Good morning. My name is Lindsey, and I will be your conference operator today. At this time, I would like to welcome everyone to the Huntington merger this FirstMerit Analyst And Investor Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer Thank you.
Mr. Mark Moose, Director of Investor Relations, you may begin your conference.
Thank you, Lindsey. Before we get started, I'd like to highlight that this presentation may include forward looking statements like those described on Slide 2. 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 and CEO of Steve Steiner.
Thanks, Mark, and good morning, everyone. In addition to Mark and myself, I'm joined by Mac McCollock, our Chief Financial Officer and Dan Newmayer, our Chief Credit Officer. We're very excited to announce this morning the merger of Huntington First Merit. Before we get into the details, I'd like to welcome the First Merit employees to Huntington. We look forward to working with Now, 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 3, we believe this combination is very compelling across a number of fronts. First, we become a leading bank throughout the Midwest. We achieved the number one deposit market position in Ohio. Furthermore, 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. 2nd, 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 complimentary. Our credit underwriting standards are similar and the quality of the 1st 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 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. And as we think about Finally, these are markets familiar to us. Over the last six years, we bolstered our board our management team, our risk organization, our IT infrastructure, all to become a $100,000,000,000 bank or larger at some point. Our due diligence has been thorough and we've delivered expected results on our prior acquisitions.
First, Merit, 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. And as you know, our board and management are long term shareholders with material hold to retirement equity requirements. Turning to slide 4, 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 $3,400,000,000 of aggregate value. This value represents a price to 2016 estimated earnings of 14.3 times 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 4 directors from First Merit to our board and intend to have geographic diversity, including 2 from the Akron area and 2 from other geographies. And we have made significant commitments to the community of Akron.
I mentioned the financial merits of the transaction and Mack 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 $2,000,000,000, 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 $55,000,000. 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 long standing 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 1st full year for 2017, excluding non recurring charges and double digit accretion in 2018 and beyond.
We enhanced our return on tangible common equity by over 300 basis points. We expect to achieve an internal rate of return in excess 20%. There will be dilution to our capital ratios at close as well as our tangible book value per share. Our pro form a 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 Mac 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 5. First Merrick was founded over 170 years ago, and today has more than $25,000,000,000 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 6, we show the performance of First Meredith achieved through the cycle. And 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 lost positions, FirstMerit has remained profitable at all quarters through the crisis, and in fact has a remarkable 67 quarters of consecutive profitability. Turning to Slide 7. FirstMerit has been able to grow their originated portfolio by 13% over and Marine RB. They've continued to exit their acquired and runoff 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. And their liquidity is very good. As we turn Our pro form a footprint, which we will discuss in the subsequent stages, has 4 key takeaways. First, as I 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.
And in addition, in 17 of our top 20 MSAs, We will we will increase our branch density, improving customer access across our footprint. We will improve our omni channel presence and we'll 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. 3rd, our distribution is complimentary. I'll give you a couple of specific examples.
In Northern Ohio, we'll have the number one 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 and the existing markets we're in with the additional distribution and frankly will do well in the new markets.
Turning to slide 9. We provide a bit more detail in the markets that FirstMerit contributes to the pro form a company, Ohio and Michigan are bit 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 where we've 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. And 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 looked at our combined loans and deposits.
Starting on the loan side, the combined loan portfolios result in pro form a mix looking very similar to Huntington's standalone profile. We gained entry into marine and recreational vehicle lending, which is strategically interesting, to us in an area where FirstMerit has significant expertise. We also recently hired an executive, Tom Wirth, an additional 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.
So with that, I'd like to turn it over to Mac and he'll take you through some
of the finer details. Thanks Steve. On slide 12, we look in more detail at the pro form a 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 First Merit and the effects of the merger, we've undertaken a detailed 0 based budgeting process involving all of our business unit leaders with a thorough review by senior management. And we see that we expect disruption due to deposit runoff and the fee reductions from our fair play strategy. We also note that we have thoroughly diligence FirstMerit's tax position and believe we will achieve an effective tax rate of 26 percent on Silver's earnings equipment and the equivalent earnings from the transaction. Taking these assumptions into account, the financial model results in EPS accretion in the 1st 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 and return on average assets culminating in a 300 plus basis point improvement in return on tangible common equity. Regarding our pro form a capital levels, we are suspending our share repurchase program as of now until the transaction closes. Which is expected to be in 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 the slide, we are creating significant long term value by prioritizing capital usage 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 and 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 and 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 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 Turning to slide 13, we discussed 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, Mac. I'd like to spend a little time on how well prepared we are for this combination on Slide 14. We entitled 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 0 based budgeting financial model business line by business line and individual by individual. We looked at over 63 percent 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 VSA AML and with operational risks. A first marriage is a lot like us. So 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 $100,000,000,000 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 concentration 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 and other larger institutions and a very deep in terms of managing the integration, and that's only enhanced with the talented FirstMerit employees. Our board also has significant experience and 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 4 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 7 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 systems since 2009. These are just some of the systems that we've invested in. And while, at the same time, we've been closing, consolidating and opening more than 300 branches.
We are prepared for this 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 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, 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. 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 were eager to extend to this transaction. So with that, we thank you all very much for your interest and we look forward to taking your questions.
You have additional questions at that time he or she may reenter the queue.
Our first question comes from the line of Ken Usdin with Jefferies. Your line is now open.
Hi, good morning. Good morning. Good morning. Mack, I was just wondering if you can just help just walk through your crossover method math and how far out you're looking meaning like what's the years of what's the right year that we should be thinking about as far as how you do that calculation, in terms of the 12% so we can understand your conservative methodology?
Sure. Thanks, Kim. So just a few points to set this up. So 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.
So this is consistent with how we view this transaction all along. It's a long term strategic decision with a very attractive financial profile that can be measured in a 1 year period. So specifically, what we do is we calculate the point at which the pro form a tangible book value per share exceeds a standalone forecast for Huntington. So the calculation assumes disruption. It does not include the revenue synergies.
And we're comfortable with this because this is how we're going to manage the business. So as Steve mentioned on the call, we have close to 500 colleagues, foreign due diligence, we did a bottoms up bill related to the financial model that we believe FirstMerit can achieve And as I also mentioned, it's very consistent to the earnings estimates that are currently published. I'll put in the synergies, that we believe we can achieve. And you really have all the assumptions on page 19 to be able to build this out.
And my one follow-up, Mac, is the restructuring charges of $420,000,000. Are those included in your tangible book dilution?
Most definitely.
All of them, like the full 420s and the TBV dilution?
Yes, it's definitely in the earn back period.
In the earn back period, but not necessarily in the capital day 1?
It is in the capital when you think about how we've built the forecast going forward.
Your next question comes from the line of Jeffrey Elias with Autonomous Research. Your line is now open.
Hi, it's Jeff 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. So 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 didn't in terms of credit metrics coming off the 5 year extended run of very low charge offs We also said we didn't see issues beyond the 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. So 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.
And 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. And then 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. But I don't think it's going to come up very quickly. 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 twothree 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 what's in terms of consolidation, what's what's built into that 40% cost savings number?
Well, Bob, we've given you the 2.5 mile roughly 2 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. So you can see just how overlap 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. And just a reminder, if you extend that and put a 10 capital and that is something approaching that, which we think in the valuation basis is reasonable, that alone is $2,000,000,000, after tax or maybe a little more.
And the other thing to keep in mind, Bob, is that with that type of density, you really don't impact customer convenience much when you go through and get these cost takeouts. So it's a tremendous opportunity, very unique when you think about the deals that have been done recently.
Sure. Would and so 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 will make the best decisions. So some of the Huntington branches will go to FirstMerit and vice versa as we look at this. But it's but that overlap is an important part of how we achieve the expense savings that we've referenced.
And the fact of matter is we have multiple scenarios in terms of how we look about at this and look forward to getting merits input into the best outcome.
Okay. And then does FirstMerit have in store branches as well? I'm just not as familiar with their mix.
No, they do not.
Your
next question comes from the line of Bill Carcache with Nomura. Your line is now open.
Thanks. Good morning. Mack, sending 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 the where you ended, fourth quarter of 2015? And then along those lines, could you also add what's your in back period if you include revenue synergies?
Yes, exactly. Exactly. So if you take a look at it on a static basis and use 2018 as the year of measurements, we think it's about 7.5 years, and that's just taking a look at the tangible book value dilution and the EPS accretion. So that would be the simple math. And again, that's a 1 year static view of the world.
And 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 one of the best opportunities might be on the commercial side of the organization with our product set. And if you just think about getting their fee revenue up to our levels, we're at about 34 percent total fee revenue to revenue. And, 1stMerit's at about 28%. That alone getting up to that level, very slowly over time brings the earn back well under 5 years.
So we think that we have, revenue synergies that we can actually achieve and manage the earn back below 5 years.
Can you give a little bit more color on how much less? Because it's 5.5 years without revenue synergies. So, can you give us a little bit more you know, a little bit more of a of a of a sense of what is it more like 3 years or, you know, with revenue synergies? And then, and just to confirm, that you said 2018 would be when tangible book value would get back to or exceed where it was for where you guys finished in the fourth quarter of 2015 on a pro form a basis?
That wasn't the answer, but I gave. I was using 2018 as year to kind of measure the static. Okay. But 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. And that one alone gets you into that low force.
So, so again, I think we've been very conservative on how we've modeled this and how we thought about it. And the strengths of both companies are going to allow us to manage to a number that's less than 5.
Great. Thank you.
Thank you.
And your next question comes from the line of Steven Alexopoulos with JP Morgan. Your line is now open.
Hey, good morning, everybody. I wanted to 1st follow-up on Ken Yuzen's question. Did you say the tangible book value dilution is 12% does not include the $420,000,000 one time charge?
No, it does, right. Well, it
does include that.
It does.
Okay. That's helpful. And, Mac, if we think about the static basis, right, it looks like you're losing, call it, 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 5.5 years? Are you ramping that earnings level higher tied to Huntington's earnings?
It's not clear to me what you're doing here.
So we are We are seeing accelerating EPS in our model, due to the cost takeouts, due to the fact that we've got, this route the 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 model.
But 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 sounds like you're making another adjustment beyond that?
Well, 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 0 based budgeting. So, 2018 is not as good as it's going to get in terms of an earnings capability perspective.
I see what you're saying.
Yes. So we 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. And 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. And then embedded in these assumptions what's the estimated revenue loss with these pretty sizable cost saves? And how much of FirstMerit's 1,000,000,000 of revenue ultimately is lost in the assumptions?
We assumed, 10% incremental deposit runoff. And then we made an adjustment for Fairplay as we bring the Fairplay product set into an organization, we do see some fee revenue adjustments on the downside. So again, we've detailed all that on page 19. Okay. Thank you.
And your next question comes from the line of Terry Naperville with Stephens. Your line is now open.
Hi, thanks. Good morning. Hi, Gary. Hi. It feels like the 75% cost saves in 2017 that seems conservative in light of the closing date and then the integration schedule.
And I guess the question is will we see the full run rate of those cost saves and 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, but 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 20
you'll see the ramp us ramp in the second half, Terry. And by the fourth quarter of 'seventeen, our our EPS ought to give us ought to give you certainly us as well confidence in what we're expecting for 'eighteen.
And specifically on the fourth quarter of 2017, we think the EPS accretion is probably in that 7% to 8% rate.
Okay. And then as
a follow-up, Nick, you said putting the buyback on hold and the tangible book value dilution from FirstMerit would be offset by growth in PPNR and then longer term capital returns. I just want to make sure I understand slide 4 correctly. To get back to that 70% total payout where you have been trending and are expected to trend on a stand alone basis, that's 10 quarters out in the future. So 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 modeled at this point. Obviously, we've got to go through the CCAR process, but that is what's modeled is that we're at 50% and then we get back to the 70% after 2Q of 2018. Great.
Thank you.
Thanks.
And your next question comes from the line of Kevin Barker with Piper Jaffray.
Morning. Thanks for taking my questions. Could you speak to the potential restructuring and some of the balance sheet given you mentioned the issuance of $1,300,000,000 worth of debt. And then you also mentioned FirstMerit has a significant amount of excess liquidity. Do you assume, certain amount of deployment of that liquidity in order to increase net interest income or your revenue estimates going forward?
On the last question, we do not. We view the liquidity as being helpful as we get the combined company to the right levels from an LCR perspective. And we actually are in very good shape as we bring the 2 companies together. So there isn't really any excess earnings that we've assumed around that liquidity. Related to the balance sheet optimization question, the fact matter is, I think both balance sheets are pretty optimally optimized, but 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. So 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.
Now could you talk about where you stand on LCR today where and where you will look prior to the acquisition and what you need to do in order to, reach your required LCR requirements.
So, on a stand alone basis, we are compliant today. Bringing the 2 organizations together will 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.
And 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. So just to verify, the Fairplay impact is $3,000,000, correct?
That is correct.
Okay. And then a follow-up on Chicago, the FirstMerit deal obviously gets you into the Chicago market. And this is a market, obviously, a little bit different than Columbus, Cleveland, etcetera. Can you talk about your views and the opportunity in that market? Do you think that there's some build out required in order to be competitive in that market?
Well, 1st, Merritt 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. Our the credit quality has looked just great.
You've got close to 50 bankers already in place in Chicago. So, we'll be adding to the team and that will be part of the growth in future years.
And your next question comes from the line of John Pancari with Evercore ISI. Your line is now open.
Good morning.
Good morning, Scott.
A couple of questions. What are you including again in that $55,000,000 in other mark
Those would be things like write downs of the investment security portfolio. Think about real estate, other assets on the balance sheet. It's it's typical items that you clean up as you go through a merger like this.
Okay, all right.
And then separately, the debt issuance the $1,300,000,000, is that included in your EPS accretion estimates?
Yes, it is.
Okay. And, and then separately, I'm not sure if, if Paul Greg is in the room there at all, but I don't know if he is, if you can comment, you know, just a little bit of color on, you know, really the rationale behind selling here, just given the pullback and evaluation, it just is, wanted to get his thoughts on that.
Well, Paul, Paul's not not not with us here, but I I would tell you from my conversation. 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, 2 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 was and more was weighed by Paul and and the board.
Okay, Steve. Thanks. If I could just touch one more on the fair value mark, appears relatively low. Is that because so much of FirstMerit's book had already had been acquired as of 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, and 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. So we looked at the port portfolio, we made adjustments to loss given default levels, just as a precaution in case there is an economic downturn. So we think these are 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%. So we feel very confident in the and the credit mark that was established.
And your next question comes from the line of
Thanks. Good morning.
Hey, John. Good morning, John.
Just a question on slide 18, you show, your integration plan geographies 1, 23 in terms of staging, the conversions Where do you have to go first? What's the most important and give us an idea of what those 3 geographies are?
Think of them as States, John and, and, geography 1 would, and this is not this could change, but geography 1 is going to be Illinois and Wisconsin. And then we'll work back, Michigan, Ohio.
Okay. And then given the 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, the it starts with people. And so And we think of ourselves as similarly as in a people business, customer relationships matter, customer servicing experience, paramount, And so as we plan the conversion related activities, it's all about making this minimally disruptive, seamless as the word you'll hear us use, a lot of communication with our colleagues in turn. They will communicate a lot with customers. And, the combination you referenced in Northeast Ohio, we're going to have tremendous position on convenience, and our in stores run 7 days a week roughly seventy hours a week. So there's a lot of opportunity with that.
We're also seeing a significant amount of deposit activity now coming through alternative channels in ATM, mobile deposit and ATM. And so that will that that's only going to increase for us in the industry as we go forward. So by the time these happen, there'll be even less stress within the branch itself.
Okay. And then just to follow-up on Dave George's question on Chicago, is this you mentioned commercial, but is this longer term of market where you would like to bring your 20 fourseven 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 in the core And that's frankly all we're gonna do. We're gonna we're gonna button it up, execute, and do this as quickly as possible. As well as possible. And, you know, we're 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. And And, you know, Paul himself is, I think, one of the best commercial banking CEOs in the country.
So having him help a short customers, work with customers, certainly work with the first Merit employees. It will only be a bonus to us.
Okay. Thank
Our next question comes from the line of Matt O'Connor with Deutsche Bank.
Good morning, Matt.
The deal seems to make sense, both strategically and financially. And 2 months ago, I probably wouldn't have asked this and focus so much on the macro, but 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. So my question is, how comfortable are you doing such a big deal, in an increasingly unknown macro environment?
Well, we've been asking, you can imagine, we're, I'm sure the first Merit Board and management team been asking themselves that question. Our team has as well. And, and I shared earlier comments, Paul and I have exchanged about what are our customers telling us. And so, We think there's a disconnect between Wall Street And Main Street given the nature of the businesses we do. It doesn't mean this is, 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 we're doing business with.
If you think of our earnings stream, half of its consumer in terms of assets, even more in deposits, And they've just gotten a dividend in terms of low, low energy price. When we talk to, the economist John Hatias at Goldman Sachs, he's given us a reassuring point of view about GDP growth, this year and next. And and and even beyond that, if there is a pullback, this is a company. FirstMerit's a company that has had extraordinary experience periods of performance, particularly in the worst of times. And that's certainly what our credit, would show.
And so if we, if we 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, but but meaningful earnings growth, going forward. So, bottom line, we like it either way, but we're we we believe this is overdone, in terms of Wall Street versus Main Street. This market pullback.
I guess specifically in the credit book, I mean, what kind of stress test thing do you do, to a credit book that you're looking to buy, in in this type of environment? And 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?
Ratio. So we understand, at a very granular level, what is in the portfolio, as well as from a portfolio view, we've that FirstMerit, stress test results, we have run their book through our model, and it fares very well. These are two companies with very comparable risk appetite, credit governance portfolios, etcetera. So we have a very good idea of, how to stress this and the combination of the 2 portfolios looks very good.
Just something to add, Matt, the whole levels here, this has been extraordinarily well managed, a lot of discipline, hold levels enforced, there's no large concentrations And then 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. So we, we like this book a lot. We think that the management team there has done a great job managing their credit.
Thanks, Matt.
Our last question comes from the line of Ken Zerbe with Morgan Stanley. Your line is now open.
First question, not to be the guy who asked this three times in a row, but the 12% tangible book value dilution, just want to be really, really clear about because I don't know if I've heard other banks take a forward integration expense number over the next year or so in attitude dilution. So if I calculate this right, if you do include $400,000,000 in your tangible book value dilution number of 12%, that would imply the deal itself is 7% dilutive and the restructuring costs are, call it, just under 5% or is that the right way of thinking about it?
So 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 1 year view, but it's it's simply looking at the 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. And then in terms of just can you just talk about Tier 1 or common equity Tier 1 capital and how the regulators are viewing that just trying to get a sense. I mean, 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 to wondering thoughts on how you're thinking about minimum capital levels?
Yes. So again, we're completely within all of our capital policy guidelines. And, 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. And we really have operating guidelines for CET1. That are in that 9% to 10% range.
But we do feel comfortable with where we're at and how we earn back appropriately over time.
Understood. Okay. So the longer term, we get back up above the 9% range. Okay.
Thank you.
And 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 trend 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 Greg and his team have done in their underwriting, We're set for the integration. Our core systems are set. Frankly, we just had, over the weekend, we just added an upgrade of our core processing capabilities. So we're in very good shape.
We're excited about a higher earnings growth rate, an efficiency ratio that puts us in the 5s, well in the 5s, 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, at this point. We expect that to continue.
And both banks have similar cultures and histories. We're both good to the communities where we live and work. So, 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.