First Financial Bancorp (NASDAQ:FFBC) reported third-quarter financial results on Wednesday. The transcript from the company’s third-quarter earnings call has been provided below.
This transcript is brought to you by Benzinga APIs. For real-time access to our entire catalog, please visit https://www.benzinga.com/apis/ for a consultation.
View the webcast at https://events.q4inc.com/attendee/257491860
Summary
First Financial Bancorp reported a record third quarter with adjusted net income of $87.8 million and adjusted earnings per share of $0.84, reflecting an 11% increase from last year.
The company achieved record revenue of $273.9 million, driven by a strong net interest margin of 4.07% and robust fee income, particularly in foreign exchange, wealth management, and bank card income.
Loan balances increased moderately, and the company anticipates low- to mid-single-digit loan growth for the remainder of 2026.
Expenses were elevated due to incentive costs tied to record revenues and higher healthcare claims, but are expected to moderate in the fourth quarter.
Asset quality was stable, though classified assets increased significantly due to the downgrade of a single ICRE relationship; this is expected to resolve over the next few quarters.
Tangible book value per share decreased by 6% due to higher interest rates, impacting the market value of the investment portfolio.
The company expects net interest margin to slightly increase in the fourth quarter and anticipates fee income between $75 and $78 million.
Strategically, First Financial Bancorp received regulatory approval for the acquisition of Finward, expected to close in early 2027.
Management expressed confidence in the current leadership structure and remains focused on strong financial performance and closing the Finward acquisition.
Full Transcript
OPERATOR (Moderator)
The First Financial Bancorp third quarter 2026 earnings conference call and webcast. After today’s prepared remarks, we will host a question-and-answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Scott Crawley, Corporate Controller. Scott, please go ahead.
Scott Crawley (Corporate Controller)
Thanks, Leah. Good morning, everyone, and thank you for joining us on today’s conference call to discuss First Financial Bancorp’s third quarter financial results. Participating on today’s call will be Archie Brown, Chief Executive Officer; Jamie Anderson, President and Chief Financial Officer; and Bill Herrod, Chief Credit Officer. Both the press release we issued yesterday and the accompanying slide presentation are available on our website at www.bankatfirst.com under the Investor Relations section.
We’ll make reference to the slides contained in the accompanying presentation during today’s call. Additionally, please refer to the forward-looking statement disclosure contained in the third quarter 2026 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, 2026, and we will not be updating any forward-looking statements to reflect facts or circumstances.
I’ll now turn it over to Archie Brown.
Archie Brown (Chief Executive Officer)
Thanks, Scott. Good morning, everyone, and thank you for joining us on today’s call. I’m very pleased to discuss our third quarter results. We had a great quarter with adjusted net income of $87.8 million and adjusted earnings per share of $0.84, which resulted in an adjusted return on assets of 1.56% and an adjusted return on tangible common equity of 20.2%. Earnings per share increased 11% from the third quarter of 2025 and were the highest in the company’s history.
We delivered record third quarter revenue of $273.9 million, driven by a strong net interest margin of 4.07% and record adjusted fee revenue of $77.6 million. Loan balances increased moderately during the quarter, consistent with our prior outlook. We were particularly proud of the strong growth in our C&I portfolio for the quarter. Loan pipelines remain healthy as we enter the fourth quarter, and we expect low- to mid-single-digit loan growth as we close out 2026. We’re very encouraged by the strength and diversification of our fee income, as adjusted noninterest income was a record $77.6 million and 28% of total revenue.
Growth from the linked quarter was driven by strong performances from foreign exchange, wealth management, client derivatives, and bank card income. As a result of our strong fee income and overall operating performance, expenses were elevated during the quarter, driven primarily by incentive costs associated with our record revenues, as well as higher health care claims and increased credit and collection costs. We do expect expenses to moderate in the fourth quarter.
Asset quality trends were stable during the third quarter. Net charge-offs and nonperforming assets were comparable to second quarter levels, while classified assets increased significantly. The increase in classified assets was primarily driven by the downgrade of a single ICRE relationship with multiple loans. The downgrade was driven by problems that developed in another business owned by our borrowers. The underlying loans exhibit strong debt service coverage and low loan-to-values, and are cross-collateralized.
We expect to resolve the workout of this relationship over the next few quarters. Finally, with respect to capital, all regulatory capital ratios increased from the second quarter. However, tangible value per share and tangible common equity declined as a result of the sharp increase in interest rates during the second half of the quarter. Tangible book value per share decreased 6% from the linked quarter to $15.65, while the tangible common equity ratio declined 43 basis points from June 30 to 7.81% at the end of September. Now I’ll turn the call over to Jamie to discuss our third quarter results in greater detail.
Jamie Anderson (President and Chief Financial Officer)
Thank you, Archie, and good morning, everyone. Slides 5, 6, and 7 provide a summary of our most recent financial results. The third quarter results were excellent and included strong earnings, robust net interest margin, record adjusted fee income, and solid loan growth. Our net interest margin remains very strong at 4.07%, increasing 9 basis points during the quarter. Asset yields increased 13 basis points and were partially offset by a 4 basis point increase in our cost of funds.
End-of-period loan balances increased $170 million, or 5% on an annualized basis, with C&I, Summit, and Consumer all having strong quarters. Average deposit balances increased $52 million, or 1.2% on an annualized basis, and included growth in interest-bearing demand accounts, money market accounts, and retail CDs. This growth was offset by a decline in brokered CDs, savings, and noninterest-bearing accounts. Turning to the income statement, third quarter adjusted fee income was the highest in the company’s history, led by double-digit percentage growth in wealth management income, bank card income, and client derivative fees. Additionally, our leasing and foreign exchange businesses had solid quarters. Noninterest expenses increased from the linked quarter due to higher credit and collection expenses, health care costs, and compensation costs tied to fee income and the overall strong performance of the company.
Our ACL coverage was unchanged during the quarter at 1.38% of total loans. We recorded $8.9 million of provision expense during the period, which was driven primarily by net charge-offs and loan growth. On asset quality, net charge-offs were 21 basis points on an annualized basis, while NPAs as a percentage of assets were 45 basis points. Classified assets as a percentage of total assets increased to 1.26%, primarily due to the downgrade of a single ICRE relationship.
From a capital standpoint, our ratios are in excess of both internal and regulatory targets. Tangible book value was $15.65, while our TCE ratio declined to 7.8% due to unrealized losses on the investment portfolio. Slide 8 reconciles our GAAP earnings to adjusted earnings, highlighting items that we believe are important to understanding our quarterly performance. Adjusted net income was $87.8 million, or $0.84 per share for the quarter. Noninterest expense adjustments exclude the impact of acquisition costs, tax credit investment amortization, and other expenses not expected to recur.
As depicted on Slide 9, these adjusted earnings equate to a return on average assets of 1.56%, a return on average tangible common equity of 20%, and a pre-tax pre-provision ROA of 2.08%. Turning to Slides 10 and 11, net interest margin increased 9 basis points from the linked quarter to 4.07%. Asset yields increased 13 basis points compared to the prior quarter. Total deposit costs increased 4 basis points from the linked quarter, partially offsetting the impact of higher asset yields. There was minimal impact from the September rate hike on third quarter net interest margin. We expect the long-term impact from this increase in rates to be approximately 3 to 4 basis points.
However, we anticipate a slightly higher impact in the near term as deposit costs are expected to increase over a more extended timeline. Slide 13 illustrates our current loan mix and balance changes. Compared to the linked quarter, loan balances increased 5% on an annualized basis. As you can see on the right, growth was driven by C&I, Consumer, and Summit, which offset a decline in ICRE, Mortgage, and Oak Street due to prepayments and payoffs. Slide 16 depicts our average deposit mix as well as a progression of average deposits in the linked quarter. In total, average deposit balances increased $52 million during the quarter, or 1% on an annualized basis.
The increase was driven by interest-bearing demand accounts, retail CDs, and money market accounts. These increases were offset by declines in brokered CDs, savings accounts, and noninterest-bearing accounts. Excluding brokered CDs, average deposits increased $144 million from the second quarter. Slide 18 highlights our noninterest income. Total adjusted fee income was $77.6 million during the quarter, which was the highest quarter in the history of the company. Bannockburn and Summit both had solid quarters. Additionally, wealth management and bank card income increased from second quarter levels. Noninterest expense for the quarter, as highlighted on Slide 19, core expenses increased $7.8 million during the period, driven primarily by higher compensation costs tied to an increase in fee income and the overall strong performance of the company.
In addition, credit collection costs increased compared to second quarter. Turning now to Slides 20 and 21, our ACL model resulted in a total allowance, which includes both funded and unfunded reserves, of $210 million and $8.9 million of total provision expense during the period. This resulted in an ACL that was 1.38% of total loans, which was unchanged from the second quarter. Provision expense was primarily driven by loan growth and net charge-offs, which were 21 basis points for the period.
In other credit trends, classified asset balances increased to 1.26% of total assets, primarily due to the downgrade of a single CRE relationship, while both net charge-offs and nonperforming assets were relatively stable compared to the linked quarter. Finally, as shown on Slides 22 and 23, capital ratios remain in excess of regulatory minimum and internal targets. The increase in longer-term interest rates negatively impacted the market value of our investment portfolio, which resulted in a significant decline in AOCI. During the period, our TCE was 7.81%. Absent the impact from AOCI, the TCE ratio would have been 9.65%. Tangible book value was $15.65 at the end of the period. Our total shareholder return remains strong, with 34% of our third quarter earnings returned to our shareholders during the period through the common dividend.
We maintain our commitment to providing an attractive return to our shareholders and will evaluate capital actions that support that commitment. I’ll now turn it back over to Archie for some comments on our outlook.
Archie Brown (Chief Executive Officer)
Yeah, thank you, Jamie. Before we conclude our prepared remarks, I want to comment on the fourth quarter outlook which can be found on slide 24. Regarding our balance sheet, we expect low to mid single digit loan growth on an annualized basis. Expected strong growth in C&I and Summit will be partially offset with payoffs in the ICRE book. For deposits, we expect low single digit core deposit balance growth. We expect our net interest margin to increase to a range of 4.08% to 4.12% over the next quarter.
Assuming a December rate hike, this range contemplates a decline in accretion income resulting from a forecasted decline in loan prepayments. Given the expected interest rate environment, we expect fourth quarter credit costs to approximate third quarter levels and ACL coverage to remain relatively stable as a percentage of loans to close up. On the outlook, we expect fee income to be between $75 and $78 million in the fourth quarter, which includes $18 to $20 million of foreign exchange income and $21 to $23 million of leasing business revenue. Noninterest expenses are expected to be between $150 and $153 million. To conclude, we delivered another strong quarter and have had an excellent year to date. We’re very pleased to have received regulatory approval for acquisition of Finward and expect to close on January 1, 2027, subject to state regulatory and Finward shareholder approvals.
Looking ahead, we remain focused on closing the year on a strong note, completing the Finward acquisition and carrying our momentum into 2027. Finally, I want to acknowledge the recently announced changes to our senior leadership structure. These changes were designed to promote continuity, reinforce our commitment to our strong financial performance and maintain our engagement centric culture. I have tremendous confidence in Jamie and the rest of our leadership team, and the positive impact we’re already seeing from these organizational changes underscores the strength of our people, our culture, and our continued commitment to serving our clients and our communities.
We’ll now open up the call for questions.
OPERATOR (Moderator)
We will now begin the question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Brendan Nozel with Hovde Group.
Your line is open. Please go ahead.
Brendan Nozel (Analyst)
Hey, good morning, guys. Thanks for taking the questions. Hey, Jamie, maybe starting off on the margin, you kind of have spoken about the margin in the context of rate hikes with this larger initial increase and then that kind of measures out over time as funding costs catch up. What’s the right way to think about the timeline from that initial 7 to 8 basis point pop to the longer-term 3 to 4 basis point benefit?
Jamie Anderson (President and Chief Financial Officer)
Yeah, Brendan, this is Jamie. Good question. So we think about that, you know, obviously the loan side. With a rate hike, we get that contractually. So about 60% of our loan book moves with the short end of SOFR, and so that’s going to move right away or within 15 to 30 days as things reprice. And then the way we look at it, then obviously the deposit side is more managed, it’s more market driven, and that’s going to play out over another quarter or two until that catches up.
And so, again, we think about that as an initial seven to eight basis point improvement right away, and then as the deposit side catches up, really probably between a quarter and two quarters, that’s going to be in that three to four basis point range.
Brendan Nozel (Analyst)
Yep, yep. Okay, that’s helpful way to think about it. Maybe one more for me, just kind of pivoting to the Finward deal. Just kind of looking at their release from last night, the tangible book value is down like 11% and they lost like 90 bps on their capital, their TCE ratio, just given AOCI marks. Just kind of wondering how the deal math changes given the shift in the rate environment and the marks on their balance sheet. I’m guessing book is more dilutive, but there’s probably more fair value accretion versus at an estimate.
Jamie Anderson (President and Chief Financial Officer)
Yeah, Brendan, Jamie again. You’re exactly right. We have a slightly more tangible book value dilution up front. We’ll get some more accretion income based on that hit that they took, you know, and everybody took, obviously, to their investment portfolio. The difference, though, if you look at the earn-back: so original, at announcement day, we looked at that earn-back at around a half a year; I think it was 0.6 years. That extends out, not a lot, but extends out to about a year; it’s 0.9 years, and mainly due to that. Obviously you take that book value dilution up front, we get a little bit more accretion, but the accretion income will come in over a longer period of time than the initial earn-back. So it just extends that earn-back out a little bit, but it’s not material.
Brendan Nozel (Analyst)
Got it. All right, that’s helpful color. Jamie, thanks for taking my questions.
Jamie Anderson (President and Chief Financial Officer)
Yep, thanks, Brendan.
OPERATOR (Moderator)
Your next question comes from the line of Brandon Rudd with Stephens. Your line is open. Please go ahead.
Brandon Rudd (Analyst)
Morning. Thanks for taking my questions. I’m Brandon. If I could start on page 13, just with the strong growth in commercial and small business, I’m just kind of curious, maybe some of the subcategories within that. Is that an increase in line utilization? Is that CapEx spend? Maybe just kind of flush out what was behind that growth here in the third quarter?
Jamie Anderson (President and Chief Financial Officer)
Yeah, Brandon, it’s kind of broad based both in terms of our markets and in terms of the different product categories. So it’s really not line utilization. If you look at our markets, like Chicago—any of our major metros are seeing some pretty good growth here. Northeast Ohio is doing well. Of course, Southwest Ohio is doing well. So it’s C&I oriented for the most part and it’s just coming from all the markets.
Brandon Rudd (Analyst)
Okay, perfect. Thank you for that. And then maybe one more modeling question. I noticed on a period-end basis the borrowings were a few hundred million dollars higher than on an average basis. I’m just curious, is that more of an anomaly of a point in time and that comes back down closer to the average balance, or is this billion dollars or so of borrowings a good number to use for the fourth quarter?
Jamie Anderson (President and Chief Financial Officer)
Yeah, I think the billion dollars of borrowing is a good number to use for the fourth quarter. It’s going to bounce around a little bit during any one period, and we kind of replaced some of the brokered—swapped out of some of the brokered CDs into borrowing. So depending on the way the market looks, we’ll do that on occasion, just depending on the most efficient way to borrow.
Brandon Rudd (Analyst)
Okay, perfect. Thanks for taking my questions.
OPERATOR (Moderator)
Your next question comes from the line of Daniel Tamayo with Raymond James. Your line is open. Please go ahead.
Daniel Tamayo (Analyst)
Good morning, Archie. Good morning, Jamie. Maybe starting on the fee income side, just particularly on the FX and leasing businesses. So FX has been kind of stable this year and leasing growth has been a little bit slower from prior years. Sorry, can you just remind us, from an annual perspective, the type of growth rates you might be looking at going forward in this business?
Archie Brown (Chief Executive Officer)
Hey, morning. Yeah, sorry, Danny—the last part of that, just want to kind of get a feel for how we see the rest of the year, full year playing out, or growth year over year? Okay. Yeah, so I think we’ve talked about this before. Vanik Burn, you know, look, it’s got a really good growth curve over a long window. It tends to come kind of in a more stair-step fashion. So if you said it’s going to grow kind of in a high single digit to 10% kind of range yearly, that’s kind of what it’s been doing.
We expect it to close out the year pretty strong here, and it’ll be still, again, decent year over year. The leasing business income is primarily tied to operating leases, and so, you know, it’s really somewhat dependent upon how much of their production is the operating lease mix. So if you think about where they are, they are getting to the place where their amortizations are starting to catch up with their production. So the growth rates are just slowing generally. So that’s going to be a little more of a slow grower as you go forward, just given the size of the portfolio and more amortization.
Jamie Anderson (President and Chief Financial Officer)
Yeah, and Danny, it’s Jamie too, just to add in on that. We will have, as well, periodic sales of leases. We still are selling, call it, around 10% to 15% of their production, and depending on any one quarter that will pop that income, so it can be a little bit lumpy. They also get some occasional end-of-term revenue as well that comes in, and so that can just move around. But we look at it, like Archie mentioned, in a little bigger window than from quarter to quarter, and we look at that in that, call it, 5% to 10% type growth rate.
Daniel Tamayo (Analyst)
Okay, thanks, guys. Just a point of clarification. I was just looking at kind of the midpoint of the guidance on the FX of around $19 million, and that takes me to about $66 for the year, which is pretty close to what you guys did last year. That’s what I was basing that off of. But it sounds like you’re continuing to expect growth off the overall number.
Archie Brown (Chief Executive Officer)
I’m trying to think—which—they had one quarter that was sort of an anomaly, Danny. So yeah, I see what you’re saying when you look at that together, I see how the math works, but that was a very unusual kind of quarter they had, and I guess I’m not thinking about that in terms because it’s more of an outlier.
Daniel Tamayo (Analyst)
Q4 of ’25 is really high.
Archie Brown (Chief Executive Officer)
Yeah. Yep.
Daniel Tamayo (Analyst)
Got it. Okay. And then maybe kind of walk us through— How you’re thinking about the, the impact of, you know, higher rates, be it kind of what we’ve, what we’ve seen so far from the, you know, back half of this year and then maybe the, the potential for more in terms of how that could impact your, your loan demand. You know, I’m curious obviously from a CRE perspective, but also, you know, leasing or any of the specialty businesses, how you think that might trend?
Archie Brown (Chief Executive Officer)
You know, Danny, this is Archie. Again, it’s not affecting on the C&I side. It’s not affecting it yet. So those numbers and those pipeline, the pipeline is really good actually. The CRE production was strong in the quarter. It’ll be a good strong Q4, but it is, it’s less than probably Q4 of last year when you look at it and start going back and looking. And part of this is multifamily has softened in terms of production. We’re seeing that for sure already.
The other thing we’re seeing, we’re seeing a lot more competition, especially in the industrial space. So, you know, we’re seeing a lot of competition come in. Spreads are thinning, structures are loosening. And I think we talked about this before, we’re not gonna, we’re not gonna play in kind of loosening structures. We’ll play to some point on certainly price competition, but it is getting thinner. So a combination of softer multifamily, a little bit more competitive on industrial, I think is bringing down a little bit of the growth rate.
On CRE, we’re seeing some still payoffs of sales of properties being sold on underlying properties being sold. And so balance pressure there still as well. So more on the CRE side, I’m seeing it now. I think that’ll play out more as we go forward. But if you look at our near-term pipeline view, and we look at this regularly, it’s still a really strong pipeline, kind of on par with where we’ve been the last couple quarters.
Daniel Tamayo (Analyst)
Got it. Okay. Well, thanks for that color, Archie. Yep.
OPERATOR (Moderator)
Your next question comes from the line of Brian Foran with Truist. Your line is open. Please go ahead.
Brian Foran (Analyst)
Hey, good morning, guys. Maybe just to follow on. As we think about growth, you know, potentially getting the low to mid single digits, what would change that would get it back to mid to high single digits? I guess just following on that last question, is it the CRE that is mainly you’d point to, or is there anything else, you know, that would have to change in the environment or kind of what you’re seeing in the markets to maybe get back to mid to high?
Archie Brown (Chief Executive Officer)
Yeah. Brian, this is Archie. Our C&I business has strengthened throughout the course of the year. And right now in the near intermediate term, it looks like it’s going to continue to be really strong. So if you start looking at the other businesses we have, the two places we’ve seen some pressure have been, as we just mentioned, CRE. So, you know, CRE in our near-term forecast has got some payoffs that are more credit related as well. We talked about our classifieds jumping up.
We expect some of that to be resolved in Q4. So that’s probably putting a little more pressure on payoffs in Q4. So maybe it starts to get a little bit better after that. But still the competition there, as I mentioned, industrial, and then the softening in multifamily I think are driving maybe more of an immediate-term softness there. So that’s a piece that would have to, I think, get better. Oak Street has seen a little more payoff pressure. This is the unit that lends to insurance agencies and RIAs. They’ve had a little more payoff pressure and it’s a little bit the same thing: businesses selling, and in a couple of cases we have grown relationships over a long window and then as they continue to get larger, they get to the place where, you know, it’s just too big for us to continue to finance. So we’ve seen a payoff or two that’s happened.
I think we’ll have a couple more in Q4 where they’ve just gotten large enough that we can’t, we can’t continue to take care of them anymore. So that’s a bit of the pressure there. That’s more, I think, one-time or related to kind of what’s happening near term. I think that will abate and they have good production. So I think their growth rates will pick up as we get into 2027. So mainly I think for us to get better, Oak Street will have higher production with less payoff pressure next year. And CRE, that’s probably the wild card: just how much does multifamily come back, how competitive does it get there, you know, do higher rates put more pressure on bringing production down? That’d be the question.
Brian Foran (Analyst)
Maybe a follow up. You know, I feel like not just for you, but for really across the industry there’s this fear that deposit competition is going to intensify and kind of steal the asset sensitivity away from the sector, have margins roll over. I mean, everything looks pretty muted and sanguine in this release, but any thoughts on what you’re seeing in the markets? Is that a valid concern? Or do you think maybe the investor focus on that is a little too high?
Archie Brown (Chief Executive Officer)
Yeah. Ron, I’ll start. Jamie, maybe chime in as well. Look, I think we feel pretty good for the near to intermediate term on your question. I think our growth in Q4 is maybe a little muted, but that’s more, we’re seeing some public fund dollars, not the operating accounts, but more the extra money they keep in the bank. They’re moving that money around to higher-rate options in some cases to take advantage of the current rate environment. So some of that money is moving out, but, you know, kind of core relationships and commercial deposits and all that will be growing, I think fairly decent, at a fairly decent clip here in Q4.
So near term we’re not concerned. Intermediate term, I don’t think I’m too concerned. Yeah, we’re watching the same dynamics you’re talking about. I think for us though, you know, the one advantage we have at least going into the current cycle is we have a pretty low loan-to-deposit ratio. I think we’re in the high 70s. So we do have more flexibility. We can, I think we’ve got some levers to pull here depending on what loan growth looks like. You know, we can be more aggressive if we need to, we can pull back if we want to in order to kind of manage this over the, I think, the course of the next few quarters.
Jamie, if you have any other thoughts.
Jamie Anderson (President and Chief Financial Officer)
No, I think that’s the biggest thing that, you know, that Archie mentioned, Brian, was that the, you know, our loan-to-deposit ratio coming off of the acquisition that we had, especially the Bank Financial deal where we picked up a good chunk of liquidity. You know, our loan-to-deposit ratio is about 78%. So, you know, over time we want to, you know, optimize the balance sheet a little bit more, get back more towards a, you know, 83% to 85% loan-to-deposit ratio, which was where we’ve historically run, kind of where we feel comfortable.
And so, you know, while we’re still competitive obviously in the deposit pricing landscape, we’re kind of, we’re kind of right in the middle and we’re doing fine in terms of gathering deposits. If we see that become a little bit more competitive, we can either pull down some of the balances from the securities portfolio or we can just elect to get more aggressive in the deposit market. So I think we have some options based on that and the way our balance sheet is right now, and the way our loan-to-deposit ratio is.
So I think it provides us a lot of flexibility.
Brian Foran (Analyst)
Thank you so much.
OPERATOR (Moderator)
As a reminder to ask a question, please press star one. Your next question comes from the line of John Armstrong with RBC Capital Markets. Your line is open. Please go ahead.
John Armstrong (Analyst)
Hey, thanks. Good morning, guys. I guess we’re kind of ticking through all the questions, and Jamie, maybe expenses is an area we haven’t talked about yet, but the new guide that you’ve talked about, does that basically strip out the impacts of what you mentioned impacted the Q3 numbers? So that takes out incentives, healthcare, and some of the credit costs that are in expenses. Is that the right way to think about it?
Jamie Anderson (President and Chief Financial Officer)
Yeah, that’s right. So we see those moderating. I mean the wildcard there is where fee income, you know, where it comes in. So we have that expense guide kind of based on, you know, that midpoint of the fee income and the associated commissions and incentives related to that. The other thing that we had in the third quarter, we had a true-up to some incentives that were more broad-based, companywide incentive-based, just based on the year that we’ve had, the strong performance.
So, you know, we think at this point that, you know, that was more of a kind of a year-to-date adjustment that we won’t have in the fourth quarter. So that’ll help moderate expenses. The credit collection should come down and we typically see a little bit of a bump in healthcare in the third quarter just based on our program. So, yeah. And then some just overall moderation in a few other line items. Small stuff, but yeah, see that coming down based on those reasons in the fourth quarter.
John Armstrong (Analyst)
Okay, good. Thank you. On that, Bill or Archie, I mean credit looks clean. Bill, you probably didn’t think you’re going to get a question, but anything more on the classified increase? It sounds like it’s pretty specific to one credit, and then anything else from a credit or economic point of view you guys are watching a little closer?
Bill Herrod (Chief Credit Officer)
Yeah. Good morning. You know, the one credit that we’re talking about, it’s a multi-asset real estate investor that also had C&I businesses, and the C&I business elsewhere is what fueled the bankruptcy. And so we do think it’s not systemic, it’s isolated, and now we’re just working through the sale of the underlying real estate assets. It’s a mix of multifamily, retail, and some office. Market interest has been encouraging. While there’s still execution ahead, remain cautiously optimistic about the outcome.
And overall, you know, credit, our watch and worse buckets have remained very steady. No big increases, and our charge-offs are in line with last quarter. So we don’t see anything systemic coming down the.
John Armstrong (Analyst)
Okay, good, thank you on that. And then, Archie, maybe just one for you. I think I’m probably last here, but anything you’re thinking about strategically? You guys have had some, you know, call it unique but also successful deals over the last year or two. You guys still active and still interested, or is it just, you know, getting the current deal closed and integrating that as the near-term focus? Thanks.
Archie Brown (Chief Executive Officer)
Yeah, John, we really are focused on Finward and getting that closed. You know, there continue to be bank M&A conversations, but I could tell you in the near term we don’t have anything else on our slate. Continued conversations, you know, maybe other opportunities will pop up that make sense to us in 2027. Regarding nonbank, we’ve always been sort of opportunistic about that. So, you know, there are spots we wouldn’t mind adding to drive some more fees, but they kind of come up when they come up. So we don’t have anything right now that we’re working on. But, you know, we’re open to the ideas if the right things make sense. It’s just they kind of come when they come.
John Armstrong (Analyst)
Yeah. Okay. All right, thank you. Thanks, Sean.
OPERATOR (Moderator)
Your next question comes from the line of David Conrad with KBW. Your line is open. Please go ahead.
David Conrad (Analyst)
Hey, good morning. Just one quick follow-up question on expenses. I know leasing kind of weighs a little bit on the efficiency ratio, but just some thoughts as you integrate and get all the cost saves out of the announced deals, what do you think the efficiency ratio could trend over the next couple years?
Jamie Anderson (President and Chief Financial Officer)
Yeah. David, this is Jamie. I’m a little disappointed you didn’t have a Rush question for me. I know you’re a big Rush fan, so that’s my one follow-up. That’s funny. Yeah. So for us, the efficiency ratio—it’s a good point that the leasing business impacts our efficiency ratio by about 200 basis points. Just that, you know, we’ve got, obviously, the fee income related to the rental payments up top and then the depreciation related to the assets down in the expenses.
That adds about 200 basis points, relatively, to our efficiency ratio. We’ve been running around that 57% range. When we get—kind of when everything’s said and done, we get everything through—we think that comes down about 50 to 100 basis points.
David Conrad (Analyst)
So kind of 56 to 56 and a half.
Jamie Anderson (President and Chief Financial Officer)
Yeah, 56. Yeah, around that—around that range. Yep, yep, yep.
David Conrad (Analyst)
Okay. Perfect. That’s right where I’m at. So thank you.
Jamie Anderson (President and Chief Financial Officer)
Got it. Thanks, David. Yep.
Archie Brown (Chief Executive Officer)
Thanks, David.
OPERATOR (Moderator)
We have reached the end of the Q and A session. I will now turn the call back to Archie Brown for closing remarks.
Archie Brown (Chief Executive Officer)
Thank you, Lee. I want to thank everybody for joining us on today’s call. We’re proud of our results, and we thank you for your interest and look forward to talking to you again next quarter. Have a great day. Bye now.
OPERATOR (Moderator)
This concludes today’s call. Thank you for attending. You may now disconnect.
Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company’s SEC filings and official press releases. Corporate participants’ and analysts’ statements reflect their views as of the date of this call and are subject to change without notice.