Old Second Bancorp, Inc. (OSBC) Q2 2022 Earnings Report, Transcript and Summary

Good morning, everyone, and thank you for joining us today for Old Second Bancorp, Inc.'s Second Quarter 2022 Earnings Call. On the call today is Jim Eccher, the company's CEO; Gary Collins, the Vice Chairman of our Board; and the company's CFO, Brad Adams. [Operator Instructions]. I will start with a reminder that Old Second's comments today may 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. 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 and earnings release, which is available on our website at oldsecond.com on the homepage under the Investor Relations tab. Now I will turn the floor over to Jim Eccher. The floor is yours.

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 color. I will then conclude with some summary comments and thoughts about the future before we open the floor up to questions. Net income was $12.2 million or $0.27 per diluted share in the second quarter of 2022. Net income adjusted to exclude West Suburban acquisition-related costs, and net gains from branch sales was $13.8 million or $0.31 per share in the second quarter. On a same adjusted basis, return on assets was 0.90%, returns on tangible common equity was 15.94%, and the efficiency ratio was 62.69%. Earnings in the quarter were favorably impacted by an increase in net interest income of $4 million, but offset by a minimal MSR valuation mark-to-market gain compared to last quarter's MSR mark-to-market gain of $3 million and net losses on mortgages sold due to the sharp increase in interest rates. The second quarter of 2022 continued to reflect the positive impacts of the West Suburban acquisition in our financials. We'll say, at this point, we are outperforming our own expectations on both cost saves and revenue that we had set for ourselves internally. More importantly, we have made substantial progress in rapidly expanding our loan origination capabilities with new teams adding substantially to our results this quarter. In regards to West Suburban, the systems conversions and branding were successfully completed early in the second quarter with no significant customer disruption. Overall, we could not be more pleased with where things stand today from both a balance sheet positioning and operational standpoint. Second quarter also reflected the highest quarterly loan growth we have ever produced, excluding acquisition impacts. We had $222.7 million or 6.6% of net loan growth quarter over quarter, or approximately $230 million exclusive of PPP runoff. As we had hoped, prepayments did finally slow somewhat and allowed continued strong origination activity to impact the balance sheet. Activity within loan committee remains very strong and line utilization remains materially unchanged during the quarter. Recent hires are really starting to hit their stride and the cultural fit has been fantastic. We are seeing significant pipelines in CRE, health care, leasing and importantly, sponsored finance. We are busier than we have been in many years. The net interest margin expanded substantially this quarter moving to a tax equivalent net interest margin of 3.18% for the quarter compared to a tax equivalent NIM of 2.88% in the first quarter. The bulk of the margin benefit resulted from balance sheet mix improvements and the impact of rising rates on the variable portion of the loan portfolio and full quarter effects from the first quarter balance sheet growth. Here, too, we consider ourselves ahead of schedule, and the trends underneath the surface are much more positive than the bottom line indicates. The stabilization and improvement that you've seen thus far in the margin are primarily more a product of liquidity deployment than an upward move in rates. The story going forward will be very different in the quarters ahead. I'll let Brad talk more about that in a minute. Our nonperforming loans increased by $4 million compared to the prior quarter with downgrades to a couple of credits. We recorded net charge-offs of $250,000 in the second quarter compared to $293,000 in the first quarter. Total classifieds increased $36.6 million to $103.2 million from $66.6 million last quarter. Five larger credits were downgraded from substandard or from a watch to performing standard, and we continue to monitor the cash flows and financial condition of these borrowers. Overall, we remain confident in the strength of our loan portfolio. Other real estate owned decreased $750,000 in the second quarter, primarily due to 3 property sales. The allowance for credit losses totaled $45.4 million at the end of the second quarter, which is 1.3% of total loans, which is consistent with the total ACL as of March 31. At quarter end, $1.3 million of provision for credit losses was recorded, which was offset by an $800,000 reduction of reserves for unfunded commitments based on a review of line utilization trends. Our outlook is cautiously optimistic as the underlying economy appears strong, albeit with significant uncertainties. We believe that we are more than adequately reserved under base case scenarios, but continue to modestly overweight more pessimistic scenarios given the high degree of uncertainty. Expense discipline continues to be strong, and we are far ahead of schedule and cost saving targets announced with the acquisition. Total merger-related costs of $3.3 million were recorded in the second quarter, which were then reduced by net gains on branch sales of $1.1 million, all pretax. The branch sale gains are recorded as a contrary to occupancy expense. Net adjustments to GAAP net income totaled $1.6 million after tax or $0.04 per diluted -- per fully diluted share. As we look forward, we will continue to focus on deploying liquidity in order to more fully leverage the quality of the deposit base by building commercial origination capability for the long term and making prudent investments in the securities portfolio in the short term, that do not carry excess spread or credit risk. As we've said before, the goal is to obviously build back towards 80%, 80% plus loan-to-deposit ratio in order to drive the returns on equity commensurate with our recent historical performance. I think we made some solid strides in that regard this quarter. Brad will provide additional color in his prepared comments. Brad?

Thank you, Jim. Net interest income increased $4 million relative to last quarter and $23.3 million from the year ago quarter. Margin trends increased due to the loan portfolio growth as well as due to the increase in security and loan yields due to market interest rate increases. In addition, deposit costs decreased 1 basis point quarter-over-quarter and the total cost of interest-bearing liabilities remained unchanged to 24 basis points in the second quarter of 2022. I would point out that loan yields did not meaningfully help the margin in Q2 due to the timing of the rate increases and less PPP benefit. I would note that the June only margin was 3.46% versus 3.18% for the full quarter. There is a significant amount of upside that remains to the extent that loan growth remains as strong as it has been and balance sheet mix continues the margin should meaningfully outperform. The second quarter itself saw a significant move in rates in addition to a widening of credit spreads all along the curve, but none more dramatic than the under 3-year portion of the curve. Longer portfolios than Old Second's would have seen relative outperformance to ours given the sharp inversion from the 2-year portion of the curve. The mark on the securities portfolio recognized through AOCI went from a $9 million gain at December 31 to a $35.5 million unrealized loss at March 31 and was a $64.7 million unrealized loss to June 30, a decrease in portfolio value of over 5% since year-end. We'd like to remind investors that we have been exceptionally cautious in deploying excess liquidity. The portfolio duration, effective duration was 2.8 years at June 30. The weighted average life was 4.5 years, and over 1/3 of the entire portfolio is variable. Our fixed rate MBS exposure is and was many multiples less than peers, and our absolute exposure to fixed rate issues is and was also extremely short going into this move. While it's not fun to see the impact, this move was exactly what we were preparing for and it wouldn't change much with the benefit of hindsight. On the under two-year portion of the curve, gaps like it has, even exceptionally cautious portfolios can initially look dislocated. I'm confident in my belief that we have the right positioning and the relative conservatism will serve us well. This obviously impacts tangible capital levels, but a recession scenario would likely serve us well as a lower rate assumption would not need to bleed very far out the curve in order for us to recapture significant tangible book value. The rest of the balance sheet looks fantastic. The deposit base, as you may know, is extremely granular and insensitive to rates. On the loan side, we do have some latency, but existing balances feature high concentrations of variable rate structures and relatively short duration on the asset side. Barring a change in current macro expectations, Old Second will transition quickly into a higher rate world with a rapidly improving profitability profile. On the expenses front, we're performing better than I expected, but this is the first full quarter impact following annual performance reviews and wage pressures remain very real in our markets. Additionally, volume-related expenses have an impact given the level of activity that we are currently seeing, which is unprecedented in our history. In the last several quarters, we have welcomed talent, talented new executives in operations, credit administration and human resources. These new leaders bring with them significant experience from much larger banks and strong track records of success. We remain active on this front and believe we have a compelling story to tell prospective additions. So I'm hopeful we'll be able to spend some of the upside in the cost savings to both strengthen Old Second's foundation and also enhance the core asset organic growth rate. When you grow like we have through acquisition, there are challenges and upgrades that need to be made to increase the level of sophistication of the organization and the overall talent level. I'm exceptionally proud of what we've been able to accomplish and the people that we've been able to welcome. This is a much better bank than it was 12 months ago. This is a much better bank than it was 18 months ago with the rapid Increase in talented people. Deposits declined a bit from first quarter levels, primarily from municipal account seasonality, but some parked funds did exit and a modest impact from rate-sensitive acquired accounts existed as well. The resulting remix and improvement in the loan-to-deposit ratio clearly benefited the margin. Margin trends from here will be a function of loan portfolio repricing, which we expect to pick up meaningfully following the recent 75 basis point hike. Confidence is high, and we have seen positive developments in C&I and utilization rates as well. As Jim mentioned, we do feel quite a bit better on the loan growth side of things. I would not expect a repeat of this quarter's performance given the magnitude of it. I don't think we've ever done anything like this. The trends are clearly very positive. The end result is that margin trends are expected to trend strongly in the right direction. If the forward curve is accurate, the first two rate hikes will benefit us, but not to the degree of any subsequent moves would. Noninterest income decreased from last quarter with a decrease of $2.9 million quarter-over-quarter and MSR mark-to-market gains as well as net losses on residential loans sold of $262,000, obviously, a very disappointing quarter in residential lending. Losses on the sale of mortgage loans resulted from significant ramp-up in fallout and hedging that underperformed. Our mortgage business is strictly legacy Old Second and operates largely in the lower income brackets, and that demographic is having a very difficult time with the level of inflation that exists in basic necessities. We are still working to penetrate legacy West Suburban markets in DuPage County to further diversify this business. This negative impact on noninterest income was partially offset by card-related income increase of $398,000 in service charges on deposit increase of $254,000. Wealth management income remained strong at $2.5 million for the second quarter. Provision for credit losses on loans of approximately $1.3 million were recorded during the quarter, and our economic outlook slightly -- declined slightly quarter-over-quarter with an unemployment rate projection increasing to approximately 4% to 5.5% through June 30, 2023, and over the remaining life of the loans. This is an increase from the approximately [3.75] to [5.25] estimate from last quarter. I would expect loan growth to outpace provision growth over the near term, though that could change with significant worsening in the macro environment. We recorded a provision for credit losses reversal of approximately $800,000 on unfunded commitments due to review of funding utilization rates on commitments. We are pleased with how credit has performed. And although total classified loans increased this quarter, we continue to consider credit metrics as stable and excellent. We have said previously that it's unlikely credit gets better from here, and we have adopted a cautious stance and are monitoring credits closely. Expenses are difficult to manage this year and mid-single-digit increases in salary and double-digit increases in benefits, reflecting wage inflation and a difficult environment to hire. We are managing through this and are thankful for the flexibility and opportunities for synergies that exist for us right now. Our efforts in the coming quarters will be to finish delivering on the synergies, continuing to bring additional talent on board, helping our customers and funding quality loan growth with the expectation of an improving margin. We need to build back capital a little bit following the investment in West Suburban, but we look to be on track in all major strategic initiatives. With that, I'll turn the call back over to Jim.

Okay. Thanks, Brad. In closing, we remain confident in our balance sheet and the loan growth opportunities that are ahead of us. Rising interest rates will certainly be beneficial to our bank, profitability in the second half, and we are playing close attention to credit and expense line items. We believe our credit and underwriting has remained disciplined, and our funding position is strong. Today, we have the balance sheet and liquidity to take advantage of a rising rate environment and have the financial strength to wait for this to occur. So that concludes our prepared comments this morning. So I'll turn it over to the moderator so we can open it up to questions.

[Operator Instructions]. Your first question is coming from David Long with Raymond James.

The last quarter, you talked about a downtick in expenses before moving higher? I know you talked about some of the wage inflation pressures, but some of the other lines had big jumps when the wages and compensation didn't seem to be materially higher in the quarter. Just wanted to walk through what changed in the quarter? And is this the right run rate? Or do we need to take the $35 million after the noise and then add on a little bit for wage inflation from that point?

So let's talk first about what's nonrecurring in here. It's not entirely clear, just looking at the breakdown of it. We've got a little over $900,000 in salaries and benefits that's nonrecurring. Then there's a net $756,000 benefit in occupancy, $1.7 million charge in computer and data processing, $50,000 legal expenses and $220,000 in other. So the sum total of that is $2.1 million. And that puts us basically kind of at run rate, we do have some volume-related expenses that are very high here, and I expect some mortgage-related expenses to come out beginning in the third. So are we modestly a bit higher than what I would have expected this quarter? Yes. I'd say wage increases for us are very real. If we'd had this conversation a year ago, we would have had relatively few people above the $15 an hour rate at the bottom of the pay scale. And now everybody is above that level. There are banks paying $20 an hour in our markets are not far from our markets. It is difficult to maintain employment levels. In terms of where we are, I still think kind of that basically $35 million number feels right. Maybe [34.5] after we get the mortgage expenses out, that sort of level going forward.

Okay. Great. Appreciate that. On the deposit side, I think we have understanding you had some great, great loan growth, and I'll go back in the queue and let someone else ask about that or I'll hop back on. But on the deposit side of things, balances were down a bit in the quarter. Just walk us through what happened there in the quarter with the deposit balances and your expectations for the back half of the year?

So we're down $200 million, roughly $50 million of it is time deposit, roughly $50 million of it is park liquidity within legacy Old Second that we knew was going to exit. It was never permanent. About $35 million, $40 million is acquired rate-sensitive money, and the bulk is just seasonality on municipal -- the bulk of the remainder is the seasonality on municipal deposits. It is not a rapid bleed out from here. Our strongest deposit quarters are always in the first quarter, and then we take down over the next 2 when we get a pickup at the end of the year. The only thing that's really different in terms of what we would have expected on a go-forward basis is about $35 million in a rate-sensitive runout. The go forward from the here feels a lot more stable.

Your next question is coming from Nathan Race of Piper Sandler.

Question just kind of on the loan growth outlook, both near term and long term. Jim, it sounds like pipelines remain strong entering the third quarter. And I'd be curious to kind of hear some of the drivers in terms of the growth that we saw here in 2Q. I imagine it's mostly market share gains. And just given that you guys have added a lot of commercial banking count over the last few years now, particularly more recently, how do you guys kind of think about more of the longer-term loan growth outlook? Obviously, we have a macro slowdown, but I imagine a lot of your growth is going to be coming from share gains. So within that context, I'd be curious to hear kind of what inning are we in, in terms of a lot of those bankers that you've added in terms of kind of bringing over the balance of their portfolios from their private -- from their previous institutions, with the exception perhaps of the sponsor financing that I believe is still operating under noncompetes or solicits.

Yes, Nate, good question. I mean, we're obviously very pleased with performance with asset generation in the quarter. It was very broad-based with contributions up and down the commercial bank, significant contributions from sponsored finance after really not producing anything in the first quarter. While they are bound by noncompete, they have a unique ability to generate new opportunities without a violation of the noncompete. So they performed well. Health care had a great quarter, our middle market C&I group did as well. Our commercial real estate group and equipment leasing group also had a good quarter. So almost clicking on all cylinders here. Pipelines do remain strong, albeit not as strong as last quarter, but we do expect another good quarter in the third quarter, barring any material prepays or paydowns. Beyond the third quarter, Nate, it's pretty difficult to know what's going to happen in the fourth quarter. Certainly, this rate hike could potentially choke up new loan demand, but we are pretty bullish based on what we're seeing at loan committee today. Certainly seeing low double-digit loan growth this year is certainly realistic.

Got you. And just as we think longer term about the loan growth opportunities in your markets and with the teams that you've added, are we still kind of in the early innings in terms of a lot of those makers bringing over the balance of their relationships and portfolios from previous institutions?

Yes. I would say early innings is fair. And we really like the fact that a lot of them are operating in nationwide market share. So we -- we're certainly not subject to local market conditions.

Got it. Okay. And then just maybe thinking about the margin outlook with the near-term loan growth outlook remaining pretty strong. Brad, just kind of any thoughts in terms of kind of where the margin trends into the third quarter ex accretion given a lot of the repricing characteristics that you alluded to earlier in terms of just the floating nature of the book, which I believe is around 50% or so. And then also just with over 1/3 of the securities book repricing as well on the short end.

So I would say, assuming a normal level of accretion, which would be kind in the neighborhood of $900,000 to $1 million. I think it's certainly foreseeable that we would see a margin above [3.50] in the third quarter, sizably, potentially sizably so.

And do you have that accretion number for the second quarter?

$1.9 million in the second quarter, which was flat to first.

Great. And then just kind of think about the overall income run rate from here, it sounds like some of the items that impacted the mortgage [indiscernible] are hopefully not likely to repeat going forward. So -- and it [indiscernible] card and deposit service charge revenue increasing the core as well. I guess kind of thinking around like a $10 million run rate going forward, kind of plus or minus in the back half of this year.

I would like to do better than that. I'd like to see mortgage at around $1.5 million level.

Your next question is coming from Chris McGratty at KBW.

Maybe to start with, Brad. You talked about the spot margin of 3.46%. Do you happen to have the spot loan yield and also the spot interest-bearing deposit costs?

So interest-bearing deposit costs are roughly equivalent to the average that you see. There's been surprisingly little movement in our markets by anybody we compete with. The loan yields -- the spot loan yield is a difficult question to answer because it's highly driven by the accretion. But I think it's safe to say that we're double-digit basis points higher than where we were in the full quarter basis.

Okay. Great. It's probably early to ask, but I'm going to ask it anyway. Some of your peers are taking steps to take down rate sensitivity by adding swaps and other adjustments to the balance sheet. Maybe philosophically, what are your thoughts if the forward curve is pricing in cuts at some point? How do we lock in the margins?

So I think that's right. I think that anybody that has shown meaningful loan yield improvement this quarter has done so by putting on received fixed swaps. We have not done so up to this point. Obviously, it would have been best to do it a month ago before the recession started eating down the curve. But I think it's safe to assume that you can expect to see us start that process in the third quarter. We are going to leg into it. It's something that -- and it's also possible we'll start to add some duration in the bond portfolio, although I'm hesitant there. It's tough to know what's going to happen, but I would say it's likely that you're going to see us carrying $100 million to $200 million and received fixed swap position on the loan portfolio as we talk next quarter.

Okay. Awesome. And then maybe just turning to credit. Could you give a little bit more color on the handful of loans that you moved, maybe sector, size, any reserves against some industry type, anything you can get comfortable with?

Yes, Chris, the migration to -- from special mention to problem really was concentrated in the 5 kind of lumpier credits, 3 offices, 2 in the city, pretty good locations, 1 in Western Suburbs in an attractive market. And then 2 health care credits. Yes. I would say all 5 credits, Chris, were affected by COVID-related challenges, experiencing lower occupancy, weaker cash flow. We are -- we have good guarantor support behind most of these. But these credits are going to require a market recovery to get on more solid footing. We have taken appropriate reserves as needed for all of them. Loan to values are still in good shape, 80% LTV or better on 4 of the 5. But as of now, we don't see significant losses given default at this point, but we are monitoring them very closely. And beyond those 5 credits, the rest of the portfolio really can move a whole lot.

And just to clear one point. It's not high-rise office. It's low-rise office. So not downtown.

Is the -- was the provision taken this quarter or since they've been on the watch, did you do it previously?

Yes, it was taken this quarter. Yes, this quarter.

Okay. Great.

[Indiscernible] suburban credit, we had an allocation on, but yes, this quarter.

Your next question is coming from Manuel Navas at D.A. Davidson.

Just thinking about the new lending, can you give a little bit more color in terms of how much of that is variable versus fixed rate and kind of the yield on the new loans?

Yes, good question. The -- our sponsored finance group and health care groups are generally generating almost exclusively variable rate credit, so we like that a lot. But commercial real estate group generally is sponsoring fixed rate credits and then our community banking and C&I group is probably a little bit mixture of both. So we're probably seeing 50% of our asset generation is voting today.

All right. That's helpful. Is there any part of your recent like commercial lending team build out that has yet to start performing? Any extra color on what teams are still to come, what teams are -- any more specifics on how much sponsored finance, for example, booked this quarter, that would be great.

Yes. So I would say, first off, broadly that all of our groups are performing as expected or better. The sponsored finance group has generated over $100 million of production in the second quarter alone. We saw similar levels in our commercial real estate group, a little bit of a lesser extent in health care, middle market C&I. So almost $475 million in total production in the quarter compared to about $300 million in the first quarter of this year. So we expect that to tail off a little bit in the third quarter, but we are certainly seeing pretty robust loan committees at this point.

Is there any update on the book that's expected to run off from WSB? I think, it had a little bit of elevated runoff in the first quarter. Is that slow significantly?

Yes, it has slowed. I mean we had about $50 million in purchase participation book that ran off in the quarter, and that is largely by design. But the legacy book has hung in there. In fact, legacy West suburban lenders had a very solid quarter in new originations as well. So we're very pleased with that performance.

We have a follow-up question coming from David Long at Raymond James.

You just talked about the sponsored finance business, and it was a good quarter in originations. So do you have the June 30 balance in the sponsored finance portfolio?

I'd rather not go there. I would say that they're performing very well and above our expectations. The balances today are 2x what we assume for the full year in terms of when we made the decision to model it out and what our return expectations were. It's a great team. They fit well. Everything is going very well.

Got it. Got it. Okay. Understood. And then as a follow-up, the loan-to-deposit ratio still sub 70%. You talked about getting that back above 80%. What is your appetite to use wholesale funds if the deposit flows don't work in your favor here in the near term?

Not opposed to it at all. I think it's fine. I mean, certainly, that would -- if the main concern for Old Second is at a world where rates fall, obviously, that would provide leverage to that. So it's not something that we'd shy away from. I think that we had, as a $3 billion bank, we traditionally added $200 million to $250 million overnight borrowing position for the bulk of 2019. There's nothing inherently wrong with it. I think that certainly, we are carrying a much higher securities portfolio than we traditionally have. So there's ample room to continue to fund loan growth, both from continuing to sop up what excess liquidity remains, which is substantial, funding out of the securities portfolio as well as increasing a borrowing position. If you'd ask them today where that loan-to-deposit ratio could be or if I answered it last quarter, I'm getting to 80%. I think I said three years or something like that. It obviously has the potential to get there much faster with this level of loan growth and in some level of deposit attrition. But our profitability profile should change quite quickly in all respects. I would just close with there's nothing structurally different about Old Second today versus a year ago or two years ago during the last tightening cycle, I think at that point, we peaked out at around a [4.25] margin before the Fed decided to cover rates. I don't pretend to know what's going to happen from a macro perspective, but the nature of the balance sheet is the same. So it's just a question of growing the right earning assets, taking care of the deposit base and staying diligent on credit. And those are all things that we're very much focused on.

Your next question is coming from Brian Martin with Janney Montgomery Scott.

Jim, I just -- can you just give any color on just the hiring pipeline? It sounds like things are great with the teams you have and your moving business over and kind of all that. But just as far as the hiring pipeline goes, is that still pretty robust today? I know you guys talked about actively continuing to look, but just kind of seeing where that's at today.

Yes, Brian, we certainly would be open to additional hires, although we've been obviously very busy closing and integrating West Suburban, not to mention our production this quarter was exceptional. We certainly are open-minded to that. We have kind of some dialogue with folks. And so yes, we will be in the market to continue that.

Got you. Okay. And you talked about the sponsor finance. Is that -- are those balances -- is it about $200 million now? I think you said $100 million this quarter. Is that kind of the general zip code of where that's at today?

No, it's not that high.

Okay.

They are exceeding expectations at this point, Brian, and we couldn't be more pleased with the growth.

Yes. Got you. Okay. All right. I just want to make sure it's clear. And then just the -- Brad, just maybe one question on the margin outlook. And just kind of -- it sounds like, obviously, it's going to be a very rapid increase here. When you think about kind of the out year as far as once the betas begin to pick up a little bit, can you just talk about how you think if the rate increases that are in the curve today occur over the next -- by the end of the year, kind of how do you expect the margin to behave, kind of when it begins to stabilize as you get through the benefits from your asset sensitivity?

So we'll move deposit rates this quarter. I would expect that you probably see us peak out at an overall cost of interest-bearing funds somewhere in the 50 basis point range.

Okay. And as far as when you start to see some stabilization, your expectation would be is that kind of early next year or mid next year or even beyond that based on the timing of...

Stabilization in terms of what, Brian?

Just the margin percentage, Brad. So when it was a beta start to increase when the -- and the loan yields are -- if they're not continuing to raise rates just kind of when you start to see that some stabilization and the rapid increase we're going to see here in the next couple of quarters.

Difficult question. But I would say, if I say if -- say they get to [3.50] Fed funds at the end of this year, which is difficult to imagine. And we're having this conversation about second quarter next year. I would expect a 4.50% to 5% loan yield and a 50 basis point overall cost of interest-bearing liabilities. I think that there's -- as I said earlier, there's nothing structurally different in this balance sheet that can't support a [4] to [4.25] margin. I think that's where we had, assuming that we don't step on a rake broadly from a macro perspective, which we always seem to do not to be. I don't want to be too optimistic. People know me as a bit of a pessimist. I'm sure there's a rake out there in the yard somewhere.

That's right. Well, we're not asking about the tax rate either, Brad. So just maybe the last one for me was the new loan yields, kind of where are the new loan yields coming on today?

Yes. We have we proactively moved those levels up, Brian, and added floors were appropriate. But we're certainly -- we're up 75 to 100 basis points from the trough maybe at the end of the year.

Your next question is coming from Nathan Race at Piper Sandler.

So just a question on the reserve trajectory from here. I know it's difficult to predict in a seasonal framework and with all the macro uncertainty out there today. But is the expectation that it kind of holds stable here, kind of absent the CECL macro adjustments? Or how do you guys kind of think about the need to provide growth relative to [1 25] reserve today and the charge-offs not expected to rise substantially any time soon?

So with all other factors held constant in terms of a macro perspective and continuing to come down a little bit on the unfunded commitment, I would guess that we would probably reserve somewhere between 75 and 100 basis points with loan growth. That feels right to me right now. But if something happens tomorrow, jobless claims, it's hard to predict, but that's kind of what it feels like in a stable world right now.

Perfect. Got you. And then just on capital ratios, the total risk-based ratio came down in the quarter. But obviously, you guys are going to be generating stronger profitability with higher rates going forward. Any kind of update about opportunities to optimize the capital mix at this point in the interest rate cycle? Or how are you guys kind of thinking about those opportunities today?

I believe we have more than adequate capital. Thinking back on this, it wasn't that long ago when we were getting questions about what we were going to do with all the excess capital, and we were reporting a 10% TCE ratio, but that included a $50 million to $60 million positive mark on the bond portfolio. I never considered that to be core capital and I don't consider the $50 million to $60 million hit right now to be not capital. The way I think about things, we're above [7] right now, we're going back to [8] in relatively short order. Obviously, we're reporting a number that's somewhat below 6. But given where we are on the curve and the speed at which that that can be recaptured, even if nothing else changes, if we're absolutely flat in terms of the curve and it doesn't move one iota two years from today, half that mark is gone. So it comes off that quick given how short the portfolio is. I would -- our comparability to others might be a little bit obscured as well because we haven't moved the dollar and to held the maturity. So what you see is actually what the portfolio looks like and the intrinsic value of the balance sheet. I'm very proud of what we've done here. We've got ample amount of capital and we're going to generate it fast. So everything feels fine on that front. I don't see any reason to start moving things around.

[Operator Instructions]. We have an additional question from Manuel [technical difficulty].

My question has been asked already and I'm good to go.

There are no additional questions in queue at this time. I'd like to turn the floor back over to Jim Eccher.

Thanks, Kelly. Okay, that concludes our meeting this morning. We look forward to speaking with you next quarter. Goodbye.

Thank you, ladies and gentlemen. 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.