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Old National Bancorp (NASDAQ:ONB)
Q3 2020 Earnings Call
Oct 19, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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 SEC's Regulation FD. Corresponding presentation slides can be found on the Investor Relations page at oldnational.com and will be archived there for 12 months.

Management would like to remind everyone that as noted on Slide 2, 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 SEC filings.

In addition, certain slides contain non-GAAP measures which management believes provides more appropriate comparisons. These non-GAAP measures are intended to assist investors' understanding of performance trends. Reconciliations 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?

James C. Ryan III -- Chairman and Chief Executive Officer

Thanks, Dorothy. Good morning. I hope this call finds all of you and your families safe and healthy. We are pleased with our third quarter results as we made significant progress on client deferrals. We improved our operating leverage and grew 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 are 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 have told their relationship managers to stay at home and not worry about goals this year. By contrast, our relationship managers are proactively serving existing clients and winning new relationships, rather than being distracted or derailed by COVID.

Jim Sandgren and I have 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 from other larger banks. I would like to thank our team members for their hard work and dedication.

Starting on Slide 3. Our third quarter net income was $77.9 million or $0.47 per share. I was particularly pleased with our progress on operating leverage and strong balance sheet growth. Growing 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. Brendon will fill you in on 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. Net interest income was unchanged, but the margin was lower from the effect of new business yields. Mortgage and capital markets revenue continue to be exceptionally strong and offset COVID-related lower deposit service charges.

We continue to achieve lower expenses as we execute on our ONB Way 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 ONB Way, I told you, I was more excited about the revenue initiatives than the cost initiatives. Many of these revenue initiatives have been delayed because of the pandemic, but we are now making progress on building systems and hiring talent to support these initiatives.

I'm excited about the team members we've 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 IT and Digital Marketing. These hires will put near-term pressure on personnel costs over the next few quarters, but will ultimately lead to higher revenue from these growth initiatives.

Most of our 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 and deferral programs run their course. We proactively downgraded some of our most vulnerable loans into the watch asset quality ratings and are 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, our diverse and granular loan portfolios and Midwest footprint should help us weather the impact better than most. We continue to share, with our Board of Directors, multiple economic forecasts and various stress tests. As a result, we don't anticipate any capital actions and we expect to maintain our current dividend.

On last quarter's call, I stated we are open for business and are extending new credit. Old National has always managed with a long-term view. We will continue to make new loans if we are comfortable with the underlying cash flow structure and pricing. The loans we are booking today are generally with better structures than we would have accepted last year. We do not jump into businesses or sectors during the good times, only to exit during the tough times.

Our balance sheet and capital remains strong. Our markets are diverse and our experienced team will help us manage through this uncertain time.

Speaking of experience, I will turn the call over to our 41-year tenure team member, Mr. Daryl Moore.

Daryl D. Moore -- Chief Credit Executive

Great, thank you, Jim. First update 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. At 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 the total portfolio.

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

On the retail side, while we continue to receive both new deferral requests and requests for renewals of pensions, the volume of those requests has fallen significantly. While we attempt to hold aggregate deferral periods to 180 days in this portfolio as well, we are a bit more lenient with individual borrowers when the cause of their financial issues is clearly COVID-related.

As you know, we were very successful in securing PPP funds for our clients, having originated just short of 10,000 loans with balances in excess of $1.5 billion. The recent announcement by the SBA of a streamlined forgiveness process for loans of $50,000 or less is good news for many of our clients who received PPP funds. In that, roughly 5,600 or 57.5% of the PPP loans we helped facilitate fall into the streamlined forgiveness category. To date, we've submitted over 2300 loans to the SBA for forgiveness, representing $486 million in outstanding balances. Remaining fees on PPP loans, not yet taken into income, totaled $37.8 million.

Slide 5 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 in acknowledging that these industries, as a whole, may be suffering disproportionately in the current environment, it is 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 5 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. But having been said, we are watching this portfolio closely. With future labor market trends uncertain and deferments expiring, consumer portfolios could come under increased stress in the coming quarters.

Slide 6 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 deferment at the end of the second quarter that were subsequently required to resume their payments by September 30.

With respect to charge-offs, in an ironic twist of fate, we posted a net recovery in the current quarter, in large part, due to recovery of the writedowns 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 COVID vaccination process.

Non-performing 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 weaknesses prior to the pandemic, as well as from the hotel segment, that, as we all know, experienced sudden and deep troubles early on in the pandemic. Further downgrades into the non-performing category are 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, we've also asked them to keep in mind more intermediate and long-term factors as they evaluate credit requests. Requests from borrowers with balance sheet and liquidity staying 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'll turn the call over to Brendon.

Brendon B. Falconer -- Chief Financial Officer

Thank you, Daryl. Before turning to the quarterly financials, we would like to provide an overview of our allowance for credit losses. Our CECL model assumptions were 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 in our qualitative reserve. Although this economic recovery appears to have garnered some traction, downside risks remain elevated and believe it is premature to release reserves until we have more clarity on the path of the virus and future government action.

Our current ACL to loan ratio, including PPP loans, stands 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 in unamortized marks from our acquired portfolio. While these marks will not directly offset charge-offs, any remaining mark will accrete through margin upon resolution.

Turning to the quarter on Slide 8. Our GAAP earnings per share was $0.47 and our adjusted earnings per share was $0.46. Adjusted earnings exclude $2.9 million in ONB Way related charges, as well as $4.9 million in debt securities gains.

Moving to Slide 9. 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 the reduction in adjusted operating expenses resulting from good execution of our ONB Way initiatives. Despite the challenging interest rate environment, we improved our 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. Approximately two-thirds of this production was in high-quality CRE 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 quarter's loan portfolio yield, excluding PPP, was 3.81% with new business rates of 3.1%. The 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 end and average deposits increased during the quarter, mostly in the noninterest-bearing checking and savings categories. Deposit 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 deposits and borrowing costs will continue to fall as these instruments mature and reprice. Overall, we are pleased with our results 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. Net 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 3.06% in Q2. The decline in margin reflects the ongoing repricing of our earning assets, as well as excess liquidity. Core earning asset yields were down 17 basis points quarter-over-quarter, and funding costs decreased by 5 basis points.

Slide 13 shows trends in adjusted non-interest income. Our third quarter adjusted non-interest income was $60 million and represents a $2 million increase over prior quarter. The primary drivers of this improvement came from an increase in deposit service charges and mortgage revenues. Deposit-related service charges have generally returned to pre-crisis levels, with the exception of overdraft fees, where we continue to see lower presentments. Mortgage revenue increased $1 million over prior quarter and was $9 million higher than the third quarter of 2019. 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 non-interest expenses, which reflects our ongoing focus on expense management. Adjusting for ONB Way related charges and tax credit amortization, non-interest expense was down $1 million quarter-over-quarter, and our adjusted efficiency ratio was a low 53.1%.

And to 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 continue 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 continue to deliver on the promised expense savings we outlined in our ONB 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. Lending costs will move marginally lower as borrowings and CDs reprice maturity, but we do not expect this to be sufficient to offset declines in asset yields.

PPP loans will also impact our margin going forward, but the timing remains uncertain. PPP fees will continue to amortize over the contractual lives but accelerated recognition will be postponed until repayment from the SBA. While we have started the forgiveness process for many PPP 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 their second quarter lows. Most deposit-related service charges have recovered nicely and should continue to trend higher. Our strong year-to-date capital markets results should continue through the remainder of the year and into next.

The mortgage market has proven 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 refi burnout. We continue to outpace our planned 2020 ONB Way expense initiatives, and have now realized most of the savings promised this year. Strong year-to-date performance 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 ONB 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 are 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 accreted an additional 40 basis points of CET1 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 CCAR severely adverse scenario, we remain well capitalized at the lowest point in a 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 restarted in Q3 and we now anticipate completion by year-end. Barring 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 are happy to answer any questions that you may have. And we do have the full team here including Jim Sandgren.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Scott Siefers with Piper Sandler.

James C. Ryan III -- Chairman and Chief Executive Officer

Good morning, Scott.

Scott Siefers -- Piper Sandler -- Analyst

Good morning, guys. I hope everyone is doing well.

James C. Ryan III -- Chairman and Chief Executive Officer

We are.

Scott Siefers -- Piper Sandler -- Analyst

And I appreciate -- 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 have been pretty candid in the second quarter about maybe not being super optimistic on pull-through rates. And I think we've generally seen that, in fact, the case, industrywide. It looks like you guys kind of bucked the trend. So maybe just a little more color on how pull-through rates actually came in relative to what you would have hoped. And then maybe a bit more detail on complexion of the growth as well, if you could sort of bifurcate it between commercial and commercial real estate.

James C. Ryan III -- Chairman and Chief Executive Officer

Sure. I'll have Jim Sandgren start off here.

James A. Sandgren -- President and Chief Operating Officer

Yeah, Scott. So from a pull-through rates 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 wait-and-see due to all the uncertainty, but again, demand continues to be really strong. Obviously, commercial real estate kind of 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're starting to see even better structure, both from a pricing perspective, more cash equity in the deals. So we really feel good about the production we're putting on from that standpoint.

C&I also was up 12% in the quarter compared to the second quarter. We saw some opportunities in the educational area, contractors, manufacturing. So with the pipeline where it is today, we're really encouraged about fourth quarter and beyond. So even given all the uncertainty, the election and all that, our customers are still willing to invest and pretty bullish as we look toward the end of the year.

James C. Ryan III -- Chairman and Chief Executive Officer

Scott, I would say that it's really been interesting. As we've been out competing for new deals, oftentimes, we find ourselves the only ones working really hard at it. And I think that's given us some great opportunities. As I said on the call, Jim and I, personally, have been on a lot of calls here during the quarter, trying to bring deals across the finish line. There has 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 ONB Way, that segment-based approach, really gives us the ability to focus and get all the resources lined up to help win these relationships and bring the full relationship over. So I think this is a good sign that the programs or the systems or the process we've put in place are really starting to work.

Scott Siefers -- Piper Sandler -- Analyst

Yeah, at a minimum [Phonetic], I mean, it definitely looks like it came through in the third quarter. So it was a pleasant surprise -- used to be what we've seen at others. Maybe just a separate follow-up question, more financial. Brendon, just looking at the sort of puts and takes on the volume and rate side in NII. Would the hope or aspiration be that you could ultimately hold NII at least flat, given the pressures on margin about some of the volumes that you guys are experiencing?

Brendon B. Falconer -- Chief Financial Officer

I think earning asset growth will certainly help buoy the net interest income. I'm not sure it's going to fully offset the headwinds we're going to deal in the net interest margin percentage. 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 kind of a slow grind downward into 2021, but at a much lower levels.

Scott Siefers -- Piper Sandler -- Analyst

Okay. And you were talking about the margin rate with the -- that currency... Yeah.

James C. Ryan III -- Chairman and Chief Executive Officer

In dollars.

Scott Siefers -- Piper Sandler -- Analyst

Okay.

Brendon B. Falconer -- Chief Financial Officer

In dollars. [Speech Overlap] it's going to depend on the strength of the earning asset growth. I don't know that the earning asset growth will be sufficient to offset all of the margin headwinds, but will certainly be a benefit.

Scott Siefers -- Piper Sandler -- Analyst

Perfect. Okay, terrific. Thank you, guys, very much.

James C. Ryan III -- Chairman and Chief Executive Officer

Thanks, Scott.

Operator

Your next question comes from the line of Terry McEvoy with Stephens.

James C. Ryan III -- Chairman and Chief Executive Officer

Good morning, Terry.

Terry McEvoy -- Stephens, Inc. -- Analyst

Hi, good morning, everyone. Maybe start with an expense question. Jim, I think you said the investments in the ONB Way revenue initiatives on the hiring side would push expenses higher on a quarterly basis. I was wondering -- and it also sounds like that's going to continue into next year. I was wondering if you could kind of quantify that increase off the 114 [Phonetic] 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?

James C. Ryan III -- Chairman and Chief Executive Officer

We anticipated your question and Brendon's got all the details here for you, Terry.

Brendon B. Falconer -- Chief Financial Officer

Yeah, So...

Terry McEvoy -- Stephens, Inc. -- Analyst

Thank you.

Brendon B. Falconer -- Chief Financial Officer

I think the 114 is a good base. I think as we think about those positions, we're going to hire several of those individuals over the course of 2021. Our expected impact for that is around $5 million in 2021. I'd just remind you, though, that we have roughly $4.5 million of merit increases that will hit next year. And I also would expect some of the customer travel and entertainment expenses to trend higher as the world opens up again.

Terry McEvoy -- Stephens, Inc. -- Analyst

And then let me just ask a CECL question. If the key economic assumptions that you list on Page 7, if they remain unchanged over the next three months, how should we then 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?

Brendon B. Falconer -- Chief Financial Officer

Yeah. So as -- we will continue to run the model, and if the economic conditions are unchanged and the reserve level is exactly what it is today, as what's needed at the end of the year, then, yes, we would cover charge-offs. How that's going to play out? We have yet to see. Obviously, Moody's expecting to continue and improve. So our reserve need may fall. But we are not -- we are, at this point, not expected to release reserves until we start to see some meaningful charge-offs start to flow through.

Terry McEvoy -- Stephens, Inc. -- Analyst

Great. That's it. Thank you both.

James C. Ryan III -- Chairman and Chief Executive Officer

Thanks, Terry.

Operator

Your next question comes from the line of Jon Arfstrom with RBC Capital Markets.

James C. Ryan III -- Chairman and Chief Executive Officer

Good morning, Jon.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Hey, good morning, everyone. Quick -- one follow-up on Terry's last question on Slide 7. 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? And what could get that to potentially flatten out in the future?

Brendon B. Falconer -- Chief Financial Officer

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 ultimate charge-off levels will be. I don't know that we'll have a lot of those answers until at least into the first half of 2021. As we get clarity around that, we'll be able to think differently, potentially, around the size of that qualitative reserve.

James C. Ryan III -- Chairman and Chief Executive Officer

Yeah, I just -- 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 is 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 it up a little higher here.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Okay. Okay. Thank you for that. And then, Daryl, maybe one for you. You talked about the potential for -- or maybe it was you, Jim, for rising non-performers and losses and I think we all expect that. But just give us kind of a gut feel on the pipeline of potential problem loans and how we should think about the cadence of some of these problems flowing through.

Daryl D. Moore -- Chief Credit Executive

Jon, 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 Brendon 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 out of that portfolio. And again I don't want to fall back onto what everybody's saying, but the fiscal stimulus is going to have a big impact on this. It's by industry. Most banks, including ours, have taken the hotel industry, we know -- we're pretty certain that that is a long tail. And so we've gone ahead and taken our actions on that in terms of downgrades. But -- and I'm not trying to skirt the question, it's just a very tough thing to try to figure out now where we're going to be in another 90, 180 days. So -- and I can't give you much clarity around this.

James C. Ryan III -- Chairman and Chief Executive Officer

And Jon, I'll just say, we're trying not to be surprised here, right? I mean, we meet weekly and with this group on the call, and plus some other senior commercial credit folks. And we're really trying to understand the trajectory of our -- each one of our clients and which ones are more sensitive than others. So we're not trying to be surprised ourselves. But as Daryl said, generally, those conversations have gone pretty well, surprisingly well. And -- but 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.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Okay. And then just one small one for Brendon, on expenses again -- back to expenses. You talked about potential for incentive accruals due to outperformance for the year. Have you accrued some of that already here or what's kind of the magnitude you're thinking for that accrual expense line?

Brendon B. Falconer -- Chief Financial Officer

We did. We started to adjust accruals in Q3, but we would expect another adjustment if things play out the way we expect in the tune of $5 million or so.

Jon Arfstrom -- RBC Capital Markets -- Analyst

That's incremental for the fourth quarter is what you're saying.

Brendon B. Falconer -- Chief Financial Officer

Yeah, yeah.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Okay, all right. Thank you.

Operator

Your next question comes from the line of Chris McGratty with KBW.

James C. Ryan III -- Chairman and Chief Executive Officer

Good morning, Chris.

Chris McGratty -- KBW -- Analyst

Hey, Jim, good morning. Good morning, everybody. I want to start maybe on capital. You talked about the capital build, but also Daryl's -- the 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's sustainability. But what about the share buyback component? How are you and the Board thinking about ultimately flipping that back on?

James C. Ryan III -- Chairman and Chief Executive Officer

Well, I think we're going to take a cue a little bit from the regulators here, right? And the regulators have basically said nothing this year. Obviously, they're not really talking about us. I think they're talking about our biggest cousins here. But we're going to take that cue. And we do have Board members asking when are we going to have confidence to be able to turn that back on? Having said that, I think it's into next year, again, as we just have more insights into ultimate loss content. We feel pretty good today, but it just seems a little premature to want to turn that back on yet.

Chris McGratty -- KBW -- Analyst

Okay. Okay. And I appreciate the color you gave on the expenses and the investments you're making as part of the ONB Way. But can you just remind us how you're thinking about the revenue side of the equation that you spoke confidently about in your prepared remark, just the timing and when we should start seeing any contribution from the revenue investments?

James C. Ryan III -- Chairman and Chief Executive Officer

Well, I do think, I mean -- so, we have hired folks already -- a number of folks already across our geographies. And I do think the growth you're seeing on both the deposit side and the loan side are really the start of really those initiatives. So higher growth in our Wealth Management business, that would be both the kind of the balancing sides of the private banking side, but also the fee income side, and, obviously, our commercial business. We haven't shared any targets, certainly, too early to share any targets, especially given kind of the economic uncertainty. But I think those are the kind of line items, the fee income, continued strong deposit growth and on the commercial side as well.

Chris McGratty -- KBW -- Analyst

Okay. And then maybe just last one, if I could. I'm looking at Slide 10. Comparing it to last quarter, it looks like C&I spreads jumped up almost 20 basis points, excluding the PPP. Any color on -- is that just, you're out in business -- you're out in the market lending and some of your peers are on their heels? I guess, what is that -- is that likely to continue or what are you seeing?

James C. Ryan III -- Chairman and Chief Executive Officer

Yeah. I -- Chris, it's a little bit of both, right? I mean, I think, we are, as Jim said, you know, not everybody else is out doing what we're doing. But I also think there is a wide variance quarter-in, quarter-out, just based on how many notes or fixed rate versus floating rate. This stuff tends to be a little bit more floating rate, which drives down the asset flow yield, but that mix shifts and can also shift these numbers around quarter-in, quarter-out. But we are getting, I would say, slightly better pricing, not a -- not more -- I'd like to get more pricing, but it's slightly better than we have seen in the last year for sure.

Chris McGratty -- KBW -- Analyst

Okay, awesome. Thank you.

Operator

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

James C. Ryan III -- Chairman and Chief Executive Officer

Good morning, David.

David Long -- Raymond James -- Analyst

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

Brendon B. Falconer -- Chief Financial Officer

We do not. I can tell you I think Moody's had an expectation in their forecast for, I think, $1.5 trillion stimulus happening in September. So the fact that that doesn't -- that didn't get done and may be delayed, did influence our thoughts and decisions around the qualitative reserve. But we don't have a specific forecast internally.

David Long -- Raymond James -- Analyst

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 that's going to work out?

James C. Ryan III -- Chairman and Chief Executive Officer

I think it's a little too early to tell how much of that we can pass along. I think our own internal projections are assuming we take that out of our spreads. I mean, spreads have increased in that business throughout the kind of refi bonanza 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 new production as well.

David Long -- Raymond James -- Analyst

Got it, OK. And then finally, on the capital side, obviously, you're in a very good position right now. But what would change or what in the economy would it take to change your outlook? Like, how bad does it have to get in the overall economy for you to change your outlook and consider raising additional capital?

James C. Ryan III -- Chairman and Chief Executive Officer

That's a good question. I kind of -- Brendon and I kind of chuckled a little bit. But we're supposed to learn our lessons as an industry heading into whatever the next crisis look like. And I felt like we had enough capital heading into this and Brendon shared our stress test that we're 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, if we had a use for it. But at this point in time, we feel very comfortable with our stress test models and obviously they're models and they could be wrong. But it has to be significantly different than what our most severely stressed environments look like in order for us to have probably a different view on that.

David Long -- Raymond James -- Analyst

Got it. Good to hear. Cool. Thanks, Jim.

James C. Ryan III -- Chairman and Chief Executive Officer

Thanks.

Operator

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

James C. Ryan III -- Chairman and Chief Executive Officer

Good morning, Scott, again. How are you?

Scott Siefers -- Piper Sandler -- Analyst

Hey. Thanks for taking the follow-up.

James C. Ryan III -- Chairman and Chief Executive Officer

Yeah.

Scott Siefers -- Piper Sandler -- Analyst

I was just curious on some of that balance sheet growth. Is that pretty broad based across the franchise or are there particular -- like, is it the sort of the legacy ONB franchise or is it some of the newer markets that you guys have? How is that all sort of projecting?

James A. Sandgren -- President and Chief Operating Officer

Yeah, Scott. Specifically on the CRE, I'd say, a big chunk of that really is up in the Twin Cities, specifically in the suburban areas, some multi-family opportunities there with the developers that I talked about earlier. Also -- and seeing some growth in Wisconsin, parts of Michigan, in and around Louisville. So it really has been spread around kind of a mix of our legacy markets and our newer markets.

James C. Ryan III -- Chairman and Chief Executive Officer

Jim and I are heading to Minnesota after this call. And so we didn't spend a time out actually walking some of these projects, getting first hand insights into them. So this is an hands-off approach. We're very active in the business, we want to make sure that things we're investing in today we feel really good about. And so it's nice to see that kind of continued growth we're seeing in Minnesota, despite some of the challenges they're are having there. The economic vibrancy is still very strong.

Scott Siefers -- Piper Sandler -- Analyst

Yeah. Okay, perfect. Thank you, guys again.

Operator

Your next...

James C. Ryan III -- Chairman and Chief Executive Officer

Thanks, Scott. Sorry, Dorothy.

Operator

Yes. Okay. Your next question comes from the line of Kevin Swanson with Hovde Group.

Kevin Swanson -- Hovde Group -- Analyst

Hi, guys.

James C. Ryan III -- Chairman and Chief Executive Officer

Hey, Kevin. How are you?

Kevin Swanson -- Hovde Group -- Analyst

Good.

James A. Sandgren -- President and Chief Operating Officer

Kevin, how are you?

Kevin Swanson -- Hovde Group -- Analyst

Good. As it relates to the expense initiatives, has there been any additional lookback at the branch footprint when considering the effects of the COVID pandemic?

James C. Ryan III -- Chairman and Chief Executive Officer

Absolutely. It's something that we review pretty regularly is our bank branch footprint and the Board has challenged us to make sure that we've got an appropriate footprint. It's -- we don't have any new assessments to share with anybody, but it's something we look at pretty regularly. 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 at this time, don't have anything new to share.

Kevin Swanson -- Hovde Group -- Analyst

Okay, thanks. And then could you talk about the parameters of what you would or would not be interested in doing for M&A and then maybe any changes in expectations or willingness of sellers?

James C. Ryan III -- Chairman and Chief Executive Officer

Well, I think, 2021, given the interest rate environment, it's going to be a challenge for our industry and I think as people put together the forecast for next year, and do the strategic planning, it could open up some opportunities for us. We continue to think, consolidating within our current footprint makes the most amount of sense. And so, we're really focused there. We've talked about potential partnerships that are more meaningful, fewer of them, but more meaningful. And I continue to be very active. It was a very active summer for me to make sure that I was calling on folks that we're interested in, and we continue to do that and be purposeful about that.

So it's on our minds, and obviously the farther we get into the pandemic, the easier it would be to put some balance sheet marks together. It's still -- I think, it's still a little early, to be honest with you, 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 looking at anything today. So we're just going to continue to keep -- be open to -- for opportunities.

Kevin Swanson -- Hovde Group -- Analyst

Okay, thank you.

Operator

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

James C. Ryan III -- Chairman and Chief Executive Officer

Yes, Terry.

Terry McEvoy -- Stephens, Inc. -- Analyst

Hey, I forgot to ask, I think it was last Thursday or Friday, a bunch of states had their highest one day COVID case count and I believe Indiana, Wisconsin and Minnesota, unfortunately, were in that count. Earlier in the year, that was the exact opposite. And Jim, you kind of talked about 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 yet again?

James C. Ryan III -- Chairman and Chief Executive Officer

All good questions. Thankfully, I would just start, with our team members and our own experience here within our four-walls, so to speak, has been relatively good. We continue to make sure that our team members remain healthy and safe and it's paramount. Right? But, having said that, obviously, we're all concerned and we're cautious about what's going on at some of our geographies. I'm hopeful that it's kind of temporary as everybody went back to colleges and maybe saw a number of increases from that. We're watching the numbers very closely. Our Chief Risk Officer sends very regular updates on this topic.

Even during the height of maybe the first or second wave, I didn't see -- we have so little restaurants and the hotel exposures, we talked about, are pretty well defined. I just don't see much difference today than I saw back then. Even with the numbers, we're trending better. So 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.

Terry McEvoy -- Stephens, Inc. -- Analyst

Great. Thanks again.

James C. Ryan III -- Chairman and Chief Executive Officer

Thanks, Terry.

Operator

And there are no further questions at this time.

James C. Ryan III -- Chairman and Chief Executive Officer

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

Operator

This concludes Old National's call. Once again, a replay along with the presentation slides will be available for 12 months on the Investor Relations page of Old National's website oldnational.com. A replay of the call will also be available by dialing 1-855-859-2056, Conference ID Code 1086029. This replay will be available through November 2. If anyone has any additional questions, please feel free to contact Lynell Walton at (812) 464-1366. [Operator Closing Remarks]

Duration: 41 minutes

Call participants:

James C. Ryan III -- Chairman and Chief Executive Officer

Daryl D. Moore -- Chief Credit Executive

Brendon B. Falconer -- Chief Financial Officer

James A. Sandgren -- President and Chief Operating Officer

Scott Siefers -- Piper Sandler -- Analyst

Terry McEvoy -- Stephens, Inc. -- Analyst

Jon Arfstrom -- RBC Capital Markets -- Analyst

Chris McGratty -- KBW -- Analyst

David Long -- Raymond James -- Analyst

Kevin Swanson -- Hovde Group -- Analyst

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