Earnings Call Transcript
OLD SECOND BANCORP INC (OSBC)
Earnings Call Transcript - OSBC Q3 2024
Operator, Operator
Good morning, everyone, and thank you for joining us today for Old Second Bancorp Incorporated's Third Quarter 2024 Earnings Call. On the call today are Jim Eccher, the company's Chairman, President, and CEO, Brad Adams, the company's COO and CFO, and Gary Collins, the Vice Chairman of our Board. I will start with a reminder that Old Second's comments today will contain forward-looking statements about the company's business, strategies, and prospects, which are based on management's existing expectations in the current economic environment. These statements are not a guarantee of future performance, and results may differ materially from those projected. Management would ask you to refer to the company's SEC filings for a full discussion of the company's risk factors. The company does not undertake any duty to update such forward-looking statements. On today's call, we will also be discussing certain non-GAAP financial measures. These non-GAAP measures are described and reconciled to their GAAP counterparts in our earnings release, which is available on our website at oldsecond.com on the home page and under the investor relations tab. Now, I will turn it over to Jim Eccher.
Jim Eccher, CEO
Good morning, everyone, and thank you for joining us. I have several prepared opening remarks and will give you my overview of the quarter and then turn it over to Brad for additional details. I will then conclude with certain summary comments and thoughts about the future before we open it up to our Q&A. Net income was $23 million or $0.50 per diluted share in the third quarter of 2024 and return on assets is 1.63%. Third quarter 2024 return on average tangible common equity was 17.14%, and the tax equivalent efficiency ratio was 53.38%. Third quarter 2024 earnings were negatively impacted by $2 million of provision for credit losses in the absence of significant loan growth, which reduced after-tax earnings by $0.03 per diluted share. However, despite this profitability, Old Second remains exceptionally strong, and balance sheet strengthening continues with our tangible equity ratio increasing by 75 basis points linked quarter to 10.14%. Common equity Tier-1 increased to 12.86% in the third quarter, and we feel very good both about profitability and our balance sheet positioning at this point. We are pleased to announce a 20% increase in the common dividend this quarter, reflective of continuing strong profitability and a well-capitalized balance sheet. We would like to position ourselves to regularly deliver growth in the common dividend as we continue to build Old Second into one of the best banks in Chicago. Our financials continue to reflect a strong net interest margin, even as market interest rates begin to decline. Pre-provision net revenues remain stable and exceptionally strong. For the third quarter of 2024, compared to the prior year-like period, income on average earning assets increased $1.8 million or 2.5%, while interest expense on average interest-bearing liabilities increased $4.3 million or 38.4%. The increase in interest expense is rate-driven and primarily due to remixing and market pricing on certain commercial deposits. The third quarter of 2024 reflected an increase in total loans of $14.5 million from the prior linked quarter end, primarily due to growth in commercial, lease, and construction portfolios, net of payoffs on a few large credits during the quarter. Comparatively, loan growth in the third quarter of last year was $14 million, which is in line with the 2024 linked quarter's total loan growth. The historical trend in our bank is loan growth in the second and third quarters of the year due to seasonal construction and business activities. Currently, activity within loan committee is improving but remains relatively modest compared to prior periods, primarily due to many customers waiting to see how market volatility, including election results, and any further interest rate reductions play out in the next three to six months. The tax equivalent net interest margin increased by 1 basis point in this quarter, driven by continuing higher rates on variable securities and loans, partially offset by higher funding costs. Loan yields reflected a 16 basis point increase during the third quarter compared to the linked quarter and a 28 basis point increase year-over-year. Funding costs increased due to increases in both rates and growth in time deposits. The tax equivalent net interest margin was 4.64% for the third quarter of 2024, compared to 4.63% for the second quarter and 4.66% in the third quarter of last year. The net interest margin has remained relatively stable in the year-over-year period due to the impact of rising rates on both the variable portions of the loan and security portfolios, as well as the deposit base and our short-term borrowing costs. Loan-to-deposit ratio is at 89% as of September 30, compared to 88% last quarter and 87% as of September 30, 2023. As we have said in the past, our focus continues to be on balance sheet optimization. I'll let Brad talk more about that in a minute. The third quarter of 2024 saw improving asset quality metrics and moderate actions taken on substandard credits, continuing remediation trends noted primarily since late last year. Our belief remains that the fourth quarter of 2023 represented an inflection point in our credit trends. Old Second began substantially downgrading large amounts of commercial real estate loans, including office and healthcare, at the end of 2021 and accelerating through 2022. Substandard and criticized loans went from approximately $60 million, or a little more than 1% of loans in the third quarter of 2021, to a peak of nearly $300 million or over 7% of loans in the first quarter of 2023. As of the end of the third quarter of 2024, substandard and criticized loans are down $187.6 million, which is essentially flat from last quarter and approximately $15.7 million less than year-end 2023 and more than 40% below peak levels. The expectation remains for further improvement through the rest of the year. Encouragingly, our special mention loans decreased $45.6 million or more than 37% from a year ago. We continue to expect realization of a relatively less costly resolution on a number of non-performers in the near future and remain hopeful we can recover some of those losses realized in the second half of 2023. In the third quarter of 2024, we recorded net recoveries with the allowance for credit losses on loans of $155,000 compared to net charge-offs of $5.8 million in the second quarter of this year and net charge-offs of $6.6 million in the third quarter of 2023. Prior quarter elevated net charge-off levels and continued asset remediation efforts have resulted in a more stable credit outlook on current problem loans and the good news is that classified loans continue to decline, falling by almost $10 million in the third quarter with the remainder of the portfolio remaining well behaved. Continued stress testing has not raised any new red flags for us and the bulk of our loan portfolios transition into the higher rate environment and will be impacted by downward rate movements going forward. The allowance for credit losses on loans increased to $44.4 million as of September 30, 2024, or 1.11% of total loans from $42.3 million at the end of the second quarter, which was at 1.06% of loans. Unemployment and GDP forecasts used in future loss rate assumptions remained fairly static from last year with a 25 basis point uptick in the unemployment assumptions on the upper end of the range based on recent Fed projections. The change in provision level quarter over linked quarter reflects the reduction in our allowance allocations on substandard loans, which largely relates to the 29% reduction in criticized assets since September 30, 2023. I think investors should know that with our continuing level of strong profitability we will be aggressive in addressing weak credits and we remain confident in the strength of our portfolios. Non-interest income continued to perform well with growth relatively flat in the third quarter of 2024 compared to the linked quarter and wealth management fees, service charges on deposits, card-related income, and mortgage income excluding the impact of mortgage servicing rights mark-to-market. A death benefit of $893,000 was realized on one BOLI contract in the second quarter of 2024 with the final true-up of these proceeds in the third quarter of 2024; no like benefit was recorded in 2023. Other income increased in the third quarter of 2024 compared to the prior linked quarter and prior year-like quarter due to recoveries on a vendor contract and refunds of prior servicing advances on a sole credit card portfolio. Expense discipline continues to be strong with total non-interest expense for the third quarter of 2024 at $1.4 million more than the prior linked quarter primarily due to an increase in incentive accruals and the First Merchants acquisition costs incurred of $471,000 in the third quarter. OREO expenses also increased in the third quarter of 2024 compared to the prior quarter as the second quarter included a net gain on the sale of OREO of $259,000. Our efficiency ratio continues to be excellent as the tax equivalent and efficiency ratio adjusted to exclude acquisition costs and BOLI death benefits was 52.31% for the third quarter compared to 52.68% for the prior linked quarter. As we look forward, we are focused on doing more of the same which is managing liquidity, building capital, and also building commercial loan origination capability for the long-term. The goal is obviously to continue to create a more stable long-term balance sheet mix featuring more loans and less securities in order to maintain the returns on equity commensurate with our recent performance. With that, I'll turn it over to Brad for additional color.
Brad Adams, CFO
Thanks, Jim. I don't know there's a ton more for me to talk about. I think Jim covered a lot of things. Net interest income increased by a little less than $1 million or 1.5% to $60.6 million for this quarter ended September 30 relative to $59.7 million last quarter. Securities yields increased 17 basis points and loan yields increased by 16 basis points. Total yield on interest-earning assets up by a similar 16 basis points up to 583 basis points in aggregate. This is partially offset by a 15 basis point increase in the cost of interest-bearing deposits and a 19 basis point increase to interest-bearing liabilities in aggregate. The end result of that was a 1 basis point increase in the NIM. Basically making my guidance from last quarter wrong yet again, but not by much. Obviously, we have rate cuts now, 50 basis points and more expected in the forward curve, which tends to show up in market indices before the cuts actually happen and does impact our margin. I don't have anything different to say in terms of the guidance there. I still think it's around 7 basis points per 25 basis point cut impact to the margin. That will be mitigated somewhat in the near term by the announced acquisition of 5 branches and a couple hundred million in deposits that are coming with that that we expect to close in early December. Deposit flows this quarter were pretty much stable. Nothing like the volatility we saw last year and earlier this year. Average deposits decreased by $91 million or 2% quarter over linked quarter, and period-end total deposits somewhat better at $56.3 million or 1.2%. Deposit pricing in our markets has come down a bit, but it remains exceptionally aggressive relative to the Treasury curve. And it's still largely pricing off overnight borrowing levels. Public funds has provided a bit of a headwind as fixed income markets offer an attractive alternative to some customers. My overall position remains, and excuse me while I talk our book here for a minute, my overall position remains that markets continue to believe that inflationary trends are far easier to kill than they actually are. The level of rate cuts reflected in the forward curve is not a realistic expectation without significant declines in real demand and consumption, otherwise known as a recession. My current expectation does not include a near-term recession, but the amount of fiscal and monetary large asset is currently on the table. As a result, I see very little value in duration at this point, and cash flows are being reinvested in variable rate opportunities. With credit spreads unbelievably tight, there is simply no value out the curve at this point relative to the risk. So poor marginal spreads persist and Old Second is continuing to focus on compounding book value and maximizing returns. For us, that means being careful with expenses and pricing risk appropriately. As a result of the recent rate cuts and their impact on these market indices that I referenced, margin trends for the remainder of the year are expected to trend down modestly. The magnitude will be mitigated by the expected closure of the branch acquisition as I mentioned. Success in funding loan growth with these newly acquired deposits offers the opportunity for upside to these expectations. The loan-to-deposit ratio is still very low at below 90%, and our ability to source liquidity from the securities portfolio remains excellent. AOCI on the portfolio came down by some 30% this quarter, which resulted in some of the capital build that you saw. I think that illustrates what we had been talking about in terms of where that portfolio was positioned on the curve and seeing improvement that may be somewhat better than others are seeing at this point, given the short overall duration of the portfolio. I think capital build will slow from here and I do believe that the overall M&A environment remains very favorable to a bank like Old Second. If that does not come to fruition, we will return capital. A buyback is still in place and is on the table. Non-interest expense increased $1.4 million from the previous quarter, primarily due to the acquisition-related costs, an increase in officer incentive accruals, and an increase in net OREO-related expenses due to ongoing credit remediation. The small gain recorded in OREO last quarter. Given the bottom-line performance, employee investment costs have been running high, but we will maintain the ability to dial that back as conditions warrant. That's all I really have. With that, I'd turn the call back over to Jim.
Jim Eccher, CEO
All right. Thanks, Brad. In closing, we remain confident in our balance sheet and the opportunities that are ahead. Our focus remains on assessing and monitoring risks within the loan portfolio and optimizing the earning asset mix in order to maintain excellent profitability. Net interest margin trends are perhaps more resilient than some expect, and income statement efficiency remains at record levels. I am proud of the year that is shaping up for us, given the risks we have faced. That concludes our prepared comments this morning, so I'll turn it over to the moderator, and we can open it up to questions.
Operator, Operator
Thank you. Ladies and gentlemen, the floor is now open for questions. Your first question this morning is coming from Terry McEvoy from Stephens. Terry, your line is live. Please go ahead.
Terry McEvoy, Analyst
Maybe if you could talk about loan pipelines today and thoughts on organic loan growth over the next several quarters for the bank.
Jim Eccher, CEO
Yes, sure, Terry. Good morning. Yes, this is the time of the year heading into the last quarter. Pipelines generally are a little softer than they were in the second and third quarters. I will say, pipelines are better than they were a year ago, but traditionally the fourth quarter is a softer quarter for us. I think looking into 2025, we still think and are confident that we can be a mid-single-digit grower organically in loans.
Terry McEvoy, Analyst
Thanks, Jim. And then maybe a question on expenses, kind of looking out into 2025. Anything to call out in terms of technology spending, digital spending, preparing for being a larger bank? And how do you think about just that core expense growth next year?
Brad Adams, CFO
I think the biggest driver for expense growth for us next year is going to be on the salary and benefits line. I think you're likely to see something kind of mid-single digits, maybe in the three to five percent range. And some of that is the benefits that's not fully baked yet in terms of what we're going to see there. Most of the technology spend and infrastructure spend, to be quite honest, we were spending like a drunken sailor for the better part of the last two years trying to get all the infrastructure in place. I don't anticipate a lot of CapEx moving forward into next year. So I think expense growth will be pretty modest outside of what happens with employee benefits. I think that, obviously some parts of the wage scale are suffering more than others in terms of the inflation that we've seen. I think we all see that at the grocery store. There's no doubt it's cumbersome. It's not devastating to many. And we are committed to taking care of our employees and making sure that we offer a very good value proposition and believe we're an excellent place to work and we intend to honor that. Great.
Operator, Operator
Thank you. Your next question is coming from Chris McGratty from KBW. Chris, your line is live. Please go ahead.
Chris McGratty, Analyst
Jim or Brad, the 7 basis points per cut is roughly mapping to kind of like a 4% terminal margin, if you believe the futures market, which I think we can debate. Is that about the right way to think about it, given the position of the balance sheet and the transaction that's pending?
Brad Adams, CFO
I think we can do better than that, Chris, to be honest. I think we've learned enough that how damaging 0% rates are and we can talk about where the terminal is and get into all that. There's a lot of things going on right now. And it is very difficult to know what actually is the right level of interest rates for this economy. I think an election plays a part in it. I think the fiscal mess we've gotten into plays a part in it. And we've all seen how very wrong the forward curve can be just in recent history. So it's difficult to know what's going on there. I think that if, say, for example, that the terminal Fed funds is 3%, we are significantly far north of a 4% margin, just given where we are and how we're constructed. I think that a higher curve at the short end, which is anything above 2.5%, there is no reason why Old Second wouldn't be north of a 4% margin.
Chris McGratty, Analyst
Thank you. Jim, regarding capital, markets are up. Is there any change in the timing or priorities regarding either pulling that buyback or pursuing something inorganic? How would you describe the inorganic opportunities currently?
Jim Eccher, CEO
Yes, I mean, obviously, we're building capital rapidly every quarter. Chris, we understand to maintain a high level of return on tangible common, we're going to need to deploy some of that capital. All that you mentioned is on the table at this point. We are open to inorganic growth. The buyback is still on the table. You saw that we raised the dividend this quarter. We're fully aware of where we're at with capital. It's going to be one of our key initiatives heading into 2025.
Operator, Operator
Thank you. Your next question is coming from Nathan Race from Piper Sandler. Nathan, your line is live. Please go ahead.
Nathan Race, Analyst
I was wondering if you could just spend some time describing the $14 million loan that moved to non-performing in the quarter and also any additional color on the $36 million, roughly, in classified loans that include as well.
Jim Eccher, CEO
Sure, Nate. I mean, the increase in non-accruals is stemming from one commercial credit C&I loan that deteriorated late in the quarter. We thought it was prudent to take that to non-accrual. Cash flow is strained with this company. We're still in the early stages of assessing next steps here, but our strategy has always been to be an early identifier. And we're moving towards, hopefully, a remediation process that's going to allow us to mitigate any significant losses there. And what was the second part of your question, Nate?
Nathan Race, Analyst
Yes, I think we had about $35.5 million in classified loans that flowed in the quarter. Obviously, classifieds came down in aggregate just based on some improvement across some other loans, but we're just curious in terms of the inflow drivers.
Jim Eccher, CEO
I mean, there was some inflow and obviously a lot more outflow, but movement was significant in the quarter. We had really a couple of credits that we took to substandard, although they're still accruing. One was a healthcare loan. One was a C&I loan. Both are we feel pretty well collateralized. Then we had $36 million in reductions to substandards. And the reasons behind that ranged anywhere from loans that were paid off, either upgraded, curtailed, or paid off by a sponsor. I will say this: We feel we've got our arms around the office portfolio pretty well. We actually have no office loans in Chicago that are classified, so that's the first time that's happened in a couple of years. We're down only $9 million in classified loans in the office book, so we feel really good about that. It's really still working through healthcare at a couple of these C&I loans, but by and large, we still feel very confident in the portfolios.
Nathan Race, Analyst
Okay, great. That's very helpful. Then just thinking about future levels of provisioning going forward, it seems like you're not seeing much in the way of lost content going forward. And loan growth may be still somewhat slow here in the fourth quarter, but any thoughts on just how you guys are thinking about the provision and reserve trajectory going forward, absent any deterioration broadly?
Jim Eccher, CEO
Yes, I think this quarter, you saw a $2 million provision. Some macro factors were tweaked, but we had run that allowance down a little bit the last couple of quarters, so we feel a lot more comfortable north of 1%. Yes, I think future provisioning in that $2 million range per quarter is probably a good way to think about it going forward.
Nathan Race, Analyst
Okay, great. And then just another one on the margin outlook. I believe Brad mentioned you should have some offsets with the branch deal coming online here late in the fourth quarter in terms of that 7 basis point impact following each 25 cut, so just curious how you're thinking about what the magnitude of that offset could be with that branch yield depending on how you're thinking about redeploying those proceeds. I imagine loan growth is the number one priority there, but just curious how you're thinking about also redeploying in the bond book as well.
Brad Adams, CFO
You kind of answered it in the way you asked it, is that it's highly dependent upon what we do with it. We framed that deal announcement on a bit of an unusual basis in that trying to keep it as simple as possible. We just said if we elected to take the liquidity and pay down overnight borrowings, that it would be 5% accretive to earnings and roughly 10 basis points accretive to margin. If we do something different than that, it could be more or less. So there's pretty much its impact is anywhere between a flat margin next quarter to maybe if we're more conservative and put it in a bond portfolio instead of a 15 basis point decline in the margin, it's more like a 7 basis point decline in the margin. It's highly dependent. I would say that feels like a wishy-washy answer, but it's really not. Given the volatility that we have in a given three-month window as it's occurred over the last six months. We go from 200 basis points of cuts before the end of the year to the long end of the curve absolutely rejecting every message point that we've seen over the last two weeks. Things move around quite a bit. I can tell you that I kind of alluded to it a little bit. I see a lot more value in basically high credit tranche, variable rate commercial-backed securities than I do anything else at this point. If somebody's reaching for duration at this point, it's a fool's errand. I'm not entirely confident that the Fed stance on inflation could be a lot more aggressive fight on the other side of an election. I certainly see things that indicate that inflation is by no means the corpse that people thought it was. So we're being cautious. And don't get me wrong, when I speak about this, you could get the impression that we're taking some sort of rate bet. We're not. We're doing the very opposite of that and just staying short and flexible. And I think that's the best path forward for Old Second.
Nathan Race, Analyst
Got it. That's helpful. One last one from me, just going back to the M&A discussions earlier. Could you guys just remind us in terms of the size of potential partners that you would look to acquire down the road?
Jim Eccher, CEO
Yes. I mean, obviously, Chicago's still overbanked in a lot of areas. We think there's a lot of opportunity just in our core market. But for us, I think anything from $500 million to $3 billion would be something we would be interested in. And conversations are ongoing and active right now.
Operator, Operator
Thank you. Your next question is coming from David Long from Raymond James. David, your line is live. Please go ahead.
David Long, Analyst
On the lending side, it seems like you guys have the infrastructure in place, people in place to take advantage of the backdrop if it was appropriate to grow more aggressively, see more than mid-single-digit loan growth. What would it take for Old Second to increase your appetite to lend at this point?
Jim Eccher, CEO
Well, I think, one, demand's got to improve. We're not seeing demand like we did 18 months ago. But also, risk-adjusted returns just haven't been there for us. And when you have the benefit of a 460 margin of chasing loan growth at yields around 7%, it doesn't make a whole lot of sense. We do have the team in place to be a high single-digit grower. I think as the economy continues to evolve, we get a few more rate cuts, we get some clarity around the election. And I do think we'll get back to a mid-single-digit grower. We'll continue to look at adding new teams as they become available. But that's kind of where I see 2025.
Brad Adams, CFO
And David, we saw as soon as those rate cuts occurred and maybe even on the forum, market pricing for loans that we were bidding on immediately get into the low sixes. And so competitors aren't wasting any time. And if you just take a step back and think about that for a second, you're looking at effectively a three-year loan that you're earning 6% on, that your marginal funding cost is 5%. And then you're at 50 basis point provision, you're talking about a marginal return on equity that is paltry. And that's where markets have been. And some of that's just a function of an inverted curve. And you can pretend all you want that a deeply inverted yield curve doesn't impact our industry, but it sure as heck should in terms of how you think about investing capital. And that's what we've tried to explain perhaps ineloquently at times, but that's why you haven't seen a lot of growth from us. I think that we could be quite aggressive in terms of growing earning assets in an environment where the curve is simply flat. That offers a lot. I think that certainly the level of volatility that we've seen in interest rates for the last six months specifically, and certainly for the last two years more generally, makes things very difficult in terms of growing earning assets consistently.
David Long, Analyst
Got it. Thanks for the color there. And then a follow-up question, Jim mentioned the potential for more credit resolutions to come. I know you're going to have those from time to time, but it seems a bit elevated here given some of the moves you made, which seems to be ahead of most of your peers. But can Old Second record another, can you have another quarter or two with recoveries exceeding gross charge-offs?
Brad Adams, CFO
As we said, we remain hopeful that we can recover a significant portion of the losses that were charged off last year. Whether that occurs or not is uncertain, but we have said that we expect mitigation efforts to be less costly than what you've seen from us over the last 12 months. Now, a million or two may show up here or there as we elect or don't elect to pull the trigger and exit something that we're worried about. So that's hard to predict, but we don't see anything big and lumpy, I guess is the real takeaway.
Operator, Operator
Thank you. Your next question is coming from Martin Friedman from FJ Capital. Martin, your line is live. Please go ahead.
Martin Friedman, Analyst
Congratulations on a good quarter. Just wanted to expand upon the M&A discussion, Jim or Brad. To me, it looks like you didn't buy any stock this quarter. Is that suggesting that something is imminent on the M&A front? And given the capital build, why can't you do both at the same time?
Brad Adams, CFO
In short, we can. There's no reason why we can't. Now, capital levels will come down a little bit with the branch purchase. That will burn 30 to 40 basis points of capital. The movement this quarter, obviously, is extreme, and that's reflective of an AOCI just basically collapse for us. Now, we do add organically what is about 30 to 40 basis points of tangible equity per quarter. I would say this, too. Our earnings have been more resilient than I think anybody expected from us. At least on some level, be that in the future or currently. If you look at evaluation on an earnings basis, Old Second looks downright hated in some respects. But there's been a significant risk of a recession at least or the potential for a recession at some time. And I think that as we work through some credit problems, and there was some skepticism about what was going to happen with credit trends at Old Second, building tangible book value is something that has provided a level of stability. And make no mistake, carrying more capital at a point where the curve is higher at the short end carries relatively little cost. And the barriers to entry to M&A this time is capital, and a lot of people don't have it, which is kind of the reason we alluded to it being a favorable environment for banks like Old Second. We have what it takes at this point, which is a well-positioned balance sheet and a lot of capital flexibility. You're right in that one does not preclude the other. What you have is our commitment that we are focused on a return on tangible common, as Jim mentioned. And if earnings come down, the likelihood of capital being returned goes up exponentially. We will be smart with capital levels and the return that we earn and are provided to our shareholders. And that's the primary focus. I know certainly that you understand that, Marty, and I hope others understand that as well.
Martin Friedman, Analyst
Great. Thank you. And I have another question about the margin, but I'll ask you offline.
Operator, Operator
Thank you. Your next question is coming from Jeff Rulis from DA Davidson. Jeff, your line is live. Please go ahead.
Jeff Rulis, Analyst
I just wanted to follow on the non-accrual, just in terms of the inflows of the increase there. You mentioned the C&I credit. What industry was that, and if that was related to the inflows on the classifieds as well?
Jim Eccher, CEO
Yes. The main inflow was that one C&I credit. And the scrapping industry just has been not performing, and we thought we'd be aggressive with the downgrade. I don't have a whole lot more to share at this point, but that was really the main credit that migrated. The remaining credits in the substandard bucket, I think I mentioned the two main ones, another healthcare facility and a solutions product company that had negative debt service coverage, but still accruing. But many more upgrades than downgrades in the quarter. So overall, we still feel good about the portfolio. Obviously, we're going to have to, from time to time, have some credits go south, and we feel like we'll get our arms around this one and hopefully take next steps to remediate.
Jeff Rulis, Analyst
Okay. So it sounds pretty idiosyncratic. The scrapping industry credit was a bit of a one-off in terms of not seeing other factors. Okay. I wanted to just, one other thing on the deposit side, you mentioned some larger non-interest-bearing depositors into quarter departures. Any sense of that seasonality?
Brad Adams, CFO
I don't recall mentioning that. So I think when you look at what happens with Old Second's deposit base, I don't think anybody would be confused in terms of what we look like at this point. We are, our deposits, our funding is dominated by very low-balance denomination checking accounts. If you look at where stress is, given the level of inflation, given some softening in employment, it is at the low end of the wage scale, which is where we live on the funding side. We are not seeing negative impacts in terms of either account closures or anything other than just average balance migration down reflecting these difficulties at the low end that I believe is driven by inflation. That's been true for two years now. I think that when the liquidity spigots are open, you do see deposit funds flowing into the industry that many confuse with organic growth. I assure you, it is not. And we saw some of that too, just as people fled fixed income markets, namely public funds and larger commercial customers. But no, we are not seeing significant migrations or loss of accounts or anything like that. As a matter of fact, we have a positive open-to-close ratio here recently this year, our first time since the closure of West Suburban in terms of that acquisition. And we are now opening more accounts than we are closing, which is the reason why you don't hear about that statistic very often, as it is overwhelmingly negative for our industry as a whole.
Jeff Rulis, Analyst
Brad, I'm referring to the $60 million in non-interest bearing deposits from a few larger customers in the last quarter and I'm interested in understanding that flow.
Brad Adams, CFO
That's just liquidity flows and seasonality and tax payment flows, nothing significant.
Operator, Operator
Thank you. Your next question is coming from Brian Martin from Jenny. Brian, your line is live. Please go ahead.
Brian Martin, Analyst
Jim, you went through the criticized level. Can you just talk about where that was at this quarter relative to last quarter? I think you kind of said I think maybe what it went up or down. I missed what you said specifically. But I thought the criticized were about $187 million last quarter. We know classifieds went down a bit. Were criticized equal this quarter, meaning the special mention maybe went up a bit? Or just link quarter change and criticized?
Jim Eccher, CEO
Yes, pretty flat. I think up a tick, Brian, from last quarter's special mention was a substandard. We're down about $9 million, and then, the one credit that went to not accrual, a lot of migration in and out. But hopefully that answers your question.
Brian Martin, Analyst
Yes. So if classifieds were down 8 or 9, then special mentions were up 8 or 9, and kind of net neutral to the total criticized. That's fair?
Jim Eccher, CEO
That's correct.
Brian Martin, Analyst
Yes, okay. Perfect. That's what I thought. Thanks, Jim. And then in terms of the buyback, I guess, Brad, I think it sounds like the inorganic is maybe the priority if it's available. But on the buyback, can you talk about, give some thoughts on pricing as far as where you're interested in buying the stock? I think a while ago you talked about maybe wanting to do it at pretty attractive levels. Some thought on if you do go that route based on what's available?
Brad Adams, CFO
I mean, everybody loves a bargain, right? But there's nothing about our current valuation that will preclude a buyback.
Brian Martin, Analyst
I understand. Given your discussion with Brad, it seems that inflation may still be a factor. If we don't see the expected rate cuts happening, it’s reasonable to assume the margin might remain relatively flat or decrease slightly as we head into next year.
Brad Adams, CFO
My gut would say down modestly. I think there's a very difficult time to be an economist, not that economists have a very good track record of ever being correct. But I think where we are on the eve of an election that is very polarizing, just being overly blunt because that's what I do, I'm not sure that we'll have a willingness to declare victory on inflation on the other side of an election if Trump is the winner of the election. So I'm cautious and think that things can snap in either direction pretty aggressively. And that's why we've maintained our positioning as relatively neutral. And I think that we'll know more in a few months.
Brian Martin, Analyst
Yes. Okay. And then in terms of, I think Jim mentioned that you might mention a little bit more on the optimization of the balance sheet, Brad, I guess. Can you just expand a little bit on that or just how you're thinking here the next couple of quarters?
Brad Adams, CFO
I would like to earn in excess of a 4% spread on marginal growth on the balance sheet. And if we can't, then we can sit tight for a bit.
Brian Martin, Analyst
Okay. And last one, since economists are usually not right, Brad, I know the tax is a favorite item of yours. So the tax rate was down a little bit this quarter. Is that probably a decent rate to use as we look forward given the changes?
Brad Adams, CFO
No. Yes. I've thought about this a lot and I was going to answer your question, Brian. And I've decided that I'm going to go with an oddly specific guidance for tax rate, and we're just going to see how it turns out. And then you guys can really give me a hard time when I'm wildly wrong. I'm going to go with 24.763 for the effective tax rate going next quarter. We'll see how I do.
Brian Martin, Analyst
Okay. Can you share your thoughts on the overall plan for next year?
Brad Adams, CFO
I really like that 24.763. I'll add another digit on there. We'll call that 7635. That's what I feel good about.
Operator, Operator
All right. We'll stay tuned. I appreciate the color and thanks. Great quarter, guys.
Jim Eccher, CEO
Okay. Thanks, everyone, for joining us. We appreciate your interest in the company. Look forward to speaking with you again next quarter. Goodbye.
Operator, Operator
Thank you. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.