Good morning, and welcome to the M and T Bank People's United Bank Merger Announcement. Today's call is being recorded. In the interest of time, we ask that you please limit yourself to one question and one follow-up. In addition, when posing your question, It is now my pleasure to introduce Don McLeod, 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 and T Bank Corporation and People's United Financial. Leading the call this morning are Renee Jones, Chairman and CEO of M and T and Darren King, M and 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 and T and Peoples United websites in the Investor Relations 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 and T and Peoples 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 and T's and Peoples United's filings with the SEC, including the risk factor disclosures in their respective Form 10ks and 10 Qs. M and T and Peoples 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 the respective companies' websites. In addition, M and 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 Renee Jones.
Renee?
Thank you, Don, and good morning, everyone. Earlier this morning, we announced the 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. Combination of M and T and People's United We benefit both firms, providing additional growth opportunities beyond what either firm could achieve independently. First, stepping back, this partnership has many similar characteristics to our 2,003 merger with All First 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 sets 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 form a 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 number 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 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. Marginally, both M and T and People's United delivered top quartile return on assets and return on tangible common equity on a standalone 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 and T's New England regional headquarters, not unlike the rural Baltimore fields 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, Renee, 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 to Slide 2. As Renee mentioned in his remarks, there are many reasons both we and the team at 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 long standing 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 Peoples team brings equipment finance, mortgage warehouse lending and fund lending to the table, While M and T brings enhanced treasury management, cash management and payments capabilities along with GSE Multifamily Lending and Debt Capital Markets to the union. As Renee 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 and T common stock For each Peoples United share, they own at closing. On a pro form a basis, M and T shareholders will own approximately 70 2% of the combined company with Peoples United shareholders owning 28%. 5 members of the Peoples United Board of Directors, including Jack Barnes and Kirk Walters will join M and T's Board. Assuming approval of the merger By M and T's Peoples United Shareholders and receipt of the customary regulatory approvals, we would expect the deal to close in the Q4 of 2021.
Based on our expected Q4 closing, our target for the operations and systems conversions is in the Q1 of 2022. Turning to Slide 4. We thought it made sense to spend a moment to introduce People's United to those M and T shareholders who might not be as familiar with them. Founded in 18/42, People's United is a diversified community focused financial services company. Peoples has a leading market position in the best commercial banking markets in New England.
That market position consists of 4 19 branches that represent $52,000,000,000 in deposits, primarily in the states of Connecticut, Massachusetts, New York and Vermont. The leadership team at Peoples 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 Peoples Management team right through to all the customer facing staff. On Slide 5, looking at the footprints of the 2 organizations.
As Renee mentioned in his opening remarks, The combination of M and 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 2nd largest branch network in the Northeastern United States and notably well ahead of the next largest super regional bank.
As was noted earlier, M and T enjoys the number 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, Returning to M and 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 Peoples' outstanding credit quality and M and T's own strong price 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 and T's annual capital generation by some $600,000,000 reflecting Peoples 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 and 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 loans 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 counts.
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 and T credit risk policy and while re pricing Turning to Slide 9, and I'll comment that as I talk about Slide 9, I'll also refer to Slide 10, since these two slides kind of go together. When looking at the 2 organizations combined, we see a substantial opportunity to improve our pace of revenue growth, although not factored into our estimates of pro form a earnings accretion. The combined company starts with about 1 third of revenue and fee income and 2 thirds and spread income. From the M and 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 and T's more robust treasury management capability and capital markets product suite represent opportunity with People's United's large commercial customer base.
M and T Realty Capital Corporation's ability to place multifamily loans with GSE and other investors represents a new fee opportunity for Peoples lenders. M and T's Wilmington Trust operations bring a wide set of wealth and investment products to the affluent markets where Peoples United operates. On the Peoples side, they offer M and 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 and T owned and branded credit card to the People's United customer base using M and T's credit card service. In addition, M and T's products for underserved or under bank customers, notably MiWay checking and a secured credit card offering will be presented to Peoples 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 in our 2 organizations. Both M and 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 geared conservative underwriting cultures. As a result, it shouldn't be surprising that the credit mark is somewhat more modest and 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% seen 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 LTVs 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 and T and People's United have extensive experience in executing and integrating with merger partners. In fact, this will be M and T's 25th merger since 1987. Consistent with our historical practice, M and T dedicated over 200 employees to examining over 3,000 documents in a virtual data room. 2,000 loan files were examined by M and 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 healthcare portfolio overall. Our review also included 100% of the criticized and watch list credits over $5,000,000 We believe that accurately performed the analysis behind our estimated credit mark. 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 and T already operates on single core systems and has experience with conversions from Peoples United's current IT provider On to M and 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 the People's United Markets given the contiguous or in some cases overlapping nature of the branch networks. Turning to Slide 15. M and T has maintained the highest possible CRA rating from the Federal Reserve since 1982.
M and 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 give back to the communities where they work and live and the 2 firms' employees combined 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 and T Bank Charitable Foundation made grants totaling $34,900,000 to not for profit agencies across our footprint in 2020 And such grants have totaled $263,000,000 over the past decade. Similarly, The 2 People's United Charitable Foundations have collectively made grants totaling $40,000,000 since 2007. Through the foundations, M and T will use $90,000,000 to support charitable activities in the communities currently served by People's United.
Filing, both M and 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 Renee for closing remarks before we open up the line for Q and A. Thanks, Erin. 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 Meaningfully EPS accretive when the merger synergies have been realized, we'll create the 11th largest U. S. Bank holding company by A commercial U. S. Bank holding company by assets and market capitalization, and we'll be operating in states that represent over 20% of the U.
S. Population and 25 That tight radius will allow us to leverage local management and market knowledge, technology infrastructure and investment and 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, 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.
We'll take our first question from Ken Usdin from Jefferies. Your line is open. Please go ahead.
Thanks. Good morning, guys, and 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 and T side? And then what you're thinking the pro form a share count looks like when you look out to that 'twenty two year?
Thanks.
Sure. Good morning, Ken. I guess what we're anticipating is that the buyback we will 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 close will be in the exchange ratio given us being out of the market, We think that we end up in around 175,000,000 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. Thank you. 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. The whole restructuring charge is contemplated in the calculation of The tangible book value per share in 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.
Okay, got it. Great. Thanks for that, Darren.
My pleasure.
Our next question comes from Ken Zerbe from Morgan Stanley. Your line is open. Please go ahead.
Hi, great. Thanks. 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 that's why we showed those two components, Hopefully that clarifies it. 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 Peoples had a 425 1,000,000,000 CECL Reserve already. If I understand it right, you're taking a total $535,000,000 which includes the $425,000,000 If that's right. And can you also just talk about how because I see that the $352,000,000 of non PCD reserve, which I guess implies of PCD reserves. Can you just talk about how the double count would impact earnings or EPS?
Thanks.
Sure. So what happens is, as you pointed out, you got the math exactly right, that the PCD loans, which would be part of the reserve, so it's $183,000,000 that you talked about will be added as a reserve and it's the non PCD loans that is what's affectionately referred to as the double count. And so on day 2, we set up an equal $352,000,000 reserve that then gets Accreted back into earnings over the life of the loan. And so you start to see that $352,000,000 come back into earnings It's starting in the Q4, assuming we complete the merger and we do the close in the Q4 as we've assumed. And then it 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 Prominently over the 1st 5 years.
All right, great. Thank you.
Joe, just on that point, important to keep in mind that the accretion, intangible book value per share includes the interest rate marks and the securities markups, 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 Shailesh from Piper Sandler, your line is open. Please go ahead.
Good morning. 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 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 in the full year, right? So if you look at 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 Q4 of 2022.
Got you. Okay. All right. Thanks for that. 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 Sort of to offset organic loan growth in the near term, a la 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 originally sell versus what we portfolio. But there's also, given our 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 that 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 and 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 a place where you'll probably see a little bit of a mix change over time that will They say you'll see work its way through the balance sheet, but it'll be gradual. The other thing just to keep in mind as we talk about loans And it will be for the combined company is we're both we both have a number of PPP loans on our balance sheet.
And as we go through 2021 into 2022, we'll see some movements up and down and they can be some large volumes. And so I'll just Remind you to account for that as we think about where loan growth might be. Yes, Sarah, I'd just add that it's really important Just keep in mind with M and T that we are always focused on maximizing risk adjusted return. So To the extent that it makes more sense for us to use our Realty Capital Markets and Our return above our cash and capital and then distribute that capital back to our shareholders. So 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.
Okay, great. Thank you.
Our next question comes from John Baccarat from Evercore ISI. Your line is open. Please go ahead.
Thanks. Good morning. Good morning, John.
I wanted to see
if you could comment a little bit more on the cost saves. The $330,000,000 I know that's about 30 Percent of Peoples expense base or 27% ex the Stop and Shop impact. Can you just help out 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. I wanted to get your thoughts on could we be looking at a number As you go along that could exceed that $330,000,000 Thanks.
So John, obviously, we spent a bunch of time going through and looking at It's 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 And from a branch perspective and also when you take into account the fact that the People's team had already made the Decision to change their posture with the Stop and Shop relationship. What's nice is that many of our traditional branch locations Within 5 miles of a stop and 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 and 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% or 20 7 percent to 30% change. It's really it's the combination of the operations areas, The combination of the staff areas, there might be some there'll 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 number one 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 Peoples operates on today that are with outside Vendors and contractors and as we bring those systems on to MT'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 Renee to add color. Hey, John, it's Renee. 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, Distribution. So either way you look at it, the question is how you capture the value. We think this is more of a growth story than it is Expense, they issue.
The next question comes from Erika Kurian from Bank of America. Your line is open. Please go ahead.
Hi, good morning. My first question is for you, Renee. In talking about this deal as more of a growth story rather than an expensive 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 at $740,000,000 in one time 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 savings target still on track, But one time expense is growing relative to the first presentation of announcement.
So that's really why I'm
Eric, it's a great question. And I'll start by stepping back. Look back at the last 3 years, there has been some question early on about how much we were spending on our infrastructure, particularly our tech And Innovation Infrastructure, we've made those investments. And so this is part of extending that infrastructure To Peoples, so if you think about it before they passed the new regulatory regime was thinking about how could they actually come up And the well, with now $100,000,000,000 bank, but at that time this year going over $50,000,000 So a lot of what we've done On tech, a lot of what we've done invested in our risk infrastructure is now really leverageable across that franchise. Second thing is Peoples are well run institution.
So they're not behind in things and spending and they have strong staff. My sense is that the numbers are what they are, exactly as Darren presented them in a classic M and T fashion. And as we go forward, I think there are places Particularly like small business and business banking, where there'll be opportunity and that will mean that we would have to add staff To capture that opportunity, but that would be its own NPV. Think of it as its own NPV, which we'll do as it makes sense. So I hope that helps.
The numbers are as they are. Darren can't change his DNA, and so it's pretty straightforward.
Got it. Thank you. And my second question is, how does this deal impact how you're thinking about Trust test participation this year, if at all, or is your participation in this year's DFAST really dependent upon know whether or not the Fed, cements the December test stress capital buffer as a new stress capital buffer versus from the June test?
Yes. This combination doesn't affect our thought process about this year's stress test. No, as part of the application, we'll go through and we'll prepare a combined stress test that will be looking at the 2 organizations, obviously, Standalone and then combined and what that means. And as we go through the next little while, we'll determine whether or not we choose Participate this year. We haven't finalized that decision yet, but that decision is by no means linked to this merger.
Yes. What I would say is it's helpful that, again, as getting prepared for things, there is a stress test infrastructure at Peoples. So we're able to kind of see their work, their governance and what they're thinking
Our next question comes from Mike Mayo from Wells Fargo. Your line is open. Please go ahead.
Hey, Renee, if you could help me reconcile 2 competing thoughts. On the one hand, Clear positive is the improved density in New England. And I just checked Google Maps. It's a 7 hour drive either from Yes, Baltimore to Boston, Baltimore to Buffalo or Buffalo to Boston. So you've made the point about 300 miles from the middle of your, I guess, triangle, So to speak, so that density certainly can help and that's a positive.
On the other hand, the negative I think is that Peoples has a much slower Growth footprint in terms of expected population growth and it's even less than the existing M and T footprint. So can you help me and I guess I'm thinking I'd rather be in Florida than Connecticut right now, maybe it's because it's so cold and Here in the Northeast. Can you help me reconcile when you think of these acquisitions, density versus your growth markets, How do you reconcile that? And of all the banks out there, M and T, I mean, over the last 30 years, you had slow growth Buffalo and you've had long term success, But does that still apply in today's world? Thanks.
Yes. Thanks, Mike. A great question. I'm really glad
that you're in Florida because you won't be competing with us in New England.
So I think that I think you kind of said it. We have this long history of being focused on Small towns, mid tier cities across our footprint. And I think what tends to get missed is that By having dominant local share, it produces outsized ability To be close to your customer, it increases the value proposition between the bank and the customer, and it obviously results And excess rents are higher returns. And interestingly enough, when you think about The basics of banking, I think what happens is because we're so close to those customers in those small towns, we end up being More important to them, so we get their operating accounts. And as competitors move to warmer weather places where there's Growth, growth doesn't always mean that it's higher returns and excess rents that you can achieve.
I think the other way
to say it is that no matter where we are, regardless of whether the population is growing, those are the communities that We need financing in a bank the most. And it's really hard for people to understand. But the last thing that comes with that is stability. And in 2,005, when I I remember when I became the CFO, all of the analysts would ask me, Well, why don't you just double down on Baltimore and get rid of Buffalo? And when we went through the financial crisis, there was nothing more rock solid In Buffalo and the people that you'd bank there and that stability extends to your franchise.
And as you know, most of our expansions have come in difficult times in the economy, Right. So I think we like our model. Although banking is not a growth industry, we believe That you can actually do it the
right way. You can get significant growth over time.
This represents a realization of that.
That's crystal clear. One follow-up. This is the first announcement for a deal in 9 years. So I guess, why now and what's the impact On M and T's tech investments, including a tech campus in the Buffalo market, will it remain there going forward? And one of your competitors said the main reason for their merger was TEC.
Is that the main reason for this merger or how would you frame that?
I'd say no, it's not
the main reason. To step back to your earlier question, We spent a fair amount of time building our risk infrastructure. I've been in this role for 3 years and it was really important for us to revisit our competitiveness, How nimble we could be, which part of the results that was the tech hub and the new ways of working. So we've invested a lot And sort of becoming faster, more nimble, think PPP and our ability to flip that And become one of the largest lenders in America even though we're in a smaller footprint. And then that resulted in The ability and the thought process of how you leverage that, right?
So it's really, really clear that it's difficult at some point because you need a modern infrastructure to be able to have better customer experiences and meet the needs and improve the quality of lives of your customers. So what's really great about this particular transaction is just I'll say it again, we said it a couple of times, but Jack Barnes and his team know their customers. And so now we're able to seamlessly export everything that we do in the tech hub, everything that we do around customer journeys And the service to those customers without an increased investment. Renee, I might just pick up on some of the conversations. We talked a lot about local scale and the importance of that and the stability of these geographies.
That gives us the platform to pick our spots in other places. And one of the things we try to do through time is choose where we compete in geography, in customer base, in asset class. And so we've got those core markets that we're operating in, the so called low growth ones. We love them. But then we've got some of these larger MSAs where we can pick our spots and choose to play and we found even in larger MSAs, Our brand of banking is valued.
And then we've got some specialty businesses that we have and that People's United brings to the table that also provides some of that And so we like the combination of how the local deposits and the stability of them set you up to do those other things. And then just on the investments, to Renee's point, when you look at the Peoples operating platform, With the exception of a few specialty businesses that run on their own tech platform, everything else is coming on to existing M and T. And so all the investments that we've made Are completely scalable on to those platforms and every investment that we make in those on a go forward basis is now leverageable across just a bigger, larger customer base. So I think it makes a ton of sense. I have to add one more thing.
I don't want to belabor the point. But when Jack and I were having discussions Whether this made sense or not, one of the things that we both saw was that this creates multiple paths To achieving a scale presence in all of the key New England markets. It's the fastest path for either one of us to gain share over time. And that was one of the things that was really compelling for
The next question comes from Gerard Cassidy from RBC. Your line is open. Please go ahead.
Hi, Renee. Hi, Darren. Congratulations.
Gary, can you share with us What kind of interest rate assumptions are you guys using to make the marks that you took in this deal Through the end of the year, whether it's long term interest rates or short term interest rates? And what if the long term interest rates go up higher Then your assumptions, what kind of changes does that do to the marks?
Yes. So, Gerard, when we put the 2 banks together and we look at the loan portfolios And the securities portfolio. We look at the forward curves and only kind of look at where they are and have been for the leading into the Due diligence discussions and then through them. And as much as possible, what we try to do is put 2 banks on equal footing from a rate curve And when you go through those and you look at where things are right now, obviously, that led to the marks that we've talked about today. If rates go up, the impact on the market will be a little bit less positive by the time we close.
And it could bring the tangible book value closer to neutral as opposed to slightly accretive. But keep in mind that the offset happens on the other side, Right. So if the marks are less positive, then the offset will increase EPS accretion because you won't have the amortization on the other side. And It might affect the IRR slightly, but overall, when we look at it, we feel really good about The tangible book value position that will end up in and the earnings accretion will end up in the IRR. And so So they can move the numbers around a little bit, but they don't materially change the positive financial aspects of this combination.
The next question comes from Matt O'Connor from Deutsche Bank.
A couple of follow-up questions. So now that you're do you think kind
of post integration,
you'll be bigger, you'll be more diversified, What capital level do you think you can run at? Historically, you talked about this kind of 10% CET1, So also focus on TCEs, but how are you thinking about capital longer term?
Yes. I guess, our thought process on capital really hasn't changed and doesn't change. We think about the bank And making sure it's well funded and well capitalized and in a position to support the growth. We always try to invest first in the franchise and The customers and supporting loan growth, and then looking at opportunities. As Renee mentioned a few minutes ago, just looking at this Opportunity and the investments that we can see in growing in the New England markets by adding bankers.
And with them, obviously, customers will be a use of capital. And if we don't find places to make those investments and then we'll look to distribute it as we always have through dividends that are well managed And a reasonable percentage of earnings and through buybacks. And that philosophy, we think it served us well In the past and will continue to in the future. I would just add, the other thing is, it's not a static question, Right. So even today, our capital levels where they are today, it's really just simply a reflection of the pandemic, looking at portfolios, being conservative, Right, which you're required to do and as economic environments change, maybe become more stable, the answer is going to be different, right?
So I hope that helps.
Our next question comes from Brian Koff from KeyBanc Capital Markets. Your line is open. Please go ahead.
Hey, thank you and good morning, Renee, Darren and Don. Congratulations.
Thanks, Brian. Good morning.
So real quick,
just I guess
on Slide 18, you gave some of the pro form a operating income numbers. Darren, So just wondering, can you describe or discuss what that transitional transaction adjustment is to the Peoples consensus number?
Yes, sure. As we go through 2022 and we think about how The merger integration will work. It's been our experience that in those time periods, we asked the customer facing folks To focus more on retention of the existing client base and the growth. And we're also expecting that we will do some repositioning And remixing of the Peoples balance sheet, moving out of some lower yielding earning assets and some higher cost deposits. And the combination of those things will lead to a little bit of a slowdown in asset growth compared to and earning balances compared to what might be in consensus and people standalone.
And so it's really just that stuff going on in that time period. And obviously, what we do, because of who we are how we think about things, we look at that in the most conservative way. The timing on those things could turn out different than what we've modeled. And if they did, there's probably a little bit of room to the upside there.
We'll take our final question from Peter Winter from Wedbush Securities. Your line is open. Please go ahead.
Great. Good morning. Congrats also on the deal.
Darren, I just wanted
to follow-up On an earlier question on the EPS accretion on Slide 6, can you just clarify just the point about what drives the EPS accretion In 2023, 10% to 12% versus the 7% to 8%, which has the fully phased in cost saves. What's the difference?
The difference between them is the timing. And so really, if you think about the we talked about the conversion or the close being at the end of this year And the systems conversion being in the Q1 of 2022. And so once you make that change to the systems and you get them stabilized, So you start to have those costs come up. And so what we're trying to show there is that what we think will actually happen in 2022 is that's like the GAAP number of what those cost saves will lead to in terms of accretion. If you had The full year of those cost saves, you would bump up to that higher number.
And then the math of Timing in 2023 of having the full year and the growth in those saves, basically the think of it as the 4th quarter run rate that goes into 2023. That's kind of the progression there and what the numbers are.
I will now turn the program back over to Don for any additional
Again, thank you all for participating today. And as always, if any clarification of any of the items on the call or the news release If necessary, please contact our Investor Relations department at 716-842-5138.
Thank you and goodbye.