Jul 29, 2011
Executives
Kenneth Lovik – VP, IR and Corporate Development Claude Davis – President and CEO Franklin Hall – EVP and CFO
Analysts
Jon Arfstrom – RBC Capital Markets Scott Siefers – Sandler O’Neill Christopher McGratty – KBW Joseph Stieven – Stieven Capital Unidentified Company Representative David Long – Raymond James Matthew Keating – Barclays Capital Kenneth James – Sterne Agee Bryce Rowe – Robert W. Baird
Operator
Good morning and welcome to the First Financial Bancorp’s Second Quarter 2011 Earnings Call and webcast. All participants will be in listen-only mode.
(Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Kenneth Lovik.
Please go ahead.
Kenneth Lovik
Thank you, Denise. Good morning, everyone, and thank you for joining us on today’s conference call to discuss First Financial Bancorp’s second quarter 2011 financial results.
Discussing operating and financial results today will be Claude Davis, President and Chief Executive Officer; and Frank Hall, Executive Vice President and Chief Financial Officer. Before we get started, I would like to mention that both the press release we issued yesterday 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 second quarter 2011 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 June 30, 2011 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.
Claude Davis
Thanks, Ken, and thank you to those joining the call today. We reported net income of $15 million or $0.27 per diluted common share for the second quarter, representing a return on average assets of 1.03% and a return on average shareholders’ equity of 9.05%.
Our results for the quarter clearly demonstrate our company’s ability to continue to produce recurring high-quality earnings despite persistent economic uncertainty both nationally and throughout our footprint. Our pre-tax pre-provision earnings were up $3.8 million or 13.9% from the first quarter.
Our provision for uncovered loans increased approximately $5 million from the first quarter or $0.06 per share. Our credit profile and metrics, however, remained stable and, as a result, our allowance remained relatively flat on a linked quarter basis.
The second quarter was an exciting one for us as we announced our first transaction since the FDIC-assisted acquisitions two years ago. We signed an agreement to acquire 16 Ohio-based branches from Liberty Savings Bank, the majority of which are located in the Dane area and will help to accelerate our growth plans in that key market.
We are well into our integration activities and are still on track to close the transaction during the third quarter. We are also pleased to announce that the Board of Directors has authorized up to a 100% dividend payout ratio of quarterly earnings consisting of two components; one, a recurring dividend based on our previously stated target payout ratio of 40% to 60% of earnings, which is currently $0.12 per share; and a variable dividend that will equal the remainder of our quarterly earnings which, for the second quarter, equals $0.15 per share.
In total, the dividend represents a 125% increase over the most recent dividend we paid to shareholders. Our stated capital ratio thresholds included tangible equity ratio of 7%, a Tier 1 leverage ratio of 8% and total capital ratio of 13%.
Obviously, our current capital levels are well in excess of this amount and are capable of supporting significant asset growth. Under the most constraining of our thresholds, we still have capacity to support more than $2 billion in additional assets.
Using the second quarter as an example, if we paid out only our recurring dividend of $012 per share, we would generate approximately $8.8 million of new retained earnings. Applying a leverage ratio of 8% to this newly-generated capital would support $110 million of asset growth on top of the $2 billion we can already support.
It is an instrumental growth capacity that we are returning to shareholders. The variable dividend is intended to provide an enhanced return to our shareholders and avoid unnecessarily adding to our capital position until we have capital deployment opportunities, such as acquisitions or organic growth that moves us closer towards our capital thresholds.
Obviously, it is hard to foresee how long we will maintain the variable dividend as the timing of certain capital utilization opportunities, such as acquisitions, are hard to predict. The board will evaluate the variable dividend on a quarterly basis, but expects to approve a payout ratio exceeding our current dividend for the foreseeable future.
At quarter-end and prior to the payment of the upcoming variable dividend, our tangible common ratio was 11.11%, and total risk-based capital ratio was 21.43%. Our regulatory capital ratios did decline slightly during the quarter due to the early redemption of $20 million of trust preferred securities.
However, the impact of the trust preferred redemption was offset by earnings for the quarter. Generally speaking, credit quality was stable compared to the prior quarter as total classified assets remained flat at $185 million.
The provision for loan losses related to our legacy and originated portfolio was $5.8 million, which covered net charge-offs of $5.7 million for the quarter. While net charge-offs increased $1.5 million compared to the first quarter, there were no significant items driving the total charge-offs for the quarter and the activity can be categorized as simply coming to resolution on a number of credits, primarily in the CRE and construction portfolios.
Non-performing loans to total loans declined to 2.65% from 2.90% as a result of the net charge-offs as well as other resolution strategies. Total non-performance assets declined $5.2 million or 5.4% during the quarter and as of June 30, total non-performing assets to total assets equal 1.50%, continuing the modest downward trend experienced over the last four quarters.
Loan demand continues to be soft within our strategic markets as both average in the period and the total uncovered loan balances remained essentially unchanged compared to the first quarter of 2011. However, our focus on building out our commercial lending platform begin to show results as average C&I loan balances increased 6.8% compared to the second quarter of 2010.
Within our commercial and CRE portfolios, we experienced substantial growth and originations and renewal during the quarter, particularly during June with the quarter total almost $240 million or 62% over our first quarter volumes. Furthermore, our C&I and CRE pipeline at the end of the quarter was at its highest point in March.
We are cautiously optimistic that this activity is perhaps a signal that the sustainable economic improvement within our strategic markets is on the horizon. In closing, we were very pleased with our results for the quarter.
The growth in pre-tax, pre-provision income, strong profitability and net interest margin, cable credit performance, in addition to continuing to lower our strategic operating costs, and continuing our growth in average core deposit balances were all very positive aspects of the quarter. Furthermore, with the introduction of the variable dividend and the announced acquisition, are both prudent uses of our capital that will provide our shareholders both a short and long-term catalyst to enhance their return on the investment in our company.
I will now turn the call over to Frank for further discussion on our financial performance.
Franklin Hall
Thank you, Claude. I will start by providing a few comments on some of the operating results of the quarter, and the major components of performance.
We have also provided supplemental information furnished separately that is available on our website bankatfirst.com in the Investor Relations section or in the 8-K we filed last night. As in previous quarters, this supplement is crucial to establishing and maintaining a clear understanding of our reported results, as well as the concepts that have a material effect on our current and future performance.
As many of you know from following our company, our operating results are materially impacted by unique accounting and reporting requirements, and the strategic distinctions we have made related to our 2009 acquisitions. However, to aid in a clearer understanding of our strategic activities, we will focus primarily on the ongoing or strategic aspects of our business on this call.
Our earnings release and our supplemental information should provide sufficient information and transparency into the purchase accounting details, and the impact of non-strategic components of our results. These complexities have also been discussed at length in our previous earnings calls and the technical accounting call that we hosted on February 4 of this year.
This information is also available on our website. Second quarter 2011 GAAP earnings per diluted share were $0.27.
Net income available to common shareholders for the first half of 2011 increased to 20.6% compared to the first half of 2010 and adjusted pre-tax pre-provision income increased 13.9% compared to the late quarter. As Claude mentioned, the most significant item affecting our earnings for the second quarter as compared to the prior quarter was a $5.1 million increase in our provision for uncovered loan losses or approximately $0.06 per share.
This increase was not due to degradation in credit quality but rather is at a level indicative of our stabilized expectations following a 10-basis-point decline in the reserve from last quarter. Firm level overall remained stable at 1.92% of ending loans while non-performing loans declined by $6.6 million during the quarter.
Our operating results are better summarized on the pre-tax pre-provision income slide which is Page 3 of our earnings supplement. Net interest income on a fully tax equivalent basis for the second quarter was down only slightly on the linked quarter, due largely to an 8.8% decrease in our average acquired loans.
Our net interest margin remained strong at 4.61% as we continued to redeploy liquidity through securities purchases and higher cost retail and brokered CDs continued to run off, helping to offset the impact of a declining covered loan portfolio. As in prior quarters, we put our excess liquidity to use purchasing almost $250 million of agency mortgage-backed securities during the second quarter.
If loan growth remains challenged, we will continue to deploy additional liquidity resulting from the combination of our strong earnings, core deposit inflows and acquired loan pay downs. We also used our liquidity to redeem $20 million of floating rate trust preferred securities.
With regard to our investment portfolio, since the end of the third quarter 2010, the duration of the portfolio has increased from 1.1 years to 1.8 years at the end of the second quarter 2011. While we have extended the duration, albeit from a very low starting point, we continue to manage the overall performance of the portfolio to provide a stable and predictable revenue stream across a variety of interest rates and areas and market conditions.
This is consistent with our intent to remain in an asset-sensitive position, while providing a suitable balance of quality and diversification. Non-interest income earned in the second quarter 2011 was $15.4 million as compared to $14.9 million in the first quarter of 2011 and $14.5 million in the second quarter of 2010.
The increase compared to the linked quarter was primarily driven by higher service charges on deposits, bank card income and client derivative fees, offset partially by lower gain on sale from residential mortgage originations and trust and wealth management fees. Additionally, we recognized the gain of $429,000 resulting from the sale of approximately $9.3 million of loans originated by the franchise finance unit.
Consistent with prior sales of franchise-related loans, the sale was conducted to lessen credit and geographic concentration risk within the franchise was $43.7 million as compared to $45.7 million in the first quarter of 2011, and $47.7 million in the second quarter of 2010. The decrease in non-interest expense of $1.9 million or 4.3% compared to the last quarter was primarily driven by lower salaries and benefits, occupancy costs and FDIC assessments, offset by an increase in data processing and professional services expenses.
At the end of the second quarter, we completed the early redemption of our remaining trust preferred securities and recognized an early termination fee on a related interest rate swap of approximately $600,000. We have disclosed a tremendous amount of detail about the balances, yields and quarterly evaluation results of our loans accounted for under SOP 03-3, which should aid in evaluating our acquired loan portfolio.
But as I mentioned earlier, we will not discuss the details of purchase accounting-related items. Overall, the credit performance of the acquired portfolios continues to exceed our initial estimates, and their quarter-to-quarter changes continue to be positive.
I will now turn it back over to Claude.
Claude Davis
Tanks, Frank, and we’ll now be happy to open the call for questions.
Operator
Thank you. We will now begin the question-and-answer session (Operator Instructions) And our first question comes from Jon Arfstrom of RBC Capital Markets.
Please go ahead.
Jon Arfstrom – RBC Capital Markets
Thanks. Good morning, guys.
Claude Davis
Hi, Jon.
Franklin Hall
Good morning, Jon.
Jon Arfstrom – RBC Capital Markets
Just to a conceptual question for you, I’d like the concept of the dividends, so don’t take this question the wrong way. But how do you weigh the variable dividend concept against the concept of a buyback?
Claude Davis
Sure, John. Good question, and obviously as you would imagine, as we contemplated that, that’s the issue we discussed and I’ll provide a couple of thoughts and then Frank can add to it if he would like.
But as we evaluated it and thought about it in the context of both our price well above book value and the incentive to book value dilution is one issue; second thing, the kind of I would call it economic and regulatory uncertainty, but also what we viewed as a shareholder-friendly way to return capital and reward our shareholders. We felt like the variable dividend did that but also retained the flexibility for us should that opportunity come along to deploy the current earnings, if you will, that we’re using in the variable dividend.
So, that was the balance of items we consider as a board as we made the decision to go to the dividend route as opposed to a buyback. But I don’t know, Frank, if you would add anything to that.
Franklin Hall
Yes. I mean those really are key considerations.
On a buyback, there’s always the debate as to whether or not it’s a good price to buy your shares back, and as Claude said, the flexibility of this approach we think is well suited for the regulatory environment that we’re in and the uncertainty of the growth environment as well.
Jon Arfstrom – RBC Capital Markets
Okay, all right. And then just a question on the lending environment.
I would characterize all of you is reasonably cautious over the last few quarters in terms of the outlook but you’re stating in your release a bit more optimism on the commitment. And I guess if anything you can attribute that to what you’re hearing from your clients or other things that you might be seeing and then the second part of that is this – if the momentum continued into July?
Claude Davis
Sure. And we are and I think what you read in our comments are true is that we have been more optimistic in the last two to three months, about and what we’re seeing in terms of loan demand and our ability to win the business and it really picked up late in the second quarter and I would say as a result of two things, one is our sales staff has done a great job of being out, actively calling, really throughout the whole crisis in ongoing and we really stepped it up in the last year.
And so, the first thing I would tribute to is a great team who’s been out aggressively pursuing good business. Secondly is, it’s always a function of demand and clients’ willingness because of their own revenue picture to make commitments.
And I think that’s what we saw as an improved change late in the second quarter. And so those pipelines have continued to build.
The only concern that we would have I would say at this point, John, would be we felt the same way late in the fourth quarter of last year we saw a nice surge in December and then it trails off. We didn’t expect that this time other than I think all of the hysteria that’s going on in Washington around the debt and loan and what that might do to the economy would be our primary concern or caution in this bad kind of new GDP growth going forward and cause some of our clients to pull back.
The other piece is that it’s still a very competitive environment. I mean, everybody’s got the same issue around loan demand and loan growth.
So, we’re certainly seeing competition that’s been more aggressive than we’ve experienced in a long time. So, I’d say those two things are the only governing factors to our optimism, but we did feel good about the late second quarter search.
Jon Arfstrom – RBC Capital Markets
Okay. Great.
Thank you.
Claude Davis
You bet.
Operator
And our next question will come from Scott Siefers of Sandler O’Neill. Please go ahead, sir.
Scott Siefers – Sandler O’Neill
Good morning, guys.
Claude Davis
Yes.
Scott Siefers – Sandler O’Neill
I wanted to follow up with a couple of quick questions on the dividend as well. Can you just talk about at a very top level sort of the discussions you went through with regulators and everything?
I mean, I imagined, at the least, didn’t object to the new policy, but I think we’re all kind of looking for that, the green light to pattern more substantial portions of – how did that back and forth go? And then additionally, Claude, I noticed in your prepared remarks, you said up to 100% payout when you’re talking about the variable dividend or the cumulative dividend, but the release says it’s going to be 100% payout.
So, is a 100% of earnings the policy or is there – are you guys keeping some wiggle room in there as well?
Claude Davis
Well, yes, good question, Scott. The first is we’re very sensitive to our regulatory relationships and so we don’t disclose either the content or the back and forth that we have with them.
I think to that point, though, I think we feel like our balance sheet is more fortress-like than at least anybody we’ve looked at, and I think with our capital levels and liquidity levels at both the bank and the parent company, we feel like we’re in very much in a position to have an outsized dividend, if you will. And just as a reminder for those on the call, if you look at our balance sheet we’re almost entirely deposit funded, we’re solely a common equity capitalized.
We have capital ratios that are probably in the fifth percentile of the industry. And that the parent company, the strength of the parent company is we have almost $100 million of cash and no debt.
So, that was the combination of factors that we said, “Look, we’re in a position to do this.” In terms of the payout ratio, I did say up to and the intent of the variable dividend, until we had opportunities is to payout the 100% payout ratio.
But, the point is or as we’ve been clear about always on dividend policy, our Board does do a quarterly valuation. And so, to say it is an absolute would be inappropriate because our Board needs to evaluate on a quarterly basis.
But the intent of this program is to payout 100% of earnings until we have capital deployment opportunities. I don’t know if that helps or answers question but that was the intent.
Scott Siefers – Sandler O’Neill
Yes, it does. I appreciate that color.
And then, separately, Frank, I was hope you could maybe – I know the kind of purchase accounting noise is always sort of add some wrinkles into the numbers. But I wonder if you could talk of that high level about some of the trends that you’re seeing that might affect purchase accounting investment because a lot of companies have done deals.
We started to see some of the accretions in the margin tail off very quickly which I think has made a lot of clients kind of nervous about sort of longevity of purchasing accounting benefits. Maybe, if you can discuss things like prepayment trends and purchase loans, that just might give us a sense for how things are trending then that might be helpful.
Claude Davis
Sure. Yes, I mean there’s really nothing that we’re seeing that’s outside of our expectations as far as any behavior there.
I would say that as you now – yields on the covered bond portfolio are more moving pieces than there are in an originated portfolio, and that you’re doing the quarterly estimations of expected future cash flows. So, it’s not as simple as taking a coupon and impacting a portfolio.
There are more moving pieces there. And as I’ve looked at some others in the industry, I would say that’s probably more the dynamic there than anything.
But the portfolio that we’ve acquired continues to behave, let’s say, in line with our expectations. Occasionally, you may see some – I can’t think of a better word than spikiness, if you will to some of the credit, but that’s more a timing-related element than anything.
And that it will be reflected in the provision expense for the covered loans, with that offset on the FDIC indemnification income. But, overall, really no surprises.
And I think if you look at the supplement – supplemental material, there is some good information on the trend and the yields on the covered loan portfolio and the yields on indemnification asset as well, and then also the details on the credit losses for the covered assets.
Scott Siefers – Sandler O’Neill
Yup. Okay.
Good. Thank you very much.
Operator
And our next question will come from Chris McGratty of KBW. Please go ahead.
Christopher McGratty – KBW
All right. Good morning, guys.
Claude Davis
Good morning.
Christopher McGratty – KBW
In account of your comments in the dividend, can you just talk about any changes you’ve seen in several markets from the acquisition front? Is there – obviously the pace of closures have been slow, but maybe you can just comment on that relative a few months ago and maybe opportunities you may see on the unassisted front in which you’re most interested in?
Claude Davis
Sure. Yes.
We continue to have our primary interest, be in Ohio, Indiana and Kentucky. And we feel that even in the context of the Liberty branch in Dayton, still feel like we have the capacity and ability both financially and operationally to do additional deals if they present themselves.
And in terms of the kind of the conversations or activity, as we’ve always said in the past, we don’t go into individual discussions, but it is one that we, like many, continue to expect the M&A activity to pick up. But it’s still obviously tepid mainly in my view because of declaration between buyer and seller expectations around price and I think continuous conservatism around credit.
So, I think M&A will be slow for a while but we, I think, remain positioned to be able to take advantage of it if the right opportunity presents itself.
Christopher McGratty – KBW
Right. And your comment on the possible assets you can add.
Is there a preference for fewer larger deals or multiple smaller deals?
Claude Davis
Well, actually, the first is sort of strategic. So, if it’s a smaller deal that is perfectly aligned in a strategic market for us, we’ll take a look at that.
You will always have a general preference for, if you think on average, a larger than average versus a smaller than average deal only because of the operational resource constraint that any deal gives to you. So, I wouldn’t want to target an amount or a preference, but we’re going to look at any opportunity that we think strategically fits what we’re trying to accomplish in our market area.
Christopher McGratty – KBW
Okay. And then just one final question on C&I pricing, if you can just talk about where new productions being put on today versus, say, six months ago, in terms of the spread?
Claude Davis
Yes, the spread, there really hasn’t been, I would say, any material change to what we’re seeing as far as the duration spreads.
Christopher McGratty – KBW
All right. Thanks a lot.
Claude Davis
Thanks.
Operator
And our next question will come from Joe Stieven of Stieven Capital. Please go ahead.
Joseph Stieven – Stieven Capital
Good morning, guys.
Claude Davis
Hi, Joe.
Unidentified Company Representative
Hi, Joe.
Joseph Stieven – Stieven Capital
Scottie Siefers, sort of, got my question, but I want to rephrase it. Basically, you guys have just got anointed to do something that no other banks got, whether it’d be JP or Wells here in U.S.
You’ve all wanted to start paying out much more and I know you won’t answer it because you just talked about – you aren’t going to talk about the regulatory side. But I would just tell you congratulations.
You guys did a great thing and that’s it. Thank you.
Claude Davis
Thanks, Joe.
Franklin Hall
Thanks, Joe.
Operator
And our next question will come from David Long of Raymond James. Please go ahead.
David Long – Raymond James
Good morning, guys.
Claude Davis
Hello, David.
Franklin Hall
Hello, David.
David Long – Raymond James
Just a follow on some of the C&I questions that we’ve heard. My questions have been answered, but regarding any particular industry, have you seen any industry standout where you may be seeing more demand from?
Claude Davis
Sure. Yes, I would say, the manufacturing sector has really been the one sector that stayed strong, kind of, throughout the cycle and I think was better capitalized to continue once the prices was over.
So, that has continued to be a stronger side, an element. And then the rest, is a variety of industries from some small healthcare, agri business to some of the other sectors that are, I’d call them, more service-oriented.
So, it’s been a mix, but if there’s one that stands out, I think it’s manufacturing. It’s been the stronger of the industries that we land into.
Joseph Stieven – Stieven Capital
Okay, and are the opportunities you’re seeing, is it more client wins or is it more line utilization?
Claude Davis
No, I’d say it’s been more client new origination activity. I think some increased line utilization.
I don’t have those numbers in front of me, but that’s always one you’re wanting to see, especially for big clients for them to use their line. But what I spoke to you was more around new activity, and some of that new activity was existing clients, but new activity, both existing and new clients.
Joseph Stieven – Stieven Capital
Great. Thanks, guys.
Claude Davis
You bet.
Operator
And our next question will come from Matthew Keating of Barclays Capital. Please go ahead.
Matthew Keating – Barclays Capital
Yes. Good morning, guys.
Claude Davis
Good morning.
Matthew Keating – Barclays Capital
Core expenses appear to rise about or fall rather about 4% this quarter. Just wondering whether we should expect any pick-up in your run rate in the second half ‘11 mainly associated with the transition of the new corporate headquarters at the Chemed Center?
Claude Davis
Sure. No, that should not, because it’s, in fact, a replacement for existing facilities that we’re already in, and so comparable cost to – we’re consolidating two facilities into one in that new headquarters facility.
And so, it should be a comparable cost impact to us, and we’ve been working very hard us a team to continue to become more efficient and reduce cost and that included not only – I would call it ongoing operational saves, but we also announced some branch closures that has helped and will continue to help us on a go-forward basis in terms of improved cost structure.
Matthew Keating – Barclays Capital
Gotcha. Thanks.
That’s helpful. Then lastly, you saw a modest pickup in home equity loans this quarter.
Just wondering if you think that’s the start of any trend there, or just was sort of interesting in light of the decline in residential mortgage line. So, just any other color you could offer on sort of the home equity lending environment would be great.
Claude Davis
Sure. I would not view it as a trend, certainly not until the housing industry begins to become to stronger.
We are always for our better clients and certainly our higher FICO score clients trying to solicit new business. And I think with some of our retail clients being perhaps more conservative of that move ups into new homes and maybe more doing remodels, that’s always a good environment to do home equity lending.
The challenge with it is really appraised values and making sure you have enough value in the home to do a safe home equity deal. So, it was a – we saw some nice trends there, but I wouldn’t be ready to call it a trend that would continue in the future.
Matthew Keating – Barclays Capital
Thank you.
Operator
(Operator Instructions) And our next question will come from Kenneth James of Sterne Agee. Please go ahead.
Kenneth James – Sterne Agee
Hey, good morning, gentlemen.
Franklin Hall
Good morning.
Claude Davis
Good morning.
Kenneth James – Sterne Agee
Kind of following up on potential capital deployment opportunities. I assume you guys would rather be doing them in right deals and growing the franchise than paying out 100% of earnings.
So, could you just kind of talk about – I would assume the biggest impediment between buyers and sellers is what the credit market plus the bank is worth to the seller. And just given the improvement in credit, generally across the industry and your FDIC-acquired portfolio, are we seeing any indications that those marks are in M&A scenarios starting to come down at all?
Franklin Hall
Yes, this is Frank. It’s really hard to say.
I mean there’s a qualitative aspect that goes into any credit due diligence as well. When I say qualitative, not credit quality but loan file quality and the risks associated with that aspect.
So, I haven’t seen any what I’d call material changes and what those valuation estimates look like, but to your earlier observation, yes, we’d prefer to have earning asset growth and capital deployment opportunities in that light.
Kenneth James – Sterne Agee
Okay. Thank.
You.
Claude Davis
You bet.
Operator
And our next question will come from Bryce Rowe of Robert W. Baird.
Please go ahead.
Bryce Rowe – Robert W. Baird
Thank you. Just a follow-up to Kenneth’s question there.
On the M&A front, Claude, are you getting more calls, incoming calls from prospective sellers that are tired board, tired of dealing with the environment? Has that ticked out at all?
Claude Davis
We try not to comment too much on activity levels in terms of one quarter to the next or one period to the next on that. We’re always having conversations because we view it as a part of role and responsibilities, good stewards.
The incoming calls tend to go in waves and I think they are continuing to occur, but it’s an environment where even when we find people are going to be looking or seeking opportunities. They still have a price expectation, and it’s that price expectation that has to be brought together between buyer and seller.
And this is just First Financial-related, I’d still think there is a gap out there that exist that – I don’t know what’s going to be the catalyst to move it together but it still exist.
Bryce Rowe – Robert W. Baird
Okay, and then a question for Frank. Frank, any thought on what to expect from that core expense base with the addition of Liberty in the third quarter?
Franklin Hall
Sure. I mean, the expectation is that we would manage it to a cost structure that is very similar to our legacy franchise.
So, I thought there maybe, what I’d call it an interim elevated level, we would expect that to be temporary in nature and would taper off.
Bryce Rowe – Robert W. Baird
Okay, all right. Thank you.
Claude Davis
All right.
Operator
(Operator Instructions) And we have a follow-up question from Scott Siefers of Sandler O’Neill. Please go ahead.
Scott Siefers – Sandler O’Neill
Hey, guys.
Claude Davis
Hi, Scott.
Scott Siefers – Sandler O’Neill
I just wanted to try to dabble into a bit more detail that the cover provision, which was a bit more elevated than I thought his quarter, if you can maybe sort of review what’s keeping that elevated, and I guess more importantly, going forward, what are the main dynamics that would keep it up toward this level or allow it to kind of drift back down more toward where it was a couple of quarters ago? I know there are the offsets that occurred in other geographies of the income statement, but if you could just kind of run through those briefly, I’d appreciate it.
Claude Davis
Sure. Again, it all stems from expected future cash flows, and we’re continually refining the model to make sure that our expectations around certain exit or renewal events are accurate.
So, it’s a combination of factors that go into that. And there’s also, keep in mind too, that we have 26 different valuation pools and each of those valuation pools, if there is net impairment and one of them you have to take the impairment regardless of whether or not there is improvement in another pool.
So, I would call it a combination of mixed shift within each of the valuation pools and some level of refinement in events, expectations and their impact on the future cash flows. But it’s a difficult line item to predict but it’s something that we’ll just continue to give you good visibility into.
Bryce Rowe – Robert W. Baird
Okay. All right, perfect.
Thank you.
Franklin Hall
Okay.
Operator
And ladies and gentlemen, showing no further questions in the queue, this will conclude our question-and-answer session. I would now like to turn the conference back over to Kenneth Lovik for any closing remarks.
Claude Davis
Actually, this is Claude Davis. Yes, I would just close by thanking everyone for their ongoing interest in First Financial and what we believe was another a good quarter and hopefully we’ll continue to provide good visibility into our future earnings capabilities.
So, we appreciate the interest and thank you very much.
Operator
The conference has now concluded. Thank you for attending today’s presentation.
You may now disconnect.