Good morning. My name is Lindsay, and I will be your conference operator today. At this time, I would like to welcome everyone to the Huntington merger with FirstMerit Analyst and Investor Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Mr. Mark Muth, Director of Investor Relations, you may begin your conference.
Thank you, Lindsay. Before we get started, I'd like to highlight that this presentation may include forward-looking statements like those described on slide two. Please refer to our filings with the SEC, including our 2015 annual report, the most recent 10-Q, which contain information about specific factors that could cause actual results to differ from these statements. With that, I'd like to turn the call over to our Chairman, President, CEO, Steve Steinour.
Thanks, Mark, and good morning, everyone. In addition to Mark and myself, I'm joined by Mac McCullough, our Chief Financial Officer, and Dan Neumeyer, our Chief Credit Officer. We're very excited to announce this morning the merger of Huntington and FirstMerit. Before we get into the details, I'd like to welcome the FirstMerit employees to Huntington. We look forward to working with you and building on your successes. We're convinced that together we have an even brighter future. This is a classic end market combination with a large well-run bank. FirstMerit has a consistent track record of steady performance and growth, and we believe that this transaction provides great opportunities to build upon that. Beginning on slide three, we believe this combination is very compelling across a number of fronts. First, we become a leading bank throughout the Midwest. We achieve the number 1 deposit market position in Ohio.
We bolster our position in Michigan and enter new markets where FirstMerit has had success. We believe in combining, we will be able to build on that success. We share similar cultures. We know each other in the marketplace. We both go to market with a relationship-oriented approach focused on customer experience. We believe this consistent approach will be very synergistic. Our loan and deposit products and portfolios are complementary. Our credit underwriting standards are similar, and the quality of the FirstMerit management team will add considerable depth to ours. We both share a core interest in consumers, small to medium businesses, and the auto indirect product set, and we will continue to focus on these customers and activities. We believe this transaction is a very attractive financial proposition to both sets of shareholders.
We're deploying capital, generating significant cost savings, and leveraging the infrastructure and brand we've built in order to drive stronger financial results. We've identified cost savings, which we will achieve, resulting in significant shareholder value creation. In addition to being immediately accretive to EPS, we will improve our growth rate, efficiency ratio, and financial return profile, accelerating the achievement of our previously disclosed long-term financial goals. As we think about the CCAR process, our pro forma pre-provision net revenue earnings will be a larger risk buffer. Finally, these are markets familiar to us. Over the last six years, we've bolstered our board, our management team, our risk organization, our IT infrastructure, all to become a $100 billion bank or larger at some point. Our due diligence has been thorough, and we've delivered expected results on our prior acquisitions. FirstMerit, we all know, is a well-run bank.
They've been very consistent and disciplined with credit and expense management, which was highly evident throughout diligence and which gives us confidence that this is a lower risk transaction. We acknowledge all transactions have risks, but we can and will manage these risks. As you know, our board and management are long-term shareholders with material hold to retirement equity requirements. Turning to slide four, we lay out the terms of the transaction and the key assumptions embedded in our financial model. FirstMerit shareholders will receive 1.72 shares of Huntington plus $5 in cash for each share they own. Based on our closing price as of January 25th, that would imply $20.14 per share or roughly $3.4 billion of aggregate value.
This value represents a price to tangible book value of 1.6x, a price to 2016 estimated earnings of 14.3x, PE of 2016 when adjusted for fully phased-in cost savings of 7.9x, and a core deposit premium of 6.8%. We'll welcome four directors from FirstMerit to our board and intend to have geographic diversity, including two from the Akron area and two from other geographies. We have made significant commitments to the community of Akron. I mentioned the financial merits of the transaction, and Mac will go into more detail later in our discussion, but let me highlight a few things. We expect the transaction to close in the third quarter of 2016. We see significant net cost savings opportunities that represent 40% of FirstMerit's expense base, and the actual savings will be realized through the combined expense base of both banks.
Our branch distribution has much overlap. The capitalized value of the cost savings is approximately $2 billion, which is substantial in relation to the size of this transaction. We've identified revenue synergies that are real, which we will achieve, but importantly, we are excluding them from our analysis. The credit quality at FirstMerit is the best we've ever seen, which results in an estimated credit mark-to-market of 1.9%. We've estimated other balance sheet mark-to-market adjustments that net to approximately $55 million. In connection with this transaction, we've decided to suspend share repurchases until the transaction closes. The impact of this is embedded in our financial model. This does not alter our longstanding policy of returning significant capital to shareholders, but we do believe the unique opportunity to acquire FirstMerit is the best use of our capital in the near term.
The transaction results in EPS accretion beginning in the first full year for 2017, excluding non-recurring charges, and double-digit accretion in 2018 and beyond. We enhance our return on tangible common equity by over 300 basis points. We expect to achieve an internal rate of return in excess of 20%. There will be dilution to our capital ratios at close, as well as our tangible book value per share. Our pro forma capital levels will remain within our capital policy guidelines. We anticipate earning back the tangible book value within five and a half years using the crossover method, which is something Matt will cover later in the presentation. I believe most of you are quite familiar with FirstMerit, but I'd like to highlight several things about their franchise. Turning to slide five. FirstMerit was founded over 170 years ago and today has more than $25 billion of assets.
They are in attractive markets with strong market positions. They've maintained discipline as a commercial lender. Their credit performance through the cycle and continuing today has proven the quality of their underwriting. We like their niche positions in wealth and marine RV. As I mentioned, their management team is very good and deep and will add to our bench strength. On slide six, we show the performance FirstMerit has achieved through the cycle. As you can see, they've outperformed peers from a credit perspective, particularly in the height and aftermath of the crisis in 2008 through 2010. In addition, while many banks found themselves in loss positions, FirstMerit has remained profitable in all quarters through the crisis, and in fact, has a remarkable 67 quarters of consecutive profitability. Turning to slide seven.
FirstMerit has been able to grow their originated portfolio by 13% over the past year while maintaining superb credit quality. Growth is largely driven by commercial, auto, and marine RV. They've continued to exit their acquired and run-off portfolios on economically attractive terms. On the funding side, it's pretty simple. They're core funded with a very stable deposit base at attractive costs. Their liquidity is very good. As we turn to slide eight, we begin our discussion on the pro forma company. Our pro forma footprint, which we will discuss in the subsequent pages, has four key takeaways. First, as I've mentioned before, we create a meaningful share with the top market position in Ohio. We bolster our number 6 position in Michigan. We will have the top branch position in the combined markets of Ohio and Michigan.
In addition, in 17 of our top 20 MSAs, we will enjoy a top five market position. Second, we improve our customer reach. We will increase our branch density, improving customer access across our footprint. We will improve our omni-channel presence and will be able to offer our respective customers a broader set of products. We will increase our investments in mobile and digital products and other services going forward, accelerating delivery of mobile channel convenience and services for our combined customers. Third, our distribution is complementary. I'll give you a couple of specific examples. In northern Ohio, we'll have the number 1 market share in Akron, Canton, Toledo, and Youngstown, with number 2 share in Cleveland. In Detroit, we're going to increase our branch presence by 40%. Jackson and Lansing, Michigan, where we mostly have an in-store presence today, FirstMerit's traditional branches will meaningfully increase our customer reach.
Finally, our entry into Chicago and Wisconsin offers opportunities and new avenues for growth, particularly on the commercial side. We believe our unique strategies with optimal customer relationships and our Fair Play philosophy will do well in the existing markets we're in with the additional distribution, and frankly, will do well in the new markets. Turning to slide nine. We provide a bit more detail on the markets that FirstMerit contributes to the pro forma company. Ohio and Michigan are clearly very familiar to us and offer strong opportunities across our business. Chicago and Wisconsin will be new to some of us. However, we believe the commercial opportunity in Chicago and Wisconsin is very attractive. Our markets share similar fundamentals, which we've attempted to show on slide 10. We look at our overlapping markets and other markets that we're in.
We then compare those to our new market, Chicago and Wisconsin. What you can see is household income and population growth are attractive in these new markets. In addition, as measured by deposits, number of businesses in each market, again, Chicago and Wisconsin are very attractive. As we turn to slide 11, we look at our combined loans and deposits. Starting on the loan side, the combined loan portfolios result in pro forma mix looking very similar to Huntington's standalone profile. We gain entry into marine and recreational vehicle lending, which is strategically interesting to us and an area where FirstMerit has significant expertise. We also recently hired an executive, Tom Worth, who in addition to auto lending, has experience in managing a much larger national marine and RV portfolio. On the deposit side, it's a perfect combination.
This is a consistent mix across both companies with a very low cost of funds. With that, I'd like to turn it over to Matt, and he'll take you through some of the finer details.
Thanks, Steve. On slide 12, we look in more detail at the pro forma financial metrics and impact that Steve referenced earlier. I'll note that there are more detailed assumptions listed in the appendix, a few of which I'd like to touch on before we examine the results. First, the numbers you see here on page 12 use current Street estimates for our own earnings as a basis for measuring the accretion metrics. For FirstMerit and the effects of the merger, we've undertaken a detailed zero-based budgeting process involving all of our business unit leaders with a thorough review by senior management. We view FirstMerit's core earnings capacity to be consistent with the Street's estimates, and we see significant efficiencies that will drive long-term value.
As Steve mentioned, the core driver of our value creation comes from the 40% cost savings that we expect to fully achieve by 2018, with 75% phased in during 2017. The numbers you see on this page also reflect some modest disruption due to deposit runoff and the fee reductions from our Fair Play strategy. We also note that we have thoroughly diligenced FirstMerit's tax position and believe we will achieve an effective tax rate of 26% on Huntington's earnings and the incremental earnings from the transaction. Taking these assumptions into account, the financial model results in EPS accretion in the first full year of the deal, which is 2017. We expect approximately 10% EPS accretion in 2018, with significant improvement across other important financial metrics, as displayed on the bottom of page 12.
Greater than 400 basis points improvement in the efficiency ratio, greater than 10 basis points improvement in return on average assets, culminating in a 300-plus basis point improvement in return on tangible common equity. Regarding our pro forma capital levels, we are suspending our share repurchase program as of now until the transaction closes, which is expected to be in the third quarter of 2016. As you know, we are a CCAR participant, and we will continue to actively manage our capital levels and returns through the process. Summing up this slide, we are creating significant long-term value by prioritizing capital usage for the FirstMerit deal over share repurchases in the near term. As we've told you in the past, our capital priorities are first, for organic growth; second, to support the dividend; finally, other uses, including buybacks and acquisitions.
We believe this partnership with FirstMerit is an excellent use of our capital. To that effect, I'd also like to preempt a question that I expect some of you will have regarding tangible book value dilution and earn back. Fundamentally, we view this merger as an opportunity to create tremendous long-term value for our shareholders while strengthening our competitive position and our strategic flexibility. The dilution and earn back period were not metrics that we viewed lightly. We take our responsibility as stewards of our shareholders' capital seriously, we're firmly committed to delivering value in the form of earnings growth and capital return. We are comfortable with the dilution and earn back in this instance because of the clear path to increased earnings and increased capital return that this transaction provides without negatively altering our risk profile.
With respect to earn back, as you know, there are a range of alternatives for calculating this metric. We view the crossover method that we've used in this analysis as the most rigorous, as it measures the company's long-term growth trajectory relative to what it would have been on a standalone basis. This is consistent with how we view all M&A opportunities. It is a long-term strategic decision with a very attractive financial profile. Turning to slide 13, we discuss the impact on our long-term financial goals, which we first shared in December of 2014. This transaction enables us to substantially accelerate our achievement of these objectives, improving our growth profile, operating efficiency, and returns while maintaining the integrity of our credit profile.
As we get further along in the integration process and begin to see the positive outcomes of this transaction, we believe we will be in a position to favorably reassess these long-term financial goals. With that, I'll turn it back over to Steve.
Thanks, Matt. I'd like to spend a little time on how well prepared we are for this combination on slide 14. We've titled the slide "Lower Risk Transaction" intentionally. We acknowledge converting and integrating banks inherently has risks. We've identified the risks, and we will manage them. Our due diligence was comprehensive, and we have a specific integration plan. About 500 colleagues across all functional areas were involved, helping to build a bottoms-up, zero-based budgeting financial model, business line by business line, and individual by individual. We looked at over 63% of the commercial loan balances and analyzed data on the entire portfolio, which was our approach to consumer loans as well. We focused on the impact of the transaction on LCR, CCAR, and asset liability management position. Detailed reviews were done in BSA/AML and with operational risks.
FirstMerit's a lot like us, we understand their businesses and products. All of their prior acquisitions have been fully integrated. As we've discussed, our business lines and business models are quite similar. The majority of their systems are hosted and managed internally. They also have significant expertise in integrations and conversions. Since our 2009 strategic plan, we've continued to build the capacity to become a $100 billion bank or larger. We've built an infrastructure that can comfortably support an institution of that size. Our IT is scalable. Our credit and risk management teams are deep. We actively manage our loan portfolios to mitigate concentrations. Remember, we had the lowest losses on the severely adverse scenario stress test under CCAR this past year of all regional banks.
Our team has significant experience at other larger institutions and a very deep bench of talent in terms of managing the integration, and that's only enhanced with the talented FirstMerit employees. Our board also has significant experience in bank acquisitions and integrations. Finally, we have management at both institutions that have done successful integrations, and we've extensively planned for this one. We expect the transaction to close in the third quarter and intend to convert in four phases, beginning shortly after close and continuing through the first quarter of 2017. Not only have we converted and integrated the transactions we've completed, over the last seven years, we've fully redone much of our standalone operations. We've rebranded all of our branches and converted all of our ATMs. We've converted our debit card issuance processing, our teller platform, and our mortgage and home lending origination system since 2009.
These are just some of the systems that we've invested in. While at the same time, we've been closing, consolidating, and opening more than 300 branches. We are prepared for this transaction and have proven how successful we've been at these activities. Turning to slide 16. In summary, we're very excited about this combination. We know what we have to do, and we will execute with focus and urgency. We believe both the strategic rationale and the financial impact are compelling. We believe the transaction is attractive for both sets of shareholders. We believe the partnership is a very good use of capital. It will result in significant EPS accretion and improve our earnings growth trajectory and return profile. This transaction will allow us to complete our long-term financial goals and cause us to relook at the ranges later this year.
We will expand our footprint, both in density and geography, and we'll be able to provide enhanced customer convenience. The combined scale and reach will strengthen our growth profile. Our credit processes and risk profiles are similar and will remain within our aggregate moderate to low risk profile. These are markets we know and understand, and we have a track record of successful conversions and integrations that we're eager to extend to this transaction. With that, we thank you all very much for your interest, and we look forward to taking your questions.
Operator, we'll now take questions. We ask each participant to please only ask one question and one related follow-up. If you have additional questions at that time, he or she may reenter the queue.
At this time, ladies and gentlemen, if you would like to ask a question, please press star then the number one on your telephone keypad. Our first question comes from the line of Ken Usdin with Jefferies. Your line is now open.
Hi, good morning.
Yes.
Good morning. Mac, I was just wondering if you can just help us just walk through your crossover method math and how far out you're looking, meaning what's the right year that we should be thinking about as far as how you do that calculation, in terms of the 12%, and so we can understand your conservative methodology.
Sure. Thanks, Ken. Just a few points to set this up. We view the crossover method as being the most rigorous method to measure earn back. It measures the company's long-term growth trajectory relative to what it would be on a standalone basis. This is consistent with how we viewed this transaction all along. It's a long-term strategic decision with a very attractive financial profile that can't be measured in a one-year period. Specifically, what we do is we calculate the point at which the pro forma tangible book value per share exceeds the standalone forecast for Huntington. The calculation assumes disruption. It does not include the revenue synergies. We're comfortable with this because this is how we're going to manage the business. As Steve mentioned on the call, we had close to 500 colleagues who were in due diligence.
We did a bottoms-up build related to the financial model that we believe FirstMerit can achieve. As I also mentioned, it's very consistent to the earnings estimates that are currently published. Put in the synergies that we believe we can achieve, You really have all the assumptions on page 19 to be able to build this out.
My one follow-up, Mac, is the restructuring charges of $420 million, are those included in your tangible book dilution?
Most definitely.
All of them? Like the full $420 is in the TBV dilution?
Yeah, it's definitely in the earn back period.
In the earn back period, but not necessarily in the capital day one?
It is in the capital when you think about how we built the forecast going forward. Okay. Understood. Thank you.
Your next question comes from the line of Geoffrey Elliott with Autonomous Research. Your line is now open.
Hi, it's Geoffrey Elliott from Autonomous Research. Thank you for taking the question. On the 4Q earnings call last week, you talked about the possibility of more volatility on the credit side. Given that, why is it the right time now to be making an acquisition which depletes the capital ratios?
Let me answer that. This is Steve. Jeff, we talked on the call last week that we thought there's a gradual return to normal that we did in terms of credit metrics coming off the five-year extended run of very low charge-offs. We also said we didn't see issues beyond oil and gas bubbling up anywhere in the portfolio at this time, and that our net charge-offs for 2016 will be below our long-term range. Paul and I have talked in the past week or so. Is he seeing anything coming in their portfolio or generally from their customer base? I've done the same thing with multiple sources, our regional presidents, our commercial lenders over the last few weeks, which I mentioned on the call. Frankly, we just don't see it happening. There's generally a cautious bullishness in the customer base that both companies have.
They're very, very similar.
Thanks. Just as a follow-up, the auto concentration comes down a bit because of the transaction. Is the intention to head back up towards the 20% pretty quickly, or are you kind of comfortable down at the slightly lower percentage?
Well, we haven't changed our hold limit. I don't think it's going to come up very quickly. This will give us a period of several years before we would approach that number absent any securitization.
Great. Thank you.
Thank you.
Your next question comes from the line of Bob Ramsey with FBR. Your line is now open.
Hey, good morning, guys. I know you highlighted that roughly two-thirds of FirstMerit's branches are within two and a half miles of your own. Just curious how you're thinking about branch closures, sort of in terms of consolidation, what's built into that 40% cost savings number?
Bob, we've given you the two and a half mile, roughly two-thirds of the branches. If you look at it on a mile basis, one mile either way, there's 39% of the branches within a mile. You can see just how overlapped we are with our distribution. That will clearly result in consolidation economics, and that's part of why we're telling you we're confident in getting from the combined organization, getting the 40% cost synergies here. Just a reminder, if you extend that and put a 10 capital in that or something approaching that, which we think in a valuation basis is reasonable, that alone is $2 billion after tax or maybe a little more.
I think the other thing to keep in mind, Bob, is that with that type of density, you really don't impact customer convenience that much when you go through and get these cost takeouts. It's a tremendous opportunity, very unique when you think about the deals that have been done recently.
Sure. Would the intention be to consolidate virtually all branches that are within a mile of each other?
We haven't yet had decisions made on this. There will be further discussion with the FirstMerit team now that we're sort of out in the open on this. There will be meaningful branch consolidation, but we'll be very sensitive to neighborhoods and communities, and we'll make the best decisions. Some of the Huntington branches will go to FirstMerit and vice versa as we look at this. That overlap is an important part of how we achieve the expense savings that we've referenced. The fact of the matter is we have multiple scenarios in terms of how we look at this, and I look forward to getting FirstMerit's input into the best outcome.
Okay. Does FirstMerit have in-store branches as well? I'm just not as familiar with their mix.
No, they do not.
Okay. Thank you.
Thanks, Bob.
Your next question comes from the line of Bill Carcache with Nomura. Your line is now open.
Thanks. Good morning. Mac, setting the crossover method aside, can you talk about what the earn back period looks like on a more static basis? Basically, how long will it take before you guys get back to where you ended fourth quarter of 2015? Along those lines, could you also add what's your earn back period if you include revenue synergies?
Yeah, exactly. If you take a look at it on a static basis and use 2018 as the year of measurement, we think it's about seven and a half years. That's just taking a look at the tangible book value dilution and the EPS accretion. That would be the simple math. Again, that's a one-year static view of the world. Again, we have not included revenue synergies in the model. We do think that there are significant opportunities for us to actually improve revenue going forward. I think one of the best opportunities might be on the commercial side of the organization with our product set. If you just think about getting their fee revenue up to our levels, we're at about 34% total fee revenue to revenue, and FirstMerit's at about 28%.
That alone, getting up to that level very slowly over time brings the earn back well under five years. We think that we have revenue synergies that we can actually achieve and manage the earn back below five years.
Can you give a little bit more color on how much less? It's five and a half years without revenue synergies. Can you give us a little bit more of a sense of what is it more like three years or with revenue synergies? Then just to confirm that you said 2018 would be when tangible book value would get back to or exceed where you guys finished in the fourth quarter 2015 on a pro forma basis?
That wasn't the answer that I gave. I was using 2018 as the year to kind of measure the static earn back.
Okay.
Okay. Back to the revenue synergy question. I just gave you one example of one revenue synergy that is probably one of the larger opportunities, but we believe that there are many more that we're going to be able to achieve. That one alone gets you into the low fours. Again, I think we've been very conservative in how we've modeled this and how we've thought about it. The strengths of both companies are going to allow us to manage to a number that's less than five.
Great. Thank you.
Thank you.
Your next question comes from the line of Steven Alexopoulos with JPMorgan. Your line is now open.
Hey, good morning, everybody.
Steve.
I wanted to first follow up on Ken Usdin's question. Did you say the tangible book value dilution of 12% does not include the $420 million one-time charge?
No, it does.
Oh, it does include that?
It does.
Okay. That's helpful. Mac, if we think about the static basis, it looks like you're losing, call it $0.83, somewhere around that of tangible book, and you're going to pick up about $0.10 or so of earnings in 2018. What adjustments are you making to get this down to five and a half years? Are you ramping that earnings level higher tied to Huntington's earnings? It's not clear to me what you're doing here.
we are seeing accelerating EPS in our model due to the cost takeouts, due to the fact that we've got deposit disruption that we get back over time. I would just direct you to page 19 in terms of the assumptions that we've used in order to build out that model.
Wouldn't that all be in the $0.10 of earnings accretion that you're describing? Wouldn't all that be in there for 2018? It seems like you're making another adjustment beyond that.
We're definitely operating the business the way we would operate it going forward. We've got a long-term model here that we've built from basically zero-based budgeting. 2018 is not as good as it's going to get in terms of an earnings capability perspective.
Oh, okay. I see what you're saying.
And again-
Okay.
Yes. You just have to think through how we're going to manage this business. We're not managing for 2018, we're managing for long term. We believe that the strengths of what this combination does is gives us the scale and the capabilities to accelerate the EPS growth rate.
Okay. Embedded in these assumptions, what's the estimated revenue loss with these pretty sizable cost saves? How much of FirstMerit's $1 billion of revenue ultimately is lost in the assumptions?
We assumed 10% incremental deposit runoff, and then we made an adjustment for Fair Play. As we bring the Fair Play product set into an organization, we do see some fee revenue adjustments on the downside. Again, we've detailed all that on page 19.
Okay. Thanks for the color, guys.
Okay. Thank you.
Your next question comes from the line of Terry McEvoy with Stephens. Your line is now open.
Hi. Thanks. Good morning.
Hey, Terry.
Hi. It feels like the 75% cost saves in 2017, that seems conservative in light of the closing date and then the integration schedule. I guess the question is, will we see the full run rate of those cost saves in the second half of the year, or is it really a 2018 event?
The full impact of the cost saves will be 2018. We will see some cost takeout probably even in the fourth quarter of 2016. The 75 number is a placeholder in terms of what we believe we're going to achieve in 2017. Again, closing probably late in the third quarter of 2016.
You'll see us ramp in the second half, Terry. By the fourth quarter of 2017, our EPS ought to give you, certainly us as well, confidence in what we're expecting for 2018.
Specifically on the fourth quarter of 2017, we think the EPS accretion is probably in that 7%-8% range.
Okay. As a follow-up, Mac, you said putting the buyback on hold and the tangible book value dilution from FirstMerit would be offset by growth in PPNR and longer-term capital returns. I just want to make sure I understand slide four correctly. To get back to that 70% total payout where you have been trending and are expected to trend on a standalone basis, that's 10 quarters out in the future. Are you saying you were willing to kind of step back for 10 quarters before getting back to that accelerated path, pace, and at that 70% total payout?
That's what we've modeled at this point. Obviously, we've got to go through the CCAR process, but that is what's modeled, is we're at 50%, and we get back to the 70% after 2Q of 2018.
Great. Thank you.
Thanks.
Your next question comes from the line of Kevin Barker with Piper Jaffray. Your line is now open.
Good morning. Thanks for taking my questions.
Hey, Kevin.
Morning.
Could you speak to the potential restructuring of some of the balance sheet, given you mentioned the issuance of $1.3 billion worth of debt? Then you also mentioned FirstMerit has a significant amount of excess liquidity. Do you assume a certain amount of deployment of that liquidity in order to increase net interest income or your revenue estimates going forward?
We do not. We view the liquidity as being helpful as we get the combined company to the right levels from an LCR perspective. We actually are in very good shape as we bring the two companies together. There isn't really any excess earnings that we've assumed around that liquidity. Related to the balance sheet optimization question, the fact of the matter is, I think both balance sheets are pretty optimally optimized. We do have opportunities. When you think about looking at risk-weighted assets and how we might be able to structure certain products to lower risk-weighted assets, we are going to take a look at the securities portfolio and just make sure that we're comfortable with the instruments that we're in, and also opportunities to maybe optimize capital. I do believe we're going to find opportunities.
We just haven't really gotten to the right level of detail to be specific with those right now.
Could you talk about where you stand on LCR today, and where you will look prior to the acquisition, and what you need to do in order to reach your required LCR requirements?
On a standalone basis, we are compliant today. Bringing the two organizations together, we'll be at 97% when we merge, and we have to be at 100%, as you know, at the end of 2016. That will be very easy for us to close that gap.
Okay. Thank you for taking my questions.
You bet. Thanks, Kevin.
Your next question comes from the line of David George with Baird. Your line is now open.
Thanks for taking my question. Good morning, guys.
David.
Just to verify, the Fair Play impact is $3 million, correct?
That is correct.
Then a follow-up on Chicago. The FirstMerit deal obviously gets you into the Chicago market. This is a market, obviously a little bit different than Columbus, Cleveland, et cetera. Can you talk about your views on the opportunity in that market? Thanks.
Well, FirstMerit has done a terrific job building a commercial lending set of capabilities in Chicago, and we would expect to continue those. We expect to continue those, frankly, to further invest in the commercial side of the business. They've got terrific people. The credit quality has looked just great. You've got close to 50 bankers already in place in Chicago. We'll be adding to the team, and that will be part of the growth in future years.
Okay. Appreciate it. Thank you.
Thank you.
Your next question comes from the line of John Pancari with Evercore ISI. Your line is now open.
Morning.
Morning, John.
A couple questions. What are you including again in that $55 million in other marks?
Those would be things like write-downs of the investment security portfolio. Think about real estate, other assets on the balance sheet. It's typical items that you clean up as you go through a merger like this.
Okay. All right. Separately, the debt issuance, the $1.3 billion, is that included in your EPS accretion estimates?
Yes, it is.
Okay. Separately, I'm not sure if Paul Greig is in the room there at all, but I didn't know if he is, if he can comment, just give us a little bit of color on really the rationale behind selling here. Just given the pullback in the valuation, I just wanted to get his thoughts on that.
Well, Paul's not with us here, but I would tell you from my conversation, and I can only give you a partial answer, but there's a realization of economies of scale, ongoing need to invest in digital and mobile, and two companies that have a lot of similarities in terms of strategies, the way we conduct business, culture, quality of people, and I'm sure all of this and more was weighed by Paul and the board.
Okay. Steve, thanks. If I could just ask one more on the fair value mark. Appears relatively low. Is that because so much of FirstMerit's book had been acquired over the past several years? Or if you could just give us a little more color, because it seems a bit low.
Well, the vast majority of it is originated by FirstMerit. The diligence here was very extensive. We're quite comfortable. There's actually a mark-up on some of the acquired portfolios that have to be netted as well at point of closing. We looked at the portfolio, we made adjustments to loss given default levels just as a precaution in case there is an economic downturn. We think this is a conservative mark. Dan, anything you want to add?
No. As Steve mentioned, 86% of the loan portfolio is organic. Our penetration on our file review was significant, over 64%. We feel very confident in the due diligence and the credit mark that was established.
Okay, great. Thank you.
Your next question comes from the line of Jon Arfstrom with RBC Capital Markets. Your line is now open.
Thanks. Good morning.
Hey, Jon.
Morning, John.
Just a question on slide 18. You show your integration plan, geographies one, two, and three, in terms of just staging the conversions. Where do you have to go first? What's the most important? Give us an idea of what those three geographies are.
Think of them as states, John. Geography one this could change, geography one is going to be Illinois and Wisconsin. Then we'll work back. Michigan, Ohio.
Okay. Given FirstMerit's concentration in Akron, Cleveland, what kind of special things do you need to think about in terms of some of the conversions and consolidations there?
Well, this starts with people, we think of ourselves as similarly as in a people business, customer relationships matter, customer service and experience, paramount. As we plan the conversion related activities, it's all about making this minimally disruptive, seamless is the word you'll hear us use. A lot of communication with our colleagues. In turn, they will communicate a lot with customers. The combination you referenced in Northeast Ohio, we're going to have tremendous positional and convenience, and our in-stores run seven days a week, roughly 70 hours a week. There's a lot of opportunity with that. We're also seeing significant amount of deposit activity now coming through alternative channels and ATM, mobile deposit and ATM. That's only going to increase for us in the industry as we go forward.
By the time this happens, there'll be even less stress within the branch itself.
Okay. Just to follow up on David George's question on Chicago. You mentioned commercial, is this longer term a market where you would like to bring your 24/7 convenience model to, or is that just too far in the distance to think about?
Too far in the distance. Our focus now is on this and the organic activities we have within the core, and that's frankly all we're going to do. We're going to button it up, execute, and do this as quickly as possible, as well as possible. We've got it laid out. We know what we have to do. There's a tremendously experienced team at FirstMerit. This is a great partnership. Just as an aside, the whole diligence process and the exposure we got, while to a limited number of executives, has just been. I've never seen anything like it. It has been extraordinarily positive in all instances. Paul himself is, I think, one of the best commercial banking CEOs in the country. Having him help assure customers, work with customers, certainly work with the FirstMerit employees, it will only be a bonus to us.
Okay. Thank you.
Again, ladies and gentlemen, if you would like to ask a question, that is star one on your telephone keypad. Our next question comes from the line of Matt O'Connor with Deutsche Bank. Your line is now open.
Good morning.
Morning, Matt.
The deal seems to make sense both strategically and financially. Two months ago, I probably wouldn't have asked this and focused so much on the macro. It seems like just the markets overall are either telling us that there's more meaningful macro problems or the market's just wrong in the sell-off year. My question is, how comfortable are you doing such a big deal in an increasingly unknown macro environment?
We've been asking, you can imagine, I'm sure the FirstMerit board and management team have been asking themselves that question. Our team has as well. I shared earlier comments Paul and I have exchanged about what are our customers telling us. We think there's a disconnect between Wall Street and Main Street, given the nature of the businesses we do. It doesn't mean at some point, it's going to be a recession or a pullback, but we're not seeing it in the metrics and the earnings of the companies that we're doing business with. If you think of our earning stream, half of it's consumer in terms of assets, even more in deposits. They've just gotten a dividend in terms of low energy price.
When we talk to the economist, Jan Hatzius at Goldman Sachs, he's given us a reassuring point of view about GDP growth this year and next. Even beyond that, if there is a pullback, FirstMerit's a company that has had extraordinary experience Periods of performance, particularly in the worst of times. That's certainly what our credit would show. If we find ourselves in that scenario, being able to take out 40% of the expenses of the combined institutions gives us a lot of buffer, and frankly, the opportunity for earnings growth, maybe perhaps not at the level we're projecting now, but meaningful earnings growth going forward. Bottom line, we like it either way, but we believe this is overdone in terms of Wall Street versus Main Street, this market pullback.
I guess specifically on the credit book, what kind of stress testing do you do to a credit book that you're looking to buy in this type of environment? Specifically, I'm thinking about commercial credit cycle. Do you stress it? Do you think about how their losses may be compared to yours in either a mild or kind of severe commercial credit cycle?
Matt, this is Dan. We look at the credits individually. Again, we had very high level of penetration, so we understand at a very granular level what is in the portfolio as well as from a portfolio view. We've looked at FirstMerit stress test results. We have run their book through our model, it fares very well. These are two companies with very comparable risk appetites, credit governance portfolios, et cetera. We have a very good idea of how to stress this. The combination of the two portfolios looks very good.
Just something to add, Matt. The hold levels here, this has been extraordinarily well managed, lot of discipline, hold levels enforced. There are no large concentrations. Their risk profile, when we overlay their book on ours, it doesn't change our aggregate moderate to low risk profile on any of the metrics. We like this book a lot. We think that the management team there has done a great job managing their credits.
Okay. Thank you for the color.
Thanks, Matt.
Our last question comes from the line of Kenneth Zerbe with Morgan Stanley. Your line is now open.
Great. Thank you. First question, not to be the guy who asks this three times in a row, but the 12% tangible book value dilution, just want to be really, really clear about this because I don't know if I've heard other banks take a forward integration expense number over the next year or so and add it to dilution. If I calculate this right, if you do include the $400 million in your tangible book value dilution number of 12%, that would imply the deal itself is 7% dilutive and the restructuring costs are just under 5%. Is that the right way of thinking about it?
Ken, I'm not quite sure I understand exactly the math you're doing there. We've looked at this probably too simplistic in terms of that one year view, but it's simply looking at the tangible book value dilution and the EPS accretion.
Understood. Maybe a different way of phrasing it is on deal close, is your tangible book value 12% lower?
Yes, it is.
Okay. That helps. In terms of just, can you just talk about common equity Tier 1 capital and how the regulators are viewing that? Just trying to get a sense. I mean, at 8.7% seems like you're sort of below the magical 9% number. Have you got any feedback from regulators? Presumably, that's the reason why you're slowing buybacks over the next couple of years or so as you rebuild capital. Just wanted to hear any thoughts on how you're thinking about minimum capital levels.
Yeah. Again, we're completely within all of our capital policy guidelines. We do recognize that we've made a change in our capital allocation outlook in order to do this deal. We do think that prioritizing the acquisition of FirstMerit ahead of share repurchases in the near term is the best long-term use of our capital. We really have operating guidelines for CET1 that are in that 9%-10% range. We do feel comfortable with where we're at and how we earn back appropriately over time.
Understood. Okay. Longer term, we get back up above the 9% range. Okay.
Hope that's right.
Okay. Thank you very much.
Okay. Thank you.
That is all the time we have for questions. I'll turn the call over to Steve for closing remarks.
Well, thank you for your interest. Again, just to recap, this is an exciting transformational opportunity for both sets of shareholders. The combined banks are much stronger together. There's a lot of economics that will be created from this, beginning with expense takeouts, but continuing with revenue growth and earnings accretion that will be better on a combined basis. As Mac referenced, we will be meeting our long-term financial goals on an accelerated basis as a consequence of this. That will give us an opportunity to reset and raise those goals in the foreseeable future. We like the transaction a lot. It meets a lot of our metrics. It has a low risk profile, and I say that in particular with respect to the credit and the quality job that Paul Greig and his team have done in their underwriting. We're set for the integration. Our core systems are set.
Frankly, over the weekend, we just added an upgrade of our core processing capabilities. We're in very good shape. We're excited about a higher earnings growth rate, an efficiency ratio that puts us in the fives, well in the fives, even better return on tangible and greater EPS. We're confident we can do this and we'll do this well, and we are clearly very focused on the execution and doing that urgently to get this done. We've gotten good regulatory support at this point. We expect that to continue. Both banks have similar cultures and histories. We're both good to the communities where we live and work. We'll look forward to getting this approved, moving forward, and demonstrating to you the results that we intend to generate. Thank you again for your interest.
That concludes today's conference call, and you may now disconnect.