Old National Bancorp

NASDAQ:ONB

Earnings Call Transcript 2023-Q1

[Operator]

Welcome to the Old National Bancorp First Quarter 2023 Earnings Conference Call. This call is being recorded and has been made accessible to the public in accordance with the SEC 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 the 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 to you to its forward-looking statement legend in the earnings release, presentation slides. The company's risk factors are fully disclosed and discussed within its SEC filings. In addition, certain slide contain non-GAAP measures, which management believes provide more appropriate comparisons. These non-GAAP measures are intended to insist investors, understanding of performance trends. Reconciliations for these numbers are contained within the appendix of the presentation.

I would now like to turn the call over to Old National CEO, Jim Ryan, for remarks. Mr. Ryan?

[James Ryan, CEO & Director]

Good morning. On the morning of April 10, our Old National family was blindsided by unthinkable tragedy. In the span of minutes, 5 of our team members were lost forever. While other team members and 2 Louisville Metro Police officers suffered injuries, all Old National team members are out of the hospital and on the road to recovery. One Louisville officer remains in the hospital. In the aftermath of this tragedy, many heroes emerged, including members of law enforcement, city and state officials, the amazing Louisville medical community and some of our own team members who are there on the scene. To all of you, thank you from the bottom of our hearts. On behalf of everyone at Old National, I also want to thank the entire community of Louisville for your unconditional love, prayers and support. I also want to acknowledge the overwhelming outreach from individuals and organizations throughout the country. Your outpouring of love and care has helped strengthen us, and we are so grateful.

Turning to the quarter. We reported strong first quarter earnings despite a rapid shift in the operating environment for all banks. Old National, it was business as usual even throughout March and the strength of our franchise remains evident in the results outlined on Slide 4. Adjusted EPS was $0.54 per common share with adjusted ROA and ROATCE of 1.4% and 23.4%, respectively. Our adjusted efficiency ratio remained under 50%. Obviously, deposits, liquidity and credit are in focus today. As you can see, deposit balances were stable during the quarter despite the normal first quarter seasonal patterns and public fund balances.

Our total cost of deposits at 72 basis points is well below peers, and we maintained our deposit pricing discipline with a low 15% total deposit beta cycle to date. Granularity is one of the keys to success here and Brendon will share some additional details on the competitive advantage our funding base provides later in the deck. With respect to liquidity, as you'd expect, we took steps to increase our cash on hand and our available liquidity over the course of March and April. Our liquidity coverage in excess of our uninsured deposits is 150%, including unencumbered assets.

Likewise, our credit remains strong with 5 basis points of non-PCD related charge-offs and stable asset quality. We remain watchful like other banks and are focused on potential pockets of softness. Like our deposit portfolio, our loan portfolio is granular, which should continue to serve us well. We remain confident in our client selection and underwriting, and as you know, Old National has taken an active approach to credit management. This approach has served us well in various economic cycles. As evidenced this quarter, we worked aggressively to address some PCD credit for the merger. On the client side, engagement remained high in the quarter, and we continue to expect disciplined loan growth in 2023, albeit not a 2022s pace. In other areas, more of the same, below peer deposit costs to drive a funding advantage, more organic growth of our wealth management client base and a continued focus on disciplined expense management.

Thank you. I will now turn the call over to Brendon to cover the quarterly results in more detail.

[Brendon Falconer, CFO]

Thanks, James. Turning to the quarter's results on Slide 5. We reported GAAP net income applicable to common shares of $143 million or $0.49 per share. Reported earnings include $15 million in pretax merger-related charges, $1 million in pretax property optimization charges as well as $5 million in debt securities losses. Excluding these items, our adjusted earnings per share was $0.54.

Slide 6 provides our quarter end balance sheet. Total asset growth of $1.1 billion in the quarter was driven by disciplined loan growth and higher cash balances funded through stable deposits and higher borrowings.

Moving to Slide 7. Total deposits were stable quarter-over-quarter despite public fund outflows. Q1 is typically our seasonal low point for public funds, and we anticipate net inflows in Q2. Our trend in average deposits reflect mix shifts away from noninterest-bearing accounts into money market and CDs, which is typical for this point in the rate cycle. Market conditions continue to put upward pressure on deposit rates with total deposit costs up 38 basis points quarter-over-quarter to a still very low 72 basis points, which equates to a total deposit cost beta of 15%.

Interest-bearing deposit costs increased 57 basis points to 1.09%, resulting in an interest-bearing deposit beta of 23%. although the terminal beta is difficult to estimate, we have a strong track record of managing deposit costs and are confident we can maintain our funding advantage throughout the remainder of the rate cycle. We are actively defending deposit balances through competitive rack rates and limited pricing exceptions in addition to playing offense through various deposit specials. We are pleased with the execution of this strategy to date as we have been able to generate new deposits sufficient to maintain stable overall balances.

Slide 8 provides additional details and granularity of our deposit base.

Our average core deposit account balances are meaningfully lower than peers. We have deep and long-standing relationships with our deposit customers. 75% of which have been with the bank for more than 5 years and nearly 1/3 have been with us for more than 25 years. The concentration of our largest customers is also exceptionally low. Our top 20 deposit clients represent less than 5% of our total deposits. If you exclude collateralized deposits, our top 20 represents only 2% of our total deposits.

Slide 9 provides details of our funding and liquidity. We have ample liquidity with approximately 150% coverage of our uninsured deposits, including $10.3 billion in immediately available funds from cash equivalents, Federal Home Loan Bank, Fed discount window and the BTFP. We also have $5.4 billion in capacity from high-quality unencumbered collateral available for pledging. Beyond the 150% coverage, we have significant other sources of liquidity through broker deposits and unsecured credit lines as well as insured cash suite product capacity.

Slide 10 shows trend in total loan growth and portfolio yields. Total loans grew 2%, consistent with our expectations and Q4 pipeline. Consumer loans were stable quarter-over-quarter and loan portfolio yield increased 34 basis points to 5.42%. The invest portfolio was stable quarter-over-quarter as portfolio cash flows were offset by an improvement in fair values. Duration improved at , and we expect approximately $1.2 billion in total investment cash flows over the next 12 months. Nearly 80% of our portfolio consists of high-quality treasury and agency investments with an additional 18% held in highly municipals. The remaining portfolio consists of highly rated corporate securities and other investments.

Slide 11 details our Q1 commercial production. The $1.8 billion of production was well-balanced across all product lines and major markets. We continue to maintain a disciplined approach to underwriting, while taking advantage of market dislocation to grow attractive new relationships. That said, we have tightened our pricing standards, enhanced credit structure and have reinforced with our relationship managers the importance of acquiring a full banking relationship for new loan requests. Turning briefly to pricing. New money yields on commercial loans increased 64 basis points to 6.72% for the quarter, with March production yields of 6.87%.

Moving to Slide 12, you will see further details of our loan portfolio. We have a well-diversified commercial loan portfolio that represents approximately 70% of total loans and carries an average loan balance of approximately $1 million. Our nonowner-occupied CRE is well diversified by asset class and geographies. As it relates specifically to nonowner occupied office, the bulk of the portfolio is made up of suburban or medical office with a meaningful amount of credit tenant leases. Less than 1% of total loans are located within central business districts, which are geographically diverse in 11 Midwestern cities with only 5 deals totaling less than $50 million in Chicago and Minneapolis St. Paul.

Slide 13 shows our credit trends. Credit conditions are stable, and our commercial and consumer portfolios continue to perform exceptionally well. Delinquencies and NPLs are showing positive trends and net charge-offs were stable at a modest 5 basis points, excluding the 16 basis point impact from PCD loans. Our special assets team is continuing to work through the FNB acquired PCD loan book and expect charge-offs from this portfolio to be elevated in the near-term. The provision expense impact from the workout effort should be minimal as we carry $54 million or approximately 5% reserve against this book.

On Slide 14, you will see details of our first quarter allowance, including reserves for unfunded commitments, which stands at $333 million, consistent with Q4. Reserves reflect loan growth with relatively small increases due to portfolio mix more than offset by improvement in economic forecast and charge-offs of PCD loans that don't require reserve replenishment. The financial health of our clients remain strong. And while credit metrics are stable, we believe it is prudent to maintain elevated reserves given the uncertainty in our economic outlook. Our current reserves reflect a 100% weighted Moody's S3 scenario with negative GDP of 3.1% and unemployment of 7.1%. Unless the economic outlook deteriorates materially, 2023 provision expense should continue to be limited to portfolio performance and loan growth. In addition to the $333 million in reserves, we also carried $96 million in acquired loan discount marks.

Next, on Slide 15, you will see details of our net interest income and margin. Both metrics were generally in line with our expectations. Net interest margin contracted 16 basis points quarter-over-quarter to 3.69%, while core margin, excluding accretion, decreased 13 basis points to 3.62%. Core margin was just shy of the low end of our margin guidance due to holding more cash on hand following market disruption in March. We continue to proactively manage the balance sheet towards a neutral rate risk position while layering in protection for a sudden reversal in Fed rate policy.

Slide 16 shows trends in adjusted noninterest income, which was $76 million for the quarter, again, this was general in line with our expectations with improvements in capital markets and wealth revenues, offsetting macro driven weakness in mortgage and a full quarter impact of our service charge enhancements put in place in December. The linked quarter increase in our other category was driven by fair market value adjustments on equity securities and higher BOLI income.

Next, Slide 17 shows the trend in adjusted noninterest expenses. Adjusted noninterest expense was $235 million, and our adjusted efficiency ratio was a low 48.8%. Expenses were well-controlled and consistent with the prior quarter. The increase in the other expense category was largely due to higher FDIC assessment and marketing expenses.

Slide 18 provides details on our capital position at quarter end. Capital ratios were stable and reflect strong earnings, offset by loan growth and share repurchases in the quarter. Our TCE ratio increased 19 basis points to 6.37% and largely due to a reduction in unrealized losses and other comprehensive income. Total available for sale unrealized losses is impacting our TCE ratio by 145 basis points. Our after-tax HDM unrealized losses stood at approximately $300 million at quarter end. We continue to monitor our balance sheet for economic stress and feel very comfortable with our capital levels. While we did repurchase 1.8 million shares of common stock earlier in the quarter, we do not anticipate repurchasing additional shares in the near-term. As I wrap up my comments, here are some key takeaways.

We had a strong start to 2023 with the results in line with our expectations. We posted strong return metrics with adjusted return on average assets of 1.39% and adjusted return on tangible common equity of 23%. Our deposit franchise continues to perform exceptionally well in this environment as we have maintained stability in our deposit balances while delivering a top quartile total deposit beta of 15%. We have ample liquidity with uninsured deposit coverage ratio of approximately 150%, including unencumbered eligible collateral. Credit remains strong, and we continue to manage expenses in a disciplined manner as evidenced by our efficiency ratio of 48.8% for the quarter.

Slide 19 includes thoughts on our outlook for the remainder of 2023. We believe our current pipeline should continue to support near-term loan growth in the mid-single-digit range. While we expect to have meaningful year-over-year NII growth in 2023 in the range of 9% to 12%, margin will continue to be under pressure from higher deposit costs. More detailed NII and margin guidance is difficult to provide, given the uncertainty of future Fed rate actions and the uncertainty of market dynamics that will ultimately determine terminal deposit betas.

That said, we remain confident in our ability to manage deposit costs better than most. Contractual accretion is expected to be approximately $16 million for the remainder of full year 2023. We expect our fee businesses to continue to perform well despite headwinds with mortgage following industry patterns. We should continue to see revenue momentum in wealth from the strategic hires we've made over the last 2 years. Capital Markets revenues will largely follow loan demand and should perform consistent with Q1 levels. This quarter's bank fees fully reflect the HSA sale and service charge enhancements implemented in December and should represent a good baseline. Our expense outlook is consistent with our prior guidance with full year 2023 total expense of approximately $939 million, excluding merger-related charges and property optimization related expenses. Provision expense should continue to be limited to loan growth, portfolio changes and non-PCD charge-offs as we believe we have adequate reserve against the PCD book, and we are already 100% weighted towards the Moody's S3 scenario.

Turning to taxes. We expect approximately $11 million in tax credit and amortization for the remainder of 2023 with a corresponding full year effective tax rate of 24% on a core FTE basis and 22% on a GAAP basis.

With those comments, I'd like to open the call for your questions. And we do have the full team available, including Mark Sander, Jim Sandgren and John Moran.

[Operator]

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

[Robert Siefers, Piper Sandler & Co.]

Condolences regarding the events of the last couple of weeks. We could start maybe on the -- sort of thoughts on deposit mix. What would be your best guess as to where noninterest-bearing levels go as a percent of total deposits. It's maybe a little historical perspective and why whatever number you think might be the best one where you sort of think things will settle.

[Brendon Falconer, CFO]

Yes, Scott, this is Brendon. Yes, we look back, I think the 28% kind of pre-COVID level is probably a decent [indiscernible] in terms of where [indiscernible] how long it takes to get there at this pace. I'm not sure, but that's probably a good place to think about where it may settle.

[Robert Siefers, Piper Sandler & Co.]

Okay. Perfect. And then when you made some comments about having worked aggressively on some PCD stuff from the merger. And it sounds like we'll continue to see some charge-offs there, albeit not ones that will require provisioning since you already have the PCD reserve. But maybe just some thoughts on what kind of stuff you are working through, how long it might take to work through the remainder of where you see issues, et cetera?

[Mark Sander, President & COO]

So we still have -- Scott, it's Mark. We still have $54 million of PCD reserves on our books. And so I think that will work through over the next 18 to 24 months, we would say, and I don't think it will be a linear type of thing. So there'll be some lumpiness in there. But as you indicated and as Brendon said, we think we're fully reserved on all those loans.

[Operator]

The next question comes from the line of Ben Gerlinger with Hovde Group.

[Benjamin Gerlinger, Hovde Group]

I just want to take a moment. You guys did a fantastic job as both a management team and -- it's a franchise to support the community and the last thing I know is -- the last thing you guys want to do is it about yourself, but I think it's applauded a tragedy. So you guys did a great job stepping up being a community bank in supporting the community far beyond loans and deposits.

[James Ryan, CEO & Director]

We appreciate you support.

[Benjamin Gerlinger, Hovde Group]

Yes, absolutely. In terms of just kind of growth going forward, I think it makes sense that it's a little bit softer. I mean, obviously, economic outlook isn't great. But when you guys think of kind of new loans, any sort of subcategories within lending or within the loan portfolio that you guys are kind of targeting is like this is an area that we could still see some growth or positive risk-adjusted returns in any sort of geographies that might entail?

[Mark Sander, President & COO]

I wouldn't specify any geographies, Ben, but C&I remains relatively strong, I would say. We've seen a lot of C&I clients over the last quarter. And they remain positive, slightly more muted than a few quarters ago given rates and noise relative to recession. But still positive outlook overall in C&I, generally speaking, strong operating performance, and they're still looking to invest. So I think the C&I space still looks solid, albeit at a lower level than we saw in '22. In CRE, certainly, volumes are down, but you still have a couple of sectors, multifamily and industrial, which is where we do the vast majority of our new business these days, which are holding up well. They're not seeing major rent increases, but they're still seeing modest rent increases off of really strong basis. So you still have pockets of strength out there.

[Benjamin Gerlinger, Hovde Group]

That's great to hear. And then I know you guys have done a pretty sizable rebranding and adjustment and frankly, highlighting wealth management. Do you still think that there's a lot of additional hires? Is that kind of embedded or are we still kind of -- are we planning somewhat of a run rate? I mean, obviously, market-dependent helps assets under management. I'm just trying to think from a fee income perspective. It seems like you guys are growing faster than peers, but clearly investing there, too. So I'm just trying to see the dynamics within that subcategory?

[Brendon Falconer, CFO]

Maybe I can start, Ben, and Mark can chime in. But First, the new hires are embedded in our outlook on the expense guide. So a lot of that would include additional wealth hires. And I know we're still seeing a lot of talent and having a lot of that and so continue to invest that. And I do think the momentum you've seen over the last couple of quarters in this space, we're hopeful that continue as market dynamics and be a bit of a headwind there.

[Mark Sander, President & COO]

I think the story here is. Similar to what we said relative to the growth, right? I think we still see opportunities at a lower level of new hires in '23 than we saw in '22, but we'll still hire. We hired 8 revenue producers across wealth and commercial in Q1. Again, I think it'll continue there's still markets we like to build out further. And we still -- we invested a long haul. And so we're a franchise that people want to join, and we still are -- I think they're a nice -- I think people who are high performers pay for themselves quickly. We never tire of saying that to the people. And I think we're going to -- you'll continue to see a steady stream, albeit at a lower level of new hires in '23.

[Operator]

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

[Terence McEvoy, Stephens Inc.]

And first off, Jim, I also want to share my ongoing support for you and the Old National team.

[James Ryan, CEO & Director]

Thanks, Terry. That means an awful a lot.

[Terence McEvoy, Stephens Inc.]

And then just a couple of questions here. Brendon, I recognize and appreciate the predicting and forecast in deposit betas tough to really estimate, but when you look at your NII guide of 9% to 12%, is there a deposit beta range or some underlying assumptions that you're willing to share within the outlook for full year NII.

[Brendon Falconer, CFO]

Sure. As you said, this is a tough environment, but we did want to at least put some out there. So what we did is we modeled both the forward curve, which implies kind of 2.5 cuts in the back half of the year. And then something more consistent with the Fed dot plot, which is one more and flat. And then we looked at a range of betas from 30% to 40% cumulative by the end of the year, and that's kind of where the range of possibilities came out. as we look at that and try to probability weight it, we have a bias towards the higher end of that range, but it's just difficult to pinpoint with any more precision than that.

[Terence McEvoy, Stephens Inc.]

Right. And then maybe as a follow-up, any comments with regards to deposit trends in metro versus community markets and how they've differed over the last several quarters at all?

[Brendon Falconer, CFO]

There really hasn't been a big difference. We have one market in particular, one state that has typically had a higher beta than others, but generally fairly consistent across the footprint.

[Mark Sander, President & COO]

And we have slightly different pricing parameters across markets. And so to reflect some of those regional differences. But yes, the performance has been stable across the entire footprint.

[Terence McEvoy, Stephens Inc.]

And then one last quick one. The debt security loss, was that an investment in one of the banks that fed last quarter?

[John Kamin, EVP & Chief Information Officer]

It was.

[Operator]

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

[Christopher McGratty, KBW]

Great. Like everyone else, extend our condolences to the ONB family. Jim, the -- or maybe a question for Brendon. The $1.2 billion that's going to come off the bond book over the next year would effectively map to one for one on your loan growth. So I guess, is that the way you're thinking kind of flat earning assets from here? And then the second part would be great. And the second part would be, given the steps you've been doing to protect downside risk on the margin. How do we think this bigger picture, the trajectory of the NIM, the core margin if the futures curve does give us some cuts maybe into next year?

[Brendon Falconer, CFO]

Yes, I'll point you back to the kind of year-over-year guide that we just -- we talked about clearly there'll be pressure on the margin embedded in that the year-over-year increase. And just -- it's really difficult to, again, say where that thing is going to land. But in terms of the downgrade protection, we continue to be really active on that spot and continue to put pressure. I mean put additional protection there. And obviously, as deposit costs continue to increase, we get closer and closer to a neutral risk rate position, which is what we're trying to move towards over the next couple of quarters.

[Christopher McGratty, KBW]

And in terms of just broader balance sheet management, is there anything that might be on the table given the environment has gotten a little bit more challenging? And also, can you remind us where you'd be comfortable letting the loan-to-deposit adrift.

[Brendon Falconer, CFO]

Yes. So yes, obviously, we're -- this is a dynamic environment. All tools are on the table, both off balance sheet and on balance sheet opportunities to preserve margin and protect capital. So we'll continue to look at all opportunities, but we don't see anything big or major restructurings in the future. And we think we have room to grow on the loan-to-deposit ratio. We have ample liquidity and we have levers to continue to let some of the noncore consumer books shrink to support higher and better quality commercial growth.

[Christopher McGratty, KBW]

Okay. Great. And then, Jim, maybe one for you. You noted the buyback. I see that happened before, March 9. I guess what would it take to either turn it back on? Or perhaps consider something external with your capital. Typically, you guys have been pretty disciplined in when you see things, but there's a lot of volatility and there likely could be some opportunities?

[James Ryan, CEO & Director]

Yes. Obviously, more stability for a longer period of time, I think is what's going to require for us to get more comfortable in looking at capital differently, getting more clarity as the year plays out with respect to the economy, I think, is also going to be critical. We're in no hurry to do much different with our capital. We're just going to continue to watch how the year plays out. And if it plays out where it's a little bit better than everybody anticipates. I think we could be thinking about capital in the future. But until then, we just got to sit on the sidelines and watch things play.

[Operator]

The next question comes from the line of Brody Preston with UBS.

[Broderick Preston, UBS]

Good morning, everyone. Again, like everybody else, I want to say I'm terribly sorry about what happened. That's very tragic. Yes. To some of the noninterest-bearing deposits, I just want to ask if there's any geographic concentration as to where that runoff occurred within your footprint? And any thoughts you can offer on expectations from here? I think Scott asked something about it earlier, but I might have missed it.

[Brendon Falconer, CFO]

Yes, sure. I can tell. No geographic concentrations. Clearly, it's mostly in the commercial side. We look at a higher percentage of noninterest-bearing deposits in total. And we had talked about pre-COVID, we were at a low point about 28% on noninterest-bearing deposits, and that might be a good way to think about a potential .

[Broderick Preston, UBS]

Okay. Understood. And then I did want to just circle back on the assumptions and the allowance that the 7.1% unemployment. Is that like a 2024 number? Like just give me a timeframe on that.

[Brendon Falconer, CFO]

Yes. I can't remember specifically the quarter that, that peaks, but that is the peak unemployment in the Moody's S3 scenario. We can follow back up with you.

[Broderick Preston, UBS]

Yes, that would be great. Could you just -- I want to circle back on the beta commentary. I think you responded to Terry's question maybe on NII, you said 30% to 40% beta is what you ran through when you did the different scenarios. I'm assuming the 40% is maybe in the flat scenario using the dot plots and the 30% is maybe closer if we get Fed cuts. Is that a good way to think about it? And could you help us understand what the interest-bearing beta is or if that was the interest-bearing beta that you were talking about?

[Brendon Falconer, CFO]

That is the interest-bearing beta. We ran all of those beta assumptions through both curves, but to your point, obviously, we'd expect probably a lower bid in the forward curve where there's cuts, higher beta and if it's higher for longer. But just where we're leaning towards [indiscernible] at the higher end or by towards the higher end of that range as we look through it. It's probably unlikely we have the highest beta in a down or a rate-cutting environment.

[Broderick Preston, UBS]

Got it. Could you remind us what percentage of the loan portfolio is floating rate and then give us a sense for what the fixed rate loans that need to reprice over the rest of the year look like?

[Brendon Falconer, CFO]

Yes, we are at 56% floating today. And the duration of our loan book is roughly 5 years. So you'll keep about 20% of our fixed rate loans reprice meaningfully higher.

[Broderick Preston, UBS]

Got it. And are we done with the hedging? Or is there additional hedging that's going to take place on the loan side?

[Brendon Falconer, CFO]

No. We'll continue to look for opportunities. Like I said, both on balance sheet and off balance sheet to continue to layer in downward protection and protect margin. And we're not taking our eyeball off OCI and capital. So we'll -- there's some opportunities to do there to protect that.

[Broderick Preston, UBS]

Got it. And then last one for me was just if you happen to have the assets under management at quarter end.

[Brendon Falconer, CFO]

Yes, it was $28 billion.

[Broderick Preston, UBS]

Okay. So relatively flattish quarter-over-quarter?

[Brendon Falconer, CFO]

Yes.

[Operator]

We have a follow-up question from the line of Scott Siefers with Piper Sandler.

[Robert Siefers, Piper Sandler & Co.]

Just sort of a [indiscernible] within the 9% to 12% NII guidance, growth NII guidance, does that assume the contractual accretion? Or is there a different number baked into there?

[Brendon Falconer, CFO]

Slightly higher than the contractual accretion number, kind of in that typical 20%, 30% range.

[Operator]

The next question comes from the line of John Arfstrom with RBC Capital Markets.

[Jon Arfstrom, RBC Capital Markets]

Like the others just deepest condolences to everyone impacted. I wanted to get to a couple of follow-ups here. But you used the term limited pricing exceptions in terms of your deposit management. How much more frequent is that today than, say, it was prior to mid-March.

[Brendon Falconer, CFO]

I don't know that it's picked up materially, it's been pretty steady since December. And I think if you look at the average interest-bearing cost and sort of the spot rate differences, to that pace hasn't really increased. So I think it's indicative. It's a pretty steady state.

[Mark Sander, President & COO]

We have competitive rack rates, as Brendon alluded to earlier. And some of the larger deposit balances we've got to them early. And so -- but most of that has played its way out. I wouldn't say it's done, but I would say the vast majority of the pricing exceptions is largely behind us because, again, the large balances were on it quickly. We're also getting aggressive and on the offense judiciously in our markets, right, where we're opening more accounts than we're losing and raising balances across our footprint.

[Jon Arfstrom, RBC Capital Markets]

Okay. Do you guys -- this seems like a crazy question, but have things really changed that much in terms of deposit pricing since mid-March?

[Mark Sander, President & COO]

Interesting question. Not really. Yes, it's a great question. There's been a lot more conversations, but the actual pricing hasn't changed dramatically since mid-March.

[Jon Arfstrom, RBC Capital Markets]

Yes. Okay. That was my sense, but I thought I should ask. A couple more things here. You're talking about your relationship managers and the focus on the full banking relationship. Is that something that's different that's now expected from your borrowers and your relationship managers? Or does that change or restrict any opportunities for you? Just you're thought, talking about a tightened pricing structure, enhanced credit structure and kind of chasing deposits as well.

[Mark Sander, President & COO]

I really appreciate that question because the answer is no. I mean that's our model, right? It's a relationship-based model, and we lend to people that bank with us. In times like this, you can be more adamant and forceful and disciplined, but I'd like to think candidly that we always are. And I think in general, we are, but this is a place where you draw a line in the sand a little bit more and make sure that that's the case.

[Jon Arfstrom, RBC Capital Markets]

Okay. And then just last one, this is a follow-up on Brody's question. The S3 Moody's rating is obviously pretty severe. Are you guys more concerned today about credit than you were a quarter ago? And if there's a degree of whether you're more concerned or not, you haven't changed your views at all. And then what happens if that S3 is just way off and it doesn't come true and where we end up in a much better spot than that.

[James Ryan, CEO & Director]

Jon, let me take the top of that. I don't think we're meaningfully more concerned about credit today than we were heading into really all of last year and into this year. Obviously, we're not immune from hearing about what's going on in the economy. And -- but as Mark said, we spent an awful lot of time with clients, and when we're out with clients, we're just not hearing that same kind of feedback that seems to be discussed in today's new cycle. Having said that, we think it's prudent and have had that opinion for quite some time. I guess the question gets back to maybe more of an accounting question about when do we think about a different forecast to run through there?

And Brendon, I don't know what else you'd add to that?

[Brendon Falconer, CFO]

No, obviously, I think there will be a time where whatever recession may or may not be coming hits, we're going to -- we'll have to think about a different weighting for the Moody's S3 and that would imply some opportunity for potential reserve relief depending on what the environment looks like.

[James Ryan, CEO & Director]

Mark continues to lead us through portfolio reviews and making sure that we're going through and doing deep dives on the entire book and particularly those areas that are generally more vulnerable. We're going to continue to do that, look for kind of active, proactive management that we've always been known for. And if we identify weaknesses, we're going to put them in the hospital quickly with the hope that they come out healthy again. And we're just going to continue to do that. And that's -- we're probably a little bit more sense to that today than we were maybe 6 months ago, but that's absolutely the approach that we've always taken and in these kinds of times.

[Operator]

[Operator Instructions]. There are no further questions registered at this time. I'd like to turn the call back over to Jim Ryan for closing remarks.

[James Ryan, CEO & Director]

Well, thank you for your participation. Thank you for your support. It's meant a lot to all of us. And as usual, if you have any follow-up questions, please don't hesitate to reach out to the whole team. We'll be here to answer anything you have. Thank you.

[Operator]

This concludes Old National's call. Once again, a replay, along with 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 866-813-9403. Access code 569807. This replay will be available through May 9. If anyone has additional questions, please contact Lynell Walton at 812-464-1366. Thank you for your participation in today's conference call.