit underwriting and asset quality that is outstanding; commitment to expense discipline; and deep talent pools, including relationship bankers, software and design engineers and credit underwriters. So in closing, both management teams are enthusiastic about this transaction. That enthusiasm is predicated on our understanding of the key drivers of success for community-focused regional banks and how they can win in local markets. We rely on local. We believe that local scale matters as much as absolute scale. The digital transformation is important, but it's really maximized when it's used to serve relationship bankers who are serving their customers. And we believe a thoughtful underwriting, combined with low-cost and locally sourced deposits, are the foundation for success, protecting capital and enhancing returns. So now we'd like to open up the line to questions.

[Operator Instructions] We'll take our first question from Ken Usdin from Jefferies.

Best of luck with the transaction. Just a couple of deal-related ones, just to start. Can you help us understand what happens on the buyback front on the M&T side? And then what you're thinking the pro forma share count looks like when you look out to that '22 year?

Sure. Good morning, Ken. I guess what we're anticipating is that the buyback -- we won't be buying back shares in 2021 through the close. And once we were able to close the merger and assess the capital levels and where our jump-off point will be for CCAR 2022, we'll look at where what we think from a capital distribution perspective. When you look at the share count that we anticipate at the end of the year, kind of based on where the close will be in the exchange ratio, given the -- us being out of the market, we think that we end up around 175 million shares going into 2022. And then through 2022, we'll look to distribute capital based on our forward-look in the capital plan and take the excess capital generated by the merger and start to deploy that either into business growth or back to shareholders, depending on where the most activity is.

Great. And then on the second part, on the balance sheet, just in terms of the immediate accretion to book value, can you just help us understand how much of the restructuring costs are included in that calculation? And how you expect that trajectory to go over the next year or so?

Yes, sure. I mean the whole restructuring charge is contemplated in the calculation of the tangible book value per share, and that accretion obviously includes the credit marks as well as the loan and securities valuations as well. So all the components are part of that accretion calculation.

Our next question comes from Ken Zerbe from Morgan Stanley.

Just a clarification. In terms of Slide 6, the 5% to 6% EPS accretion in 2022, is that the total amount of accretion that you expect to get in the full year? Or is that on a run rate basis by the end of the year?

Yes. Thanks for the clarification question, Ken. It is what we expect full year. If you look at the run rate and you see the middle bar there, that would be where you would kind of start to see if the cost saves were available for the whole year, what that might look like. And then the run rate obviously kicks in as we get into 2023, and that's where you get to that double digit. And so those -- why we show those 2 components. But hopefully, that clarifies it. But if you still have a question, just let me know.

Got it. No, it does. It does. Fine. And then just a second question. I want to make sure I understand the credit mark properly, just given we're in this new CECL world. So People's have $425 million CECL reserve already. If I understand it right, you're taking a total $535 million, which includes the $425 million, if that's right. And can you also just talk about how -- because I see that the $352 million is non-PCD reserve, which, I guess, implies a $183 million of PCD reserves. Can you just talk about how the double count would impact earnings or EPS?

Sure. So what happens is, as you pointed out, you've got the math exactly right, that the PCD loans, which would be part of the reserve, so the $183 million that you talked about will be added to the reserve. And the non-PCD loans that is what affectionally referred to as the double count. And so on day 2, we set up an equal $352 million reserve that then gets accreted back into earnings over the life of the loan. And so you start to see that $352 million come back into earnings, starting in the fourth quarter, assuming we complete the merger and we do the close in the fourth quarter, as we've assumed, and then starts to show up in earnings over the next several years. And given the life of loans and the fact that it's primarily driven off of commercial loans that tend to be shorter-dated, you would get that accretion predominantly over the first 5 years. Just on that point, it's important to keep in mind the accretion and intangible book value per share include the interest rate marks and securities mark comps, right? And so on the flip side of that income or that accretion of the double count, so to speak, coming back into earnings, it's, in large part, offset by the amortization of those premiums over that time period as well. The basis of amortization is slightly different, and so you get a little bit of noise. But in reality, the best way to think about it is that they basically offset each other.

We'll take our next question from Frank Schiraldi from Piper Sandler.

Darren, just a follow-up on the accretion. The 7% to 8% you have for 2022 that assumes the fully phased-in cost saves. Can you talk about how that -- the ramp-up from there to the 10% to 12% in 2023 and beyond?

Yes. Thanks, Frank. The big difference, really, is just the impact of timing on the full year, right? So if you look -- as we go through 2022, you'll see those cost saves ramp up as we go through the second half of the year. And when you look at 2023, it's really just the impact of the full run rate going into 2023. So we should be looking at that kind of a number towards fourth quarter of 2022.

Got you. Okay. All right. And then just secondly, you talked about the potential synergies. You talked about potential fee opportunity in multifamily. Just wondering if there's any targeted -- or we should think about any sort of runoff portfolios that may serve to offset organic loan growth in the near term, the Hudson City deal?

Yes. I guess, I wouldn't call them runoff per se, Frank, when I think about it. If you look at the mortgage banking business that People does, it's retail-oriented, very much like ours. They make portfolio a little bit higher percentage of the loans they underwrite, and we'll look to have maybe a slightly different mix of what we originate to sell versus what we portfolio. But there's also, given their geographies, a decent set of jumbo mortgages in there as well, and so those might end up in the portfolio a little bit more than in gain on sale. The other place that is worth thinking about and talking about is the commercial mortgage portfolio. And then if you look at our commercial mortgage portfolio, we see the benefit of the 2 franchises and the concentration change that happens with the addition of the commercial mortgage portfolio that comes with People. But that's also an opportunity to use our M&T RCC, the Realty Capital Corp. capabilities to play some of those mortgages with the GSEs or with insurance providers. And it's a way to drive some fee income and also help improve the margin and drive PPNR. And so that's the place where you'll probably see a little bit of a mix change over time that will -- you'll see work its way through the balance sheet, but it will be gradual. The other thing, just to keep in mind as we talk about loans and to be -- for the combined companies, is we're both -- we both have a number of PPP loans on our balance sheet. And as we go through 2021 and into 2022, we'll see some movements up and down, and they can be some large volumes. And so just remind you to account for that as we think about where loan growth might be.

Yes. Darren, I would just add that it's really important to just keep in mind with M&T that we are always focused on maximizing risk-adjusted returns. So to the extent that it makes more sense for us to use our realty capital markets and from a return above our cost of capital and then distribute that capital back to our shareholders, we would do that even if it makes the loan grow smaller. I think this is something that sometimes we miss. We're not really focused on size. We're focused on maximizing returns.

The next question comes from John Pancari from Evercore ISI.

I wanted to see if you could comment a little bit more on the cost phase. The $330 million, I know that's about 30% of People's expense base or 27% ex the Stop & Shop impact. Could you just talk about the potential that, that could come in above that, just given the amount of overlap you guys have and the potential for real estate rationalization? Wanted to get your thoughts on could we be looking at a number as you go along that could exceed that $330 million?

So John, obviously, we spent a much of time going through and looking at the operations and how we'll combine them. When you look at the degree of geographic overlap, it's actually not quite as much as you might think from a branch perspective and also when you take into account the fact that the People's team have already made the decision to change their posture with the Stop & Shop relationship. What's nice is that many of our traditional branch locations are within 5 miles of the Stop & Shop, so I think that's helpful from a customer perspective. But the -- if you look at the cost saves, just to give you context, when we talk about 27%, excluding the impact of Stop & Shop, we take out the saves from both the numerator and the denominator. And so when you look at the bank, the changes that we've contemplated, they really are what will happen with the rest of the bank and that 30% -- 27% to 30% change. It's really -- it's the combination of the operations area, the combination of the staff areas. There might be some -- there will be some overlap in some of the geographies with customer-facing folks. But what we really found was not a great degree of overlap in the customer basis. And so because of that, we don't anticipate any changes to speak of to the folks that talk to customers. And that's really, as we go into these, our #1 priority is protecting those relationships. The last part of the cost saves that I'll mention is just some of the operations, the technical operations areas and that there's a number of systems that People's operates on today that are with outside vendors and contractors. And as we bring those systems onto M&T's core, that those expenses will go away. And so those are -- those have less impact on employees, obviously. So those are where some of the big ones are. I'll pass it over to René to add color.

John, it's René. Yes. I think if you step back and think about your question, it's a market extension deal. And all of the upside in small business and equipment leasing, all the areas that Darren mentioned, we haven't factored in. And so the way to think about it is that if there were more ways to become efficient through the value chain and deliver products to our customers faster, we probably -- that would probably be offset by the growth opportunities that we have and needing that expense for People's distribution. So either way you look at, the question is how you capture the value. We think this is more of a growth story than it is an expense save issue.

The next question comes from Erika Najarian from Bank of America.

My first question is for you, René. In talking about this deal as more of a growth story rather than an expense save story, I'm wondering if you could talk to us a little bit about what you may have identified as potential investments that you would have to put in to People's United and whether or not that's contemplated in that $740 million in onetime merger expenses. And the reason I ask this question is, in some recently closed deals, I think investors were a little bit surprised to see cost saving target still on track,but onetime expenses growing relative to the first presentation and announcement. So that's really why I'm asking the question.