Q3 2020 Old National Bancorp Earnings Call

[music].

Welcome to the old National Bancorp third quarter 2020 earnings Conference call. This call is being recorded and has been made accessible to the public in accordance with the FCC regulation FD horse.

Corresponding presentation slides can be found on the Investor relations page at old National Dot Com and will be archived there for 12 months.

I would like to remind everyone that as noted on slide two certain statements on today's call may be forward looking in nature and are subject to certain risks uncertainties and other factors that could cause actual results to differ from those discussed.

The company's risk factors are fully disclosed and discussed within its FCC filing.

In addition, certain slides contain non-GAAP measures.

Which management believes provide more appropriate comparison.

These non-GAAP measures are intended to it this assist investors understand performance trends reconciliation for these numbers are contained within the appendix of the presentation I'd now like to turn the call over to Jim Ryan for opening remarks Mr. Ryan.

Thanks, Dorothy Good morning, I Hope this call fine all of you and your families shape and healthy we're pleased with our third quarter results as we made significant progress on client deferrals.

We improved our operating leverage and grow the loan portfolio and ended the quarter with a robust commercial pipeline.

We remain committed and focused on the health and safety of our team members clients and communities. We're currently occupying about 50% of our office buildings by rotating team members every four weeks our branch lobbies are open and we are active in our communities. Many larger banks and told her relationship managers to stay home and not worry about goals this year by contract.

Our relationship managers are proactively serving existing clients and winning new relationships, rather than being distracted or derailed by cobot.

Jumps anchored and I've also been actively calling on new client opportunities to help win business I've been impressed by the quality of the new relationships, we've been able to win this quarter many of them moving from long term relationships or other larger banks I would like to.

I would like to thank our team members for their hard work and dedication.

Starting on slide three our third quarter net income was $77.9 million or 47 cents per share I was particularly pleased with our progress on operating leverage and strong balance sheet growth.

Among our balance sheet and watching our costs should help us mitigate the near zero interest rate environment, while we did not take a provision this quarter. We did grow the reserve given our net recoveries for the quarter Brendan will fill you in and all the details with respect to our reserve.

End of period commercial loans increased by 10.5% annualized primarily due to the record commercial production. Our commercial production was $978 million up from 658 million in the second quarter.

Line utilization was about the same.

Core deposits were higher by 7% on an annualized basis, driven by continued growth in non interest bearing deposits.

Interest income was unchanged, but the margin was lower from the effect of new business yields.

Mortgage and capital markets revenue continued to be exceptionally strong and offset coated related lower deposit service charges.

We continue to achieve lower expenses as we execute on our own be away initiatives, our adjusted efficiency ratio for the quarter was 53% year over year operating leverage improved by almost 300 basis points.

When we introduced the only way I told you I was more excited about the revenue initiatives then the cost initiatives. Many of these revenue initiatives have been delayed because of the pandemic, but we're now making progress on building systems and hiring talent to support these initiatives I'm in.

I'm excited about the team members have already hired and the ones. We have in the pipeline. We have a great story to tell and we have strong interest from senior relationship managers from other larger institutions, we have hired and expect to hire more in wealth management private banking commercial Treasury management and key support team members in IP and digital marketing.

These hires will put near term pressure and personnel costs over the next few quarters, but will ultimately lead to higher revenue from these growth initiatives.

Most ever reported credit quality metrics are relatively unchanged during the quarter, but we expect that credit metrics will ultimately worsen and losses will materialize once the stimulus in deferral programs run their course, we proactively downgraded some of our most vulnerable loans into the watch asset quality ratings and our meeting weekly to review credit quality loan by loan.

We still don't know when losses will meaningfully materialize, but we suspect sometime in the first half of next year, depending on additional government stimulus programs.

We believe our historically strong underwriting practices are diverse and granular loan portfolios and Midwest footprint should help us weather the impact better than most.

We continue to share it with our board of directors multiple economic forecasts and various stress test as a result, we don't anticipate any capital actions and we expect to maintain our current dividend.

On last quarters call I stated, we are open for business and are setting new credit.

National has always managed with a long term view, we will continue to make new loans that we're comfortable the underlying cash flow structure and pricing.

The loans, we are booking today are generally with better structures and we would have accepted last year we.

We do not jumping to businesses are sectors. During the good times only to exit during the tough times, our balance sheet and capital remained strong our markets are diverse and our experienced team will help us manage this uncertain time.

Speaking of experience I will turn the call over to our 41 year tenure team member Mr. Darrell more great. Thank you Jim.

First I think we'd like to provide this morning relates to our client relief programs with respect to deferrals. We have previously reported that we granted some type of deferral on roughly $1.3 billion in loans, which represented roughly 10% of the portfolio.

The end of this most recent quarter the dollar amount of loans still in deferral mode had dropped to 138.6 million, which represents approximately 1% of total portfolio.

In the commercial area request for deferrals have effectively dried up and we've taken a position that any applications for future deferrals and would result in total aggregate deferment period in excess of 180 days would be granted only in the most unusual circumstances.

The retail side, while we continue to receive both new deferral requests and request for renewal extensions. The volume of those request has fallen significantly while we attempt to hold aggregate deferral period to 180 days in this portfolio as well we are a bit more lenient with individual borrowers when the causes there financial issues is clearly colgate related.

As you know we were very successful in securing PTP funds for our clients have been originated just short of 10000 loans with balances in excess of $1.5 billion.

The recent announcement by the FDA of a streamline forgiveness process for loans of $50000 or less is good news for many of our clients who receive PPP funds in that roughly 50, 657.5% of the PPP loans, we help facilitate fall into the streamline forgiveness category to date Weve submitted over 2300, I'll 2300 loan.

As to the FDA for forgiveness, representing $486 million in outstanding balances.

Remaining fees on PPP loans, not yet taken into income totaled $37.8 million.

Like five sets out those industries that many across the banking landscape feel are most vulnerable to our current economic conditions. There has been little change in our exposure to these industries, which remains at only roughly 7% of total loans. While there is merit and acknowledging that these industries as a whole may be suffering disproportionately in the current environment.

It's important to note that not all of the borrowers in these categories are experiencing difficulties with some even doing well.

The chart at the bottom of slide five shows the breakout of our consumer portfolio, along with corresponding average FICO scores. This portfolio has shown little change as well since our last presentation to you I have.

That having been said we are walking this portfolio closely with future labor market trends on certain and deferments expiring consumer portfolios could come under increased stress in the coming quarters.

Six lays out trends in the most significant credit indicators delinquencies rose in the quarter slightly to 20 basis points of the total portfolio with the increase in delinquency rates wholly attributable to the retail lending portfolio.

This increase in retail loan delinquencies was not unexpected given the level of retail loans on to permanent at the end of the second quarter that were subsequently acquired to resume their payments by September Thirtyth.

With respect to charge offs in an ironic twist to fate, we posted a net recovery in the current quarter in large part due to recovery of the write downs, we took back in the fourth quarter of 2019, and the first quarter of 2020 on a pharma related project. This particular project became much more valuable given its intended use in the cobot vaccination process.

Yes.

Nonperforming loans increased in the quarter as was expected the increase in the current quarter came about in great part through the downgrade of relationships that had shown weakness is prior to the pandemic as well as from the hotel segment that as we all know experience sudden and deep troubles early on in the pandemic.

Further downgrades into the nonperforming category or certainly a strong possibility with the pace and magnitude dependent in some part on the continued impact of the pandemic and the ability of Congress to come to an agreement on additional fiscal stimulus.

One final comment I'd like to make is around the loan growth in the quarter, while we have given direction to our underwriters to be mindful of current economic conditions. You have also asked them to keep in mind more intermediate and long term factors as they evaluate credit requests.

West from borrowers with balance sheet and liquidity stain power are viewed as opportunities and not discouraged from consideration if they meet our lending standards, which have always been intended to live through economic cycles with that I will turn the call over the print.

Thank you Daryl.

Before turning to the quarterly financials, we would like to provide an overview of our allowance for credit losses are seasonal model assumption for again derived from the Moody's baseline forecast, which included meaningful improvements in both GDP growth and unemployment trends.

Decrease in reserve need driven by improving current and expected economic conditions was more than offset by an increase our qualitative reserve. Although this economic recovery appears to garner some traction downside risks remain elevated and believe it is premature to release reserves to a more clarity on the path of the virus and future government action.

Our current able to loan ratio, including PBP loans stand at 95 basis points, excluding PPP balances our allowance to loan ratio would be 106 basis points.

We'd also like to remind you that we continue to carry $56 million and unamortized Mark from our acquired portfolio. While these mark will not directly offset charge offs any remaining mark will accrete through March margin upon resolution.

Turning to the quarter on slide eight.

GAAP earnings per share was 47 cents, our adjusted earnings per share was 46 cents.

Adjusted earnings exclude $2.9 million and only way related charges as well as $4.9 million in debt securities gains.

Moving to slide nine we are pleased with our quarterly adjusted pre tax pre provision net revenue, which was 3.4% higher year over year and 2.7% higher over prior quarter. This improvement was driven by commercial loan growth strong mortgage revenues as well as a reduction in adjusted operating expenses, resulting from good execution of our long be way initiatives.

Despite the challenging interest rate environment, we improved operating leverage by 298 basis points year over year.

Slide 10 shows the trend in outstanding loans, and earning asset mix end of period loans increased $240 million quarter over quarter, driven by record commercial production of $978 million.

Roughly two thirds of this production was in high quality CRB projects spread across a variety of property types and geographies.

We also ended the quarter with a record $2.9 billion commercial loan pipeline with over $800 million in the accepted category.

This quarters loan portfolio yield, excluding PDP was 3.81% with new business rates of 3.1%.

Investment portfolio yield was down 18 basis points quarter over quarter to 2.45% with new purchases yielding 1.4%.

Moving to slide 11, both period and average deposits increased during the quarter, mostly in the non interest bearing checking and savings categories.

The balances benefited from increases in existing accounts, but more importantly, we added a meaningful amount of new deposit accounts as well.

Our total cost of deposits declined from 17 basis points in the second quarter to 13 basis points in Q3.

While we continue to look for opportunities to reduce funding costs. Most of our planned rate actions are now complete.

However, time deposit and borrowing costs will continue to fall as these instruments mature and reprice.

Overall, we are pleased with our results from our of our deposit pricing strategy that has resulted in a significant reduction in deposit costs, while maintaining our core client base.

Next on Slide 12, you will see net interest income was unchanged from prior quarter, which was supported by our strong commercial loan growth.

Interest margin declined 11 basis points quarter over quarter, which was generally in line with our expectations.

Excluding the impact of both PPP loans and accretion net interest margin was 2.96% compared to 3.6% in Q2.

The decline in margin reflects the ongoing repricing of our earning assets as well as excess liquidity.

Or earning asset yields were down 17 basis points quarter over quarter and funding costs decreased by five basis points.

Slide 13 shows trends in adjusted noninterest income our third quarter adjusted noninterest income of $60 million and represents a 2 million dollar increase over prior quarter. The primary drivers of this improvement came from an increase in deposit service charges and mortgage revenues deposit.

Deposit related service charges have generally returned to pre crisis levels with the exception of overdraft fee, where we continue to see lower presentment.

Mortgage revenue increased $1 million over prior quarter and was $9 million higher than the third quarter of 2019 elevate.

Elevated gain on sales margins and robust production of $628 million helped contribute to the stronger quarter.

Next slide 14 shows the trend in adjusted noninterest expenses, which reflects our ongoing focus on expense management adjusted.

Adjusting for only way related charges and tax credit amortization noninterest expense was down $1 million quarter over quarter, and our adjusted efficiency efficiency ratio with a low 53.1%.

As I wrap up my discussion on the quarter here are some key takeaways. We are pleased with our overall performance as the fundamentals of our core business continued to be strong record commercial loan production led to meaningful earning asset growth and our fee businesses continue to perform well, particularly mortgage and capital markets.

We also continued to deliver on the promise expense savings, we outlined in our only way strategic plan.

Slide 15 includes thoughts on our outlook for the remainder of 2020.

We ended the quarter with a record $2.9 billion commercial pipeline, which should help sustain our recent balance sheet growth.

Our expected, earning asset growth will help support total net interest income, but the impact of historically low long term rates will continue to put pressure on net interest margin.

Funding costs will move marginally lower as borrowings in Cds reprice maturity, but we do not expect it to be sufficient to offset declines in asset yields.

TPP loans will also impact our margin going forward, but the timing remains uncertain.

Fees will continue to amortize over the contractual lives, but accelerated recognition will be postponed until repayment from the SBS while.

While we are starting to forget this process for many TPP clients a significant portion of the related fees may not be recognized until next year.

We expect our fee businesses to continue to perform well wealth and investment revenue should be stable as assets under management have rebounded from the second quarter lows.

Deposit related service charges have recovered nicely and should continue to trend higher are strong.

Our strong year to date capital markets results should continue through the remainder of the year and Internet.

The mortgage market is proving more resilient than we expected, but will still be subject to typical seasonal declines in the fourth quarter and 2021 revenue could be impacted by Rifiber now.

We continue to outpace our planned 2020 on the way expense initiatives and have now realized most of the savings promised this year.

Strong year to date performance may strong year to date forms may impact fourth quarter incentive accruals as we currently are on track to outperform our 2020 budget.

As Jim mentioned in his opening remarks, we are renewing our focus on achieving our only way revenue initiative goals, many of which were delayed due to COVID-19 as these initiatives ramp up over the next several quarters, we will likely see an increase in personnel costs as we look to hire talent in key revenue positions in our commercial and wealth businesses.

We're also looking to infuse new talent to our technology team that will be focused on supporting both revenue and efficiency initiatives.

We would also like to give you an update on our current capital position and outlook. We have created an additional 40 basis points of Cetone capital ending the quarter at a healthy 12.1% I would also reiterate that based on our current capital levels and our outlook on earnings. We believe we will continue to out earn our dividend. We've also recently updated our stress test model and under the sea car severe.

The adverse scenario, we remain well capitalized at the lowest point in the nine quarter horizon.

Lastly, a brief update on taxes as we previously reported project delays caused by COVID-19 have impacted the timing of our historic tax credit projects. Those projects. We started in Q3 and we now anticipate completion by year end.

During some unforeseen issues, we will take the full tax credit amortization and corresponding tax benefit in the fourth quarter. The total net income benefit in the fourth quarter is expected to be approximately $1 million.

With that we're happy to answer any questions that you may have and we do have the full team here, including Jim Sandgren.

At this time, if you would like to ask a question. Please press Star then the number one on your telephone keypad that is star one to ask a question. If you would like to the top of your question press. The pound key we will pause for just a moment to compile the culinary roster.

Our first question comes from the line of Scott Siefers with Piper Sandler Good morning.

Good morning, Scott wondering guys hope everyone is doing well.

Yes, it's good good and I appreciate you taking the question.

Jim I guess, the first question I wanted to touch base on was some of the commercial growth I think you guys had been pretty candid in the second quarter about.

Maybe not being super optimistic on pull through rates and I think weve generally seen that in fact to be the case industry wide looks like you guys kind of bucked the trend. So maybe just a little more color on how pull through rates actually.

Actually came in relative to what you would have hoped and then maybe a bit more detail on complex one of the growth as well if you could sort of bifurcated between commercial and commercial real estate.

Sure I'll have Jim Sandgren start off here, yes, Scott so from a pull through rate perspective, we were at a very low 23% in the second quarter that increased to 37% in the third quarter, clearly I think folks were kind of waiting to see due to all.

Due to all the uncertainty, but again demand continues to be really strong obviously commercial real estate cattle paved the way for our growth in the third quarter and as both Jim and Daryl talked about really high quality projects with developers that we are very familiar with we are starting to see even better structure, both from a pricing perspective.

Yes.

More cash equity in the deals.

So we really feel good about the the production, we're putting on from that standpoint.

And I also was a was up 12% in the quarter compared to the second quarter, we saw some opportunities in the educational area contractors manufacturing so.

As a pipeline where it is today, we're really encouraged about about fourth quarter and beyond so even.

Even given all the uncertainty the election and all that our customers are still willing to invest in a pretty bullish as we look towards the end of the year.

Scott I would say that it's really been interesting is we've been out competing for new deals.

Often times, we find ourselves the other ones working really hard at it and I think thats given us a great opportunities as I said on the call Jim and I personally have been a lot of calls here during the quarter trying to bring deals across the finish line.

There's been some banks that quite frankly have been a little distracted and we've been a little bit more focused.

I think our new organizational structure through the old be way in that segment based approach really gives us the ability to focus and get all the resources lined up to.

To help a when these relationships and bring the full relationship over so I think this is a.

A good sign that that the programs with systems of the process, we put in place a really of certain work.

Yeah, we look at a minimum it definitely looks like it came through in the in the third quarter. So those.

Well it wasn't surprising to be what we've always seen that others.

Maybe just a separate follow on question more more financial.

Brendan just looking at the sort of the puts and takes on the volume and rate side and I.

With the hope our aspiration b that you could ultimately hold and I.

At least flat given the pressures on margin, but some of the volumes that you guys are experiencing.

I think earning asset growth will certainly help to even interest income I'm not sure it's going to fully offset the headwinds we're going to feel in that and the net interest margin percentage as.

As we look forward, we think we might have a similar maybe slightly lower decline in fourth quarter, and then I think we have a fairly dramatic drop off but still a kind of slow grind downward into in the 2021, but at a much lower levels.

Okay, and you were talking about the margin rate with the class currency. The dollar okay, Yeah and dollar in dollars and channels. Some of that's going to depend on the strength of the earning asset growth side I don't know that the earning asset growth will be sufficient to offset all of the margin headwinds, but we'll certainly be a benefit.

Perfect. Okay terrific. Thank you guys very much thanks Scott.

Your next question comes from the line of Terry Mcevoy with Stephens. Good morning, Terry Hi, Good morning, everyone.

Maybe start with an expense question.

Jim I think you said.

Yes, the investments and the Olin be way revenue initiatives on the hiring side would push expenses higher on a quarterly basis was wondering and it also sounds like thats going to continue into next year. I was wondering if you could kind of quantify that increase off the 114 kind of core run rate that I calculated and just to be clear is that kind of a pretty good.

Run rate to think about each quarter next year or will there be some decline in the latter part of the year. We anticipate your question Brent has got all the details here for you. After you think though I think the 114. It is a good pace I think as we as we think about those positions we're going to hire several as individual.

Over the course of 2021.

Our expected impact for that is around $5 million into 2021, I just remind you, though that we have roughly $4.5 million merit increases that will hit next year and I.

I would expect some of the customer travel and entertainment expenses to trend higher as the world opens up again.

And then.

He just asked to see so question if the key economic assumptions that you list on page seven if they remain unchanged over the next three months how should we send think about the quarterly loan loss provision is it more a reflection of loan growth as any charge offs would likely be already captured in today's reserves.

Yes, so as as we will continue to have run the model and if the economic conditions are unchanged and the reserve level is exactly what it is today is what's needed at the end of the year and yes, we would cover charge offs, how that's going to play out we have yet to see.

Lastly, Moody's expects things continue and improve so.

So our reserve need may fall, but we are we are not at this point not expected to release reserves until we start to see some meaningful charge offs start to flow through.

Great. That's it thank you both thanks Terry.

Your next question comes from the line of Jon Arfstrom with RBC capital markets. Good morning, John Hey, Good morning, everyone.

One follow up on Terry's last question on slide seven the qualitative factors.

I think we all understand there's a lot of uncertainty, but maybe can you talk a little bit about some of the key drivers that went into that.

What to get that to potentially flatten out in the future.

Yeah, I think we need to get some clarity around the path of the virus any additional government actions and get a sense for what the what the ultimate charge off levels will be I don't know that we'll have a lot of those answers until at least into.

At least into the first half of 2021, as we get clarity around that we'll be able to to think differently potentially around the size of that qualitative reserve. Yeah. I. Just you know given the uncertainty out there we're going to lean on being more conservative in our assumptions here right.

As we get more clarity, which you know, it's probably not likely to happen until the middle part of next year. Then I think we could be looking at those factors a little bit differently, but just given all of the economic uncertainty I think it's better to hold up a little higher here.

Okay.

Thank you for that and then Daryl maybe one for you.

You talked about the potential for maybe it was you Jim for rising.

Nonperformers losses, and I think we all expect that but just give us kind of a gut feel from.

Hi plan, a potential problem loans and how we should think about the cadence of some of these problems flowing through.

John I wish I knew the answer to that right that is something that the whole industry is a bit struggling with and I'll go back to what Jim and Brendan said, we're only really less than two full quarters kind of into this and so as we see interim financial information from our clients.

It's just really hard to try to understand what ultimate losses are going to come on that portfolio and again I don't want to fall back on to what everybody, saying, but the fiscal stimulus is going to have a big impact on this.

It's it's by industry, most banks, including ours have taken hotel industry. We know we're pretty certain that that is a long tail and so we've gone ahead and taking our actions on that in terms of downgrades, but you know I'm not.

Im not trying to skirt. The question. It's just very tough thing to try to figure out now where we're going to be another 90 180 days. So I can't give you much clarity around it and John I'll, just say, we're trying not to be surprised you're right. I mean, we meet weekly and with this group on the call a plus some other senior commercial.

Credit folks and we're really trying to understand the trajectory of each one of our clients and which ones are more sensitive than others. So we're not trying to be surprise ourselves, but as Daryl said Gerald those conversations have gone pretty well surprisingly well.

And but but you know there's a lot of uncertainty out there and like Daryl said, we haven't seen a lot of interim financials and so it's just it's pretty hard to put a pinpoint on it.

Okay, and then just one small one for Brendan on expenses again back to expenses, you talked about potential for incentive accruals due to outperformance for the year, but have you accrued some of that already year, what's kind of the magnitude you thinking for for that.

Accrual expense line.

We did we started to adjust accruals in Q3, but.

But we would we would expect another adjustment if things play out the way, we expect in the tune of $5 million or so.

That's an incremental four before yes, what you are saying okay. Thank you.

Our next question comes from the line of Chris Mcgratty with KBW.

Good morning, Chris.

Hey, good morning, good morning, everybody.

I want to I want to start.

Maybe I'm on capital you talked about the capital build but also daryls comments about the uncertainty.

Jim I'm interested in your thoughts about capital management into next year, I think you've talked pretty confidently consistently about the dividend sustainability, but but what about the share buyback component. How are you in the board's thinking about.

Ultimately flipping that we'll get him back on.

Well I think we're going to take a Q a little bit from the regulators here right and the regulators have basically said nothing this year obviously.

Obviously, you know, they're not really talking about us I think they're talking about our biggest cousins here, but we're going to if we're going to take that Q and we do a board member and asking what are we gonna have confidence still turn that back on having said that I think its into next year again as we just have more insights into ultimate loss content.

You know, we feel pretty good today, but but it just seems a little little premature to want to turn that back on yet.

Okay, Okay and I appreciate the color you gave on the expenses and investments you're making.

As part of the way I'd be way, but.

Can you just remind us how you're thinking about the revenue side of the equation that you that you spoke confidently about in your prepared remark just the timing and when we should start seeing any contribution from in the revenue investments well I do think I mean, you know so we have hired folks already a number of folks already across our geographies and I do think the growth you're seeing unfolded.

Posit side and the loan side are really the start of really those initiatives.

So you know higher growth in our wealth management business that would be both the kind of the balance sheet side to the private banking side, but also fee income side.

And obviously our commercial business.

We haven't shared any targets to certain into early to share any targets yet.

Especially given kind of the economic uncertainty, but I think those are the kind of line items that fee income continued strong deposit growth and a and on the commercial side as well.

Okay.

And then maybe just last one if I could if I'm looking at slide 10.

You know comparing it to last quarter it looks like see nice spreads jumped up almost 20 basis points, excluding the triple B any color on is that just the you're out in the biz you're out in the market lending and some of your peers are on their on their heels.

I guess what does that.

Is that likely to continue or what are you, saying, yes.

Chris It's a little bit of both right I mean, I think we are as Jim said, you know not everybody else without doing what we're doing but I also think there's a wide variance at quarter end quarter out just based on how many notes are fixed rate versus floating rate.

You know this stuff tends to be a little bit more floating rate, which which drives down the absolute yield but that mix shift can can also ship these numbers around quarter in quarter out, but we are getting I would say slightly better pricing no not a.

No not a not more I'd like to get more pricing, but but a slightly better than we have seen in the last year for sure.

Okay awesome. Thank you.

Your next question comes from the line of David Long with Raymond James Good morning, David.

Good morning, everyone. Thanks for taking my my question I'm going to get back to that qualitative portion of the reserve really quick just do you have a specific internal projection that you are using as to what the next stimulus package may look like in coming up with that ultimate reserve level.

We do not I can tell you I think Moody's had an expectation in their forecasts for I think a one and a half trillion dollar stimulus happening in September. So the fact that that doesn't that didn't get done and maybe delayed did influence our thoughts in decisions around the qualitative reserve that we don't we don't have a specific forecast internally.

Got it okay. Thank you and then switching gears to the mortgage banking side, obviously strong again, there how does the upcoming 50 basis point fee impact your origination expectations and is that something that you can pass along or how do you think thats going to work out.

I think it's a little too early to tell how much of that we can pass along you know I think our own internal projections are assuming we take that out of our spreads have been spread that increase in that business.

Throughout the kind of refinance that we've all seen here so that probably at some level comes out of our margin, but I'm hopeful that we can pass along some of that increase.

Through through new production as well.

Got it Okay, and then finally on the capital side, obviously in a very good position right now but.

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What would change or what in the economy would it take to change to change your outlook like what will how bad doesn't have to get in the overall economy for you to change your outlook can consider raising additional capital.

That's a good question you know I caught a friend and I've kind of chuckled, a little bit you know we were supposed to learn our lessons as an industry heading into whatever the next crisis looked like and I felt like we had enough capital heading into this and Brent and shared our stress tests that were running right. So things would have to get.

Pretty draconian before I think I'd have to move off my position here I understand the rationale for kind of opportunistic issuances, particularly we had a use for it.

But at this point in time, you know, we feel very comfortable our stress test models and obviously their models and they could they could be wrong.

But but it has to be significantly different than what you are more severely stressed environment look like in order for us to have probably different view on that.

Got it good to hear cool thanks, Jim.

Thanks.

Your next question comes from the line of Scott Siefers with Piper Sandler.

Morning, Scott again, how are you hey, thanks for taking the follow up I was just curious on some that that balance sheet growth is that pretty broad based across the franchise.

The franchise or are there particular like is it the sort of the legacy Oh NB franchise or is it some of the newer markets that you guys have how is that all sort of trajectory, yes Scott.

The decline in CRB.

I'd say, a big big chunk of that really is up in the twin cities.

Specifically in the suburban areas some multifamily opportunities there with the developers that I talked about earlier also seeing some growth in Wisconsin.

Parts of Michigan, and getting around a little hole. So it really has been spread spread around kind of a mix some of our legacy markets in our in our newer markets.

Jim and I are head to Minnesota. After this call and so we've been spent a time out actually walking some of these projects you know getting first hand insights into them. So this is.

So this isn't a hands off approach, we're very active in the business, we want to make sure. The things we're investing today, we feel really good about so it's nice to see that kind of continued growth, we're seeing in Minnesota and display.

Despite some of the challenges are having there the economic vibrancy is still very strong yeah.

Yeah.

Okay perfect. Thank you guys again.

Thanks, Kevin.

When that are driving this okay. Your next question comes from the line of Kevin Swanson with Hovde group.

Hi, Kevin how are you.

Yes, yes good.

No. It's an expense initiatives has there been any additional look back at the branch footprint when considering the effects of the colon endemic.

Absolutely.

You know, it's something that we review pretty regularly as our bank branch footprint and.

The board has challenged us to make sure that we've got an appropriate footprint. It's a we don't have any new assessments to share with anybody, but it's something we look at pretty regularly and we do.

And we do think over time, just as customers continue to move transactions to mobile and other online platforms. We will continue to have opportunities to look at those branches a little bit differently, but.

But this time don't have anything new to new to share.

Okay. Thanks, and then could you talk about the parameters of.

Well, you would or would not be interested in doing for M&A.

And then maybe any changes in expectations or willingness of sellers.

Oh, I think 2021, given the interest rate environment is going to be a challenge for our industry and Ah you know I think as people put together the forecast for next year to the she's planning you know it could could open up some opportunities for US you know we continue to think a consolidate.

Consolidating within our current footprint makes the most amount of sense.

And so we're really focused there you know we talked about a lot.

Potential partnerships that are more meaningful fewer of them, but more meaningful.

And you know I continue to be very active it was a very active summer for me to make sure that I was calling on.

You know folks that were interested in and we continue to do that and be purposeful about that so.

It's on our minds you know obviously the farther we get into the pandemic the easier would be to put some balance sheet March together still I think it's still a little early to be honest with you up but but the farther we get into it it would be easier to think about a potential partnership but at this point in time.

We're not we're not looking today. So we're just going to continue to.

Keep the opened up opportunities.

Okay. Thank you.

You have a follow up question from the line of Terry Mcevoy with Stephens.

Just tell you hey.

Hey, I forgot to ask I think it was last Thursday, or Friday, a bunch of states had their highest one day Kobe case, count and I believe, Indiana, Wisconsin, and Minnesota. Unfortunately, we're in that count.

Earlier in the year that was the exact opposite in Jimmy kind of talked about maybe.

Maybe the upside to your franchise just given how it was impacting different parts of the country in a different way and now it's kind of come closer to home. So I guess what are your updated thoughts there and do you have any kind of updated thoughts on some of the vulnerable industries and whether that count goes higher whether those industries need to be looked at it yet again.

All good questions you know thankfully I would just start with our team members and our own experience year within our four walls. So to speak in relatively good we continue to make sure that our team members remain health and safety is Paramount right.

But having said that obviously, we're all concerned and we're cautious about what's going on in some of our geographies I'm hopeful that it's kind of temporary if everybody went back to colleges and maybe I saw a number of increases from that we're watching the numbers very closely our chief risk officer sense.

Sounds very regular updates on this topic.

You know even during the height of maybe the first or second wave.

No I Didnt see you know we have so little restaurants, and the hotel exposures you know, we talked about a pretty well defined I just don't see much difference today than I saw back then.

Even when the numbers were trending better so I don't I don't think it gives us any kind of different outlook, Terry but it's something we're watching very very closely if nothing else for the health and safety of our own team members.

Great. Thanks again, thanks to.

Thanks Terry.

And there are no further questions at this time.

Well thanks, everybody for your attendance so great set of questions and as usual the team is here for any follow ups everybody have a great day. Thank you.

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