Old National Bancorp

NASDAQ:ONB

Earnings Call Analysis

Old National’s Strong Q2 2024 Performance Driven by Strategic Growth

Old National Bancorp exceeded expectations in Q2 2024, reporting $0.37 GAAP EPS and $0.46 adjusted EPS, over consensus by 5%. Their revenue growth and lower expenses led to a favorable operating leverage, driven by investments in new markets, low-cost deposits, and solid credit performance. Notably, their CapStar Bank partnership added $2.3 billion in deposits and $2.6 billion in loans. Excluding CapStar, deposits grew 2.4% and loans 5.9% annualized. Adjusted ROE was 17.2%, and book value per share increased by 10% year-over-year. Looking ahead, they anticipate modest net interest income growth for the rest of 2024.

A Strong Start to 2024

Old National Bancorp began 2024 with robust financial performance, indicating a strong start for the year. The company reported adjusted earnings per share (EPS) of $0.46, which exceeded consensus expectations by $0.02 or 5%. This result was attributed to better-than-expected revenue growth and lower expenses. Additionally, the adjusted return on average tangible common equity stood at an impressive 17.2%, and the adjusted return on assets (ROA) was 1.12%. These metrics highlight the company's solid operational efficiency and profitability, backed by an adjusted efficiency ratio of 52.6% .

Strategic Expansion with CapStar Bank

A noteworthy development in the second quarter was the successful integration of CapStar Bank, a Nashville-based partner. The merger completed on April 1, 2024, strengthened Old National's presence in several Southeastern markets. By July 15, all former CapStar branches had seamlessly transitioned into Old National's network. This integration has been marked as a significant achievement, enhancing the franchise's footprint and operational capacity .

Solid Financial Growth

In terms of financial growth, the company realized a 2.4% annualized growth in total deposits and a 5.9% annualized growth in loans, excluding CapStar-acquired assets. Including CapStar, total deposits surged by $2.3 billion, while loans grew by $2.6 billion during the quarter. The company maintained a low total cost of deposits at 216 basis points, demonstrating disciplined financial management. Moreover, the tangible common book value per share grew by 10% from the previous year, reinforcing the company's focus on value creation .

Balance Sheet and Capital Position

Old National's balance sheet reflects continued stability post-CapStar acquisition. The company's capital ratios remained stable, with the Common Equity Tier 1 (CET1) ratio unaffected by the merger, ensuring a solid foundation for future growth. Liquidity and capital levels also showed a strong position, as the company continued to accrete capital faster than peers through a robust return profile and a 30% dividend payout ratio. This prudent financial management positions Old National well for the latter half of 2024 .

Controlled Noninterest Expenses and Stable Credit Quality

The company reported adjusted noninterest expenses of $264 million for the quarter, with CapStar contributing $18 million. These expenses were within the expected guidance and displayed tight control. Additionally, credit quality remained stable. The delinquency ratio stayed constant, and the nonperforming loan ratio decreased by 4 basis points. The total net charge-offs were 16 basis points, showcasing the company's conservative and proactive credit risk management approach .

Positive Outlook and Future Guidance

Looking ahead, Old National expects a modest increase in net interest income (NII) in the third and fourth quarters of 2024. This forecast is based on anticipated rate cuts and a declining rate deposit beta. Though second-half charge-offs are projected to be slightly higher, the company remains confident in maintaining annual charge-offs between 15 to 20 basis points. Old National also reaffirmed its commitment to strategic priorities such as organic loan growth and maintaining a top-tier adjusted return profile among peers .

Expanding in High-Growth Markets

The merger with CapStar has opened up significant opportunities in high-growth Southeastern markets, particularly Nashville. The company's expanded presence in these regions is expected to drive new business and client relationships. This strategic move, combined with disciplined financial management and a focus on maintaining high credit quality, positions Old National for sustained growth and value creation in the coming years .

Earnings Call Transcript 2024-Q2

[Operator]

Welcome to the Old National Bancorp's Second 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 disclosed. 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 provides more appropriate comparisons. These non-GAAP measures are intended to assist investors' understanding of performance trends. Reconciliations for these numbers are contained with 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?

[James Ryan, executive]

Good morning. Earlier today, Old National reported our second quarter 2024 results. Our earnings per share exceeded expectations due to better-than-expected revenue growth and lower expenses, which led to positive operating leverage. These strong second quarter results were driven by our investments in new markets and talent and our footprint, supported by our peer-leading low-cost deposit franchise, solid credit performance and ample capital. We remain focused on the acceleration of our wealth management, treasury management and capital markets businesses.

Before moving to our second quarter highlights, I also want to provide you an update on our previously announced partnership with the Nashville-based CapStar Bank, which closed on April 1, and expanded our franchise to several strong and vibrant southeastern markets.

I'm pleased to share that last week, we successfully completed all banking center and systems conversion for this partnership. As of July 15, all former CapStar branches have been converted to Old National banking centers, and all legacy CapStar team members are now operating in the Old National network.

The success of our partnership would not have been possible without our team members' hard work, passion, professionalism and collaboration, and I want to take this opportunity to acknowledge and thank everyone involved in the integration for a job extremely well done.

Now moving to our second quarter highlights on Slide 5. We reported GAAP earnings of $0.37 per common share, and our adjusted EPS was $0.46. These adjusted earnings per share results exceeded consensus [ assets ] by $0.02 or 5%. Our adjusted return on average tangible common equity for the quarter was 17.2% and our adjusted ROA was 1.12%. Our adjusted efficiency ratio was a low 52.6%.

Excluding deposits and loans assumed in the CapStar transaction, our total deposit growth was 2.4% annualized during the quarter and our loan growth was 5.9% annualized. Including CapStar deposits were up a total of $2.3 billion and loans were up $2.6 billion in the quarter. Our total cost of deposits for the quarter remains at a low 216 basis points. At the same time, we remain focused on growing our tangible common book value per share, which grew 10% from a year ago.

In summary, our second quarter 2024 earnings evidenced another strong on-plan quarter for Old National. We exceeded aimless expectations due to our strong deposit franchise, disciplined loan growth, solid credit quality and ample capital.

With that, I'll now turn the call over to John.

[John Moran, executive]

Thanks, Jim. Turning to Slide 6, you can see our second quarter balance sheet, which highlights continued stability in our liquidity and our capital position. Our balance sheet also reflects the close of the CapStar transaction on April 1. Total deposit growth over the last year has again allowed us to organically fund loan growth while holding borrowings flat. Additionally, we were able to grow our tangible book value per share of 10% over the last year.

Given its relative size and our strong retained earnings in the quarter, the addition of CapStar was essentially capital neutral, with our CET1 ratio unchanged despite closing the deal. We continue to expect that we will accrete capital at a faster pace than most through the combination of a better-than-peer return profile and a 30% dividend payout ratio.

Our loan-to-deposit ratio ticked up modestly due to planned deposit runoff of approximately $400 million at CapStar. Our liquidity and capital levels continue to provide a strong foundation, which positions us well as we enter the back half of 2024.

On Slide 7, we show the trend in total loan growth and portfolio yields. Total loans grew $2.6 billion, with $2.1 billion attributable to CapStar. Excluding CapStar, total loans grew 5.9% annualized from last quarter, in line with our expectations. We remain focused on full relationships and structure at prices that meet our risk-adjusted return requirements. New loan production rates in the high 7% range and marginal funding costs in the mid-4% range support our expectation that net interest income will grow modestly for the remainder of 2024.

The investment portfolio increased 3% in the quarter due to the CapStar transaction. Shortly after closing, we repositioned CapStar investments, which improved our total portfolio yields. Overall, fair values and duration were effectively unchanged. As we've mentioned in past calls, new money yields continue to run 200 basis points above back book yields, and we have approximately $1.3 billion in cash flows expected over the next 12 months.

Moving to Slide 8. We show our trend in total deposits which grew $2.3 billion, with $2.1 billion attributable to CapStar. As mentioned earlier, we intentionally ran approximately $400 million of higher cost deposits out of CapStar at closing. Excluding CapStar, total deposits grew 2.4% annualized with normal seasonal outflows in commercial and retail deposits, offset by a public fund and broker deposit increases.

Our broker deposits as a percentage of total deposits are 4.6% and remain well below peer levels. We did see a 15 basis point increase in deposit rates compared to the prior quarter, with CapStar driving approximately 5 basis points of that upward pressure. That said, deposit costs leveled out at 216 basis points and were steady over the course of the quarter, which was consistent with our spot rate at June 30. Overall, we remain pleased with the execution of our deposit strategy, and we believe we are stabilizing with respect to both total cost and the noninterest-bearing mix.

Slide 9 provides our quarter end income statement. We reported GAAP net income applicable to common shares of $117 million or $0.37 per share. Reported earnings include the following pretax items: $19 million in merger-related charges and $15 million of CECL day 1 non-PCD provision expense. Excluding these items, our adjusted earnings per share was $0.46.

Moving on to Slide 10. We present details of our net interest income and margin. Spread revenue and margin were both slightly better than forecast, primarily due to higher asset yields and accretion. Our low total deposit cost of 216 basis points remains a key competitive advantage. Year-over-year, we again showed deposit growth that essentially kept pace with asset generation, while maintaining a low total cost of funding.

On Slide 11, we show trends in adjusted noninterest income, which was $87 million for the quarter, with CapStar contributing $7 million. Our primary fee businesses performed well, with bank fees in line with our expectations, mortgage benefiting from seasonality and modest improvements in production and pipelines, and capital markets returning to more normalized levels.

Continuing to Slide 12, we show the trend in adjusted noninterest expenses of $264 million for the quarter, with CapStar contributing $18 million. Expenses were in line with our guidance and remain very well controlled.

On Slide 13, we present our credit trends which remains stable, reflecting the quality of both our commercial and consumer portfolios. The delinquency ratio remains stable and the nonperforming loan ratio decreased 4 basis points. Total net charge-offs were 16 basis points and a low 11 basis points, excluding 5 basis points related to PCD loans.

Our second quarter allowance for credit losses to total loans, including reserve for unfunded commitments, was 108 basis points, up 5 basis points from the prior quarter. There were no material changes to our model assumptions and awaiting on the Moody's S3 scenario remains 100%. It is also worth mentioning that our allowance for credit losses plus the discount remaining on acquired loans to total loans now stands at 161 basis points.

Slide 14 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 long periods of time. We have long practiced conservatism here, and we believe the results speak for themselves. With CRE remaining in focus, we have enhanced disclosure in this quarter's presentation.

I'll turn it over to Mark on Slide 15.

[Mark Sander, executive]

Thanks, John. Given the heightened focus on credit and CRE, in particular, this quarter, we decided to dive deeper into our loan portfolio and specifically expand on certain segments that we have been watching more closely for some time.

Slide 15 breaks down our $36 billion portfolio, which is well diversified across our desired and actual mix of approximately 40% C&I, which includes owner-occupied CRE, given it is underwritten as C&I, 30% investor CRE and 30% highly-rated consumer.

Investor CRE of $11.7 billion is well diversified across subsegments, the most noteworthy of which I will talk about in a minute. Importantly, owner-occupied CRE represents $4.3 billion of our portfolio, with a modest risk profile in line with the rest of our C&I book.

Lastly on this page, our diversity is reflected geographically across our footprint as well, with modest out-of-market exposures driven almost entirely by in-market relationships.

We have presented looks similar to Slide 16 many times. So to briefly reiterate, we believe our pending maturity schedule is extremely manageable. We have always stressed our CRE loans in underwriting at 300 basis points over current rates, such that the vast majority of our pending maturities have interest rates still within that range. We have only about $400 million maturing over the next 18 months, which are at rates outside of this underwriting cushion, and most of those have since seen rent growth well beyond our originally underwritten levels.

CRE office has been of concern industry-wide for some time, so we thought more color was warranted as seen on Slide 17. Though sometimes the segment gets painted with the same brush, not all office loans are alike. With an average loan size of $2.9 million, our portfolio looks a great deal like the picture on the left, which is generally lower risk than the one on the right.

Our office exposure is well diversified by loan size and geography. The lowest risk segments in this space, investment-grade tenants and/or medical office buildings, comprise over 40% of our office exposure, and the highest risk segment, central business districts, less than 14%.

The credit metrics overall of our office portfolio are strong, with an average debt service coverage of nearly 1.5x and a weighted average loan-to-value of 64%. As in all of our portfolios, we are well disciplined around maximum individual credit exposures. In this case, the largest is $50 million, and the top 10 dropped dramatically from there.

On Slide 18, we cover multifamily, our largest segment in investor CRE at $5.5 billion. Our multifamily lending trends much more towards middle-income tenants than Class A high-rises in major metro markets. This book is also well diversified and granular, with an average loan size of just over $5 million. Overall, this asset class remains stable in our markets, although prolonged higher interest rates have impacted some more recent projects.

Here again, we have strong credit metrics in terms of debt service coverage ratios and loan to values, and the portfolio is well diversified by dollar exposure and location. Our largest exposures are well within our moderate risk tolerance, represent long-tenured relationships and tend to have stronger credit metrics.

I'll now turn the call back to John.

[John Moran, executive]

Thanks, Mark. On Slide 19, we review our capital position at the end of the quarter. As expected, ratios were essentially unchanged from the first quarter, with the impact from the close of the CapStar transaction absorbed by strong retained earnings.

Slide 20 includes updated details on our rate risk position and net interest income guidance. NII is expected to increase modestly in the third and fourth quarters. Our assumptions are listed on the slide, but I would highlight a few of the primary drivers. First, we assumed 2 rate cuts of 25 basis points each, consistent with the forward curve. Second, we are now anticipating a declining rate deposit beta of approximately 30% in a noninterest-bearing deposit mix that falls 22% by year-end.

We continue to believe that we have positioned the balance sheet well as we reach the end of this rate cycle, and we have achieved a neutral rate risk position. In addition to the 2 cut scenario, we did run a 3 cut scenario and a static curve through our models. The results of each were not materially different from our base case scenario, again, suggesting we have effectively managed the balance sheet to neutral.

Slide 21 includes thoughts on our outlook for the remaining items in the third quarter and the full year 2024. As you can see, our guidance is essentially unchanged, with a modest increase in NII reflecting this quarter's results in a slightly wider provision range. That range reflects loan growth and annual charge-offs that are unchanged, although second half charge-offs are expected to run modestly higher than the 15 basis points we have experienced in the first half, we remain comfortable with the full year outlook of 15 to 20 basis points.

In summary, we had an excellent first half of 2024, with second quarter results better than our expectations, and strong performance metrics. More importantly, we continue to demonstrate our ability to execute against our strategic priorities.

First, we continue to organically fund our loan growth. Second, our adjusted return profile remains top quartile against peers at 17% on tangible common equity. Third, we remain disciplined on operating expenses with an adjusted efficiency ratio below 53%. Fourth, we have clean credit with non-PCD net charge-offs of just 11 basis points, 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 10% year-over-year.

With those comments, I'd like to open the call for your questions.

[Operator]

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

[Robert Siefers, analyst]

I guess -- wanted to ask on just sort of the beta assumption. Maybe, John, when you think of the 30% down beta, maybe just sort of the inside baseball on sort of why you're thinking that's the right number? And maybe some thoughts on how that would trend after 4Q '24? Presumably, there's some catch up later on as time marches on. But just curious how that would sort of flex into 2025 as well?

[John Moran, executive]

Yes. Thanks, Scott. So I think most of what we're going to get the down beta from is really out of the exception price book. That book today is $12.3 billion, 31% or so of total deposits, 38% of our total transaction deposits. And that's at the quarter, sort of [ 4 30 ] was the cost on that book. And we think we'll be able to drop that pretty quick. I mean I think that will be close to 85% kind of beta on the way down. So that's where most of it will be.

And then depending on the path, the short-term rates into 2025, I think that will sort of influence what we're able to do with the exception price book. 2025, I think, is more about fixed asset repricing though and shape of the curve.

[Robert Siefers, analyst]

Okay. Perfect. And then maybe switching gears for a second to the loan growth. Maybe just a broad thought or 2 on where that growth is coming from. I ask, sort of in the context of it, it's been a very weak backdrop for the rest of the industry that you all seem to be outperforming. Maybe sort of where is it coming from? And then maybe over the next several months, do you see trends getting better or worse? And why would that be the case?

[Mark Sander, executive]

Scott, it's Mark. The loan growth this quarter was broad across the footprint. It was about evenly split between CRE and C&I. CRE, we had some construction draws that helped boost it a bit. And in C&I, just some of the hires we've made over the last few years in our expansion markets give us some outsized growth. In this quarter, we had a really nice quarter from our business banking team. That's our core business, that's full relationships, and so it's nice to see them grow nearly $100 million this quarter. So widely diversified.

[Operator]

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

[Brendan Nosal, analyst]

Maybe to start off on kind of the outlook overall at a top level. I mean you broadly reiterated the guide for the rest of this year. But it feels like a fair bit of change environmentally since April, especially with respect to the rate outlook in the environment. I mean I guess I'm just wondering if you had a bias or feeling better or worse about the outlook you're offering now for the past 2 quarters? Where would you folks [ all ] to that?

[John Moran, executive]

Yes. Look, I think the balance sheet is neutral. So NII, I mean, we've been saying for a couple of quarters now, it doesn't really matter what happens with short rates.

I think if there were perhaps some room for upside, I'd point to the few lines where we continue to invest in wealth management, those investments are starting to bear some fruit. Mortgages bouncing along the bottom, but was seasonally better in 2Q than maybe what we would have expected. That would be where I think we might have a little bit of upside to the guide out there.

[Brendan Nosal, analyst]

Perfect. Maybe one more for me before I step back. Can you help us unpack the NII guide for the rest of the year in terms of how you see the margin trending in the back half, especially in light of the core margin firming up this quarter?

[John Moran, executive]

Yes. I think it's a couple of basis points one way or another in third quarter, and then fourth quarter, we'd expect to see things start to improve.

[Operator]

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

[Jared David Shaw, analyst]

Maybe just sticking with the NII and margin. Can you share with us what the accretion was this quarter and what the expectation is for accretion as we go into third and fourth quarter?

[John Moran, executive]

I would say the difference in accretion versus the last quarter was about $5.5 million that came in from CapStar, rough top, a 3 basis point helper. And I'd expect that to be pretty flat for the balance of this year.

[Jared David Shaw, analyst]

Okay. So stable at this, let's call it, [ 11 6 ] in second quarter?

[John Moran, executive]

Yes.

[Jared David Shaw, analyst]

Okay. And then any color on credit migration within criticized, classified, and how you're looking at those trends?

[Mark Sander, executive]

Yes, Jared, it's Mark again. In this quarter, we saw about $75 million coming to criticized and classified from CapStar, which is what we expected. And then multifamily drove the bulk of the rest of the migration this quarter, not unexpected. You had some properties with a little slower lease-up and so the excess cash flow has tightened a bit, but we still feel really good about those properties. They're really solid properties, strong sponsor support and very low loss content, we believe.

[Jared David Shaw, analyst]

Okay. And then looking at the debt service coverage ratio on office, it looks like that improved or increased this quarter. Any color on what was driving that? And is that sort of a stable level, do you think, for the category?

[Mark Sander, executive]

I think that remains to be seen, but we haven't seen the deterioration in those ratios [ generally effect ] at this point. So the best eyesight we have is what's happening right now, and it seems to be stabilizing.

[Operator]

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

[Terence McEvoy, analyst]

Thanks for Slide 17 and 18, I always like pictures. Maybe a question to John, can you just, I guess, simple, how do you fund 5% to 7% annualized loan growth? What's your assumptions on deposit growth, use of wholesale funding for Q3 and the back half of the year?

[John Moran, executive]

Yes. So certainly, Terry, the mission around here has been, for a really long time, but we probably got even more focused on it last year. We are all deposit gatherers. And so certainly, the intention would be to fund our asset generation with core deposits, and we've been able to do that so far.

So if you look year-over-year, our asset generation is basically kept pace with our deposit generation. That would be the plan going forward, to the extent that we have a quarter that deposits are a little bit lighter than the asset generation. We have plenty of capacity on brokered and a lot of capacity on wholesale as well, if we chose to.

[James Ryan, executive]

And I would just remind you, we said this publicly before, but we're going to remain on the offense. To the extent that there are banks that will continue to be aggressive as rates fall, we will remain on the offense. And we just believe this is a good long-term play for us. So I look forward to that opportunity if it presents itself.

[Terence McEvoy, analyst]

And from prior conversations, you've been real conscious of the TCE ratio, which is, call it, 7%. I guess my question is, where would that ratio need to be today before you think about share repurchase?

[James Ryan, executive]

Terry, this is Jim. Certainly, it's a tool we're very conscious of. Clearly, the TCE ratio is in a better spot post our partnership in Chicago. Obviously, the stock price, we're sensitive to earn back. And if you look at today's stock rents, which we're very pleased to have that earn back extend out, it's a little less attractive to it than it once was. But I think we'll just continue to evaluate each day to see if the tool makes sense to use. At this point in time though, I don't think we need to rush into anything and just let the back half of the year play out.

[Terence McEvoy, analyst]

Maybe just stepping out of the earnings model. Could you talk about kind of synergies in the Nashville market between wealth and banking and vice versa, and maybe retention in that market now that the deal has been closed for 3 or 4 months?

[James Ryan, executive]

Let me just give you a high-level view and I'll let Mark or Jim jump in as well. I got to tell you, I was just down there not too long ago and met with a bunch of different clients. We're bringing our Board meeting down there in August, and so we're going to have a client event down there with 150-plus clients and have a chance to interact and really talk about the future of Nashville, the future of the Southeast for us and as we just kind of evaluate the opportunities. And I am -- I continue to be blown away by the opportunities that present themselves to us.

There are obviously no shortage of good banks that are down there, but that doesn't mean we can go out and compete effectively. We got a great team down there. There's just so much organic growth, which is going to present opportunities for us. And while we've always been bullish on that opportunity, every single time we're down there, we get reinforced that the opportunities are endless with us in terms of our team members that are down there completely engaged as well as the new business opportunities.

[John Moran, executive]

Retention has been really high, Terry. And it's early, but I just would say this team is really excited to join Old National. I think they look at the cultural fit and the capabilities that we bring to the table, and they're excited about.

And to your -- the first part of your question, we haven't even begun to tap the wealth opportunities there. This wasn't something that CapStar did much of candidly. And I think we've got a really strong capability. We've got a strong team that was already there, if you may recall. So both sides of that equation are very excited.

[Operator]

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

[Christopher McGratty, analyst]

Jim, any thoughts of tweaking any exposures in the back half of the year, either post deal? I mean there's not -- you don't have a CRE problem, but there's decent liquidity for certain assets. Anything that's on the books that might not be core going into '25?

[James Ryan, executive]

Well, I think all banks retain a certain amount of its balance sheet that's got flexibility around. And while we have, there's no specific plans for us anywhere. I think we need to continually look to optimize the balance sheet, and so we'll need to continue to look at how we're able to bring core funding and to support new growth. One thing is for sure, we're going to continue to acquire new relationships. When those relationships are full relationships, we have a huge appetite to continue to grow, and you can clearly see we've demonstrated that.

One of the challenges -- you followed us for a long time, one of the challenges we had in the past was our ability to grow. That is clearly not a challenge today. We've got great markets, great people, great growth opportunities ahead of us. So to the extent that there are noncore assets that are on the balance sheet or have limited relationships, I think there is an opportunity for us to continue to optimize the balance sheet, but nothing big or wholesale in nature that would dramatically change what you'd expect to see us looking like in the back half of the year. But it's something we've got to continually challenge ourselves to look at.

[Christopher McGratty, analyst]

Okay. Perfect. Maybe dovetailing on the buyback question. Any change in how you're thinking about strategic M&A into '25? I know organic is the focus, but any change there would be great.

[James Ryan, executive]

Yes. I really don't see -- I think there will be plenty of opportunities that present themselves to us in the coming years. Our appetite, I think, as I would express, is very limited right now.

I think just given the organic growth opportunities, the execution that we have in our core markets and the markets we've added through talent and obviously now in Tennessee and North Carolina, I think we owe it to ourselves and owe it to our shareholders to continue to focus on that.

And as we've talked about previously before, the idea of compounding tangible book value in a double-digit clip for the next few years sounds really appealing and really attractive, and I think ultimately may drive the highest award for our shareholders.

[Operator]

[Operator Instructions] Your next question comes from the line of Jon Arfstrom with RBC.

[Jon Arfstrom, analyst]

Maybe start with you, John. You talked about the high 7% on new origination yields in mid-4 funding costs. Would you say the new production is margin accretive at this point? Or is it margin neutral?

[John Moran, executive]

Margin accretive.

[Jon Arfstrom, analyst]

Okay. On the deposit costs, Slide 8, I see that flat deposit cost, the [ 2.16% ] at the end of the quarter. What do you think that looks like in a quarter or 2? What's the message you're trying to send there? Is the pressure stopped?

[John Moran, executive]

I think the pressure has largely moderated. I do think it's still competitive out there. And again, as long as we can continue to do margin accretive business, we're going to stay on our front foot, right?

So if you were to go out to Old National's website today, you'd see us running specials that are very competitive. I mean, we are open for business, and we're going to fund this bank. I think that it's moderating. The worst of it is clearly behind us. Could we see a little drift up in third quarter? Yes, that's possible.

[Jon Arfstrom, analyst]

Okay. Tying into that, the noninterest-bearing guide, the 22% by the end of the year. Do you feel like that's it? Or does that -- do you think that continues to leak lower naturally? Or do you feel like we're getting to the bottom on that percentage?

[John Moran, executive]

I think we're getting there. I think we're towards the bottom. And part of the secret sauce around here, as you know, is just the granularity of the book, right? I mean something like 80% of the relationships here are less than $25,000. The average on that book is like [ 4,500 ] a box, right? At some level, there's still probably a little bit of cash sorting that needs to happen, but I think we're through most of it.

[Jon Arfstrom, analyst]

Okay. Okay. And then just to wrap up, you feel like a cut or 2 isn't necessarily beneficial to your outlook, but maybe just the new production is beneficial to the margin outlook. Is that a fair way to look at it or am I misreading that?

[John Moran, executive]

Yes. No, that's a fair way to look at it, Jon.

[Operator]

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

[James Ryan, executive]

Well, thank you for your support today. As always, the team will be here to answer any follow-up questions you have. I hope you will have a great day.

[Operator]

This concludes Old National's call. Once again, a replay, along with the presentation slides, will be available for 12 months on the Investor Relations page of Old National's website, oldnational.com. A replay of the call will also be available by dialing [phone], access code 2973663. This replay will be available through August 6.

If anyone has additional questions, please contact Lynell Durchholz at [phone]. Thank you for your participation in today's conference call. You may now disconnect.