First Financial Bancorp. (FFBC) Q3 2020 Earnings Report, Transcript and Summary

Good morning, everyone, and welcome to the First Financial Bancorp Third Quarter 2020 Earnings Conference Call and Webcast. [Operator Instructions] Please also note, today's event is being recorded. And at this time, I'd like to turn the conference call over to Scott Crawley, Corporate Controller. Sir, please go ahead.

Thank you, Jamie. Good morning, everyone, and thank you for joining us on today's conference call to discuss First Financial Bancorp's third quarter and year-to-date 2020 financial results. Participating on today's call will be Archie Brown, President and Chief Executive Officer; Jamie Anderson, Chief Financial Officer; and Bill Harrod, 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 will 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 2020 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, 2020, and we will not be updating any forward-looking statements to reflect facts or circumstances after this call. I'll now turn the call over to Archie Brown.

Thank you, Scott, and good morning, everyone, and thank you for joining us on today's call. Yesterday afternoon, we announced our financial results for the third quarter. I'm very pleased with our performance, especially when considering the challenging economic environment. Our third quarter results demonstrated continued strength and diversity in our business lines. Despite difficult business conditions, we produced our 120th consecutive quarter of profitability. Highlights after being adjusted to remove non-recurring items included earnings of $0.44 per share, 1.09% return on average assets, 14.18% return on average tangible common equity and 59% efficiency ratio. Core banking trends were solid as net interest income increased slightly despite the continued interest rate headwinds impacting the industry. Transaction deposit growth was extremely strong with increases from the prior quarter of $435 million on average, we're 19% annualized with much of that growth in personal and business non-interest-bearing deposits, which increased $179 million or 23% on an annualized basis. The third quarter was again highlighted by record fee income from mortgage banking and our Bannockburn foreign exchange team. Our mortgage team had a sensational quarter, supporting the home financing needs of our customers during this historically low interest rate environment. Expenses were temporarily elevated in the third quarter, as our strong operating results and exceptional fee income performance led to higher incentives and commission expense. Credit trends remained relatively stable, while our allowance for credit losses increased to 1% of total loans, excluding PPP as we reported $13.4 million of provision expense in anticipation of credit deterioration for the remainder of this year and into 2021. Our low delinquency and payment deferral trends are encouraging. We continue to manage the portfolio in a disciplined manner, given the backdrop of increasing COVID-19 cases in the Midwest and uncertainties around the timing of vaccines to bring the pandemic under control. We've made much progress over the last six months of the global pandemic and are encouraged by our improved operating performance and the resiliency of our associates. Most all our retail banking centers have reopened and some associates are returning to the corporate workspaces, albeit at significantly reduced capacity levels. We're guiding principles in managing this crisis continue to be prioritizing associating client safety, preserving the continuity of our business, assisting our communities and ensuring the safety and soundness of our company. I'm sincerely appreciative of the ability of our associates produced strong financial results, while prioritizing these individual needs of our customers and communities during these challenging times. I'll now turn the call over to Jamie to discuss details of our third quarter results. And after Jamie's discussion, I'll wrap up with an update on loan payment deferrals and provide some forward-looking commentary. Jamie?

Thank you, Archie, and good morning, everyone. Slides 4 and 5 provide a summary of our third quarter and year-to-date 2020 performance. The third quarter saw our earnings continue to increase from the first half of the year, as record fee income and declining provision expense offset a slight decline in net interest margin and elevated variable expenses. Similar to the first half of the year, the pandemic continued to produce meaningful headwinds in the third quarter. While credit metrics have remained relatively stable, we recorded $13.4 million of provision expense during the quarter, and we believe our current reserve levels position us to absorb expected credit deterioration as the pandemic continues to play out over the coming months. Our capital ratios improved during the quarter and remain in excess of both the internal and regulatory targets. We continue to believe that our balance sheet is well positioned and our stress testing results indicate that our core fundamentals position us to maintain these levels for the foreseeable future. As expected, our net interest margin declined 8 basis points compared to the prior quarter, driven by a decrease in asset yields to the lower interest rates and dilution from PPP loans. However, we were able to partially offset these negative impacts by deliberately managing funding cost and growing low-cost core deposits, while letting higher priced brokered CD balances decline. Once again, fee income was the highlight of the quarter and one of the main drivers of our quarterly results. Mortgage banking exceeded expectations, increasing $1.9 million or 11.6% compared to the second quarter. In addition, Bannockburn had a record quarter and deposit service charges rebounded. This elevated fee income offset by an increase in variable expenses resulted in another quarter with a sub-60% efficiency ratio. Third quarter results indicate that we remain well positioned from a regulatory capital standpoint as both total and Tier 1 capital ratios improved on a linked quarter basis. Total capital increased 18 basis points and our tangible common equity ratio increased 16 basis points in the third quarter to 8.25% or 8.79%, excluding the impact of PPP. Additionally, we were pleased that our tangible book value per share grew by $0.30 to $12.56 at the end of the quarter. Slide 6 reconciles our GAAP earnings to adjusted earnings. Highlighting items that we believe are important to understanding our quarterly performance. Adjusted net income was $43.2 million or $0.44 per share for the quarter, which excludes $100,000 of COVID-19 related expenses and $2.1 million of other non-recurring items such as branch consolidation costs. As shown on Slide 7, these adjusted earnings equate to a return on average assets of 1.09% and a return on average tangible common equity of 14.2%. Our 58.9% adjusted efficiency ratio remained strong despite elevated incentive compensation during the quarter and reflects our continued diligence and managing expenses. Turning to Slides 8 and 9, net interest margin on a fully tax equivalent basis was 3.36% for the quarter. The 8 basis point decline was primarily related to lower asset yields, which were negatively impacted by the low interest rate environment. Asset yields and mix negatively impacted the net interest margin by 19 basis points during the quarter due to lower rates. This was partially offset by lower funding cost, which positively impacted the margin by 14 basis points during the period. In addition, PPP resulted in 3 basis points of incremental margin dilution from the second quarter. As shown on Slide 9, asset yields continued to decline as the full quarter impact of the low interest rate environment negatively impacted the yield on loans, which declined 25 basis points, while the investment yield dropped 11 basis points. In response to these declining yields, we aggressively lowered our cost of deposits 13 basis points during the period, which reflects deliberate rate adjustments as well as a shift in funding mix from higher priced brokered CDs to core deposits. Slide 10 depicts our current loan mix and balance changes compared to the linked quarter. In this period, loan balances were relatively flat for the period, as increases in CRE loans were offset by modest declines in all other loan types. Slide 11 shows the mix of our deposit base as well as a progression of average deposits from the linked quarter. In total, average deposit balances declined $169 million during the third quarter, driven by a decline in higher priced brokered CDs. However, we are pleased with the trajectory of deposit balances as this decline was partially offset by increases in core deposit balances, which included $179 million in non-interest-bearing deposit growth. We will continue to monitor deposit pricing over the coming months and make any necessary adjustments based on market conditions and our funding needs. Slide 12 highlights our non-interest income for the quarter. Third quarter fee income was our highest since 2011 and was driven by a significant increase in mortgage banking and foreign exchange income. We were also pleased as wealth management fees were in line with expectations and service charge income began to return to pre-pandemic levels. Non-interest expense for the quarter is outlined on Slide 13. Overall expenses increased compared to the linked quarter. However, absent incentive compensation, non-interest expenses were in line with our expectations. During the quarter, we incurred $100,000 of COVID-19 related expenses and approximately $2.1 million of other costs not expected to recur such as branch consolidation costs. In addition, we incurred $4.4 million of incremental incentive compensation related to improved operating results and $2.6 million of commission expense directly related to mortgage production and foreign exchange income generation. Also included in our third quarter expenses was a $500,000 contribution to the First Financial Foundation. Turning to Slide 14, our 3rd quarter ACL model resulted in a total ACL, which includes both funded and unfunded reserves, of $183 million and $13.4 million in total provision for credit losses. The model utilized the Moody's baseline economic forecast released at the end of September, which was slightly improved from the second quarter. Similar to the first half of the year, it's worth noting that the majority of the third quarter's provision expense related to the expected economic impact from COVID-19. However, the model was positively impacted in the third quarter by an increase in prepayment rates. As shown on Slide 15, credit quality was once again fairly stable, as we had $5.4 million of net charge-offs for the period and only slight increases in nonperforming and classified asset levels. Net charge-offs were 21 basis points as a percentage of loans for the quarter, which remains lower than historical levels and were 10 basis points year-to-date. While our credit metrics don't reflect much stress at the current time, we do expect some deterioration through the remainder of the year and into 2021. As such, we believe our current reserve levels adequately position the balance sheet to absorb further deterioration. Finally, as shown on Slide 16 and 17, capital ratios remain strong and are in excess of regulatory minimums. Total and Tier 1 capital ratios, each increased during the quarter and all ratios continue to exceed internal targets. Our tangible common equity ratio grew by 16 basis points during the period and our tangible book value increased to $12.36. We do not anticipate any near-term changes to the common dividend. However, we will continue to evaluate various capital actions as the economic impact of the COVID pandemic further materializes. I'll now turn it back over to Archie for a commentary related to specific areas of focus in the loan portfolio, our deferral program and our outlook for the remainder of the year. Archie?

Thank you, Jamie. Given the continued economic circumstances related to COVID-19, we've updated Slides 19 through 29, which cover loan payment deferrals and specific areas of focus within our loan portfolio. As mentioned earlier, Slide 21 highlights our participation in the Paycheck Protection Program, which included $910 million in loans and $24.2 million in unearned fees as of the end of the third quarter. At this point, we've opened our forgiveness portal and a limited number of loans have completed the forgiveness process. Customers could give us requests that have been steady and we expect those to continue throughout the fourth quarter and into 2021. Jumping to Slides 26 and 27, we continue to provide a bridge for our clients to navigate the difficult business environment. $1.5 billion or 70% of the loans that have exited round one deferrals have returned to a normal payment schedule, while approximately $630 million or 6.2% of total loans have moved to a round two deferral with $85 million yet to exit the round one deferral period. While round one deferrals were universally granted, round two deferrals were granted on a case-by-case basis after due diligence of borrower operations, financial condition, liquidity and cash flow. Slides 28 and 29 provide an update specific to our areas of focus within the loan portfolio. Of our franchise portfolio, 66% of the expired round one deferrals have returned to a normal payment schedule, while 81% of those receiving a second round deferral are making interest-only payments. The stress continues to be primarily with the sit-down restaurant portfolio, and we're actively working with these borrowers to ensure a positive resolution. As discussed on prior calls, our hotel portfolio will likely require additional time to stabilize as occupancy rates has slowly improved into the 25% to 45% range. We have limited exposure to large convention hotels, event space or fly to leisure destinations, which are expected to take the longest to recover due to their dependence upon large social gatherings. 93% of our initial hotel deferrals have been granted a second deferral with 25% of these different second deferrals making interest-only payments. Regarding our retail ICRE portfolio, we're pleased that 96% of round one deferrals have returned to a normal payment schedule. Only $20 million or 4% of initial ICRE payment deferrals granted have received a second deferral. Given the uncertain operating environment we're continuing with limited forward-looking guidance. Slide 30 shows the key factors that we expect to impact our performance moving forward. Loan growth is expected to be in the low-single digits, excluding the transitory impact of the PPP program and deposit balances are expected to remain elevated over the near term. The net interest margin is expected to be positively impacted by the timing of PPP forgiveness payoffs and the associated accelerated fee and recognition. Excluding PPP impacts, we expect some slight pressure going forward, given the low interest rate environment and ongoing purchase accounting declines, but absence of these variables, which can be somewhat volatile, we expect margin to stabilize in the near term. Regarding credit, the full impact of the pandemic is yet to play out. However, we expect moderate declines in our provision expense going forward. We've added a total of $125 million to our allowance for credit losses during 2020, which brings our total ACL to greater than 3 times the balance at December 31, 2019, it should, we believe, help us address future losses if they materialize. Specific to fee income, we expect continued strong mortgage originations in the fourth quarter. However, we anticipate some seasonal decline in volume and lower premiums. We expect service charge and interchange revenues to continue gradually improving and foreign exchange income to be consistent with the third quarter. With respect to expenses, we expect the fourth quarter to decline by approximately 5% due to lower incentive compensation. We follow a disciplined approach to expense management and a pause on most planned hiring discretionary expenditures and significant investments except were critical. Last quarter, we closed four branch locations, bringing to a total of 58 closures over the last two years or almost 30% of our branch network. In light of accelerated changes in customer behavior observed during the pandemic, we continue to evaluate our distribution channel for opportunities to become more efficient. Overall, I'm very pleased with our performance this year considering the challenging circumstances. Our capital and liquidity remain strong as we have effectively managed to ensure the safety and soundness of our company. However, the broader economic environment remains uncertain and our clients continue to face challenges. Going forward, we will continue to manage pandemic priorities and believe we have positioned the company for even stronger financial performance when the health crisis subsides. As we play out this memorable year, we remain steadfast in our focus on the well-being of our associates, clients, communities and shareholders. This concludes the prepared comments for the call. We will now open up the call for questions.

[Operator Instructions] Our first question today comes from Scott Siefers from Piper Sandler. Please go ahead with your question.

I think the first question is just on the deferrals, so you guys have given an excellent color on the round one and round two dynamics. I appreciate that. I guess just as you sort of look at things that the hotel portfolio, some of the sit-down restaurants, those will take a longer period of time to kind of work out completely. But I guess, Archie, as you're looking at things, what would - how would you recommend we sort of level set our own expectations for where the aggregate level of deferrals could go over the next, I guess, 90, 180 days? What sort of things are you guys looking for internally?

Sure. Scott, let me start and then Bill is here too and he can add to my comments if you don't mind. So we are in the kind of the bulk. Now the second round of deferrals, we disclose what that looks like. I think we would view - that will continue to dwindle down, and I think these were basically 90-day deferrals and again, a good portion of those were interest-only as opposed to full payment. But it will dwindle down, Scott, over that 90-day window, probably end of the back part of the first quarter and then we'll evaluate who needs additional support, but it's primarily going to be centered in that hotel book. So, I would say without getting too precise, does that 6% number drop by half by the end of the second round? We probably get into that range and then it's primarily hotels and maybe some sit-downs. Bill, any other comments on that?

Yes. I mean that is what we're kind of anticipating right now. We have through our round two deferrals, we did a lot of additional due diligence, including assessing the prognosis for a potential third round that kind of puts us in the range that Archie just alluded to as far as what we expect on the back end.

It is Scott. Well, look, if we get to that window of time, we'll evaluate what is the right prescription for those types of borrowers and where we have with the vaccine, we'll just look at the conditions and decide what's the appropriate course, but we do think it's probably longer stabilization windows for those types of borrowers.

Perfect. All right, thank you. And then, I think you guys had said in your prepared remarks, so dividend, it just doesn't sound like that's a real concern, and I think that would be pretty much supported by where the earnings stream is, but you said you would continue to evaluate capital actions. When you say, what are you referring to? Are you thinking like additional sub debt or preferred things like that?

Well, I think it's everything from buybacks to M&A to just looking at all the levers we may have to pull. And I think our view is it's too early to - we don't think we need to do more in terms of adding to capital other than just growing earnings right now, but when you think about how do you start to utilize that and improve results, I think there are some things we can do, but it's going to come after we get comfortable the things have stabilized after we know there is a vaccine that's in distribution, things like that. So we're just - we think we're creating flexibility for sales down of the road.

Okay, good. All right. I just wanted to be sort of clear on that. All right. So it's more - when we're talking capital actions these days, we're thinking more along the lines of return than raise to I guess put it simply.

Yes.

And our next question comes from Chris McGratty from KBW. Please go ahead with your question.

Jamie, let me start with you. We've seen quite a few banks take the excess liquidity and optimize the balance sheet. I'm interested in your thoughts here in terms of reducing some borrowings, growing the investment portfolio. I'm just trying to think how - I'm trying to get my head around how you're thinking about managing the balance sheet near term?

Yes. So actually, we've seen that increase in deposits and surge deposits and really across the board in the transactional accounts. So one of the things that we did early on in the pandemic in that March-April timeframe as we rotated out of Federal Home Loan Bank advances and took out some brokered CDs. So as the liquidity has remained on the balance sheet, and we've actually seen deposit balances transactional deposit balances increase, so you saw this quarter, we had over a $500 million drop in brokered CDs. So we are reducing, what I would call, the wholesale side of the balance sheet from a liability standpoint. And then we were in a little bit of a wait and see mode, I would say, over the last 3 or 4 months as just kind of seeing how customers were reacting how deposit balances and really monitoring deposit balances. We are seeing those take a little bit more than maybe we thought that they were in the beginning. And so we are looking at putting some more dollars to work from putting some of that liquidity to work in the investment portfolio and increasing the investment portfolio by roughly $300 million here going forward. And then we'll kind of see after that. But yes, we have - so we really, I would say, we really did with those things that you're talking about, we've reduced borrowings, and I think we're going to put some of that liquidity to work.

And just to - I'm sorry. Thank you for the color. The $300 million of additional securities that's relative to the, call it, $3.2 billion in the quarter. So $3.5 is kind of where you were targeting?

Right.

On the guide, I just want to make sure I understand the guide, the expense for Q4. Is your starting point, the GAAP expenses or the adjusted expenses?

The starting point would be the adjusted expenses.

Okay.

Yes. And then we had - so from the expense side, we had the increase about a $7 million quarter-to-quarter increase in incentive compensation/commissions. So about $2.6 million of that was related directly to commissions for mortgage banking and foreign exchange. And then the other piece of that is related to our company-wide bonus plan and just based on our earnings through three quarters, the improvement really in the third quarter, we needed to both that additional amount in the third quarter in anticipation of the expected payout after the end of the year. So but we booked that amount, we expect that to come back down. As we mentioned in the outlook, we expect that to come back down in the fourth quarter to more normal levels.

Great. And there's two other quick ones, Jamie. The guidance on the margin, is that with or without the PPP impact?

Well, so when we are talking about the margin, I would tell you we're talking about the margin without PPP. I mean, when you look - so really when you look at our margin, I would say our core margin without that impact of PPP will be relatively stable over the next, really going forward here. With that, just maybe a hint of pressure just from reinvestment rates and - but we're getting - we're still projecting a decent amount of relief from the deposit side here over the next couple of quarters. But overall, the core margin is relatively stable. And then you have the volatility of the loan fees and especially loan fees related to the PPP, but loan fees in general can be a little bit volatile quarter-to-quarter and then obviously we still have some purchase accounting that affects our margin as well, which we would model to be going down. But again, it can bounce around a little bit quarter-to-quarter.

And then lastly, on taxes, maybe any thoughts on the perspective outlook and then the sensitivity to what's being proposed in Washington on taxes?

Well, so here, I mean, going forward, absent any change in Washington to the rate, I mean, our effective tax rate is roughly right around 19%. Obviously that changes, if something comes out of the election or the out of the administration.

Right. But the sensitivity that you got on the way down. There is nothing philosophically different on the way up right at the proportional increase.

No.

Okay, all right. Thanks.

And our next question comes from Terry McEvoy from Stephens. Please go ahead with your question.

Archie, can you just run through the branch actions that occurred in the third quarter? And then I assume your retail customers are just using the digital platform more since March. How has that impacted traffic? Just some opportunities as you look out into 2021, I was wondering if you'd be maybe a little bit more specific or some thoughts on the year and what you could do with the branch network?

Yes. So we close, I think, at the end of the second quarter, well, four locations and as I mentioned that takes us about 58 or so over the last couple of years. So we continue to evaluate it. Terry, we were seeing even still now there are branches in our lobbies are fully open, we're still running 15% to now - high teens 15% to 20% range down on transaction levels from where we were pre-pandemic. And if you look at things like ITM usage, just alternative means, those areas are up, remote deposits are up significantly. So really, we do think some clients have found other ways to do their banking and some of that's sticking. So we are evaluating transaction counts for office to say what's that going to look like in the future. Are there consolidation opportunities, there may be some repositioning opportunities as well, but we're going through a fairly extensive study of that. And the outcome of that will be probably over time, we'll be making some changes that I don't think you'll see that materialize in a quarter two, but it will certainly gradually bleed in it. We'll be communicating more as we get further in that study.

And Terry, this is Jamie. I think one part of your question, maybe was around the expenses that we incurred during the quarter, the $2.1 million of branch consolidation costs. Those are mainly fixed asset write-downs, and they could have been from the branches that we just took action on or branches in the past as well that we might have not have an updated appraisal or something like that. So that's part of that $2.1 million as well.

And then just as my follow-up, if your outlook is correct, the FX business, it will be the third quarter out of four quarters this year that will be over $10 million. Just since it's a relatively newer business and not one that I model at any other bank. Does that $10 million - is that a new step up as you think about next year? Or is there something going on this year to drive the upside relative to what we've seen in the past?

Yes, if you think about it, Terry, the second quarter, of course, was down and that was really the shutdown of the economy and without much transaction occurring. It's just - it was lower but, yes, other than that, it's been running kind of closer to that number. And we would have said, I think, coming into the year, we would have said that probably $8 million to $9 million a quarter would be the expectation in ramping up as we got into later this year and into next year, ramping up another million or so a quarter. So you're getting into that $10 million range. So we think we're kind of at the level we would expect. And as they keep doing their work, it will incrementally improve, but $10 million is kind of a good number for the run rate.

And our next question comes from Jon Arfstrom from RBC Capital. Please go ahead with your question.

Archie, one for you. Outside of the stressed areas that you've touched on, what's your kind of qualitative view of your local economies? And how people are doing? How the small businesses are doing?

You know, Jon, really well, other than some of these areas that we know are - we've highlighted, really I think they're doing very well. We've been very pleased and you think about where we were six months ago and I think everybody in the country, certainly, we felt like with this we're going to be bad - how bad it could get, and I think, we're a lot more optimistic about how the resiliency of the business community and consumers and how they perform, so. Local economies are doing very well, they are doing strong, but hotels, some sit-down restaurants, some have done well in terms of they converted into a good take-out type of a business or delivery kind of a business, but still pressure in those kinds of areas, but other than that, I think very well. I will say this, the case counts related to COVID are peaking right now. They are probably 4 to 5 times where they were in April, May, kind of in the states that we're operating in. So that's creating some concern, but right now, things are still, I think, moving on pretty well for businesses.

And then maybe for you or either Bill, I'm lodging you talk about some extra due diligence for the second round of deferrals. When you go on a due that due diligence, what are you finding? Is it generally improving results? What kind of things you asking for in return? Just walk us through that process, if you can?

Yes, absolutely. This is Bill. We do a number of things with the hotels, including assessment of course of our sponsor and then also the property. Where's that, what type of business does it serve? Who is it really the demand generator? And what we see as short-term, long-term prognosis. And when you take our hotels on the whole, what we've learned is that we don't have a lot of destination hotels, where that as Archie talked about earlier that are going to need large crowd gatherings, a lot of our hotels benefited from the summer - and the summer travel splitters by individuals, by families. And as businesses start to free up and start to travel a little bit more, we'll also see a pickup. And so we saw a nice pick up in our occupancy rates over the last couple months, and we do expect this to kind of go down a little bit in the fall here, but then also pickup around the holidays especially as business travelers get out more and more. It is really what we're seeing. And we're in a nice market where our flags, we don't have a ton of full service reception and convention dependent stuff. So with our Hilton IHG, Choice, Marriott, those type of flags, we start to see the traffic coming back.

Yes. I would also add, Jon, this is Archie, that when we're looking at deferrals and going another round, another thing that Bill and his team are doing is evaluating really the sponsors commitment. So we're asking the sponsor to step up and do some things along with the bank, kind of a shared effort to help the hotel sustain over time and get back to where it used to be.

And just add on that just a little bit, I mean we do a lot of work with their budgets, their breakeven cash flow, and we put covenant package is in place to monitor that.

And Jamie, maybe one for you. Mortgage really stands out, you kind of flagging that may pull back a bit. But you talk a little bit about the pipelines and maybe what kind of a pullback you expect on that revenue line?

Yes. So obviously, we had great not only great third quarter, second quarter was good as well. We do see that coming down in the fourth quarter, some of that is the seasonality of that business as well. So I mean, overall, I would tell you, we do see it coming down overall in the fourth quarter. So no doubt about it. And so, I mean, overall we would look at the overall volume in the fourth quarter compared to the third quarter that be down roughly 15% to 20%. And then, I mean, the other thing that we were seeing in both the second and the third quarter, especially in the third quarter were you saw this everywhere probably were that the premiums on the backside when you're selling these were just huge. So we are expecting those to come back down to revert to the main a little bit and come back down to more kind of historical norms over time. It will come down right away, but we do expect those premiums to come down as well. So and that's probably another 15% or 20% or so. So we do see that revenue coming down although it will still be elevated compared to a year or so ago from an income standpoint, but that will come down.

[Operator Instructions] Our next question comes from David Long from Raymond James. Please go ahead with your question.

Just wanted to get back to Chris' question on the expense. Just wanted to confirm, are you saying that you're using the $95 million base for your expenses when you're talking about the 5% decline in the fourth quarter?

Yes, that's correct.

Okay, got it. And then...

Yes, just the $95 million - yes, the $95 million is adjusted out and takes out those couple of million of those branch write-downs.

And the $4.4 million improvement from performance across the firm, was there some catch-up in there, I assume then from earlier in the year?

I mean you catch-up might be a little bit of a, I mean, a little bit of a misnomer. It's really just, I mean, it was really just looking at where we were on a year-to-date basis and the improvement from the second quarter caused us to have to take a look at that and take a look at the expected payout and then adjust the accrual accordingly.

And you talked about your hotels and maybe some of the sit-down restaurants having to extend deferrals beyond 180 days. How do you envision accounting for them? Have you talked to regulators about how you're going to treat those loans then going forward?

Yes, this is Bill. We have reviewed our round three or what we're calling a re-stabilization of products with the regulators and it will include interest-only period and to extend into next year, and we will be having some incentives or fees paid on the back end of those. And based on our review with both the regulators and our accountants, from an accounting standpoint, we would not be classified most necessarily as TDRs. Now individual cases may dictate that we would, but categorically, it's not intended. We will still flag those as deferrals, but not necessarily TDRs.

And through this whole process of deferring some of the loans, have you been downgrading credits on deferral, if you think it's appropriate?

Yes, absolutely. And with each stage of the deferral, we do a reassessment of the rating. And depending upon factors surrounding that credit, both the performance as well as support outside from the owners and sponsors, it's really a loan-by-loan and a case-by-case analysis to determine what the appropriate rating should be.

And our next question is a follow-up from Scott Siefers from Piper Sandler. Please go ahead with your follow-up.

Just wanted to ask you a question probably on loan growth. There's been a definite bifurcation in the industry between the real evaporation in demand that the large banks have seen and some of the - conversely some of the growth that smaller names have seen. I've always thought about FFBC as kind of playing a middle ground where you sort of kind of punch above your weight class in terms of customers at times. I guess, just curious, broadly, what you're seeing and what sort of opportunities factor into the low-single digit? Are you able to take market share from some of the bigger guys? Or what are the main dynamics at play?

Yes, Scott. This Archie, maybe talk about a couple of areas. First just, we've seen if this year very much on the consumer side, not just mortgage volume, the consumer volume, we're having really high-high consumer origination volumes. Through this window we're not getting the growth there because the refinance market has been strong enough to also pay in the mortgage side has been paying off consumer balances. But we are seeing good work there. We are seeing increasing momentum and feel like that will continue to do well there. On the commercial side, we're having a little bit of a slowdown on the ICO reside, some that is a little bit intentional on purpose, we're trying to, I guess, be a little more interested about the areas where we're wanting to grow in slowing down areas that we think we've got enough on the books. So that's, you'll see probably a little bit on the ICO reside. It was slowing, accruing, but really our opportunity we think is on the commercial banking side, and we are seeing in pockets. It's not, I would say it's probably wave of pockets of nice new clients coming to the bank. In many cases, I'd say majority of the situations, we're taking market share and it's typically coming from one of the super regionals here in the marketplace. We've got seasoned team, strong reputation in the business. As you said, with the level of sophistication maybe greater than size and that's, I think, creating a bit of a winning formula that we think we can build off of.

And ladies and gentlemen, in showing no additional questions, we will end today's question-and-answer session. I'd like to turn the conference call back over to the management team for any closing remarks.

Thank you, Jamie. Just thanks, everybody, for joining. We're proud of the quarter. I look forward to talking, again, next quarter. Have a nice day.

Ladies and gentlemen, with that, we will conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.