Old Second Bancorp - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 delivered strong profitability: net income $21.8M and diluted EPS $0.48; adjusted diluted EPS $0.50 after $0.8M merger costs and $0.53M MSR mark-to-market loss.
• Net interest and dividend income rose to $64.2M (+2.1% q/q; +7.6% y/y) with tax-equivalent NIM at 4.85% and efficiency ratio at 55.99%.
• S&P Global consensus was beaten: EPS actual $0.50 vs $0.478* and “Revenue” actual $72.6M vs $63.7M*, indicating a broad-based beat; EPS reflects adjusted presentation while GAAP diluted EPS was $0.48.
• Management highlighted margin durability, capital strength (CET1 13.77%) and integration of Evergreen Bank Group (closed July 1) as near-term catalysts; Q3 margin outlook “flat ±10 bps” with earnings bias “slightly higher” for Evergreen.

What Went Well and What Went Wrong

What Went Well

• Net interest and dividend income increased to $64.2M (+$1.3M q/q; +$4.5M y/y) on higher security yields and stable deposit costs; TE NIM at 4.85% with GAAP NIM 4.83%.
• Noninterest income improved q/q (+$0.7M), led by card income (+$304K q/q) and BOLI cash surrender value (+$192K q/q).
• Asset quality stable: nonperforming loans declined to 0.8% of total loans; ACL/NPL rose to 135% from 124% in Q1; net charge-offs fell to $0.8M from $4.4M in Q1.
• CEO: “exceptional margin performance and disciplined operating efficiency… CET1 13.77%, loan-to-deposit 83%, cash and marketable securities >23% of assets”.

What Went Wrong

• Noninterest expense remains elevated y/y (+$5.5M), driven by salaries/benefits (+$3.5M), CDI amortization, data processing, and legal/other costs including FRME and Bancorp Financial transactions.
• MSR mark-to-market loss of $0.53M and merger-related expenses of $0.81M reduced reported EPS versus adjusted EPS.
• Deposits fell $54M q/q (1.1%) with run-off in June across savings, NOW, demand, and time deposits; average demand deposits remain lower y/y.

Transcript

Operator (participant)

Morning everyone, and thank you for joining us today for Old Second Bancorp, Inc.'s second 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, 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 practices. 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 homepage and under the Investor Relations tab. I will now turn it over to Jim Eccher. Over to you.

Jim Eccher (Chairman, President and CEO)

Good morning everyone, and thank you for joining us. I have several prepared opening remarks. We'll give you my overview of the quarter and then turn it over to Brad for additional details. I will then conclude with certain company comments and thoughts about the future before we open it up to Q&A. Net income was $21.8 million or $0.48 per diluted share in the second quarter. The return on assets was 1.53%. Second quarter 2025, return on average tangible common equity was 15.29%, and the tax equivalent efficiency ratio is 54.54%. Second quarter earnings were significantly impacted by a couple of items, the first being a $531,000 in mortgage servicing rights (MSR) mark-to-market losses or $0.01 per share, and an $810,000 charge in merger-related expenses or $0.01 per diluted share primarily related to the Bancorp Financial merger, which closed on July 1.

Despite these items, profitability at Old Second remains exceptionally strong, and book values continue to compound heading into the July 1 close of the Evergreen Bank Group acquisition. The tangible equity rate flow increased by 49 basis points in the last quarter from 10.34%-10.83% and had an increase by 144 basis points over the like period one year ago. Common equity share one was 13.77% in the second quarter, increasing from 13.47% last quarter. We feel really good both about profitability and our balance sheet positioning at this point. Brad will provide additional color on our capital positioning in his comments.

Our financials continue to reflect a very strong benefit margin with pre-provision net revenues increasing from exceptionally strong levels.For the second quarter 2025 compared to last quarter, tax equivalent income on average earning assets increased $1.7 million, while interest expense on average interest-bearing liabilities increased $343,000. Net interest margin improved 22 basis points year over year on a tax equivalent basis and decreased three basis points compared to the last quarter. Total cost of deposits was 84 basis points for the second quarter compared to 82 basis points for both the prior winter quarter and for the second quarter of last year. The loan-to-deposit ratio is 83.3% as of June 30 compared to 81.2% last quarter and 87.9% as of June 30 of last year. I'll let Brad talk about that more in a moment. Second quarter 2025 reflected an increase in total loans of $58.4 million from last quarter, driven by growth in construction loans and lease portfolios during the quarter.

The tax equivalent loan yield reflected a three basis point decrease during the second quarter of 2025 compared to the winter quarter and a four basis point decline for the quarter year over year. Asset quality was largely stable this quarter, with non-performing assets essentially flat and only a modest increase in classified assets as well. We recorded a $1.2 million gross charge-off in the second quarter of 2025, of which the majority was associated with a single C&I credit, which is holding the year for. One property was moved to OREO during the quarter with a favorable outlook regarding its disposition this year. The allowance for credit losses on loans increased to $43 million as of June 30th, or 1.08% of total loans from $41.6 million at March 31st, which was 1.05% of total loans.

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 set projections. The impact of the global tariff volatility was considered within our modeling. Provision level quarter over late quarter reflect no material change, as our projections continue to be aligned with the prior quarter's assumptions for allowance allocation. Non-interest income continued to perform very well in the second quarter compared to the prior year of the quarter, after excluding $892,000 in death benefits and BOLI realized in 2024, as wealth management fees increased $324,000 or 11.7%, and service charges on deposits increased $280,000 or 11.2%.

Mortgage banking income reflected a slight increase in the second quarter of 2025 compared to the prior late quarter and a decrease in the prior year's late quarter, primarily due to volatility in mortgage servicing rights mark-to-market valuations. Excluding the impact of mortgage servicing rights mark-to-market adjustments, mortgage banking income increased nominally quarter over late quarter and from the prior year's like period. Other income is flat in the second quarter compared to the prior winter quarter and higher compared to the prior year's like quarter. Expense discipline continues to be strong, with total non-interest expense for the second quarter of 2025 at $1.1 million less than the prior winter quarter. Our efficiency ratio continues to be excellent, as the tax equivalent efficiency ratio adjusted to exclude Core Deposit Intangible amortization acquisition cost and OREO cost was 54.54% compared to 55.48% for the first quarter of 2025.

Our focus now is on the effective integration of Evergreen Bank Group and optimizing the balance sheet for its impacts. We have sold the bulk of the acquired securities portfolio from Evergreen and reduced reliance on wholesale funding within the legacy of Evergreen Bank, as it was merged with Old Second. Nothing really has changed relative to our expectations in terms of financial performance targets associated with the transaction. Cost savings estimates are on target, and earnings expectations are maybe biased slightly higher. Next quarter will, of course, feature the bulk of merger-related expenses. With that, I'll turn it over to Brad for additional color.

Brad Adams (COO and CFO)

Thank you, Jim. Net income increased by $1.3 million or 2.1% to $64 million for the four days of June 30th relative to the prior quarter of $62.9 million. Also increased $4.5 million or almost 8% from the year ago like quarter. Tax equivalent yield increased 16 basis points and loan yields were three basis points lower in the second quarter of 2025 compared to the first quarter. Total yield on interest earning assets decreased two basis points over the late quarter to 5.68%. Interest earning deposits and total securing liability costs and credit to two basis point increase. The end result was a three basis point increase in the tax equivalent income to 4.85% for the quarter ended from 4.88% last quarter. Employees have continued to be exceptional margin performance. Average deposits increased $51 million or 1.1% quarter over late quarter.

That's primarily seasonal and outlined below underneath the hood there. Old Second should continue to build capital, as evidenced by the 144 basis point improvement in the TC ratio in the past year, which means we have added $1.78 of annual book value over the last 12 months. Pretty strong performance. Evergreen will absorb some of its capital cushion, however, Old Second will still have an exceptionally strong and flexible capital position. To that end, and subsequent to the end of the quarter, we repurchased approximately 327,000 shares in a privately negotiated transaction at a modest discount to market. Our perceptions on capital returns continue to evolve given the Evergreen Bank acquisition consumes significantly less capital than almost any other potential deal we could have done.

Our financials remain relatively uncluttered by the impact of purchase accounting going forward due to the lack of significant fair value marks associated with the transaction. Non-interest expense was materially on track for the previous quarter, increasing $1.1 million, primarily due to significantly lower OREO expenses in the current quarter. Non-interest expense has run higher year over year, increasing $5.5 million compared to the same quarter last year, primarily due to higher salaries and employee benefits, as well as acquisition costs through data processing and core deposits and tangibles. Most of the Core Deposit Intangible expense related to the five branches we acquired late last year. Overall, we are hopeful keep with core expense growth exclusive of acquisitions in the kind of four percent area. Not a lot going on. In terms of this quarter, I think it's pretty transparent. The trends remain very strong.

I don't feel very good, as Jim mentioned, about the estimates we put forward as it relates to Evergreen. He also mentioned bias slightly higher. I think that from a rate standpoint, things still look roughly balanced to me in terms of status quo versus some level of recession and/or rate cuts. I don't see rate cuts happening. A recession, obviously, there's some butterfly somewhere that's flapping its wings. It can make things very different than that expectation. As we sit here right now, I feel exceptionally good about how we're positioned. I believe that, although it's difficult to give a margin forecast for next quarter given we're not done with the fair value marks, I'm very bullish that our margin will remain at exceptionally strong levels over the remainder of the year and into next. With that, I would like to turn the call back over to Jim.

Jim Eccher (Chairman, President and CEO)

Thank you, Brad. In closing, Brad mentioned he feels this is a very solid quarter for the company. We remain confident in our positioning and extremely excited with what the Evergreen Bank transaction will add for us. We're off to a strong start for the first half of 2025, and we are extremely optimistic about the rest of the year ahead as we welcome the Evergreen team and its product offerings. That concludes our prepared comments this morning, so I'll turn it over to the moderator and open it up to questions.

Operator (participant)

Thank you very much. At this time, we'll be conducting our question and answer session. If you would like to ask a question, please press star one on your phone keypad now. A confirmation tone will indicate that your line is in the queue. You may press star two if you would like to remove your question from the queue. For any participants using speaker equipment, it may be necessary to pick up your handset before you press the keys. Please wait a moment while we poll for any questions. Thank you. Your first question is coming from Jeff Rulis of D.A. Davidson. Jeff, your line is live.

Jeff Rulis (Managing Director and Analyst)

Thanks. Good morning. I just wanted to check in on the timing of conversion expected on Evergreen and on that expense run rate. It's a two-part. There's a conversion timing and then run rate at kind of looking at 52-53 on a core basis. Does that sound in the ballpark?

Jim Eccher (Chairman, President and CEO)

Yeah, I think some of that relates to the timing of the cost base. The conversion to be expected to be kind of early fourth quarter type range, early to mid. By the time we report fourth quarter in December is the first time that you'll see closer to the final run rate on operating expenses, and then first quarter should be relatively clean.

Jeff Rulis (Managing Director and Analyst)

Got it. If you can remind us, did that acquisition days the loan-to-deposit balances bought over?

Jim Eccher (Chairman, President and CEO)

I'll have that like for Evergreen?

Jeff Rulis (Managing Director and Analyst)

Yeah.

Jim Eccher (Chairman, President and CEO)

They were just north of 90%.

Jeff Rulis (Managing Director and Analyst)

90% of all deposits?

Jim Eccher (Chairman, President and CEO)

Just the actual,

Jeff Rulis (Managing Director and Analyst)

The actual level?

Jim Eccher (Chairman, President and CEO)

Yeah.

Jeff Rulis (Managing Director and Analyst)

123 billion?

Jim Eccher (Chairman, President and CEO)

Yeah. One, two of those. Yeah. One, two and change.

Jeff Rulis (Managing Director and Analyst)

Okay. Got it. Is the last one on the, you called out the owner-occupied security that's brought into classified. If you could just wrap a little more detail about kind of geography or your position on that one.

Jim Eccher (Chairman, President and CEO)

Yeah, I got it. It really stems from one large healthcare transaction in Oregon. We don't see a loss at this at all. We're in a very strong collateral position, 70% coverage loan-to-value. The facility had some restrictions put on by the state of Oregon, which caused a drag on their ability to lease out the facilities. A lot of those restrictions have been freed up, and we expect cash flow to get stronger in each subsequent quarter. We've got a good sponsor behind us as well. We don't see any loss given the fall here.

Jeff Rulis (Managing Director and Analyst)

Gotcha. Okay. I'll step back. Thank you.

Jim Eccher (Chairman, President and CEO)

Thanks, Jeff.

Jeff Rulis (Managing Director and Analyst)

Thank you.

Operator (participant)

Thank you very much. Your next question is coming from David Long of Raymond James. David, your line is live.

David Long (Managing Director and Analyst)

Good morning, everyone. My first question relates to overall commercial book client sentiment. When we were back in April having this call, we were coming off of Liberation Day, and everything seemed to be toned down a bit. I'm just curious what you're hearing from your commercial customers and their appetite to grow their business and close some of the loans that may be in your pipeline.

Jim Eccher (Chairman, President and CEO)

Yes. I think, first of all, David, I would say our commercial clients are weathering the tariff uncertainties exceptionally well. Appetite for CapEx has been muted, I would say, since the first half of the year, and that's still about pretty low levels of line utilization. We are seeing pockets of growth in our leasing group, and some in commercial real estate. We had a even though we had a pretty good quarter from a loan growth perspective, that did not come with any growth in our finance group. That group has been obviously historically very strong performer for us. Loan demand in that area has been somewhat weak, although they are reporting pretty strong second half pipelines. You couple that with Evergreen Bank, which you know, typically historically is a very strong second and third quarter asset generator in the power source area.

We are encouraged by loan pipelines. The second quarter brought that was our strongest growth quarter in over two years. We think low to mid-single-digit growth is possible still for 2025.

David Long (Managing Director and Analyst)

Got it. Thanks, Jim. Appreciate it. You mentioned the Evergreen deal and maybe having a little bit more of a positive bias than when the deal was announced. Does that tie to the performance of that bank since you've announced the deal? As a tie into that, just any turnover worth noting with that transaction?

Brad Adams (COO and CFO)

Yes. They're performing well ahead of what we had assumed. I mean, the way that they work is you take their subperiod year-to-year projection in terms of what it's going to be and what level of profitability it's performing at and project it forward going into year two or three as a standalone entity, for better or worse. It's kind of industry standard outside. They are already a standalone and performing at the profit level that I had assumed for all of that year. It is a great asset. Pretty good. Probably a lot larger than what I had assumed it would be. That's difficult to say. Fair value is not completed, but that's the bias right now.

I've got a few pretty good, I mean, you didn't get any credit right on March this quarter, even though I see the lady I had that we missed it by 20 pages or 20 less, where it said we definitely missed it. All right, direction. Overall, we feel pretty good.

David Long (Managing Director and Analyst)

Great. Thanks, Brad. Appreciate it.

Brad Adams (COO and CFO)

Yes.

Operator (participant)

Thank you very much. Our next question is coming from Nathan Race of Piper Sandler. Nathan, your line is live.

Nathan Race (Managing Director and Analyst)

Hey, guys. Good morning. Thanks for taking my question.

Brad Adams (COO and CFO)

Welcome.

Nathan Race (Managing Director and Analyst)

No, I would not go in that arena with you. It's never been long enough. I was hoping to talk about the outlook for charge-offs going forward. Obviously, you're picking up a higher risk reward business from Evergreen when you think about their lending specialties. I'm just curious with that business in the fold and all the improvement on the legacy Old Second Bancorp side of things, how you're thinking about what's going to be the charge-off trajectory going forward?

Jim Eccher (Chairman, President and CEO)

Yeah, I mean, I think we're probably good. It's a solid quarter for us from a charge-off perspective. I think we just had one of $1 million that was fully reserved for. I think, you know, investors should know that in power source lending in general, loss rates can run a little bit higher, but you have to look at that hand in hand with the contribution margin that that portfolio generates. Losses in that quote could be anywhere between less than one percent and one point five percent. It's not a pretty good buy, but you're also looking at a portfolio with an average coupon today on new assets going on around nine percent. You have to look at those things hand in hand, going forward.

Nathan Race (Managing Director and Analyst)

Right. If I was doing some quick back of the envelope math on their portfolio and overlaying that loss rate, am I in the ballpark of around 30 basis points going forward of charge-off?

Jim Eccher (Chairman, President and CEO)

Yeah, I think so. I think that's good.

Nathan Race (Managing Director and Analyst)

Okay. Great. Obviously, with Evergreen, you're picking up a higher beta deposit franchise, particularly relative to legacy Old Second. I'm just curious, Brad, to maybe interrupt you to drop on how you think the margin responds, following a 25 basis point Fed cut at some point going forward.

Brad Adams (COO and CFO)

Yeah, when is that?

Nathan Race (Managing Director and Analyst)

I'll let you up on that, Brad.

Brad Adams (COO and CFO)

Oh, man. I remember the $6.48 yesterday, and what used to be $13 is now $16. That happened in the last two weeks. Somebody just told me the price increases at Walmart in the last 30 days. I mean, my interest rate prognosticator newsletter has a really hard time seeing a rate cut this year. I don't see a basis for it, but I think people will flock for it. Here we are also in a land of meme stocks running again. A general thing is to call for a little bit to go buy a few GameStop. It's against my moral fiber and something approximating religion to think about a rate cut this year. It doesn't make any sense to me.

Whereas before we had said we'd lose somewhere between four to seven basis points for every 25 basis point cut, I would say that's 25% lighter conservatively on a pro forma basis. There's more margin to movement for us right now just in balance sheet movement. As Jim mentioned, we sold the entire security portfolio and reduced the wholesale funding. All those assets were limited. They were being carried at a net negative margin contribution. There are a number of things going on under the hood that are more powerful than movements and expected interest rate within the Fed's futures curve. Put it this way, we gave up 3 basis points this quarter despite something approximating 40 basis points of movement out the SOFR curve. I think we're less pointed than maybe people expect at this point.

I have been somewhat surprised at the margin durability given what the curve has done over the last year. I think that if you had for your view, I would probably raise what I believe the long-term margin is for Old Second here on a standalone basis before Evergreen was added to it. This is, if you know me, this is about as bullish as I've found. Monotone and all. I'd say if you make me assume there's a rate cut this year, I would say four basis points to give up. Man, I answered that with a lot of words.

Nathan Race (Managing Director and Analyst)

Yeah. I would say that we're three weeks after the close, right, of Evergreen. You know you're right. They are a higher beta funding shop. We started bringing high-yield loan markets down and deposit levels have been remarkably solid. We haven't seen a whole lot of runoff. Again, it's only been three weeks, but I would agree with Brad. Right now, these are about as good as we feel hope. Got it. That's a really helpful color and thoughts. Brad, just maybe start for the third quarter given the repositioning of some of the security portfolio at Evergreen and the other impacts on the deal. How are you thinking of kind of like a range to the margin for the third quarter?

Brad Adams (COO and CFO)

Yeah, I'm going to go with flat because there is a wider margin there than it typically would be. It's flat plus or minus 10 basis points instead of plus or minus five. Bearing in mind when I answer that, they're not for fair value marks to use on it. It's difficult to say with any precision, but it's seven.

Nathan Race (Managing Director and Analyst)

Okay, that's helpful. Sounds like you're more keyed in on the margin outlook than pass rate, so I'll leave it there. Thanks, guys.

Brad Adams (COO and CFO)

Very good.

Operator (participant)

Thank you very much. Your next question is coming from David Conrad of KBW. David, your line is live.

David Conrad (Managing Director and Analyst)

Yeah. Hey, good morning. Just a little bit of a follow-up to that recent discussion. Maybe add a little color to, you know, absence of what you paid down in wholesale deposits, kind of what is their cost of funds bringing over? Maybe the leverage you guys have over the next year plus of just working down that with your strong deposit franchise.

Brad Adams (COO and CFO)

I mean, you can see what their cost of funds were in their standalone financials in the for percent range. What do I expect to see by the end of the next quarter? I would expect relying upon the market-based funds that have something with a for percent handle to be $100 million less. I'll let you match the way you're at. In aggregate, the overall standalone cost of funds within every range could be down somewhere between 30 and 70 basis points. Again, there's movements here. I'm speaking about a quarter that is only the third. I'm sitting in the DMAs on a fly here, for example. Nobody's asked me yet, but I thought Pencke PL had sold that portfolio that he had mentioned previously, because I don't want to sell it when you have to market, and if the market would see that it actually becomes a pretty good asset. We're learning as we go.

David Conrad (Managing Director and Analyst)

Moving past this quarter, I guess, can your deposit growth absorb their loan growth, or do you continue to kind of fund marginally with that side of the bank?

Brad Adams (COO and CFO)

We've got a substantial amount of range given where our standalone loan-to-deposit ratio is. In times of positive runoff coming in the Q2 quarter, it's not an overnight thing. As we exit next year, if I had to guess, I would say we would be at a 90% loan-to-deposit ratio and an overall cost of funds that's substantially better than A plus B. I spoke previously about a desire to take up some supplemental small deposits and equivalents, as they adverse versus frank deals that we did prior. That would mean that we'd basically return us to where we were before, so there's certainly room for that. Will it come to fruition?

Jeff Rulis (Managing Director and Analyst)

Got it. Thank you.

Brad Adams (COO and CFO)

Yep.

Operator (participant)

Thank you very much. Your next question is coming from Terry McEvoy of Stephens. Terry, your line is live.

Terry McEvoy (Managing Director)

Thanks. Maybe just a follow-up, Brad, on that last question. Would your preference be to wait until Evergreen is integrated before your next transaction, or something along the lines like you just mentioned, be keen for sale? Would you take a serious look this year?

Brad Adams (COO and CFO)

I mean, we're always looking, but ideal timing wouldn't be before October, no. I think there would be serious risks like a power scoot and me falling out of a window or something like that. You know, people would be very accepting of me in general. Acquisitions are a lot of work, and you hear things saying about this industry of its own four branches, its own five branches, or its own 10 branches. That is a wild understatement on the amount of work that's involved. This one does have some advantages to help us, and we have a similar core. It makes things a little bit easier, but there are a whole lot of I's and a whole lot of D's that need to be dotted and crossed so you get it right.

A lot better than it used to be, but small missteps in conversions can put you in the newspaper as we've seen some of the overall discounts in the last couple of years. We don't want to be in the.

Yeah. I mean, Terry, I think in a perfect world, we'd like to pause here, digest the deal, integrate it, and start growing organically a little better. As you know, M&A timelines are unpredictable. Rarely do seller and buyer timelines come into alignment. We'll continue to be opportunistic, but we've got plenty to choose today.

Terry McEvoy (Managing Director)

Appreciate that. You mentioned repurchasing $327,000 shares in a private sale. Did that happen after the deal, and were the sellers connected to the bank that sold, or was that separate? I guess, as a follow-up, what's the appetite for incremental buyback?

Brad Adams (COO and CFO)

It was a private equity investment. It was. It's what's the deal equivalent? Yes, it's the price of $18 per share of the quarter.

David Conrad (Managing Director and Analyst)

Great. Thanks for taking my question.

Brad Adams (COO and CFO)

Okay.

Operator (participant)

Thank you very much. Just a reminder, if there are any remaining questions, you can join the queue now by pressing star one on your phone keypad. Our next question is coming from Brian Martin of Janney. Brian, your line is live.

Brian Martin (VP and Analyst)

Hey, good morning, guys.

Jeff Rulis (Managing Director and Analyst)

Hey, Brian.

Brian Martin (VP and Analyst)

Good morning.

I'll leave the tax question, Brad, since it sounds like you don't want to end on that anyhow. Maybe just one back for the margin, Brad, just bigger picture. You know, once things reset in third quarter and you get through some of the noise, which sounds like you're more optimistic than pessimistic, just directionally from there, how should we be thinking about the margin, kind of in a flat-rate environment? I mean, I don't know what happens at the Fed, but once you kind of reset and get through the noise like you're talking about this quarter, can you give any thoughts just directionally how the margin, kind of what the picture takes on the outlook thereafter?

Brad Adams (COO and CFO)

I mean, a flat-rate environment along the curve, meaning that we don't see this lift on in SOFR and overnight index rate. We've seen over the last few days, it's really flat along the curve and more than it's stable and durable. It's slightly higher than what Evergreen brings to the table. Obviously, different curve scenarios from that, from totally stable, which, you know, does re-exist in nature and go either one direction or another. I feel very good about what our margin outlook is. We're not outside on any of that. We do have a subsidy that we'll have to deal with next year that will be a negative to margin. I don't know what the plan is for that year. Assuming that gets taken care of in a way that's not.

Brian Martin (VP and Analyst)

Gotcha. You talked about just kind of the long-term floor, you know, maybe being raised. How are you thinking about that, kind of that long-term floor and where the margin is, you know, just with the perspective with.

Brad Adams (COO and CFO)

I mean, you heard me say it before, that I do not believe that there is a pathway back to a zero percent interest rate world, and that banks like us are fundamentally better positioned, even though there aren't many banks like us. I had said previously, and to save everybody's time of going back through transcripts, I said previously that I believe that our margin floor was probably around four percent. If you guide me down and maybe answer the question today, you kind of are. It's probably more like 4.25% would be my guess.

Brian Martin (VP and Analyst)

Gotcha. I appreciate all the color. How about just in terms of, you know, once you've given some of the noise that's going to play out here in the near term with the deal, can you talk about what, you know, when you get to that maybe first quarter of next year with the deal closed, integrated, kind of how you're thinking about ROA, just to be kind of back into kind of how we think about things. Where do you think ROA is going to trend to in 2026, whether it points to a quarter or a year, Brad, whatever you can offer just in terms of your outlook, from where we stand today?

Brad Adams (COO and CFO)

I see you're confusing me now. Are we talking about rate cut land again? Are we talking about, are we still talking about stable interest rates? What are we talking about here? What are we talking about?

Brian Martin (VP and Analyst)

We'll go with your scenario, Brad. I don't know. Just like you don't know. I guess I'm just wondering where you think ROA is going to land, you know, in your thinking. It sounds like probably no rate cuts. Go with that. That's fine.

Brad Adams (COO and CFO)

I would feel very comfortable with a 1.50% ROA.

Brian Martin (VP and Analyst)

Okay. I think you answered the question about buyback. You're on the table at this point, for.

Brad Adams (COO and CFO)

Oh, we'll do it. Yes.

Brian Martin (VP and Analyst)

We'll get through it. Okay. This last one was loan growth. It sounds like you're a bit more optimistic on loan growth.

Brad Adams (COO and CFO)

Yeah, that was more than helpful.

Brian Martin (VP and Analyst)

Yeah. Is there anything else?

Jim Eccher (Chairman, President and CEO)

Second and third quarter are generally our better quarters, Brian, you know that. What I'm most encouraged about is, you know, having more money in verticals to help sustain that growth is kind of encouraging. Now to be fair, we did not have as many payoffs or paydowns in the second quarter, but it was one of our stronger origination quarters than we've had in some time. So I would expect some growth again in the third quarter and then probably some stabilization in the fourth and first quarter.

Brian Martin (VP and Analyst)

Okay. Perfect. Thank you, guys, for taking the questions.

Brad Adams (COO and CFO)

Thanks, Brian.

Operator (participant)

Thank you very much. We appear to have reached the end of our question and answer session. I will now turn the call back over to Jim for any closing remarks.

Jim Eccher (Chairman, President and CEO)

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

Operator (participant)

Thank you very much. This does conclude today's conference. You may disconnect your phone lines at this time and have a wonderful day. We thank you for your participation.