Old National Bancorp - Q3 2024

Transcript

Operator (participant)

Ladies and gentlemen, welcome to the Old National Bancorp third quarter 2024 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 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 or outcomes to differ from those discussed.

The company refers you to its forward-looking statement legend in the earnings release and presentation slides. 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 provide 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, excuse me, the appendix of the presentation. I'd now like to turn the call over to Old National's Chairman and CEO, Jim Ryan, for opening remarks. Mr. Ryan?

Jim Ryan (Chairman and CEO)

Good morning. Earlier today, Old National reported our third quarter 2024 results, with earnings per share in line with expectations. These solid third quarter results were driven by our ability to execute on our organic growth strategy and invest in new markets and talent in our footprint. Our results were also driven by the strong organic deposit growth, prudent loan growth, durable margin management, and focused efforts in growing our fee income businesses. Moving to our third quarter highlights on Slide 4, we reported GAAP earnings of $0.44 per common share, and our adjusted EPS was $0.46. Our adjusted ROATCE for the quarter was 16.8%, and our adjusted ROA was 1.13%. Our adjusted efficiency ratio was a low 51.2%.

Our core deposit growth was strong at 10.1% annualized, with our non-interest-bearing deposits growing nearly $100 million during the quarter. Our total cost of deposits for the quarter remains at a low 225 basis points, and we were already taking advantage of recent Fed actions, which John will touch on later in his comments. Meanwhile, our commercial loans were up 4.1% annualized due to disciplined client selection.

Growing our tangible common book value per share remains a top priority, rising 8% since the second quarter of 2024 and 21% year-over-year. In summary, our third quarter 2024 earnings evidenced another strong quarter for Old National. We remain focused on the fundamentals, continuing to fund loan growth with low-cost core deposits, effectively managing credit, creating positive operating leverage through disciplined expense management, and consistently growing tangible book value per share. With that, I will now turn the call over to John Moran.

John Moran (CFO)

Thanks, Jim. Turning to Slide 5, you can see our third quarter balance sheet, which highlights continued improvement in our liquidity and our capital position. Total deposit growth over the last year has again allowed us to organically fund loan growth while reducing our borrowings. As Jim just mentioned, we grew our tangible book value per share by 21% over the last year and by 8% from the prior quarter. We ended the quarter with a strong CET1 ratio of 11%, and we continue to expect that we will accrete capital at a faster pace than most. Our liquidity and capital levels continue to provide a strong foundation, which positions us well as we finish 2024. On Slide 6, we show our earning asset trends.

Total loans grew 2.7% annualized from last quarter, in line with industry performance, with strong production in our commercial book in the quarter, partly offset by payoffs. We remain focused on full relationships and structure at prices that meet our risk-adjusted return requirements. Quarterly new loan production rates in the mid-7% range and marginal funding costs in the low 4% range support our expectation that net interest income will grow modestly in 4Q 2024. The investment portfolio increased 3% in the quarter due to reinvestment of cash flows and positive changes in fair values, with duration decreasing to just under four years. We have approximately $2 billion in cash flows expected over the next twelve months.

New money yields are currently running approximately 110 basis points above back book yields on securities and approximately 175 basis points above back book yields on fixed-rate loans. Moving to Slide 7, we show our trend in total deposits, which grew 8.5% annualized from 2Q. Core deposits, ex brokered, were up an even better 10% annualized, and we saw a nearly $100 million increase in non-interest-bearing deposits in the quarter. Commercial and community deposits were up, and public funds saw normal seasonal increases. Our brokered deposits decreased, and at 4.2% as a percentage of total deposits, our use of brokered remains well below period levels.

We did see a nine basis points increase in deposit rates compared to the prior quarter as we remained on offense with respect to client acquisition, and we drove our loan-to-deposit ratio below 90%. Total deposit costs decreased in September, consistent with Fed actions, and our spot rate of September 30th was 212 basis points. Moreover, our exception price book has seen a 90% down beta since we started lowering rates in that book in early 2Q. This was in line with our expectations. Overall, we are highly confident in the execution of our deposit strategy, and it continues to unfold as we expected. We are prepared to proactively respond to future Fed rate actions and the evolving environment while staying focused on driving above-peer deposit growth at reasonable costs. Slide 8 provides our quarter-end income statement.

We reported GAAP net income applicable to common shares of $140 million, or $0.44 per share. Reported earnings include $0.02 per share of merger-related and separation expenses. Excluding these items, our adjusted earnings per share was $0.46. Moving on to Slide 9, we present details of our net interest income and margin. Net interest income grew as expected, while net interest margin was essentially unchanged as increases in asset yields and accretion were offset by deposit costs. year-over-year, we again showed deposit growth that essentially kept pace with asset generation while maintaining a low total cost of funding. Slide 10 shows trends in adjusted non-interest income, which was $94 million for the quarter and above our expectations.

Our primary fee businesses all performed well, with bank fees ahead of expectations, mortgage benefiting from seasonality and a modest improvement in production, and capital markets benefiting from CRE production. Continuing to Slide 11, we show the trend in adjusted non-interest expenses of $263 million for the quarter. Expenses remained well controlled, and we generated positive linked quarter operating leverage. On Slide 12, we present our credit trends, which reflect the quality of both our commercial and consumer portfolios. Total net charge-offs were 19 basis points and a low 16 basis points, excluding 3 basis points related to PCD loans. The non-performing loan ratio increased 8 basis points, due mostly to poor borrowers in unrelated sectors that we are actively monitoring.

The third quarter allowance for credit losses to total loans, including the reserve for unfunded commitments, was 112 basis points, up four basis points from the prior quarter. Risk rating migration over the last several quarters has been driven by the effects of higher interest rates and a more conservative posture in our risk rating framework. While the grade migration has resulted in an increase in our quantitative reserves, our total qualitative reserves are unchanged from the prior quarter. Qualitative reserves now incorporate a 100% weighting on the Moody's S2 scenario, with additional qualitative factors to capture the possibility of further grade migration. This is logical, as greater conviction comes into focus that a hard landing scenario is unlikely. Moreover, the S2 scenario assumes an unemployment rate that is 70% higher than current levels and negative GDP.

Also, we remind you that our allowance for credit losses, plus the discount remaining on acquired loans to total loans, now stands at nearly 160 basis points. Slide 13 presents key credit metrics relative to peers. As you can see, our proactive approach to credit monitoring has led to above-peer levels of NPLs, but delinquency and charge-off ratios that are well below peer averages over time. We have long practiced conservatism, and we continue to believe that the results speak for themselves. On Slide 14, we review our capital position at the end of the quarter. All ratios increased, driven by strong retained earnings. In addition, the rate environment further aided TCE build. Slide 15 includes updated details on our rate risk position and net interest income guidance. NII is expected to increase modestly in the fourth quarter.

Our assumptions are listed on the slide, but I would highlight a few of the primary drivers. First, we assume two rate cuts of 25 basis points each, consistent with the forward curve. Second, we are now anticipating a declining rate total deposit beta of approximately 30% and a non-interest bearing to total deposit mix that remains stable at 24%. We continue to believe that we have positioned the balance sheet well, and we have maintained our neutral rate risk position. Slide 16 includes our outlook for the fourth quarter and the full year of 2024. You can see the details in the chart, but it is worth pointing out that our full-year outlook for pre-provision net revenue remains unchanged from the initial expectations we shared with you in January of this year, and our outlook proved more durable than many peers.

Full year loan growth and NII are expected to be right in line with those original expectations, while higher fee income is expected to be partially offset by higher non-interest expenses. Net charge-offs are in line with our original range, while provision expense is slightly higher than originally expected as a result of grade migration driven by our proactive approach to credit management. In summary, year-to-date 2024 results have been excellent, with third quarter results in line with our expectations and strong performance metrics. More importantly, we continue to demonstrate our ability to execute against our strategic priorities. First, we are driving organic deposit growth to fund our asset generation.

Second, our adjusted return profile remains top quartile against peers at 17% on tangible common equity. Third, we remain disciplined on expenses, driving positive operating leverage and an adjusted efficiency ratio of 51%. Fourth, our borrowers remain resilient, as evidenced by non-PCD net charge-offs of just 16 basis points, and we believe we have ample reserve coverage, along with a well-diversified and granular loan book. And fifth, we are continuing to rapidly compound tangible book value per share, which was up 21% year-over-year. With those comments, we'd like to open the call for your questions.

Operator (participant)

And thank you. We will now begin the question-and-answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, press star one a second time. If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, it is star one if you would like to join the queue. And your first question comes from the line of Scott Siefers with Piper Sandler. Your line is open.

Scott Siefers (Analyst)

Morning, guys. Thanks for taking the question. Just wanted to-

John Moran (CFO)

Good morning, Scott. Good to hear from you.

Scott Siefers (Analyst)

Hey, likewise. You too. Thank you. So, just wanted, John, appreciate the comments on the sort of the full year NII. I guess the fourth quarter in particular, the expectation may be a little lighter than what we had hoped, 90 days ago. Suspect it's sort of just a function of what happened with the belly of the curve since then, as well as the different timing of the Fed moves. But would love to hear in your words, anything that has changed. And then, I know you touched on, like, the $2 billion of cash flows over the next 12 months. If you could maybe offer any updated thoughts on sort of how powerfully the NII base could advance from the fourth quarter expectation and, you know, just sort of main levers additionally that you would see allowing it to do so?

John Moran (CFO)

Perfect. Yeah. Hey, Scott, your suspicion is right on the NII guide. Really, it's a touch on the five-year point of the curve. Belly of the curve being a little bit lower is driving that outlook and then on securities, roughly $2 billion in cash flow coming off of that book over the next 12 months. You know, pick up there about 110 basis points against the back book, so certainly that'll be helpful and we would anticipate plowing most of that just right back into the securities book. You know, at the margin, there could be a touch, you know, if loan growth comes in stronger, maybe we let that come in just a little bit. But I think most of that'll go back into securities at this point.

Scott Siefers (Analyst)

Okay, perfect. And then maybe if you, John, if you could expand a little on some of the reserving comments, just in particular, trying to get my arms around, you know, why credit costs a little higher this quarter and expected to be so, at least relative to what I would have anticipated, next quarter. You know, is this something that will continue for a little while, or is it kind of a transitory catch-up? You know, how should we think about those sort of dynamics?

John Moran (CFO)

You know, I think it's just normalization of credit here. You know, I think for the year, we sort of tightened the range on the guidance, but it's still. You know, I think at the beginning of the year, we were saying 15 basis points-20 basis points on charge-offs. We're now sitting at 17 basis points-20 basis points on charge-offs. So I don't think that there's any real difference in our expectation around loss content. You know, and the provision that you saw in the quarter was kind of covering charge-offs and building a little bit of reserve.

Scott Siefers (Analyst)

Okay. All right. Perfect. Thank you, guys, very much.

John Moran (CFO)

Thanks, Scott.

Operator (participant)

Your next question comes from the line of Brendan Nosal with Hovde Group. Your line is open.

Brendan Nosal (Director of Equity Research)

Hey, good morning, folks. Hope you're doing well.

Jim Ryan (Chairman and CEO)

Thanks, Brendan.

Brendan Nosal (Director of Equity Research)

Maybe just to start off here, looking a little further out on kind of the margin and NII dynamics. You know, I heard your comments again this quarter on a relatively rate-neutral balance sheet positioning. Maybe just offer some thoughts on how you expect the NIM to trajectory across 2025, you know, if we end up getting the forward curves, like, let's say, 200 basis points or so of cuts by the end of next year? Thanks.

John Moran (CFO)

Hey, Brendan, I think you know what you're seeing here is kind of bottoming in 3Q, 4Q, probably up a little bit. Our bias would be up a little bit. I think our bias in 3Q was kind of stable to down a little bit, and that played out, right? I think as we look out into 2025, you know, de-inverting in the yield curve and continued growth in the underlying franchise are going to be helpful for us. And, you know, look, I think that's helpful for us, it's helpful for the whole industry, right? So I think that'll be the key factor next year.

Brendan Nosal (Director of Equity Research)

Okay, perfect. Perfect. Maybe one more from me. You know, just kind of looking at the charge-off rate on the PCD kind of core loan book, you know, seeing a little bit higher numbers over the past two quarters. Just wondering how you would characterize that. Is that still well within the framework of normalization off of a low base, or is it indicative of, you know, perhaps some gradual weakening?

Mark Sander (President and COO)

No, I think you hit the nail on the head with your first option, Brendan, which is it's normalization of credit and still well within our guidance. You know, as John said, we started the year at 15-20. We're now 17-20 for the full year, and so, as credit normalizes, I think that's just what you're seeing.

Brendan Nosal (Director of Equity Research)

All right, fantastic. Thank you for taking the questions.

Mark Sander (President and COO)

Thanks, Brendan.

Operator (participant)

Your next question comes from the line of Ben Gerlinger with Citi. Your line is open.

Mark Sander (President and COO)

Hey, Ben.

Ben Gerlinger (VP of Equity Research - Regional Banks)

Hey, good morning, guys. Good morning.

Mark Sander (President and COO)

Good morning, Ben.

Ben Gerlinger (VP of Equity Research - Regional Banks)

Can you guys talk through your appetite for kind of hiring and where you might be targeting? It's more so obviously a 2025. We're even getting into the 2026 question. But again, like, from the balance sheet perspective, you seem pretty well situated for the current rate outlook. But just kind of appetite on hiring and any trends you might want to highlight.

Mark Sander (President and COO)

I'd answer, Ben, this is Mark. I would answer it this way: I think we're open and opportunistic, but we don't need to do anything, really. We like the team that we have. We think we can outgrow industry loan growth. I think our deposit performance, growth performance has been terrific, and all of our teams are focused on that, so I don't think we need to do anything, but we will continue to look to opportunistically fill in. You know, good talent, we say it all the time, pays for itself quickly. And so, if people come along. But we're also watching expenses closely, and so we're not looking to add talents unless, you know, just that great opportunity comes along.

John Moran (CFO)

Yeah, I might add on top of that, as we think about talent acquisition, we're particularly paying attention to our fee income businesses. You think about treasury management, you think about our wealth management businesses. Those are businesses that, again, have a little bit longer earn back on the hires, but we think are the right long-term investments for us, particularly as we just transition to a larger institution, have more opportunities, in that space. And so that's an area. As Mark says, we have plenty of balance sheet growth and don't feel like we need to have more relationship managers there to grow the balance sheet. However, on those fee income businesses, there's going to be continued opportunities for us to be successful.

Ben Gerlinger (VP of Equity Research - Regional Banks)

Gotcha, that's helpful. And then when you think about the integration and going forward, kind of, let's call it the Southeast, or kind of, is there any additional cost savings now that you kind of have the integration in place, you kind of have your lay of the land? Anything that you would want to potentially call out that is incrementally more positive on growth or thoughts on any additional expense cuts, just now that you have your feet under you here?

John Moran (CFO)

No, not. No, I think, you know, you'll see the full run rate reflected in Q4 in terms of the saves that we highlighted for CapStar. Just to remind you, those are around $30 million annually. And we expect that that'll be fully realized in the fourth quarter. I think, if anything, we're looking to invest in that market. That's a great market, and I don't know if Mark would add or Jim would add.

Mark Sander (President and COO)

Yeah. I would just say, I haven't spent a lot of time down there. It seems like I'm down there a few times a month, and it's unique. And you know, our core legacy Midwestern markets, you know, oftentimes we're a part of the economic engines that are making those you know, communities successful. And down in Nashville and Tennessee broadly, really, you just have to be there. There's just plenty of organic growth opportunities for us, and we need to be in a position to take advantage of that. And so, as John said, I think we'll continue to invest there. It's unlike any other part of our franchise where the economic growth is still incredibly strong.

Ben Gerlinger (VP of Equity Research - Regional Banks)

Got you. That's helpful color. I appreciate it. Thanks, guys.

Mark Sander (President and COO)

Thanks, Ben.

Operator (participant)

And your next question comes from the line of Terry McEvoy with Stephens. Your line is open.

Terry McEvoy (Managing Director)

Thanks. Good morning, everyone. Maybe John, let's start with a question for you. Did the $400 million guide for NII in the fourth quarter, does that assume $13 million of accretion? And then how are you thinking about the deposit beta over the next several quarters? I know on the slide you said 30% total deposit beta by the end of this year, but what's your insight beyond the end of 2024?

John Moran (CFO)

Yeah. So, the accretion piece, yeah, roughly stable. So you've got the right number there for Q4. In terms of beta, you know, I think 30% probably allows us still some room to play offense, and we've been unapologetic about that. We're on our front foot with respect to client acquisition, and we really want to continue to fund organically our loan growth. You know, I think where we'll get the most beta, and we've been saying this for a couple of quarters now, and it's playing out exactly as we had expected, is really in that exception price book. And there, we expect to see roughly 85% down beta, and we've been able to move that very quickly.

In fact, when the Fed moved 50 basis points, Mike Lloyd and team had program A and program B. One was ready to go for 25 basis points, one was ready to go for fifty basis points. When we got 50 basis points, they pressed the button, and that went in that afternoon, right? And so, you know, we're ready to move very, very quickly, and we'll remain agile.

Terry McEvoy (Managing Director)

Thanks. And then as a follow-up, could you discuss any common themes, among the increase in non-accrual loans? I think there was four specific borrowers, as well as the increase in classified loans, and, anything to do with the recent Shared National Credit, credit exam that showed up in third quarter results.

Mark Sander (President and COO)

Yeah. I'll take those in reverse, Terry. You know, it's Mark. You know, given the environment, we moved to a more conservative posture in our risk rating framework this year, which drove that negative migration overall. We're now looking at our primary source of repayment, debt service coverage, almost exclusively in our risk ratings. And so, as you know, as borrowers have absorbed a full year of the 500 basis point increase in rates, coverage ratios have tightened, particularly in CRE. You know, we still feel good about secondary sources of repayment, guarantors, and collateral. So, but these sources no longer factor into our risk ratings. But they obviously influence loss content, which we still believe is generally low across our special mention and substandard loans. Specifically to the nonaccruals, there were four larger credits.

When I say larger, you got to think about that, relatively speaking, larger for us. You know, those four credits were all in the $12 million-$25 million range, so each one is a manageable level. Each was on our radar screen before they moved into nonaccrual. And again, that's just reflective of our granular portfolio, I think. You know, one was a downgrade from the SNC exam, a C&I credit out of the CapStar portfolio. The other three were different segments of CRE, so no trend, no geography, just unique issues to each individual credit. And again, I'll just say, like, like most of our non-performing book, I think there's decent underlying value in the real estate and demand for those properties. So even though our nonaccruals are up, our charge-off guidance hasn't moved. We think in Q4, we'll still be in that 20-25 basis points.

Terry McEvoy (Managing Director)

Great. Thanks, Mark, and thanks for taking my questions.

Mark Sander (President and COO)

Thanks, Terry.

Operator (participant)

Your next question comes from the line of Jared Shaw with Barclays. Your line is open.

Jared Shaw (Managing Director)

Hi, good morning. Thanks. You know, maybe just looking at the guide for fee income, it sort of looks like it's implying an $8 million decline versus third quarter. Anything specifically driving that, or is that just a little bit of seasonality, and how should we be thinking about sort of the jumping off point as we look next year on fee income?

John Moran (CFO)

Yeah. Hey, Jared. Yeah, it was, I think a little bit seasonality in some of the lines that are subject to that, right? Mortgage will probably be a little bit softer in the fourth quarter. Capital Markets had a really strong 3Q. You know, I don't know that I would necessarily count on that one run-rate. And then in other, there was a couple of little things that kind of broke our way in 3Q that I don't know are necessarily run-ratable.

Jared Shaw (Managing Director)

Okay, thanks. And then, how should we be thinking about your thoughts and view on capital build here? You know, it certainly seems like we're going to continue to see capital building, especially CET1, plenty of capital for the organic growth side. Is there an opportunity to supplement that with buybacks or any other capital actions?

Jim Ryan (Chairman and CEO)

Yeah. You know, so 11% CET1, we're starting to rebuild capital very quickly, right? Left unchecked, we'll tack on 100 basis points ± a year on that ratio. You know, so I think as we get into next year, certainly there's an opportunity to kind of think about buyback. You know, we're a little bit sensitive to earn back on that. You know, and every quarter, we kind of talk about dividend with the board, so.

Jared Shaw (Managing Director)

Okay, thanks.

Jim Ryan (Chairman and CEO)

Thanks, Jared.

Operator (participant)

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

Chris McGratty (Analyst)

Hey, good morning. Jim or John, positive operating leverage, you talk about a lot, and you talked about your low fifties efficiency ratio. How do we think about just the cadence of those with the forward curve and, you know, the investments and the growth? Any material change to as we get into 2025?

Jim Ryan (Chairman and CEO)

No, I think we just keep running the playbook. And to the extent that, you know, we have the ability. We're obviously sensitive to our expenses, and we know ultimately some of that expense base is inside our control. As you know, though, Chris, we've really been trying to manage for the long term here and want to continue to invest in ourselves, both from a risk management governance perspective, but also from an offensive relationship management perspective. And we're going to continue to make those type of investments, but I am sensitive to, you know, revenue growth to help offset any of those investments we make.

And sometimes the investments we make, you know, as we talked about some of the fee income businesses, you know, the returns are a little bit longer than you know, maybe some of the other businesses, like the balance sheet. But we've done a pretty good job of managing those trade-offs, and I expect us to continue to make those same types of calls in 2025.

Chris McGratty (Analyst)

Thanks for that. Any use of capital related to your fee income initiatives, Jim, or maybe even a deal-

Jim Ryan (Chairman and CEO)

No.

Chris McGratty (Analyst)

In the next year?

Jim Ryan (Chairman and CEO)

No. Yeah, I don't see anything. I don't see anything coming to the future that's material of any nature. But again, you know, we just know that that's an area, as I think about, you know, treasury management, wealth management, you know, we have the right to win. And you know, clearly mortgage is mortgage, and you know, there's been some volatility around that, and we like the production where we're at today, and hopefully it'll continue to grow. But I think it's at an inflection point around the 6% kind of 30 year rate. But those two other businesses, treasury and wealth, are ones that we have the right to win. We have some long-term gains. You know, we have high expectations around the growth of those businesses, and we're going to continue to build in those businesses specifically.

Chris McGratty (Analyst)

Okay, great. Thank you.

Jim Ryan (Chairman and CEO)

Thanks, Chris.

Operator (participant)

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

David Long (Managing Director of Equity Research)

Thanks. Good morning, everyone.

Jim Ryan (Chairman and CEO)

Good morning, David.

David Long (Managing Director of Equity Research)

As you're talking about the positive operating leverage and that being a goal, how does that revenue growth impact how quickly you may invest in, say, Tennessee, where you see some great growth opportunities? Do you need to have positive operating leverage, or can you- if revenue growth maybe doesn't come in, are you still going to put the dollars forward in that market?

Jim Ryan (Chairman and CEO)

Yeah, I think that's an area we got to continue to invest in. That is, again, like I said earlier, the growth dynamics there are unlike any other part of our franchise, where we ... You know, we have low share, obviously, but there's high growth. In other parts of our market, you know, we have low share, and maybe the growth in total is not as high. So I think we'll prioritize investments in that newer part of our franchise.

I would say continue in some of our expansion markets as well. Those are going to be key continued investments. You know, I would rather, you know, give up a little bit of the expense side for kind of longer term growth. I think we've been able to kind of navigate those trade-offs on a pretty adept basis and continue to deliver earnings and return profile that you all expect.

David Long (Managing Director of Equity Research)

Yeah. Thanks, Jim. And then my second question is related to loan growth. And as far as customer demand, you know, what do you think are the biggest catalysts out there in the marketplace to increase commercial customer loan demand?

Mark Sander (President and COO)

Yeah, David, it's Mark. I think, you know, just removal of uncertainty, right? As the soft landing is becoming a little bit more coming clear into focus, I guess the cautiousness that we've seen is starting to abate a little bit. And then people just kind of hang on the election stuff, and they want to get past the election. So, you know, they just talk a lot about that, and not that they're frozen, but I think it's making people a little more hesitant. So I think once we get a little more clarity on those two issues, you'll see. That said, you're starting to see activity and people refinance things out in the CRE markets. You know, you're seeing longer-term lenders take things out at pretty aggressive rates. So you're starting to see, you know, there's sources out there, and demand needs to catch up a little bit.

Jim Ryan (Chairman and CEO)

David, I would add Mark and Jim have done an excellent job kind of leading us through, you know, this, this different environment since the spring of 2023, and you know, our, our expectations have, have definitely risen in terms of what we want: full relationships, you know, deposit growth, so I think that client selection has played a really important part of, of maybe, you know, a somewhat slower quarter for the third quarter than we've seen in the back half of the year or the first half of the year, but that was quite intentional. We want to ensure that we hit our hurdle rates in terms of the economic pricing and that we bring a full relationship to the table, and we're, we're much less willing to bet that it will come and we wanna make sure it's there up front.

David Long (Managing Director of Equity Research)

Got it. Thanks, Mark. Thanks, Jim. Appreciate the insight.

Jim Ryan (Chairman and CEO)

Thanks, David.

Operator (participant)

Your next question comes from the line of John Arfstrom with RBC Capital Markets. Your line is open.

John Arfstrom (Managing Director and Analyst)

Hey, good morning.

Jim Ryan (Chairman and CEO)

Good morning, John.

John Arfstrom (Managing Director and Analyst)

Just a quick follow-up on that. Is it more competitive, do you think? You're talking about risk-adjusted return hurdles on lending, but, you know, is it more competitive? Is that what's driving your intentional comment, or is it something else?

Jim Sandgren (CEO of Commercial Banking)

Hey, John, this is Jim Sandgren. No, I think we're starting to see the competitive pressures just picking up a little bit over the last quarter. So, you know, we're still fighting, and we have the right to win in all the spaces that we do business in because of our relationships. So but it's picking up both on the lending side and the deposit gathering side. So again, I like our chances. We like our chances to win, and we're doing just that.

John Arfstrom (Managing Director and Analyst)

Okay, thank you on that. John, maybe for you on the. I like that exception pricing chart, the one on Slide 7 and then 22 as well. But how quickly is that gap closing, and would you say the reasons for the initial exception pricing have faded quickly or maybe are no longer there?

John Moran (CFO)

I think we can close the gap. You know, and look, clearly, we've sort of crested here on both total deposits and the exception book. But again, John, I mean, we're gonna stay on offense. I mean, we, if somebody else is out there flashing a 50% deposit beta, I view that as Old National's opportunity. You know, I think we're very much interested in continuing to have deposits keep pace with our loan generation. And so, you know, we're still putting on good spread, right? And as long as that's the case, we'll stay on offense on deposits.

John Arfstrom (Managing Director and Analyst)

Okay. All right. And then, last one, on credit again. Maybe hard to answer this, but when I look at the delinquency and non-performing trends, I think they're still obviously manageable, but what's the signal you want to send us? Are you expecting the growth to flatten out, to continue to go up a little bit over time, or are you seeing some of this stuff start to crest as you look forward? Thanks.

Mark Sander (President and COO)

John, you know, Mark, I'll start with the delinquencies. That bumped a little bit this quarter based on the CapStar conversion, you know, it's really administrative issues. So that, I think, is a non-event, honestly, and I think that'll come, that it's still at a decent level now, and it'll come back down in Q4.

John Arfstrom (Managing Director and Analyst)

Okay.

Mark Sander (President and COO)

Relative to further risk rating migration, I mean, we could still see some. I mean, it's possible. But I think our potential problems are well known and closely monitored. And, you know, so while we could still see some downgrades, I think there is a lot of things that'll mitigate the downgrade activity. Frankly, our conservative and proactive approach in identifying them early, you know, this expectations for a soft landing, which we're starting to see manifest itself already in some upgrades as well, interest rate cuts and just our aggressive efforts to reduce that book. So again, we could see some, but I think we'll manage it well.

John Arfstrom (Managing Director and Analyst)

Okay. All right. Thank you very much.

Jim Ryan (Chairman and CEO)

Thanks, John.

Operator (participant)

And as a reminder, it is star one if you would like to ask a question. And we will take a follow-up question from Scott Siefers with Piper Sandler. Your line is open.

Scott Siefers (Analyst)

Thanks, guys. Just as sort of a top-level or strategic question, Jim, as you build capital so quickly, just hoping to get any updated thoughts on how M&A might fit into the picture. Last quarter, I recall getting the impression that deals were not high on the list of preferences. But, you know, as you look ahead, would the preference be to stay on the path of increasing tangible book value, or would we look to deploy some of that into any acquisitions?

Jim Ryan (Chairman and CEO)

Yeah, I think what we've said is, you know, any future M&A opportunities really have a high hurdle. And as we've tried to convey, we've got plenty of organic growth opportunities today that we just need to execute on. However, you know, to the extent that, you know, there are opportunities that come along and exceed those very high hurdles we have in place, I think all of our shareholders would want us to look at those things opportunistically. But at the end of the day, you know, we are very focused on long-term shareholder value creation, and anything we look at has to, has to meet those pretty high hurdles we've put in place.

Scott Siefers (Analyst)

Perfect. Okay, good. Thank you very much.

Jim Ryan (Chairman and CEO)

Thank you for the question, Scott.

Operator (participant)

There are no further questions at this time. I'd like to turn the call back to Jim Ryan for closing remarks.

Jim Ryan (Chairman and CEO)

We appreciate your participation, and, as usual, the team will be around all day to follow up with any questions. Have a great day.

Operator (participant)

Ladies and gentlemen, 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 800-770-2030, access code 158-6600. This replay will be available through November 5th. If anyone has additional questions, please contact Lynell Dirkhuis at 812-464-1366. Thank you for your participation in today's conference call.