First Financial Bancorp (FFBC) 2013 Q3 法說會逐字稿

Good morning welcome to the First Financial Bancorp third quarter 2013 earnings conference call. (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to Ken Lovik. Please go ahead.

Thank you, Jessica. Good morning, everyone, and thank you for joining us on today's conference call to discuss First Financial Bancorp's third quarter 2013 financial results. Discussing our operating and financial results today will be Claude Davis, President and Chief Executive Officer; and Tony Stollings, Executive Vice President and Chief Financial Officer.

Before we get started, I would like to mention that both the press release we issued yesterday and announcing our financial results for the quarter and the accompanying supplemental presentation are available on our website at www.bankatfirst.com, under the investor relations section. Please refer to the forward-looking statement disclosure contained in the third quarter 2013 earnings release, as well as our SEC filings for a full discussion of the Company's risk factors.

The information we will provide today is accurate as of September 30, 2013, and we will not be updating any forward-looking statements to reflect facts or circumstances after this call. I will now turn the call over to Claude Davis.

Thanks, Ken, and thanks to those joining the call today. We are pleased to report net income of $14.9 million or $0.26 per diluted share for the third quarter. Return on assets was 96 basis points and return on tangible common equity was 10% for the quarter. Our results for the quarter were impacted by several non-operating expense items that, in total, reduced pre-tax earnings by approximately $2.4 million or $0.02 per share. Excluding these items, return on assets was 1.05% and return on tangible common equity was 11.02%.

Loan growth continued to be solid as we achieved our sixth consecutive quarter of growth in our uncovered portfolio. Average balances were up $102.7 million or 12.4% on an annualized basis compared to the prior quarter, reflecting our strong growth throughout the year. We continue to demonstrate her ability to compete well against both the large regionals and the smaller community banks as our diversified product set, coupled with our relationship-based approach, provides multiple avenues for loan growth.

Our C&I, owner occupied CRE, and franchise finance groups had particularly strong quarters, and our specialty finance and residential mortgage teams made solid contributions as well. Ending balances were up $48.8 million or 5.7% on an annualized basis, as we experienced a higher level of payoffs compared to the prior two quarters.

Additionally, we had anticipated some late third-quarter production that did not ultimately fund until October. When combined with our strong pipeline of new business at the end of the quarter, which was up over 12% compared to the end of the second quarter, we feel very optimistic on our prospects heading into year end.

Total deposit balances for the quarter were down slightly, less than 1% compared to the linked quarter, driven in part by declines in CD balances due to the continued low rate environment and seasonality. As a result of the deposit rationalization work we have executed over the last 18 months, focused primarily on higher rate CDs to single service clients, we have right sized the composition of the deposit base with over 80% now consisting of non-time core accounts.

Looking forward, we are focused on strategies to drive deposit growth as this will be key to overall organic balance sheet growth. Two new products -- our indexed money market account and relationship CD -- have produced growth. And newer products, such as our Worklife program, HSAs, and a promotional CD marking the Company's 150 year anniversary, as well as client incentives for multiple products, are showing early signs of success. Additionally, we will soon be introducing a new indexed checking and small business checking products that we expect to drive additional growth.

Adjusted noninterest income was down $1.4 million compared to the linked quarter. Tony will provide more details on the drivers of that, but I wanted to briefly comment on some strategies in place that we believe will drive key revenue growth going forward. For example, in wealth management, we have rolled out new investment strategies to capture more discretionary business from our existing clients and generate new business growth in our primary markets.

Additionally, our retirement plan services segment is gaining traction as we market the product and cross sell to our commercial client base. In our mortgage line of business, like the rest of the industry, gain on sale income was down as originations declined during the quarter. However, two positive aspects to our growing mortgage business are -- first, our model has focused on purchased business, and we have never been overly reliant on the refinance wave.

Third quarter originations were almost 70% purchase, up from about 60% during the second quarter. And, second, we have recently become an approved servicer for Fannie Mae and Ginnie Mae and are launching a third-party origination channel with originations sourced from multiple channels, including smaller community banks.

Moving briefly now to asset quality. Net charge-offs declined almost 20% compared to the linked quarter and totaled 34 basis points of average uncovered loans on an annualized basis. Overall, the level of nonperforming assets was down slightly, or less than 1%, but nonaccrual loans declined $4.1 million or 6.6% as resolution strategies and payoffs on some larger credits occurred during the quarter. We did expect some additional nonperforming loan resolutions during the quarter, and these remain on track, but the timing has been pushed to the fourth quarter or first quarter of 2014.

We continue to make excellent progress on the efficiency plan during the quarter, as operating expenses on an adjusted basis declined over $3.6 million during the quarter. All initiatives have been fully implemented and, on an annualized run rate basis, we estimate that we will exceed our original announced $17 million target of expense savings. Based on actual results to date, we remain firmly on pace to realize 85% of the original target in full year 2013 results, with all savings from the original plan to be realized in 2014 and thereafter.

Throughout the process related to the original plan, we identified opportunities for further efficiencies that we are currently in the process of implementing. We expect these new initiatives to produce an additional $5 million of cost savings that should be realized in 2014's full year results. And, like the original efficiency plan, will result in savings across multiple expense categories.

Despite our intense focus on efficiency, however, we feel we have more than sufficient capacity to continue executing on balance sheet and revenue growth strategy. We will continue to invest in our business lines and allocate resources in areas and markets that should provide strong growth opportunities while still carefully managing expenses.

In conjunction with the earnings release, we announced our quarterly dividend of $0.15 per share to be paid January 2. While we no longer pay out the variable dividend, our dividend rate translates into a 3.8% yield based on yesterday's closing price, and is still in the upper end compared to peer institutions. As we mentioned in the earnings release, we did not repurchase shares during the third quarter, as we hit our 1 million share annual target as of June 30. We do expect to begin the second year of the share repurchase plan and we'll be in the market during the fourth quarter.

Capital levels continue to remain strong as we ended the quarter with a tangible common equity ratio of 9.6%, a tier 1 ratio of 15.26%, and a total capital ratio of 16.53%, which are all well above our long-term targets for the Company. We understand and know the key to achieving solid, long-term EPS growth will be the effective deployment of our excess capital, which we conservatively estimate to be at least $100 million under the most constraining ratio, and after factoring in the expected impact of Basel III.

The three capital management strategies we are focused on are M&A, organic growth, and a balanced capital management strategy consisting of dividends and share repurchases. If, over time, our M&A and organic growth strategies do not sufficiently utilize our capital and generate acceptable EPS growth, we will consider additional strategies.

With regard to M&A, our strategy remains unchanged. We remain interested in whole bank or branch acquisitions within our three-state footprint, as well as other contiguous markets, with growth opportunities and characteristics similar to our existing franchise. We also remain interested in looking at non-bank financial services providers such as asset generators or fee revenue providers that fit strategically with their commercial, consumer, wealth management, or mortgage businesses.

In summary, our overall performance was solid as strong expense management offset declines in net interest income and fee revenue. We are in a transition period right now, where strong, organic loan growth is being offset by the headwinds of a declining covered loan portfolio, which is further exacerbated by our aggressive resolution of those credits we intend to exit prior to loss share expiration. This is going to continue to challenge our ability to grow net interest income over the next several quarters.

However, from an overall earnings perspective, execution of our strategies related to efficiency, fee revenue, and deposit growth, as well as continued focus on building client relationships and leveraging our diversified credit product set, should help to mitigate the impact of further declines in the covered loan portfolio. With that, I'll now turn it over to Tony for further discussion.

Thank you, Claude. Our third quarter adjusted pre-tax, pre-provision earnings of $26.4 million, which exclude certain items related to covered loan activity as well as other significant items, was essentially unchanged quarter over quarter. As shown on slides 3 and 4 of the supplement, this was 1.69% of average assets on an annualized basis. Total interest income declined $2.8 million or 4.5% compared to the linked quarter due to lower interest income earned on loans, a modest decline in interest income earned on investment securities, and higher amortization of the indemnification asset for covered loans.

The decline in interest income on loans was primarily the result of an average balance decline in covered loans of approximately $81 million or 12.3%, and a 37 basis point decline in the yield earned on that portfolio compared to the linked quarter. Additionally, the average balance of the FDIC indemnification asset declined approximately $23 million or 21.5% during the quarter, due to increased asset resolution activity, which contributed to a 455 basis point increase in the negative yield earned on the indemnification asset and further impacting net interest income and margin.

The indemnification asset balance at September 30, 2013, is $78.1 million or 15% of covered loans, down from a balance of $130.5 million or 16% of covered loans one year ago. The level of asset resolutions experienced during the quarter, while high, was not totally unexpected. Many of these resolutions were the result of several years of work-out and asset management efforts by our loss share team. And while it is sometimes difficult to predict the timing of these resolution efforts, we expect them to remain elevated given the relatively short time frame remaining on the commercial loss share agreements.

The impact from covered loan activity was partially offset by another strong quarter of loan production, as we saw a $103 million or 3.1% linked quarter increase in average uncovered loan balances, as well as modestly higher loan fees. However, we continue to feel the impact of the current low interest rate environment, as the yield earned on new loan originations during the quarter was approximately 78 basis points lower than the average yield on loans that paid off during the period.

Modestly lower interest income from investment securities resulted from a $160 million or 6.8% decline in average balances compared to the linked quarter, partially offset by a 12 basis point increase in the portfolio yield, which was largely driven by stabilization in premium amortization during the period. As the investment portfolio is now similar in size to a level of 12 months ago, we have begun to reinvest the portfolio runoff generally using a barbell approach of 60% to 70% fixed rate and 30% to 40% floating rate. The overall duration target remains in the four-year timeframe and, dependent on loan demand, the investment portfolio could increase up to $100 million between now and the end of the year.

Total interest expense and net interest margin continued to benefit from the impact of the Company's deposit strategies, declining approximately $500,000 compared to the linked quarter. The cost of funds related to interest-bearing deposits declined 4 basis points, while the average balance of interest-bearing deposits declined $139 million or 3.7% during the quarter. Including non-interest-bearing deposits, our total cost of deposit funding declined 3 basis points to 24 basis points for the quarter.

In addition to reducing the balance of higher cost, noncore relationship deposits, we have significantly improved the quality of the deposit base as total non-time deposits now comprise over 80% of the total deposits compared to approximately 76% a year ago. While there may be some limited opportunity for further improvement in our cost of funds, we remain focused on both commercial and retail deposit growth initiatives, as Claude discussed in his comments.

To this end, we have launched several new products in recent months, including an indexed money market account, which has grown to almost $200 million in balances with approximately 50% new money, and promotional and relationship CD products that improved our CD retention rates from 68% at June 30 to 87% at September 30. Creating long-term franchise value through our core deposit base remains a strategic objective.

Net interest margin declined 11 basis points to 3.91% from 4.02% for the linked quarter, primarily as a result of the balance and yield changes on covered loans and the FDIC indemnification asset discussed earlier. As I mentioned, we are now within the final 12 months of the five-year coverage period for commercial assets acquired in the FDIC assisted transactions of 2009.

This is important, as the yield on the indemnification asset is the result of our modeling efforts related to expected cash flows on the covered loans and the claims with the FDIC, and may be subject to volatility due to fluctuations in the amount of the timing of those cash flows versus our modeled expectations. We expect the negative yield earned on the indemnification asset to remain elevated going forward and note the potential for further volatility over the remaining life of these agreements.

Finally, I would note that all the major components of the net interest margin showed positive trends during the quarter, with the exception of those related to covered loans and the indemnification asset.

Moving now to noninterest income. Excluding reimbursements due from the FDIC, other covered loan activity and other items is noted in table 1 of the release, third quarter noninterest income declined approximately $1.4 million from the linked quarter to $15 million. The decrease was primarily driven by lower bank card income, net gains on sales of residential mortgages, client derivative fees, and portfolio valuations related to client derivatives, all partially offset by higher service charges on deposits during the period.

While we don't normally speak to the volatility in the quarterly derivative portfolio valuation, this quarter the fluctuation in value resulted in lower reported noninterest income compared to the second quarter of approximately $800,000. The decrease in bank card income during the quarter was related to incentive fees recognized during the second quarter, while lower net gains on sales of residential mortgages, client derivative fee income, and fluctuations in derivative portfolio valuations were influenced by interest rate movements over the past six months.

Noninterest expenses for the third quarter -- excluding certain FDIC and covered asset expenses associated with the implementation of our efficiency plans, and other items as noted in table 2 of the release -- were $44.4 million as compared to $48.1 million in the second quarter. The decrease in noninterest expenses compared to the linked quarter was due primarily to lower salaries and employee benefits, occupancy costs, professional services expenses, and fixed asset related losses during the quarter.

As noted in the release, we are planning a second phase of efficiency initiatives expected to result in approximately $5 million of additional reductions. These initiatives should all be in place by the end of this year and we expect to realize the full impact during 2014. Overall, we continue to be pleased with our performance with respect to expense management, and feel we are making solid progress in developing an efficient, scalable operating platform.

Income tax expense for the quarter was $7.6 million, resulting in an effective tax rate of 33.9%, compared with income tax expense of $6.5 million and an effective tax rate of 29% in the second quarter. While the effective tax rate during the second quarter was impacted by a state tax change and an adjustment related to the resolution of an unconsolidated former Irwin subsidiary, the effective tax rate for the third quarter was in line with our expectations and should remain stable going forward.

Turning briefly to covered assets. Net credit costs on covered assets for the quarter were $1.4 million, as highlighted on page 8 of the supplement, which shows the individual components of credit and FDIC related items associated with those assets. Credit costs on covered assets can vary from quarter to quarter and are impacted by actual charge-offs, changes in estimates for both the timing and amount of expected cash flows, and continued mix shift as the covered loan portfolio matures.

Finally, with respect to interest rate sensitivity, we expect to maintain a relatively neutral sensitivity position under a plus 100 basis point parallel rate shift, and be slightly asset sensitive under a plus 200 basis point rate shift as of September 30. We continue to evaluate strategies to manage our balance sheet, including hedging and the reinvestment strategies related to the investment portfolio, in order to balance the mix of fixed and floating rate assets and to manage duration towards the shorter end of the curve.

I will now turn the call back over to Claude.

Thanks, Tony. And, Jessica, we're now happy to open the call for questions.

(Operator Instructions). Scott Siefers, Sandler O'Neill.

Morning, guys. Let's see -- Tony, maybe first question for you, just on the margin, given the volatility that's in it from the covered portfolio. As you weigh all the puts and takes, and understanding that the covered piece is going to continue to stay pressured for a little while, what would be your best guess as to where the FT margin flushes out in coming quarters?

Well, Scott, you win the prize. I figured this would be the first question. (Laughter). In Q2, we said that we are expecting over the balance of the year a decline of 10 to 15 basis points, and we had 11 here in the third quarter. It is almost entirely driven by what we've talked about in terms of the resolution strategies, and just the shorter time period remaining on the agreement with the FDIC.

So, it's really, really hard to say. Could there be another 11 basis point drop? I don't know, but it is going to drift down. The thing that we do know right now regarding the indemnification asset, this is a blended rate. We do a mid-quarter valuation of the portfolio so what you see here is a blended rate. We do expect the negative yield to grow more negative here in the fourth quarter and beyond.

Beyond that, it's really up to resolution -- the level of resolution activity and just very hard to say. I know it's a long answer to not a very -- or a long response and not a very good answer for you, but it's just really difficult to predict.

No, no. I understand. I appreciate the color. I guess if I'm taking away the appropriate message, it sounds like on a core basis, even though there might be some typical, modest pressure, you feel pretty good about things. But it's really just the covered portfolio that is the volatility factor (multiple speakers).

It absolutely is. And the other components and other drivers of the margin are trending positively. So we feel good about where we're headed related to loans and deposits, and the investment portfolio is performing well. It is really isolated on the covered loan and the indemnification asset.

Yes, okay. I appreciate that color. And then maybe switching gears a little. Claude, on the expense side, so you've got -- next year will be the full run rate of the current efficiency initiative, and then you outlined the additional $5 million or so. And all else equal, that $5 million would equate to about the amount of growth that you've had on a typical year, sort of on a per-share basis and expenses, going back over a longer period of time.

So, in the aggregate, would you think that core expenses could be flat or down next year? Or will there be additional, say, investment spending that might put some upward pressure on total costs in spite of the plans you guys have announced?

Sure, Scott. Let me -- Tony has probably got a better handle just in terms of run rate guidance. So, Tony?

Yes, the way I would think about it, Scott, is look at the third quarter here. We think that we are at a pretty good level and that should be our base. Going forward, if you analyze that, take the $5 million off, you're probably going to get in the range of where we think we're going to operate next year.

Okay. All right. That sounds great. I appreciate it, guys.

Emlen Harmon, Jefferies.

Hello. Good morning, guys. I wanted to continue on the expenses and the magnitude actually of expenses that you realized from the first plan. I take a look at table 2 in your press release and can back out some of the improvement in noncovered OREO, marketing; maybe a couple of hundred thousand for mortgage commissions. Seems like the expenses were down $3 million quarter over quarter. And I know you guys had about $15 million out of the $17 million in the original expense savings plan were done last quarter.

So, to me, it seems like there is several million upside on that $17 million plan that you laid out. Could you give us a little bit of color just about how much better you did than what your original expectations were? I threw a bunch of math at you there, sorry.

Yes. I don't know if I can give you specific numbers, but I can tell you that we did overachieve a little from what we thought and had a few more strategies that we were able to put in place. But I don't know if we've quantified that necessarily in the context of the $17 million.

Yes. Would it be fair to say that the magnitude is in the several million dollar range on an annual basis?

We'd have to look at that.

Yes, I'd have to look at that.

Okay.

I think what I said earlier around working off the third quarter adjusted expense base is really the way to look at it.

Okay, that's fair. And if we could talk about the -- let's talk about the M&A environment a little bit. You guys continue to look -- I would be interested in hearing your impression of what's happening in that bid-ask spread that we've heard a fair amount of about. And maybe within that, if you could address -- we have seen a few transactions lately where the sellers have been private institutions, and so maybe a little bit more willingness to sell where there is more skin in the game and you don't have a management versus agency problem. Have you seen any difference between potential targets and willingness from private sellers versus public?

I don't know that I would speak to private versus public, Emlen, but I would tell you I think, as we have said in past calls -- I think I mentioned in the last quarter call -- we continue to be out actively meeting with other banks. And I feel like that the bid-ask spread is narrowing, that the conversations are productive. But certainly no suggestion as to whether or not we can get a deal done, but we do feel good about the opportunities that are out there. We feel good about the conversations that are happening.

And it remains one of our key strategies for deployment of what we've described as the excess capital position that we have. And I would just reiterate that point, that we really prefer to deploy that $100 million of excess capital, as we've defined it in my script, in growth strategies. So, that would be what I would comment. I think some of your points are very appropriate and may make sense, but I don't know that we have enough conversations out there to be able to say it's different, public/private.

Got you. Okay, thanks. And then just one last quick one for me. Just on the pace of runoff on the covered asset book, I have seen that accelerate some. Is the pace of decline we saw this quarter what we should expect going out the next several quarters here?

This was a record quarter, if you will, in terms of activity. Honestly, I'd be surprised if it stayed at this kind of level. Certainly higher than our trends up to this quarter, but probably not at the level that we saw this quarter.

Okay, great. Thanks for taking the questions.

Taylor Brodarick, Guggenheim Securities.

Great, thank you. I just had a question about the franchise finance lending. You cited it in the release as a source of strength. Where -- what type of growth did you experience? And, also, have you added on new customers or just organic growth with your existing? Thank you.

Sure. Yes, in the franchise finance space, just to remind everyone, we primarily finance quick service restaurant clients, and predominantly among 15 to 20 concepts. And it's continued to be a space that we view as strategic to the Company that we want to grow. We have seen some payoffs in that space just because there's a lot of acquisition activity going on among franchisees.

But our new origination has been both from existing clients and maybe they're perhaps acquiring new franchise. But also with new clients, as we continue to have a pretty active business development effort which identifies franchisees that maybe we're not doing business with in our target concepts, that our salespeople continue to actively call on. So it's a bit of both.

Great. Thank you.

Jon Arfstrom, RBC Capital Markets.

Hello, guys. This is Andy Hedberg in for Jon. Just a quick one on loan growth. You talked about some of the deals slipping to 4Q, just curious if the pace of growth accelerated throughout the quarter. And then in terms of spreads, are they holding in there fairly well relative to historical quarters?

Yes, I don't know that the pace accelerated during the quarter. I think we, as I mentioned, what we saw late in the fourth quarter is we expected some larger deals that were going to close toward the end of the third quarter that slipped into October. Which is not unusual. But as we've shown over the last few quarters, we continue to have pretty solid new originations and pretty solid loan growth in the uncovered book.

We expect that to continue. What can happen -- and we saw a little bit of it, as I mentioned as well -- that we had some payoffs, not because of anything negative; just normal business activity. Either a project gets sold or something occurs. So, with our pipeline up 12%, with some deals slipping to the fourth quarter, we feel good about the fourth quarter production.

The one caveat I would put to that is -- one of the things we're seeing in the commercial real estate space is that, as values have improved, you're seeing stabilized projects being sold or going to market because it's a time for those investors to monetize some of those projects that maybe they've not been able to in the last few years. So we've seen a few payoffs related to that. But in terms of new originations we -- it's just been a solid quarter and it continues into the fourth quarter.

Okay. That's helpful. And then one in terms of capital. You talked about the buyback coming back into the equation next quarter. But just curious of where your excess capital sits today. I know this is probably more of a permanent change, but is there a possibility that you get more aggressive on the dividend payout?

Our Board looks at it every quarter and it's one of those we'll continue to evaluate. We are very sensitive, and I think we've shown over time that we try to be shareholder friendly in what we think is the right approach to capital management. Today, where we sit, is with the plan around our $0.15 per share a quarter dividend plus the buyback program, that will return 60% to 80% of current earnings.

And, so, with that program as it is, if we don't see balance sheet growth then our excess capital position will just build beyond the $100 million plus that it is today. So, we are very focused on deploying that capital. As I mentioned, we'd prefer to do it through M&A and through organic growth because we think that's a better return to shareholders. If at some point in the future -- and I can't define what that future point is -- if we don't see the opportunity to deploy it, that's where I mentioned we'll look at additional capital management strategies.

But I think the important thing for investors to understand is that we think we have real leverage opportunity with our capital base that exceeds many of our peers. And we're very focused on that and we'll be very transparent about how we intend to deploy it. And there's a whole, as I mentioned, a whole range of options to do that, but with growth clearly being our first choice.

Okay, great. Thanks, guys. That's all I had.

Christopher McGratty, KBW.

Good morning. It's John Barber filling in for Chris. Just related to Andy's loan growth question, what would have loan growth on the noncovered portfolio have been in the third quarter if those few closings hadn't slipped into October?

I'm not -- I don't have those numbers right in front of me. It was a few larger deals. So, I don't have it and I would hate to hazard a guess. But I would focus more on the pipeline is 12% up over 2Q as the best future indicator.

Okay, that's fair. And then just on the incremental $5 million of cost saves that you've identified. I know you said it was over -- or across multiple line items, but are there any particular areas that you expect you might get more -- that the $5 million might be more geared towards?

I don't think it's going to be heavily weighted one area or another. We're looking at -- and have been for a while -- looking at all of our discretionary spending. Still going through a number of branch rationalizations, so it's going to be a mix of things.

Okay. And then the last one I just had, there's been some turnover in the past few months at the senior management level. Could you just speak to the strength of the bench at First Financial?

You bet. Yes, no, we feel very good about our team here. And to this point we've been able to I think replace almost every position that we've changed with internal talent that we immediately were able to put in place. And that's a part of our ongoing process we work on with the Board, is succession planning. So, yes, we feel very good about that. At the same time we are always out actively looking for good talent to join the organization new. So, yes, we feel very good about where we are at from both the management team as well as a sales staff perspective.

Great, thank you.

Bryce Rowe, Robert W Baird.

Thanks. Good morning. Tony, wanted to just get a feel for the deposit balances. We've seen declines in the deposit portfolio for many of the last 10 quarters or so. It kind of sounds like it might be at an end to the declining balances with the core deposits up as much as they are now. So I just wanted to get a feel for what to expect there on the deposit side.

Yes. Bryce, this is Claude. We have seen that decline and, as we've mentioned a couple of times, a part of that has been managed. As we felt we were going to be in a protracted low rate environment, we really -- as we called it -- took on a deposit rationalization approach, where being pretty aggressive in terms of our pricing approach to reduce deposit costs. Especially after our acquisitions in 2009 and 2011, where we had acquired pieces or parts of four entities, all of whom had much higher than peer deposit costs.

And so we needed to go through a process of working through that and changing the mix, especially the CD portfolio. We do feel like we've reached the end of that process. Now, that's not to suggest one quarter or another is just going to be perfect growth from here, but to the point and the comments I mentioned in my script, we've aggressively changed our deposit product approach.

We've really begun to incent heavily a lot of our sales staff and look at new strategies there. So we would expect on balance over time that we'll begin to see deposit growth again, and deposit growth that's more reflective I think of the markets that we are in and our position in those markets. The part that we look at, which has been a positive, is that we continue to see good core account growth, which is the most important for us. But we're really focused now on overall deposit growth as a key strategy. So, I would expect going from here you should begin to see, over time, good deposit growth.

That's helpful, Claude. And then one cleanup question on the cost-saving initiative. Tony, is the run rate to use to model in this $5 million cost save number, is it the $44.4 million from table 2 of the release?

No, it's probably a little lower than that when you factor in some ORE losses and some of the loss share. I'd probably use something in the mid-43s.

Okay. Thank you.

(Operator Instructions). John Rodis, FIG Partners.

Good morning, guys. Thanks for taking my question. Just a quick question back on the covered portfolio. So, if you had run off this quarter of about $100 million, and based on the slide presentation, I guess you expect to keep about $358 million, which implies additional runoff of about $160 million. Is that the right way to look at it over the next year or so -- the $160 million runoff?

Yes, the -- I'll let Tony speak to it. The only -- I would say on the $358 million, you're right. Those are relationships that we want to retain, John. But what happens just even with legacy loan book -- you can't see it because it's mixed with new originations -- but that $358 million number will continue to attrit down as well, both through normal amortization as well as payoffs, refinances, property sales, et cetera.

And so what you can't see necessarily is, is that $358 million number will continue to drift down and I think it represented about half of the $100 million runoff this quarter was in that likely to retain bucket. But we may be picking up pieces and parts of that from those relationships in the uncovered book. So, while we don't disclose relationship changes, that's the way it works on the balance sheet. If that makes sense to you.

So you're going to see runoff in both of them. We're just trying to retain the relationships in that $358 million bucket that you referenced.

So, basically, the stuff that you want to retain -- if you renew something, it goes out of the covered portfolio into the noncovered portfolio, essentially?

Well, it can come out of the covered because it's possible that those types of changes would require us to no longer -- it would not be eligible any longer for loss share coverage, but it would still be in the accounting framework that it's been in for the last four years.

Okay.

The other part of your question, John, around the $160 million. We're not going to get all of that out of there. We're not going to be totally successful. And if you fast-forward on a big picture level of what we might look like there a year from now, our hope and goal is that that $160 million would be a relatively small number of -- let's call them nonperforming or subpar credits. They would have an allowance; they would still be marked; we're just trying to move that $160 million down to as low a level as possible.

Okay. That makes sense. And one other question for you, Tony. Just wanted to make sure I heard your comment on the securities portfolio. Did you say that you could potentially see it go up about $100 million between now and year end, depending on loan growth?

Yes, that's right. We're back to our pre-leverage strategy levels, and we're looking to add to the portfolio in a more measured way around fixed and float and some duration. So, I think it's likely -- again, depending on loan growth -- that we could see that portfolio grow between now and the end of the year.

Okay, super. Thanks, guys.

With no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Claude Davis for any closing remarks.

Great. Thanks, Jessica, and again I would just thank everyone for joining our call today and your interest in First Financial Bank. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.