Earnings Call Transcript - OSBC Q3 2025

Operator, Operator

Good morning, everyone, and thank you for joining us today for Old Second Bancorp, Inc. Third Quarter 2025 Earnings Call. On the call today are Jim Eccher, the company's Chairman, President and CEO; Brad Adams, the company's COO and CFO; Darin Campbell, the company's Head of National Specialty Lending; and Gary Collins, the Vice Chairman of our Board. I want to remind you that Old Second's comments today will include forward-looking statements regarding the company's business, strategies, and prospects, which reflect management's current expectations in the existing economic environment. These statements do not guarantee future performance, and actual results may significantly differ from the projections. Management encourages you to review the company's SEC filings for a comprehensive discussion of the company's risk factors. The company does not have an obligation to update any forward-looking statements. During today's call, we will be discussing certain non-GAAP financial measures. These non-GAAP measures will be described and reconciled to their GAAP counterparts in our earnings release, which is available on our website at oldsecond.com on the homepage and under the Investor Relations tab. I will now turn the call over to Mr. Jim Eccher. Sir, the floor is yours.

James Eccher, CEO

Okay. Good morning, everyone. Thank you for joining us. I have several prepared opening remarks. I 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 up to questions. From a GAAP perspective, net income was $9.9 million or $0.18 per diluted share in the third quarter of 2025. Return on assets was 0.56%. Third quarter 2025 return on average tangible common equity was 6.16% and tax equivalent efficiency ratio was 64.46%. As expected, a lot of noise this quarter. Third Quarter 2025 earnings were significantly impacted by the July 1 completion of our acquisition of Bancorp Financial and its wholly-owned bank subsidiary Evergreen Bank Group. Adjusting items impacting net income for the third quarter of 2025 include the following: as it relates to the Evergreen acquisition, we had day 2 provision on non-PCD loans of $13.2 million pretax or $0.19 per diluted share. We also had acquisition-related costs of $11.8 million pretax or $0.17 per diluted share. We also had a $389,000 MSR mark to market losses pretax or about $0.01 a share and $430,000 of BOLI death benefit proceeds recorded due to the death of a retired executive, also $0.01 a share. Excluding all adjusting items, net income for the third quarter of 2025 was $28.4 million or $0.53 per diluted share. The quarter included favorable impacts of the Evergreen acquisition with a net interest margin as $1.3 million of loan purchase accounting accretion was recorded, partially offset by additional core deposit intangible amortization of $233,000 and time deposit fair value amortization of $227,000. Net purchase accounting accretion income will be a very small contributor on a go-forward basis especially relative to the size of the acquisition itself. The bulk of loan fair value adjustments were concentrated in the solar loan portfolio, which featured a very low contractual coupon. Market conditions warranted holding on to the solar book. On a core basis, profitability at Old Second improved and perhaps somewhat surprisingly, tangible book value increased this quarter despite the impacts of the acquisition. The tangible equity ratio declined by only 42 basis points from last quarter from 10.83% to 10.41% but remains 27 basis points higher than the like period 1 year ago. Common equity Tier 1 was 12.44% in the third quarter, decreasing from 13.77% last quarter, but a decline of only 42 basis points from 1 year ago. With the relatively team level of capital dilution despite the usage of $49 million of cash consideration, we now expect an earn back period associated with Evergreen to be significantly shortened from the 3 years estimated at announcement. Our financials continue to reflect exceptionally strong net interest margin at 5.05%, that is a 20 basis point improvement from last quarter and 41 basis points year-over-year on a tax equivalent basis. Pre-provision net revenues increased from both loan growth and acquisition impacts. The total cost of deposits was 133 basis points for the third quarter compared to 84 basis points for the prior linked quarter, and 92 basis points for the third quarter of 2024. For the third quarter of 2025 compared to last quarter, tax equivalent income on average earning assets increased $28.8 million while interest expense on average interest-bearing liabilities increased $10.3 million. The loan-to-deposit ratio was 91.4% as of September 30, 2025, compared to 83.3% last quarter and 89.4% as of September 30 of last year. I'll let Brad talk about this more in a moment. The third quarter 2025 reflected an increase in total loans of $1.27 billion from last quarter, primarily due to $1.19 billion of loans acquired with Bancorp Financial. Tax equivalent loan yields reflected a 67 basis point increase during the third quarter of 2025 compared to the linked quarter and a 47 basis point increase over the quarter year-over-year. The increase in yield is primarily a function of higher yielding consumer credits we recorded as part of the legacy Evergreen Powersport portfolio. Asset quality softened modestly this quarter, nonperforming loans increased only modestly, but classified assets increased $38.4 million. In general, our collateral position is very good on these downgraded credits. Provision levels relate to earnings to ratings changes primarily within the C&I portfolio as certain industries have softened, most notably, transportation and warehousing. Our office and CRE portfolios remain largely the same in terms of ratings momentum. Importantly, as a percentage of total loans, NPLs, classified and criticized loan levels are a little changed. We recorded $5.1 million of net loan charge-offs in the third quarter with the majority stemming from the Powersport portfolio and a couple of small losses related to collateral values in the struggling trucking and transportation industry. With regards to Powersports, I would say that losses given default are running a little bit higher than we expected. However, loan yields are much higher than expected, and the contribution margin is both above expectations and improving. Due to the nature of the Powersports business, gross charge-offs are anticipated to run at a higher rate than Old Second has historically experienced, especially in a higher interest rate environment like today. This is the nature of what is a very good business. The allowance for credit losses on loans increased to $75 million as of September 30, 2025, or 1.43% of total loans from $43 million at June 30, 2025, which was 1.08% of total loans. $30.7 million of the increase is associated with day 1 and day 2 allowances recorded on the acquired loans, PCD loans recorded from Evergreen increased the ACL by $17.6 million as of day 1 and the non-PCD loan credit mark recorded to provision expense for day 2 increased ACL by $13.1 million. Unemployment and GDP forecasts used in future loss rate assumptions remain fairly static from last quarter with no material changes in the unemployment assumptions on the upper end of the range based on recent Fed projections. The impact of the global tariff volatility continues to be considered within our modeling. Provision levels quarter-over-linked quarter, exclusive of day 1 and 2 purchase accounting impacts increased $6.5 million, reflecting the new consumer mix in our loan portfolio post-acquisition and an increase in historical loss rates as our net charge-offs to average loans increased to 39 basis points for the third quarter of 2025 from 8 basis points in the prior linked quarter. Noninterest income continued to perform very well in the third quarter of 2025 compared to the linked quarter and prior year like quarter. Excluding $430,000 in death benefits on BOLI realized during the quarter of 2025. Noninterest income increased $2.1 million compared to the prior year like quarter as wealth management fees increased $728,000 or 26.1% and service charges on deposits increased $274,000 or a little better than 10%. Mortgage banking income improved in the third quarter of 2025 compared to both the prior linked quarter and prior year like quarter primarily due to the volatility of mortgage servicing rights mark-to-market valuations. Excluding the impact of mortgage servicing rates, mark-to-market adjustments, mortgage banking income increased nominally quarter-over-quarter and from the prior year like period. Other income increased $513,000 in the third quarter of 2025 compared to the prior linked quarter and was nominally lower compared to the prior year like quarter. Total noninterest expense for the quarter was $19.7 million more than the prior linked quarter, $11.8 million of which is related to acquisition costs, including $8.4 million of additional salary and benefits expense based on the addition of Evergreen employees. Our efficiency ratio continues to be excellent as the tax equivalent efficiency ratio, adjusted to exclude core deposit intangible amortization, OREO cost and the adjustment to net income, as noted earlier, was 52.1% compared to 54.54% for the second quarter of 2025. Our focus today is now on effective integration of Evergreen Bank and optimizing the balance sheet for its impact. We did sell the bulk of the acquired securities portfolio just after legal close. Brad will talk about that. And we continue to reduce reliance on wholesale funding as we allow the legacy Evergreen brokered CDs to run off. I'll now turn it over to Brad for additional color.

Bradley Adams, COO and CFO

Thanks, Jim. I've got a lot less work than Jim, and a lot less fancy words too. I'll be relatively brief today. I know people have some questions here. Net interest income increased by $18.5 million or 29% to $83 million for the quarter ended September 30. It's relative to $64 million last quarter. It's also up 37% from the year-ago quarter. Tax equivalent loan yields increased by 67 basis points. Obviously, that's reflective of the change in the portfolio composition with the addition of Evergreen and securities yields were effectively flat in the third quarter compared to last quarter. Overall, total yield on interest-earning assets increased 66 basis points. Cost of interest-bearing deposits increased by 61 basis points, again reflecting the addition of Evergreen and total interest-bearing liabilities increased by 60 basis points. The end result of that was the 20 basis point increase in the NIM that Jim mentioned, we're now at 5.05% for the quarter ended. That's up from 4.85% last quarter. Obviously, we feel like this continues to be exceptional margin performance. The NIM relative to last year is up 41 basis points. I think that's a trend that's a lot different than people may have expected from us given the decline in rates that we've seen so far. Average loans increased $1.26 billion or 32% over the linked quarter. Average deposits increased $1.08 billion or 22%. In addition to that or underlying that, we had organic loan growth of $72 million in the third quarter compared to balances at the prior end. I guess I should say here that Evergreen doesn't really look like the deal that I had spent for the last 2 years preparing the balance sheet to absorb, it was far less dilutive to capital than the generic deal I had in my mind, but it will also be far more accretive when all is said and done. The net result of my wrongness is that we are both far better prepared for falling rates than I expected to be and far more profitable. This is the kind of wrongness that I can rally behind, by the way. As we sit here today, the balance sheet remains prepared to capitalize upon strategic opportunities that may arise. I would note that systems conversions related to Evergreen are complete as of 2 days ago. And at this point, it appears to be the best we have ever done. The net interest margin is above 5%, and we're doing enough, I still feel really good about it. Capital will build quickly from here, but return on TCE is at very strong levels approaching 17%. Tangible book value per share is $13.51 and earnings have positive catalysts to push substantially above the $2 run rate over the last couple of quarters. This is all relative to a stock price that is $18. I'll let others do that math. But it is top decile performance at this point for Old Second. Some had expressed concern that Old Second had failed to find growth opportunities in the last year or 2. I believe we have found it the right way. This is a highly cyclical industry, and growth opportunities don't always come in a straight line. But if you look back over the last 7 years, our earnings per share are up 4x in terms of run rate. That's relative to a 3x growth in the bank over that same time frame. I'm really proud of how we've managed that growth. Over the last 5 years, we have more than doubled not only the size of the bank, but also earnings per share. We also just announced a 17% increase in the common dividend. At this point, we are also well reserved for our new business mix and prepared for any economic environment. Noninterest expense trends reflected Evergreen deal costs as expected. Operating costs increased $20 million over the prior quarter and $8 million, excluding acquisition costs. Much of this increase is the result of the larger bank requiring more workforce facilities and operating expenses in general. Noninterest expense is running higher year-over-year, again, due to the same reasons. Also included is the 5 branches that we acquired in late 2024 from First Merchants. Overall, we are hopeful that we can keep core expense growth in the 4% area ending 2026, exclusive of the impact of Evergreen. Much of that relates to increases in human benefits expense, particularly insurance, which we're running solidly into the high teens in terms of our expectations at this point. Cost savings related to Evergreen are still to come. We are extremely excited about how the conversion has gone and optimistic that we can achieve those ahead of schedule. I'm sure, as I said, there are a lot of questions, we've got a lot going on this quarter. What I would like everyone to know that relative to my personal baseline anyway, I'm in a really good mood. With that, I'd like to turn the call back over to Jim.

James Eccher, CEO

Thanks, Brad. In closing, we're very confident in our positioning, extremely excited about what the Evergreen Bank transaction will add to our pro forma company with the completion of our Evergreen acquisition, data conversion and the full onboarding of the Evergreen team. We're very optimistic about the remainder of 2025 as we welcome new team members and product offerings. The 17% increase we just announced with our quarterly dividend of $0.07 a share is reflective of our continued confidence in the performance of Old Second in the markets we serve. That concludes our prepared comments this morning. So I will turn it over to the moderator and we can open it up to questions.

Operator, Operator

Our first question is coming from Terry McEvoy with Stevens.

Terence McEvoy, Analyst

I want to keep Brad happy here. So I don't want to use any fancy words. I guess within the press release, you talked about kind of potential runoff of exceptional price deposits, could you just maybe expand upon the amount when you kind of see that naturally rolling off? And is it your view that those will be replaced with more legacy Old Second types of deposits?

Bradley Adams, COO and CFO

So I would say we've probably got a couple of hundred million dollars in what I would call pure market-priced funding at this point. You can see that in its impact in overall pricing. It will be an ongoing battle. We had alluded prior to that we would like to get back to Old Second type funding. That's obviously exceptionally difficult to do organically, if not impossible. We are interested in acquiring additional deposits. Fortunately, for us, we have the balance sheet and now both the operational capacity to do that. It doesn't have to be big to make a big difference. Obviously, you can see the power of what Evergreen has added from an earning asset perspective. I have no problem with taking some of the liability sensitivity off the table that was added at the margin. It's about being the best bank you can be. And it's not that difficult for us to get even better. So yes, we would look to replace that over time. I think it's probably a 6- to 12- to 18-month type look to get that back to what we looked like before.

James Eccher, CEO

Terry, surprisingly, excluding the brokered and high-yield money market runoff, we were very pleased to see that actual core deposit funding at Evergreen actually expanded in the first quarter, which was great to see.

Terence McEvoy, Analyst

Okay. And then as a follow-up, thank you for Slide 8 in that disclosure presentation. When you think about future originations in Powersports, is the focus diversified across that Tier 1 through 5? Or is there a bias towards maybe the 1, 2 or 3 tier given kind of the risk profile there.

Darin Campbell, Head of National Specialty Lending

Terry, this is Darin Campbell. Yes, I mean, our focus is to originate all those tiers, but historically, we've been doing this for 30 years. We've been in the top 2 tiers, 75% or better. And we'll stick with that policy going forward. And if there's a change economically, we would even tighten up a little bit more at the lower end to drive more to the top end, but right now, we feel good about that mix.

Terence McEvoy, Analyst

And maybe since on this topic, I'll squeeze in 1 last one. Those Powersport fees that were somewhere in the release, what's a typical kind of quarter look like or yearly run rate? Is there any seasonality there? And just kind of help me understand the nature of those fees.

Darin Campbell, Head of National Specialty Lending

Yes, the fees in that Powersport business could be payment fees, they could be a late fee, and that's consistent throughout all 4 quarters. Fee income would be consistent. Originations happen in the second and the third quarter, your biggest origination month with a little bit of runoff in the first and the fourth quarter, but fees would be consistent across every quarter.

Operator, Operator

Our next question is coming from Nathan Race with Piper Sandler.

Nathan Race, Analyst

Sorry about that guys. Brad, I appreciate the commentary on 4% legacy Old Second growth expectations going forward. Just curious if you can kind of frame up kind of where you see the run rate over the next quarter or 2 as you get some of the cost saves from the acquisition and just in light of that legacy growth expectation.

Bradley Adams, COO and CFO

I hope that it balances out between those two because my main concern is making things as easy as possible for you, Nate. I understand you have a lot on your plate with new family members and I want to ensure you have the time at home to handle everything, even waking up at 2 in the morning with a baby.

Nathan Race, Analyst

So it sounds like it's pretty stable from kind of the core run rate right around $52 million in the third quarter.

Bradley Adams, COO and CFO

I believe that will be pretty darn close. Yes.

Nathan Race, Analyst

Okay. Then a bunch of moving pieces on the margin. You obviously exceeded kind of which you were thinking last quarter. Curious if you can kind of just frame up overall kind of margin expectations just in light of what you brought out with the higher-yielding book at Evergreen and then also how you see yourself positioned from a margin contraction perspective these days with additional Fed cuts on horizon?

Bradley Adams, COO and CFO

That's tough, right? Because it's not only at the absolute level of rates, it's actually the speed of NIM and what happens in terms of the overnight index swap rates, it's complicated. And you can be really wrong in terms of what you're saying with Fed fund rate not even changing. I would say this. I would say that 2 years ago, the bottom margin in a 0% rate world for Old Second probably looked like something around 3.80%. I do not believe that there's any scenario where we can go back to a 0% rate world, and we can get into a very nerdy macro discussion about why that is, but I'd rather not. But I would feel like the bottom margin for Old Second at Fed funds rate around 3% does not go below 4.50% by any stretch of the imagination and may not even threaten it. It's a different ball game now. I am very optimistic about how much money we can make even as short rates fall.

James Eccher, CEO

Yes. I mean, I think what we're really encouraged about with Evergreen, even in rapidly declining interest rate environment. Coupons on the Powersport portfolio will still remain relatively robust, where we maybe print new business in the 9%, 9.5%, even when rates were 0%, Darin was able to still achieve an 8% coupon. So we think that's really going to help us in a down rate scenario.

Nathan Race, Analyst

Okay. Great. And then just thinking about the charge-off trajectory from here. I appreciate a bulk of the charge-offs were tied to the solar book and just the components around the Powersports vertical. I think last quarter, Brad, we were talking around 30 basis points of charge-offs on a combined basis. Any thoughts on just kind of the go-forward outlook? It doesn't seem like there's much loss content expected with a couple of the legacy Old Second loans that moved to nonperforming in the quarter, but I would just appreciate any updated thoughts there.

Bradley Adams, COO and CFO

The changes in nonperformers were mainly due to administrative factors, with no significant trends to discuss. Most of the classified movement, about two-thirds, is well-collateralized, even in difficult conditions. There is some risk associated with $10 million to $15 million of it, but I'm very hopeful for a positive outcome soon. In fact, in the last three weeks, we've seen a notable decline in nonperformers compared to what is currently reported, so I’m not too worried about credit. Regarding Powersports, the losses this quarter are slightly higher than we had projected. However, as Jim pointed out, the yields are significantly better. I’m not particularly concerned whether losses are $150 million, $120 million, or $175 million because of the net contribution margin from this business. I also believe we may be in or very close to a consumer recession, which typically tends to be short and shallow. Therefore, I’m confident about the quality of the business. A loss rate of 30 basis points seems appropriate for Old Second in the near, intermediate, and long term.

Operator, Operator

Yes. Our next question is coming from David Long with Raymond James.

David Long, Analyst

Brad, you had mentioned expense growth in 2026 briefly. And I think you mentioned 4%. Was that inclusive of Evergreen in those numbers, I didn't...

Bradley Adams, COO and CFO

No, it was not.

David Long, Analyst

Got it. Okay. And then on the growth side, can you talk maybe about what you're seeing in your just core commercial loan pipeline and what your hiring prospects are? And if there is an appetite to still bring in some incremental lenders there?

James Eccher, CEO

Yes, it was a really good quarter for us, Dave. I believe it's our best quarter in 2.5 years in terms of organic growth. Our pipelines are still quite strong, likely at a two-year high. Typically, the fourth quarter tends to be quieter for us, but unless we experience unusual paydowns and payoffs, we expect to achieve our guidance of low single-digit growth for 2025. Regarding talent acquisition, that is always part of our budget, and we remain open to it, particularly in the commercial and industrial sector. However, we have the in-house team needed to maintain a consistent low to mid-single-digit growth in a normal environment.

David Long, Analyst

Got it. And then specifically to the sponsor finance team, what does the pipeline look like there? And is there still capacity to add people?

James Eccher, CEO

Yes. That group obviously has been very high performing. The first half of the year was very soft in that industry. I think you had a lot of sponsors on the sidelines waiting for some certainty around the economy and tariffs. Starting in the beginning of the third quarter, we saw pretty significant growth. We expect the fourth quarter to be very meaningful. This is a group that's consistently generated between $150 million and $200 million in originations a year, might be a little softer this year, but they will have a very big second half of '25.

Operator, Operator

Our next question is coming from Jeff Rulis with D.A. Davidson.

Jeff Rulis, Analyst

You guys touched on the credit to a degree. I wanted to ask about the acquired problem loans there. Is there any kind of low-hanging fruit or credits that have a quick resolution in place? Just trying to think about the balances of what was brought on? And do you think under your purview that maybe you could see a portion of that move along pretty quickly?

James Eccher, CEO

Yes, good question, Jeff. Actually, the timing didn't work in our favor this quarter. We resolved about $10 million in remediation right after the quarter ended. We're optimistic that this will contribute positively in the third quarter and provide a nice boost for us in the fourth quarter. Some of the acquired loans were participations we had with Evergreen, which just added to our existing classified list. Most new additions to the classified list involve companies experiencing difficulties in the trucking, transportation, and logistics sectors due to a general slowdown from macroeconomic factors. Cash flow is somewhat constrained, but as Brad mentioned, our collateral position in most cases is very strong, with many backed by SBA 504 deals. We anticipate continuing resolutions on some of these into the fourth quarter, and we remain confident about our credit outlook.

Jeff Rulis, Analyst

Great. And then one last point focused on integrating and completing this deal, what are your thoughts on any additional mergers and acquisitions? I believe Brad mentioned it, and we are certainly looking at deposit-heavy opportunities or something in that area. If you could provide an update on any potential acquisitions, if there are any.

Bradley Adams, COO and CFO

So this is 1 of those questions where I wish the people who work here couldn't hear what I'm about to say because I just watch people sleep on couches all weekend, and I really don't want to scare them. But from a balance sheet perspective, we're ready. It's nice to have this integration done so quickly after the close. It's certainly nice not to have had what appears to be no significant customer disruption. A couple of one-offs here and there. But all in all, we've done a pretty darn good job. So I don't want to scare anybody who works here, they've done an exceptionally good job and worked really hard to do that. But from a finance perspective, we look really good right now.

Jeff Rulis, Analyst

And Brad, the aim would be, if you are ready, would you kind of lean into the deposit being a focus in the market?

Bradley Adams, COO and CFO

It always is. The Evergreen was the unusual one here. It's not very often that you get a chance as a community bank to acquire an asset generation business that is attractive. So obviously, that's exceptionally exciting to us. But in general, our M&A strategy is entirely focused around the liability side of the balance sheet, and we are usually an organic grower from an asset generation standpoint.

Operator, Operator

Our next question is coming from David Konrad with KBW.

David Konrad, Analyst

Brad, I thought maybe another follow-up question on the NIM. You guys are helpful on the asset side, but wondering with Evergreen deal, you actually now have a little bit of room. So I was just wondering your thoughts on the deposit beta now versus you guys and other cycles over the next few quarters, what you get on a deposit beta?

Bradley Adams, COO and CFO

We're going to see some CD runoff over the next few quarters. We're going to see overnight borrowing rates pick up. So in terms of our liability sensitivity, it will increase, which obviously helps with sensitivity to forward rate cuts. You'll see the loan-to-deposit ratio will probably continue to pick up over the next few quarters until we get a chance to remix the funding a little bit. So that will help with margin sensitivity in the expected current interest rate environment. I have no issue with the loan-to-deposit ratio moving slightly higher ahead of any strategic opportunities that may present themselves. I am very happy with where we sit from a rate positioning standpoint now.

David Konrad, Analyst

Okay. Great. And then switching gears a little bit. Just want to talk a little bit about wealth management. I thought it was a really strong quarter. I don't know if Evergreen really helped that much into the quarter, but good sequential quarterly growth there and just wanted an outlook in the wealth management business.

James Eccher, CEO

Yes, exceptionally strong quarter wealth at north of a 25% increase in fees. The team has done a great job of bringing in new assets under management. Generally, this is a pretty slow growth business. I mean, normally, we're pretty happy with 3% to 4% growth in revenue, but we've made a couple of key hires over the last couple of years and new assets under management have gone up exponentially. Obviously, the market has also helped drive additional income as well. But we like that business. We'd like to continue growing.

Operator, Operator

Our next question is coming from Brian Martin with Janney.

Brian Martin, Analyst

Jim, can you talk a little bit about or just give a little thought on just the loan growth outlook just in terms of what you think is sustainable? I guess I know you talked about maybe some of the seasonality where it's at, but just now that you kind of have the acquisition in hand, how should we think about that over the next 12 months or so in terms of what you think is sustainable longer-term?

Bradley Adams, COO and CFO

Normally, I would tell you, the fourth and first quarter are going to be pretty soft. I can't tell you what the first quarter of next year is going to look like. But based on our third quarter pipelines, we feel pretty good that the fourth quarter is going to net some meaningful growth. We're seeing pretty good pipelines and sponsored and good pipelines in investment commercial real estate and some C&I growth. So our leasing group continues to be very consistent. We've got some opportunities in healthcare. So I still feel really good about low to mid-single-digit growth heading into '26.

Brian Martin, Analyst

Got you. Okay. And just jumping back, I think outside of the M&A with the capital, just the buyback, what are your thoughts there on? I know you talked a little bit about your opportunities as Brad did on M&A, but just in terms of how you're thinking about the buyback. Any thoughts there?

Bradley Adams, COO and CFO

It is open and on the table.

Brian Martin, Analyst

Okay. Given the valuation, is that more of a priority than M&A at this point?

Bradley Adams, COO and CFO

It depends on what the M&A looks like. I can tell you that very few deals are priced as well as our stock rate now in my mind.

Brian Martin, Analyst

Okay. Regarding the charge-off outlook, considering the current reserves, do you anticipate maintaining that reserve level around 140, assuming there are no changes in the macroeconomic outlook? Or should we expect it to fluctuate either up or down?

James Eccher, CEO

Yes. Brian, I think what you need to understand, as it relates to Powersport, once a loan that's 120 days, it's a full charge. And we obviously move to recovery. So we will be carrying a higher reserve in this 140 range is probably where we'll tend to manage it to. So yes, you'll see a higher reserve going forward.

Bradley Adams, COO and CFO

It can't come down over time as loss rates. Actually, I think it will come down over time because I think the loss rates are high. Right now being at least on the doorstep of the consumer recession. It also helps if we've got loss history of our own experience going forward and we can refine it going forward. But make no mistake, I believe we are very well reserved at this point.

Brian Martin, Analyst

Yes. Got you. And Brad, just I know, I guess, on the margin, there's a lot of moving parts here, I guess. But in terms of the biggest drivers of the margin at this point? And it sounds as if we do get a couple of rate cuts, the margin may not even go lower. So just trying to understand the biggest drivers. I know you could be really right or really wrong, but just in terms of the biggest impact on the margin here as we think about directionally, where it's going to go, what should we be watching there?

Bradley Adams, COO and CFO

SOFR, I mean it's always about SOFR. Obviously, it didn't go down even though SOFR took a nosedive with the change in terms of the expected rate cuts over the 6-month horizon. So that's pretty darn powerful. I would say the actual realized rate cuts will have a negative impact. I had spoken in the past that each kind of 25 basis points felt like at one point, it was 7, and I started to realize how wrong I was, and that kind of became 4 to 5. And I guess that's still kind of what it feels like; it may be less. It's a bit of a different game now. But as I said, you can look wrong after we hang up this phone, all of a sudden, SOFR takes a 20 basis point dive. And I look like an idiot; it's not really my fault. So it's a difficult game.

Brian Martin, Analyst

Okay. But it seems you do not anticipate significant changes in the margin overall.

Bradley Adams, COO and CFO

I don't, I don't. You put me on the spot now to take a guess. I'm guessing flat.

Brian Martin, Analyst

Yes. That's what it sounds like. It didn't sound like I'm not asking up or down just more or less, not a lot of movement one way or the other right now. So I appreciate the taking a stand...

Bradley Adams, COO and CFO

I don't know about you, Brian, but I haven't seen a lot of 5% margins in my 25 years doing this.

Brian Martin, Analyst

No. You guys are in a great spot. So it was a great spot before the deal; it's even better now. So I appreciate that. And Brad, maybe just 1 last one for me. On the profitability, I mean, given it sounds as though everything is better than when we looked at it before the deal got done. And if a couple of quarters ago, you were maybe thinking that the profitability for Old Second could be in the 150 ROA type of level as you go into next year. It feels like that could be higher today given the performance and what the deal has done thus far better than expected. Is that fair in terms of kind of what you're thinking then versus now the performance you're seeing?

Bradley Adams, COO and CFO

Yes. I wouldn't want to engage in a fistfight if you try to convince me of that. That's certainly the case.

Operator, Operator

Thank you. As we have no further questions on the line at this time, I would like to turn the call back over to Mr. Jim Eccher for any closing remarks.

James Eccher, CEO

Okay. Thanks, everyone, for joining us this morning. We appreciate your support and interest in the company. We look forward to speaking with you again next quarter. Goodbye.

Operator, Operator

Thank you, ladies and gentlemen. This does conclude today's call. You may disconnect your lines at this time, and we thank you for your participation.