Operator: Welcome to the Old National Bancorp Q3 earnings conference call. This call is being recorded and has been made accessible to the public in accordance with the SEC's Regulation FD. The audio webcast and 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.
Operator: Reconciliations for these numbers are contained within the appendix of this presentation. I would now like to turn the call over to Old National's Chairman and CEO, Jim Ryan, for opening remarks. Mr. Ryan.
Jim Ryan: Good morning. Earlier today, Old National reported another record quarter with Q3 EPS of $0.66 and new records in net income, adjusted diluted EPS, and adjusted efficiency ratio. These results reflect the strength of our franchise and disciplined execution of our strategy. Growing profitable relationships, funding that growth with core deposits, maintaining strong credit standards, and operating efficiently. Growth remained healthy and balanced with strong deposit growth and continued expansion of both C&I and CRE lending. Active portfolio management moderated reported loan growth during the quarter. Despite the increased competition, we remained disciplined and pursued opportunities that met our pricing, relationship, and credit hurdles. These results reflect our consistent focus on full relationships, sensible pricing, strong underwriting, and core deposit funding. Revenue trends remain constructive with continued growth in net interest income and broadly stable fee income performance.
Jim Ryan: As John will discuss, we believe the current rate environment is modestly helpful to net interest margin going forward. Operating discipline remained a clear strength. We delivered record efficiency while reducing adjusted expenses from the prior quarter, even as we continued to invest in technology, AI, process improvements, and talent. This balance supports strong current returns and durable shareholder value. Credit quality remains stable and consistent with our expectations. We continue to manage credit proactively, maintain rigorous underwriting standards, and stay close to our clients. Our diversified portfolio and straightforward banking model continue to serve us well. Our capital position remains strong, supported by continued significant capital generation and tangible book value growth. This strength gives us flexibility to support organic growth, invest in the business, and pursue additional capital returns with discipline.
Jim Ryan: During the quarter, we added 26 relationship managers across commercial and wealth, expanding client-facing capacity and supporting continued organic growth. Commercial hires included 4 proven performers in Ohio, 2 in Cleveland and 2 in Columbus, important expansion markets where we believe our brand and go-to-market strategy will resonate. We also added leaders in our Fintechs, FX, and food and beverage businesses, broadening capabilities that support key strategic priorities. We are pleased with the caliber of talent we attracted and developed during the quarter. We will continue to invest selectively in high-quality bankers and specialized expertise where we see attractive opportunities to drive organic growth, deepen client relationships, and expand fee income. In summary, this was another record quarter with disciplined growth, exceptional efficiency, stable credit, and strong capital.
Jim Ryan: We remain focused on the fundamentals that create durable shareholder value, profitable organic growth, deeper client relationships, disciplined investment, and strong risk management. I want to thank our team members for their continued commitment to our clients and one another. With that, I'll turn the call over to John to discuss the quarter's financial results in more detail.
John Moran: As Jim mentioned, we delivered a strong quarter highlighted by record earnings and efficiency, very strong deposit growth, balanced loan growth, disciplined expense management, stable credit performance, and meaningful capital return to shareholders. Beginning on slide 5, we reported GAAP Q3 earnings per share of $0.66. Less than $1 million of merger-related expenses were offset by a similarly sized valuation gain on the settlement of the legacy Bremer Pension Plan. Excluding these, our adjusted earnings per share were also $0.66. Results were driven by strong deposit and disciplined loan growth, stable fee income, and well-controlled expenses. Credit remained normalized with 24 basis points of non-PCD charge-offs. Our profitability profile remained top decile as compared to our peers with return on assets of 1.37% and return on tangible common equity of 19.6%.
John Moran: Capital finished the quarter with CET1 over 11%, and we grew tangible book value per share 5% year over year. But for the impact of higher rates on AOCI, tangible book value would have increased an even stronger 13% annualized from the prior quarter. We continued to return capital to shareholders through cash dividends and share repurchases in the third quarter with a combined payout ratio of 62% of net income to common. On slide 6, you can see our quarterly balance sheet trends underscoring continued strength in our liquidity and capital positions. Driven by strong deposit growth, our loan-to-deposit ratio declined to 89%, and the CET1 ratio remains above 11%. Again, we compounded tangible book value per share year over year, despite the impact of merger charges and the increased pace of capital return.
John Moran: We repurchased $100 million, or 3.9 million shares during the current quarter, and $327 million or 13.4 million shares over the last year. As we've stated in the last several quarters, we continue to believe that the best investment we can make today is in ourselves. On slide 7, we show trends in earning assets. Total loans grew 3% annualized from last quarter and 7% annualized year over year. This growth was led by our commercial portfolio with C&I up 12% and CRE up 3% year over year. Production this quarter was balanced across our commercial book and remained predominantly floating rate. The next few quarters should be supported by a pipeline of $4.4 billion, up 6% from a year ago. The investment portfolio declined due to rate-driven market valuation, with new purchases coming on at higher yields. We expect $1.8 billion in cash flow over the next 12 months.
John Moran: Today, new money yields are approximately 6%, which are well above back book yields of 4.2%. Loan growth, ongoing repricing across both loans and securities, and deposit pricing discipline supports continued growth in spread revenue into Q4. Moving to slide 8, we show trends in deposits. Period-end total deposits increased 11% annualized, primarily driven by $1 billion of organic increases in business accounts and seasonal strength in public funds. Non-interest-bearing deposits grew $182 million and represent 22% of total deposits. Like our loan pipelines, deposit pipelines remain healthy. Both total deposit costs and interest-bearing deposit costs increased 8 basis points linked quarter. We remained on offense with respect to client acquisition in a competitive deposit environment. The spot rate on total deposits was 187 basis points at 30 September. Overall, our deposit strategy outperformed our expectations even after adjusting for normal seasonal strength in public funds.
John Moran: Slide 9 shows our quarterly income statement trends. As I mentioned earlier, adjusted EPS were a record $0.66 for the quarter, and our profitability remains peer leading. Moving on to slide 10, we present details of our NII and margin. NII grew 4% annualized from Q2 levels. Total margin was down modestly in the quarter with rate, volume, and day count benefits offset by increased funding costs. We anticipate Q4 growth in NII dollars to be supported by continued earning asset generation, disciplined deposit growth, fixed asset repricing, and the slightly higher mix of floating-rate loans. We remain well-positioned to the forward curve and based on current spot rates for loans, deposits, and securities, and assuming a static balance sheet, we would expect a +2 basis point positive impact to margin, all else equal.
John Moran: Slide 11 shows trends in adjusted non-interest income, which was $128 million for the quarter. Core banking, wealth, and capital markets fees continue to perform well while mortgage fees reflect some softness given the rapidly changing rate environment. Continuing to slide 12, adjusted non-interest expense was $355 million for the quarter. Run rate expenses remain well controlled, driving positive operating leverage both quarter-over-quarter and year-over-year while delivering a record low 44.9% adjusted efficiency ratio. As Jim mentioned upfront, we continue to invest in top talent across our footprint in both commercial and wealth. Q3 saw strong pull-through from the talent pipeline with many of these hires happening late in the quarter. I'll discuss the anticipated expense impact on our outlook slide. On slide 13, we present our credit trends. Total net charge-offs were 27 basis points or 24 basis points excluding charge-offs on PCD loans.
John Moran: Criticized and classified loans declined 9% this quarter and are down 16% from a year ago. Non-accrual loans remained relatively stable linked quarter at 92 basis points of total loans but are likewise down meaningfully from 123 basis points last year. The Q3 allowance for credit losses to total loans, including the reserve for unfunded commitments, was 120 basis points, down 1 basis point from the prior quarter, primarily driven by charge-offs on PCD loans and improved credit quality. On slide 14, you can see our strong capital position at the end of the quarter. Tangible book value per share was up 5% year-over-year. Overall regulatory capital ratios were up modestly linked quarter with strong earnings absorbed by loan growth and continued share repurchases. As previously mentioned, we repurchased $100 million of common stock during Q3, and we have $177 million remaining under our program.
John Moran: Slide 15 includes our outlook for the full year 2026. Our overall expectations remain unchanged from the guidance that we first provided in January of this year. We continue to expect positive operating leverage, growth in tangible book value, and EPS growth exceeding 15%. We expect to achieve these results even as we have navigated a markedly different operating environment over the course of the year and our 2026 estimates prove to be durable. As you can see, we believe our year-to-date results and current pipeline continue to support full-year loan growth of 6% to 8%. You will recall that we increased this range last quarter given the strong performance the H1 of the year.
John Moran: With Q3 results and a focus on striking the right balance between growth of full relationships that come with sensible pricing and credit discipline, we now expect mid-single-digit growth for the Q4, which would bring us to the lower end of the annual range. Our NII guidance is unchanged. Obviously, the exact path of NIM and NII in the Q4 will be dependent on balance sheet growth dynamics, the shape of the yield curve, the production mix, and the deposit landscape. However, we believe our balance sheet is well-positioned to the forward curve, and as previously mentioned, our spot margin is up slightly from Q3 levels. That said, given the year-to-date results, mathematically, we expect full year NII to come in on the lower end of the stated range, with Q4 NII dollars expected to show continued growth from Q3 levels.
John Moran: Our fee income guidance, which had also been increased earlier in the year, remains unchanged. We expect our core fee businesses to continue to perform well with mortgage fee softness likely to continue in Q4 amid the rising rate environment and seasonal factors. Our outlook for expenses is likewise unchanged and, given year-to-date results, is now expected to fall near the lower end of the annual range. Robust hiring at the end of the Q3 is expected to run rate into Q4 and next year. The outlook for credit and tax rates are also unchanged. Finally, we expect to fully utilize the remaining buyback plan opportunistically over the course of the current authorization, which runs through the end of February 2027. In aggregate, we continue to expect 15% plus EPS growth, positive operating leverage, peer-leading profitability, normalized credit, and sustained growth in tangible book value per share.
John Moran: Importantly, the durability of that outlook has now been tested across three consecutive quarters of volatility in the operating environment. It has held, and it is expected to result in record EPS for 2026. To close, this was a strong quarter for Old National. Record earnings, record efficiency, very robust deposit growth, improving credit trends, and continued capital return. These are not one-time results. They are the direct output of the franchise we have built. A franchise with peer-leading profitability, sustainable growth, a diversified and growing fee income platform, and a capital base that gives us the flexibility to invest in talent and technology while returning meaningful capital to shareholders. We are not just performing well today, we are investing to ensure Old National is an even stronger company in 2027 and beyond. With those comments, I would like to open the call for your questions.
Operator: We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. If you would like to submit a question on the webcast, please press star one as a reminder. Please stand by while we compile the Q&A roster. Your first question is from Daniel Tamayo with Raymond James. Your line is now open. Please go ahead.
Daniel Tamayo: Thank you. Good morning, everyone.
John Moran: Morning, Daniel.
Daniel Tamayo: Yeah. Good morning. Maybe just starting on the margin, John, the guide, I think you said up 2 basis points is your thoughts for Q4 if I am not mistaken. I think I saw on the slide deck that the spot rate was up 2 basis points at the end of the quarter. So implying kind of stable in Q4. Just trying to think through where the trend goes from here. You have been talking about that continuing to move up. Is that still the overall thought that the margin would be kind of moving higher from here? Is Q4 just kind of some impact from rising deposit costs following the hike in September and anticipation for one in December? Maybe you could just talk through the margin dynamics.
John Moran: Yeah, for sure. The 2 basis points spot that we talked about is what it would look like right here right now today, not factoring in anything else for what might come later this year. Obviously based on Fed funds futures and forward curve, probably we are going to get a little bit more help and that will be modestly beneficial, I think to the quarter. I think in general for Q4, we could expect to see NII dollars continuing to move up. I think that will have as opposed to the 592 level that we were at in Q3, probably has a 6 in front for Q4, and then a margin that will expand a couple basis points from here.
Daniel Tamayo: From the Q3 average level. Correct? The 352.
John Moran: Yeah, correct. The 352 today would be 354, and if we get a little bit more help, would be even better than that. I think the expectation of a modest improvement in margin is probably the right way to be thinking about Q4.
Daniel Tamayo: Got it. Okay. Thank you, John. Then maybe just digging into the deposit pricing if I can for a second. The margin was down a bit in the quarter. Was the deposit pricing or the rise in deposit cost more than you guys expected? Then just looking in, zeroing in on the money market and checking account, looked like you had a decent increase there. If you could just kind of give us a little color on what drove that would be helpful.
John Moran: Yeah. So 8 basis points in the quarter. 4 basis points of that was just the growth that we put on. That growth is coming on a little bit more expensive than probably what we would've thought earlier this year. We've been talking all year about it's a competitive environment for deposits. We're staying on our front foot. We're very interested in continuing to grow deposits in line with our earning asset growth. The other factor in this quarter is a little bit usually Q3 seasonal strength in the public fund side of things. Those can be a touch pricier. That had a couple of basis points impact on the quarter's deposit cost. I think overall we're in really good shape continuing to fight it out in a competitive environment and interested in growing core client deposits.
John Moran: I think, look, when you look year on year C&I up 12%, those don't all show up on day 1. Tim and team are really actively getting after it in terms of getting deposits in the bank.
Daniel Tamayo: The increase in the money market and checking was not so much repricing as it was, or maybe some repricing, but it was more incremental. Is that what you're saying?
John Moran: Yeah. I think a lot more incremental. Back book, we continue to work hard.
Daniel Tamayo: Okay. All right. Well, thanks for the color. I appreciate it, and I'll step back.
Operator: Your next question is from David Chiaverini with Jefferies. Your line is now open. Please go ahead.
David Chiaverini: Hi. Thank you for-
John Moran: Morning, David.
David Chiaverini: Taking the questions. Morning. On the loan side, can you talk about the pipelines? It sounds like up nicely versus a year ago, 6%. I guess to the extent you can talk about how much higher rates in this backdrop is impacting loan demand of your clients.
Tim Burke: Sure. Good morning, David. We talk to our clients every day, and we continue to be impressed with their ability to navigate the uncertainty in the rate environment. We don't see a change in demand right now for commercial lending. We continue to be optimistic about the pipelines. We see good growth in the pipelines and feel good about where they're at and where they're trending.
David Chiaverini: Would you say it looks like C&I has a bit more momentum than CRE? Is that the expectation for the next few quarters as well?
Tim Burke: Yes, I think that's a fair way of saying it. We've got really strong C&I results. John mentioned we're up 12% year over year. Our pipelines in C&I continue to look good. We're investing in talent and capabilities there that I think have us well positioned in the market. I think when you think about the interest rate environment going forward, you'll see that impact CRE, I think, as an industry, but we feel like we're very good in the CRE space. We're consistent in that space. The market knows that we consistently execute there. So we'll continue to see growth in CRE, but I think C&I will continue to outpace it.
David Chiaverini: Relatedly, the 19 commercial relationship managers that you brought on, are they focused more on C&I than CRE, or do they kind of offer both products?
Tim Burke: Yeah. The majority of those bankers that we hired are going to be primarily focused on C&I bankers. We have a great CRE team that we continue to increase and improve. But for the most part, the majority of those 19 bankers are going to be C&I-focused in our metro markets.
David Chiaverini: Very helpful. Thank you.
Tim Burke: Thank you.
Operator: Your next question is from Brendan Nosal from Hovde Group. Your line is now open. Please go ahead.
John Moran: Hey, good morning, everybody.
John Moran: Morning.
Brendan Nosal: Thanks for taking the questions. Morning. Maybe to shift gears here to capital. Just curious if this quarter's thinner TCE position, just following the AOCI drag lessens the enthusiasm for how you think about share repurchases going forward.
John Moran: No, not at all, Brendan. I think we have plenty of both reg cap and GAAP cap. We feel good about where we are, especially against the risk that we take on the balance sheet. I think no change to plans. Continue to expect to execute the $177 million that's left on the repurchase authorization. Maybe a little bit more opportunistically over the balance of this, but we would expect to exhaust that.
Brendan Nosal: Okay, perfect. Maybe shifting gears to this quarter's commercial hires. I haven't heard you folks talk about Ohio in a long time. Now you've got four new people on the ground there. Maybe just talk about the opportunity that Old National has in those markets and what you ultimately want to accomplish there.
Tim Burke: Oh, thank you. Well, just personally speaking, I've spent 30 years in Northeast Ohio personally and professionally, so I feel like I have a good understanding of the market, the talent. When you think about Cleveland and Columbus, they're very similar to our other large Midwestern cities. Strong C&I, middle market, manufacturing, the types of business banking clients that we think we are very well-positioned to continue to grow. So they're markets we know well. We know the talent that we hired. We think there's opportunities in those markets to expand, and we feel our story resonates very well there. So we're excited about the opportunity.
Brendan Nosal: Okay, great. Thanks for taking my questions.
Operator: Your next question is from Brandon Rud with Stephens Inc. Your line is now open. Please go ahead.
Brandon Rud: Morning. Thanks for taking my questions. I guess if I could start, Ken mentioned new loan originations are focused more on the floating rate side of things. I am just kind of curious what that blended new origination yield is compared to the roll-off rate of about 5.1% on page 10.
John Moran: Yeah. Compared to the back book, fixed repricing, so fixed to fixed is going to be well north of 100 basis points, but fixed into what we have been putting on is kind of 100 basis points against the back book. We have got, again, to remind you, $4.6 billion of fixed rate coming out of the loan portfolio. On the securities side, you did not ask about securities, but I will give it to you anyway. 1.8 there, and that is 180 basis points or better in terms of what we are putting on there. In terms of yields themselves, up 5 basis points linked quarter. It is up closer to 10 basis points on a spot basis. Again, I think if we get the forward curve and Fed moving the way that the market expects it to, we would see a lift starting in November on that book.
John Moran: The float mix on the balance sheet has shifted a little bit over the last year. We will get a little bit of a helper there.
Brandon Rud: Got you. Okay. Thank you. I think you mentioned the increase in deposit costs is more related to new growth rather than back book repricing. I know your guide does not include an additional rate hike, but when you think about this hiking cycle, what are your initial expectations for interest-bearing or total deposit betas as you work through these hikes?
John Moran: Yeah. Look, interest bearing showed pretty good growth this quarter, up $182 million. We are pleased with that. Absolutely, I think the more C&I business that we are doing, the more shots on goal we have with companies for operating accounts. We intend to grow that bucket. I think in terms of cash sorting, everybody that is going to sort has sorted. We have been in a cash sorting environment for the last 3 plus years at this point. I would not expect too much to change on that. The other thing that is kind of interesting about us, the median balance for our total deposits are $3,800. If you rip out the CDs, it is closer to $3,000. There is just not a lot to do with sorting. I think where we are in terms of mix is probably going to be pretty stable.
Brandon Rud: Got it. Okay, sorry. I guess I was asking more about the betas on incremental rate hikes from here.
John Moran: All right. Yeah.
John Moran: Your initial expectations there.
John Moran: I think there is nothing that we see in our book today that changes our expectation. We were 40% up, we were 40% down. I think based on what we see in our back book today, our expectation would be that we would be about in line with what the historical average has been. The interesting thing out of that exception book, though, is that our turn in the book and our retention there has been way better than what we thought. Maybe there is a little bit more opportunity to kind of test and learn in that. We want to stay focused on growth of deposits.
Brandon Rud: Got it. Okay. Thanks very much.
Operator: Your next question is from Brian Foran with Truist. Your line is now open. Please go ahead.
Brian Foran: Hey. I have got a bunch of investor inbound questions just on the deposit growth, so hopefully I can just hit through them real quick. Obviously, the 11% annualized is a great result. First, do you happen to have the broker balance at the end of Q3? Did that contribute at all to the growth?
John Moran: Broker was actually down in the quarter. It was a really strong organic quarter for us. I would say $1 billion was kind of organic. Then we had a win in the public side. It was a little bit of a larger deposit relationship. Then the normal seasonal strength in public funds added probably $450 million or so to the quarter's balance.
Brian Foran: Perfect. That was my second question. Then back to the question about the money market growth. I see on the website there is a 3.85 promo. I am not sure when that started. Any chance you have got a breakdown of how much of the growth was from that promo offer?
John Moran: That one we might have to follow up with you after. I am not sure that I have that number handy.
Brian Foran: Got it. Then the last one, just on the legacy Bremer footprint. I have never loved the FDIC market share reports, and I am very cognizant that things like rehousing commercial deposits can move things a lot. But some people have pointed to this year it printed at, I believe, at a 2.9% share for Old National, at least in the Minneapolis MSA, and last year it was 3.5%. Can you kind of walk through how you think about how the Bremer footprint is doing? Do you think there has been any share erosion or maybe is it things like moving some corporate relationships to the Old National headquarters or something like that?
John Moran: Yeah. That is exactly what is going on. That summary deposits report is, I would describe that thing as directionally correct, but specifically wrong. And how you household municipal deposits, broker deposits, large corporate deposits can sort of swing that around in any given year. Yeah. So I think underneath the surface, the core Bremer franchise I would describe as very stable.
Tim Burke: And we have seen a pickup in pipelines from our legacy Bremer footprint that lead us to believe strongly that the results going forward will continue to be stable and we will be able to build and grow those markets as well.
Brian Foran: Got it. I am not sure you will answer this one, but I will try. Some people have pointed to the margin and consensus reaching 3.65% or so by H2 next year. Any thoughts on what you think a normalized or achievable margin over time is? Or maybe I will just leave it like that and let you decide.
John Moran: I think that the curve, should it play out, will be helpful for us. Modestly helpful. So I think that we can see improvement in Q4 and then maybe a sustained improvement into 2027. But we will come back in January and refresh you on that set of assumptions.
Brian Foran: Thank you for taking my seven-part question.
Operator: Your next question is from Nathan Race with Piper Sandler. Your line is now open. Please go ahead.
Nathan Race: Hey, guys. Good morning. Thanks for taking the questions. Was hoping just to walk through some of the takes from a loan growth perspective in the quarter. I think you are coming off a record loan pipeline coming out of June. Yet, I think Jimmy alluded to some portfolio optimization in the quarter. Just curious what you saw in terms of a payoff and production, I am sorry, from a payoff perspective in the quarter, and just any thoughts on why the pipeline hitting in Q4 is down from a commercial perspective 20% or so.
Tim Burke: Morning, Nathan. Thanks for the question. We feel very good about where we landed the quarter. When you think about navigating the competitive landscape, having strong pricing discipline, which allowed us, as John mentioned, to increase loan pricing by 5 basis points and 10 basis points in our spot rates. That said, we delivered 3% loan growth for the quarter, and we feel good about our ability to hit our increased loan growth range for year-end. Speaking on payoffs, we had a couple of payoffs on the CRE side. I think when you have projects and you see rates going up, there is going to be some payoffs and pay downs there. We had a couple of those that happened right near quarter end.
Tim Burke: But like I said, we feel good about the pipelines, our conversion rates, and our ability to continue to grow loans at a clip that we have provided guidance on. So feel good about where we are at and good about where we are going.
Nathan Race: Okay, that is helpful. John, I appreciate you speaking to kind of the lower end of the NII guide for the quarter, but maybe just looking to expenses as maybe an offset relative to maybe more conservative thoughts from a top-line perspective there. Is it fair that maybe expenses come in at kind of the low end of the expense guide for the year? Obviously, really good cost controls in the quarter, but just curious on kind of how you see the expense run rate turning into Q4.
John Moran: Yeah, I think you have got it read correctly there. I think when you look at that range, $1,435 million to $1,455 million on the year, our expectation would be at the low end of that range. I think we do tick up as compared to Q3. Again, a lot of the hiring that we did was kind of back-end loaded in this quarter. So Q4 will run higher than Q3. But absolutely, we think for the year, we are going to end up at the low end of that prior annual guide.
Tim Burke: Nathan, one thing I would share back on the loan growth. Our line utilization for the quarter was slightly down. So we think there is some embedded demand that we will see that pick up as C&I companies are looking to build inventory and other items. So we think that also could be a tailwind for us going forward.
Nathan Race: Okay, great. Just going back to some of the commercial hires in the quarter lastly. It seems like good momentum there. Just curious to what extent, if any, you are having some attrition with some of your commercial bankers, maybe seeing some competitors pay up more for talent these days? Or do you kind of expect continued net growth in your commercial banker producer headcount as we get into next year? Or are you seeing increased competition for some of the high-quality producers these days?
Tim Burke: Yeah. The market is very aggressive right now for talent. From a timing perspective, as we are sitting here in October, I would expect that to wane for year-end and Q1 until bonuses are paid out. But it is very competitive, and we feel we are doing a very good job of being proactive to keep our top bankers and continue to give them a platform to succeed. As far as adding new bankers on a net basis, yes, that will continue to be the plan to invest in top talent and continue to grow our banker base. We see an opportunity for our story to resonate in the market very well. The conversations we are having, the talent that we are talking to, I think, are excited about the opportunity, and we will continue to have those conversations and look to grow net bankers up as we move forward.
Nathan Race: Okay, great. I appreciate all the color. Thanks, guys.
Operator: Your next question is from Janet Lee with TD Cowen. Your line is now open. Please go ahead.
John Moran: Morning, Janet.
Janet Lee: Good morning. Given the seasonality of public deposits in Q3, it seems like they may come down in Q4. What is the implication on the deposit cost? Because on the slides it says spot rate of 1.87%, which is a bit of an increase versus the average. If the deposit growth on the public side moderates a bit, could that help on the magnitude of the deposit increase in Q4 being a little bit less than Q3? And spot rate
John Moran: Good question.
Janet Lee: Could it be below the spot rate of 1.87%, or is that too optimistic?
John Moran: I would say that that is probably optimistic. I do think, though, that the muni flowing out could help deposit costs by a couple of basis points. Call it 2 basis points, 3 basis points, something like that. That is again, kind of normal seasonal flows. So those are still sitting there at the early part of this quarter, but they flow out.
Janet Lee: Got it. The 40% beta you mentioned, that is on the interest-bearing deposits?
John Moran: No, total.
Janet Lee: Total. Got it. I heard your message around your intent to use up all of the remaining buyback authorization. On a go forward, is there a good target payout ratio that you keep in mind? You did 62% on a combined basis. Is that a good level on a go forward?
John Moran: We haven't really targeted a combined payout ratio. I think, look, the fact is we're putting up returns on tangible common equity in the high teens. Those are sort of peer leading profitability. So we stack capital up very quickly, and our plan certainly would be to continue to return that capital to shareholders. I think that's been running 60-ish%, plus minus, the last couple of quarters. We'll re-rack things and come up with a new authorization in February.
Janet Lee: Okay, got it. Thank you.
John Moran: Sure.
Operator: Your next question is from Timur Braziler with UBS. Your line is now open. Please go ahead.
Timur Braziler: Hi. Good morning.
John Moran: Hey there.
Timur Braziler: Everyone.
John Moran: Good morning.
Timur Braziler: Hi. On the CD side or on the time deposit side, I am just wondering some of the growth there, if you are able to lock in duration and maybe capture some of the, albeit higher cost, lock that in for a little bit longer here if the customer appetite is maybe changing. Then maybe more broadly in terms of how you are thinking about deposits. What matters more, just being in a higher for longer environment in terms of where deposit costs might go? Or do you still ultimately think that thinking of a beta is the right way to think about ultimately where deposit costs can end up?
John Moran: Yeah. Thanks. Absolutely. We put on some CDs this quarter. I think that is going to look really smart in a quarter or 2 or 3 or 4. Our thoughts in this quarter was that the funding curve was probably in front of the Fed, and leaning in was probably a good thing to do in Q3, so we did. I think we will get benefit from that in Q1, Q2 of next year. I think in terms of higher for longer, on balance, it is modestly helpful as we have spelled out, and that is kind of a function of balance sheet mix and ALCO. So we have sort of pivoted ever so slightly asset sensitive here over the last couple of quarters. The impact on deposit costs, I think higher for longer suggests that it is going to stay competitive for longer.
John Moran: Our stated objective is grow deposits in line with earning assets. We will stay competitive.
Timur Braziler: Okay. Then maybe a follow-up on the expense question from before. Your unchanged guide, to your point, does imply a step up in expenses in Q4. Thinking kind of low point versus mid versus high, is there any kind of granularity or any kind of insight you can give on where within that range we can end up on expenses in the fourth quarter and what could take it away from kind of the lower end of the range into something more middle or upper end?
John Moran: Yeah, I think middle or upper end is very unlikely. If you were going to force me to pick a number, I would say take the 355 in the Q3 and add 10-ish to it for Q4 just on the hiring and then normal kind of year-end factors. That would probably be as good a place as any to kind of land it.
Timur Braziler: Great. Thank you.
Operator: Your next question is from Jon Arfstrom with RBC Capital Markets. Your line is now open. Please go ahead.
Jon Arfstrom: Hey, good morning.
Jim Ryan: Morning, John.
Jon Arfstrom: Question for you guys on the competitive environment and lending in the pipelines. How competitive is it out there? On the pipeline numbers, would you describe the pipeline right now as full or healthy? Or does your gut tell you that pipeline goes higher or lower over time based on what you're seeing?
Tim Burke: Sure. Thanks, John. I would say it is certainly competitive out there. I do not think that is going to change anytime soon. I feel pipelines are solid. I never feel they are full. They can always get better. I think what we are hearing from our clients is that demand is going to continue. I think as I said earlier, I think our clients are navigating uncertainty better than ever. I think people are used now to a high degree of uncertainty, and people are continuing to invest through that. As we continue to add new bankers, those bankers, it takes a quarter or two to ramp up pipelines. I am very pleased with the pipelines we already have. In fact, we have a couple of signed term sheets already from new hires that we just made this quarter.
Tim Burke: I feel very good about the pipelines where they are at today, but I feel like there is upside going forward to continue to grow those pipelines as we continue to add bankers and grow and build capabilities on the corporate banking and specialty banking side.
Jim Ryan: John, I would just add, Tim and the leadership team have done a really good job making sure that the pipeline is really clean and to the extent that we do not believe there is a full relationship available to us or it is going to be harder to come by. We are cleaning those out of the pipeline. We are not looking at those opportunities to the extent we do not think it is going to meet our pricing hurdles and there is just too much competition. We are cleaning those out of our pipeline. So I feel really good about the work that Tim and the entire commercial leadership team have done to have a really even better pipeline going into the year-end that is high quality, more so than even the past.
Jon Arfstrom: Yep. Okay, good. Then, of course, Jim, since you have the mic, the one question that has not been asked, what are your thoughts on M&A from here? I know that people talk about Bremer, but I am looking at a 19.5% ROTCE and 15% EPS growth. It seems like it has worked. What kind of an appetite do you have and any interest at all?
Jim Ryan: Yeah. Thanks, John. We appreciate that. We do believe it has worked, and we have a lot of empirical evidence to suggest that we have created real shareholder value over the multiple deals we have done in the organization. You know us as good as anybody or better than most, and you can see that. But having said that, I think there is a time and place, and I do not think this is the time or place for us to be thinking about more M&A. Obviously, the market is a little bit difficult too with rising rates, and everybody is really focused in on day one tangible book value dilution. And quite frankly, we do not need it to support the kinds of returns we are putting up. We do not need it for the growth we are putting up.
Jim Ryan: I think growing organically and going out and being very active in the hiring and talent front, I think has allowed us to stay really front-footed. That is where we are going to spend our time and effort. And there may be a time where M&A might make sense, but I do not see it in the foreseeable future here. I think it is just sticking to our knitting and doing the things we know really well. And honestly, as we talked about, the investment in ourselves, the returns that John is able to put back
Jim Ryan: through the buyback program are really strong, and that makes a lot of sense. And I think investors obviously are supportive of that. But I also just think taking the time to invest back in ourselves and continuing to build the foundation to be a larger organization will put us in a really good position. And if that makes sense in a couple of years to think about M&A again. But it is not something we spend any time on today.
Jon Arfstrom: Yep. Okay. All right. Thank you.
Jim Ryan: Thank you.
Operator: Your next question is from Chris McGratty with KBW. Your line is now open. Please go ahead.
Chris McGratty: Oh, great. Good morning.
Jim Ryan: Morning, Chris.
Chris McGratty: Hey, Jim. John, for you on the deposits, listening to the call, it reminds me of what you did during the last cycle, where you got the bad news out of the way with the deposit repricing and everyone caught up. Obviously, every cycle is different. Is there an element of that repeating itself?
John Moran: I don't know that I would say that there's an element of that repeating itself. I think the quarter was a great growth quarter for deposits. Half of that deposit cost increase was on that growth. It's a competitive environment out there, right? Maybe to the extent that we're seeing deposit costs increase, I don't think we're wildly out of line with what I've seen from other reporters. I think if people are interested in growing deposits, they're going to be paying for it. Right?
Chris McGratty: Okay. Worth a shot. Thanks. Then for kind of putting the pieces together, is operating leverage based on the cross currents right now, is that something that's in the cards over beyond the quarter into next year?
John Moran: As you know and again, you've known us for a long time, right? It's a philosophical approach to every budget that we cut. We're trying to drive positive operating leverage. I think we've got, look, obviously this quarter's results were a little bit softer on top line. We've got some pressure in the mortgage business. We've got some pressure on NII. But I think when you look at the forward curve, we've got more tailwinds than headwinds there. That should set up a better revenue environment, and we're working hard on expenses.
Jim Ryan: As you know, Chris, this is a real focus of ours. We've been really disciplined. Between John, Tim, and I, we have regular arm wrestling matches over how much we can afford to invest versus how much we need to let drop to the bottom line. I think we're striking the right balance between investing in the future which means investing in growth and also driving positive operating leverage. We've said we can't be holding to this really low operating efficiency level forever. We're going to have to continue to invest in ourselves. Obviously, to the extent that John's pointed out, to the extent that we get benefits from rates, that allows us a little bit more flexibility. We're striking the right tension to deliver the right strong shareholder returns, but also deliver in a really efficient way.
Jim Ryan: I never want to sacrifice our future for lack of investment. Especially when we have such an awesome opportunity to continue to tell our story. There is actually nobody better at telling our story to relationship managers than Tim has been. We need to take advantage of that while we can and continue to grow the business and make the right long-term decisions.
Chris McGratty: Okay, great. Thank you.
Operator: Your next question is from Jared Shaw with Barclays. Your line is now open. Please go ahead.
Jared Shaw: Hey, thanks. Good morning.
Jim Ryan: Hey, Jared.
Jared Shaw: I guess maybe just on the capital side, you continue to see really strong CET1 capital with the growth, even with the buyback. How should we think about a target capital ratio, especially given the potential tailwinds coming out of the regulatory side as we go forward?
John Moran: No target has been set, but super comfortable with where we are. North of 11% CET1 feels like a ton of capital for the risk that we take on the balance sheet. If those changes in Basel III go in as written, I think we get probably a rough 100 basis points of additional CET1, and that may allow us to reconsider the size of the repurchase authorization when we get to that in February.
Jared Shaw: Okay. On the fee income side, any new initiatives or how should we think about the trajectory of fee income growth as we exit the year?
John Moran: Feel great about where we are in the core banking fees, wealth management, and capital markets. Mortgage, obviously a little bit of softness just given the rate environment. Then we have normal seasonality in Q4. I do not think mortgage is going to be a big grower for us next year. The good news there is that there is an obvious and easy expense offset because everybody that works in mortgage is variable comp in terms of production. If it is soft enough, we have some other levers that we can pull in terms of the fixed cost piece of that business. Tim, I do not know if you wanted to add some color on some of the initiatives that we have in other parts of the bank.
Tim Burke: Yeah, we continue to invest in our non-interest income businesses. I think about specialty banking. I think about corporate banking. We have made investments, FX, Fintechs, syndications, wealth management, really across the board, either in people and/or the platform and are continuing to do that as we look at 2027. So I think you will continue to see investments in the businesses, and we feel good about where the pipelines are today and where we see them going short of the rate environment as it relates to mortgage.
Operator: Your next question is from Anthony Elian with JPMorgan. Your line is now open. Please go ahead.
Anthony Elian: Morning, and thank you.
Jim Ryan: Morning, Anthony.
Anthony Elian: On expense, you are pointing us to the lower end of the range. You called out earlier your efficiency ratio is a record low 45%. How do you think about maintaining that efficiency ratio at that level while you keep investing in some of the areas you call out on slide 12?
Jim Ryan: We have, for a really long time, been good about driving expense out of the bank in the back and middle office, and just kind of how we move things around. We take those dollars and recycle them into revenue generation, and some client-facing technology. This is a path that we have been on for, heck.
Jim Ryan: 10 years. Yep.
Jim Ryan: 10 years, maybe more than that. I think what you are seeing in the efficiency ratio is really the result of the scale that we tacked on with Bremer and realizing those one-time saves, or not one-time saves, those expected saves, dropping to the bottom line of the run rate. I think that that is what has allowed us to sort of drive efficiency ratio sub 50. We will continue to work at it real hard. We work at it every year.
Anthony Elian: Thank you. Your adjusted ROTCE has been around 20% for several quarters now. Does this feel like the right level where the company should be operating at? Do you see upside from here, given your earlier comments on the levers the company has to rising rates? Thank you.
Jim Ryan: I would add, hey, we feel really good about where we are at from a profitability perspective. To the extent that we get a little help on the revenue side, there is possibility to be higher here. I think we are leading most of our peer group with those kinds of numbers, and we feel like this is a great spot to be in and run at. We are obviously working every day to continue to improve our overall profitability. We will not stop investing in our business to continue to have it grow. That is just, again, the tension we find ourselves in every single day is the ability to invest, and maintain that high degree of operating efficiency, and have long-term growth in our business.
Anthony Elian: Thank you.
Operator: Your next question is from Terry McEvoy with Wells Fargo. Your line is now open. Please go ahead.
Jim Ryan: Morning, Terry. Welcome back, Terry.
Terry McEvoy: Good morning, everybody. Morning. Thank you. If I think about 19 bankers or RMs, they could eventually, in theory, support a multi-billion-dollar bank, and I think CapStar was, I haven't had a chance to look, but call it $3 billion. My question is, how do you think about an earn back on new hires? Then just as a follow-up, were any of those new hires maybe upgrades where there is a cost savings or some cost savings component to it? Thank you.
Jim Ryan: Terry, I can take the earn back question, and then Tim will clean this up. For commercial talent, our earn backs tend to be very quick. Very quick, I mean inside a year and a half. On the wealth side, when we hire new wealth people, that can be a little bit extended because it is harder for them to move relationships. But the right commercial talent, we have said for a long time, pays for itself very quickly.
Tim Burke: Yeah. On that 26, 19 of those bankers were net new, seven replacements for the total of the 26 new, just to give you that breakdown. Yeah. As far as expectations, what I will tell you is we are very disciplined in who we are hiring, and we are looking to hire bankers that we know are top performers in markets that we know our story resonates very well. I think if you have seen the expansion markets and our history and our track record of going into new markets, because we have that approach, we have been very successful. I think we have been successful quickly, and I expect that to continue. As we look at the pipelines that are already growing and building from the new bankers we have hired, we feel very good about them to be able to pay for themselves and then some.
Tim Burke: When you think about the business they are bringing on, that core C&I business, they are coming with primacy and good core operating, non-interest-bearing deposits. That is sticky business that provides recurring revenue that helps build that top line, and we feel very good about the trajectory of that growth as well as the bankers that we have hired and their ability to pay for themselves very quickly.
Jim Ryan: I think we have done a really good job focusing in on quality over quantity. That quality, though, comes at a price. As Tim said, these are top performers in the marketplaces. I think the also interesting fact is many of those folks are going to sit across from Tim and I and John and others right here at headquarters. We are very hands-on in this process, both from a recruiting perspective and telling our story perspective of making sure these are going to be really great fits for us from a cultural perspective. I think that has helped us make sure that the people we hire stick around, last long, and are really productive right out of the gate. I am not sure how other banks approach it, but we want to make sure we get the best of the best that come work for us.
Tim Burke: And just building on that point, the discipline we have. We are hiring bankers that for the most part, one of our leaders, usually me or one of my directs, have worked with them directly. So we know not just what they're producing, we know how they're producing it, and we know the types of clients that they're going after with primacy in mind and sustainable recurring revenue from delivering the entire bank in a collaboration perspective as well. So we feel good about what they'll do, not just in C&I, but driving our wealth business and driving other areas of the bank based on client need. That's great. Thank you very much.
Operator: There are no further questions at this time. I'd like to turn the call back to Jim Ryan for closing remarks.
Jim Ryan: Well, thank you all for having so much interest. This may be a record duration for a long time. Everybody's high level of interest and detailed questions. Of course, we're going to be around all day to take any follow-up questions. Joel, thank you for all your hard work to make sure we had a successful call. Have a great day, everyone.
Operator: Thank you so much, Jim. 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. If anyone has any additional questions, please contact Lynell Durchholz at 812-464-1366. Thank you for your participation in today's conference call.
