Old Second Bancorp - Earnings Call - Q1 2025

Executive Summary

• OSBC delivered solid Q1 with GAAP diluted EPS of $0.43 and adjusted diluted EPS of $0.45; Primary EPS (S&P definition) modestly beat consensus (0.45 vs 0.445) and “revenue” (S&P definition) significantly beat ($70.7M vs $60.0M) as margin expanded to 4.88% TE and funding costs fell sequentially. EPS/Revenue consensus from S&P Global marked with asterisks below.*
• Net interest and dividend income rose to $62.9M (+2.1% q/q, +5.2% y/y) on a 20 bps q/q NIM (TE) expansion to 4.88%, aided by deposit growth and the payoff of higher-cost borrowings post-FRME branch acquisition.
• Credit metrics improved y/y with criticized/classified balances down materially; Q1 included ~$4.4M of gross charge-offs (mostly one C&I) and $2.4M provision; NPL ratio remains sub-1% (0.9%) while ACL/loans is 1.1%.
• Management guided NIM to be “stable to modestly down” from here (deposit flows raised the NIM “floor” by ~10 bps) and reaffirmed ~4% expense growth for 2025; tax rate mid-24%. Near-term stock catalysts: margin resilience vs rate-cut fears, improving credit trajectory, and expected Evergreen (Bancorp Financial) merger closing in 3Q25 adding high-yielding consumer origination capacity.

What Went Well and What Went Wrong

• What Went Well

  • Margin and funding: NIM (TE) expanded to 4.88% (+20 bps q/q; +30 bps y/y) as deposit costs fell and FHLB advances rolled off; CFO: “exceptional margin performance… deposit growth accelerated throughout the quarter”.
  • Credit progress: Classified and criticized loans declined sharply y/y; CEO highlighted “nonperforming assets and classified loans have declined meaningfully… we are exceptionally proud of our performance”.
  • Balance sheet/capital: TCE/TA rose to 10.34%; CET1 improved to 13.47%—strong flexibility heading into Evergreen acquisition.

• What Went Wrong

  • Noninterest income softness: Down $1.4M q/q (12.1%) to $10.2M on MSR mark-to-market losses (-$570k) and lower BOLI accretion; also down 2.9% y/y.
  • Expense pressure: Noninterest expense was flat q/q but up 16.4% y/y to $44.5M on salary/benefit growth, core deposit intangible amortization (FRME), and OREO costs; management expects OREO to normalize from Q2.
  • Loan balances: Total loans declined $41.1M q/q; net paydowns in CRE owner-occupied and multifamily, and deliberate runoff of purchase participations (still ~$200M targeted for exit over 24 months).

Transcript

Operator (participant)

Good morning, everyone, and thank you for joining us today for Old Second Bancorp's Q1 2025 Earnings Call. On the call today are James Eccher, the company's Chairman, President, and CEO; Brad Adams, the company's Chief Operating Officer and Chief Financial Officer; and Gary Collins, the Vice Chairman of our Board. I'll just start with a reminder that Old Second's comments today will contain forward-looking statements about the company's business, strategies, and prospects, which are based on management's existing expectations in the current economic environment.

These statements are not a guarantee of future performance, and results may differ materially from those projected. Management would ask you to refer to the company's SEC filings for a full discussion of the company's risk factors. The company does not undertake any duty to update such forward-looking statements. On today's call, we will 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. Now, I would like to turn the call over to Mr. James Eccher.

James Eccher (Chairman, President and CEO)

Good morning, everyone, and thank you for joining us. As customary, I have several prepared opening remarks. I'll give my overview of the quarter and then turn it over to Brad for some additional details. I will then conclude with certain summary comments and thoughts about the future before we open it up to questions. Net income was $19.8 million, or $0.43 per diluted share in the Q1 of 2025. ROA was 1.42%. Q1 2025 return on average tangible common equity was 14.70%, and the tax equivalent efficiency ratio was 55.48%. Q1 2025 earnings were significantly impacted by several items.

$575,000 in MSR mark-to-market losses, or about a penny per diluted share, $446,000 in merger-related expenses, or just shy of $0.01 per diluted share related to costs of the First Merchants five-branch acquisition, as well as costs related to the pending merger with Bancorp Financial and Evergreen Bank Group.

Also, a $2.4 million provision for credit losses in the absence of significant loan growth, which reduced after-tax earnings by $0.04 per diluted share. However, despite all this, profitability of Old Second remains exceptionally strong, and balance sheet strengthening continues with our tangible common equity ratio increasing 30 basis points from last quarter, from 10.04%-10.34% in the Q1 of 2025. Tangible equity ratio increased by 130 basis points over the like period one year ago.

Common Equity Tier 1 was 13.47% in the Q1 of 2025, increasing from 12.82% last quarter, and we feel very good both about profitability and our balance sheet positioning at this point. Our financials continue to reflect a very strong net interest margin, even as market interest rates have declined. Pre-provision net revenues remain stable and exceptionally strong.

For the Q1 of 2025, compared to the prior year length period, tax equivalent income on average earning assets increased $221,000, or 0.3%, while interest expense on average interest-bearing liabilities decreased $2.9 million, or 21.3%. The decrease in interest expense is primarily due to the deposits acquired related to the First Merchants branch purchase, which closed in December of 2024, which resulted in the paydown of our higher rate other short-term borrowings, which improved our margin significantly year over year.

Net interest margin improved 30 basis points year over year on both the GAAP and tax equivalent basis and improved approximately 20 basis points compared to the prior linked quarter. Q1 of 2025 reflected a decrease in total loans of $41.1 million from the prior linked quarter, primarily due to net paydowns in commercial, commercial real estate owner-occupied, and multifamily portfolios during the quarter.

Furthermore, we have purposely reduced our purchase participation portfolio, which declined $46 million, or more than 10%, in the quarter. Since the West Suburban acquisition, our purchase participation portfolio has declined $376 million, or nearly 49%, as we have intentionally repositioned our loan book. The historical trend in Old Second is for our bank to realize some loan growth in the second and third quarters of the year due to seasonal construction and business activities.

Currently, activity within loan committee remains relatively modest to prior periods, primarily due to many customers waiting to see how market volatility, including any market interest rate changes or changes due to the current global tariff uncertainty, play out over the coming three to six months. Tax equivalent loan yields reflected a five basis point decrease during the Q1 of 2025 compared to the linked quarter, but a four basis point increase year over year.

Total cost of deposits was 82 basis points for the Q1 of 2025 compared to 89 basis points for the prior linked quarter and 71 basis points for the Q1 of 2024. Net interest margin has improved due to the more favorable funding position we are now in, even after considering the impact of market interest rate changes on the variable portions of both the loan and security portfolio. The loan-to-deposit ratio is in excellent shape at 81.2% as of March 31, 2025, compared to 83.5% last quarter and 86.1% as of March 31, 2024. I'll let Brad talk about this more in a moment.

This quarter reflected a positive change regarding our loan portfolio credit remediation efforts. Specifically, we recorded $4.4 million of gross loan charge-offs in the Q1 of 2025, $3.4 million of which was one C&I loan that was downgraded two quarters ago.

We have now addressed the entire balance of this credit, as audited financials, collateral field audits, and bankruptcy declarations resulted in a significant charge of this relationship, excluding balances collateralized by cash held at Old Second and the successful liquidation of equipment through an auction.

This credit was discussed the last few quarters, and with fully addressing it this quarter, we should now be able to focus on any remediation or recovery efforts if the potential is there. Last quarter, we recorded $1.7 million in OREO valuation expense on two properties, which were both sold in the Q1 of 2025. Our total OREO balances are now down or have declined $18.7 million quarter over quarter, which contributed to a 27.2% reduction in non-performing assets since year-end 2024.

Substandard and criticized loans decreased in the Q1 of 2025. Total criticized loans now total $116.7 million and decreased 42%, or $84 million from one year ago. In the Q1 of 2024, criticized loans were $200 million. Q1 2025 balances represent a decline in their lowest levels in three years since May of 2022, so we're very pleased with this performance.

Classified and non-accrual balances continue to improve significantly on both a year-over-year and link quarter basis. Total classified assets declined by $52.2 million, or 37% year over year as of March 31, 2025. Special lending loans also continue to improve dramatically. These balances are now down 51% from a year ago.

The allowance for credit losses on loans decreased to $41.6 million as of March 31, 2025, or 1.05% of total loans, from $43.6 million at year-end, which is 1.1% 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 Fed projections. The impact of the global tariff volatility was considered within our modeling.

The change in provision level quarter over link quarter reflects a reduction in our allowance allocation on substandard loans, which largely relates to the 42% reduction in criticized assets year over year. Non-interest income continued to perform well, with growth in the Q1 of 2025 compared to the prior year's link quarter of $528,000, or 20.6%, in wealth management fees and $304,000, or 12.6%, in service charges on deposits.

Mortgage banking income reflected a decrease in the Q1 of 2025 compared to the prior link quarter and prior year's link quarter, primarily due to the impact of mortgage servicing rights mark-to-market valuations. Excluding the impact of mortgage servicing rights mark-to-market, mortgage banking income was flat quarter over link quarter and slightly more than the prior year's link period.

Other income increased in the Q1 of 2025 compared to the prior linked quarter and prior year's linked quarter, with the linked quarter variance primarily due to incentives received on two vendor contracts in 2025.

Expense discipline continued to be strong, with total non-interest expense for the Q1 of 2025 at $183,000 more than the prior linked quarter. Our efficiency ratio continues to be excellent, as the tax equivalent efficiency ratio adjusted to exclude core deposit and tangible amortization acquisition costs and OREO costs was 55.48% compared to 54.61% for the Q4 of 2024. As we look forward to the balance of the year, we're focused on doing more of the same, which is managing liquidity, managing capital, and also building commercial loan origination capability for the long term.

The goal is obviously to continue to create a more stable long-term balance sheet mix featuring more loans and less securities in order to maintain the returns on equity commensurate with our recent performance. With that, I'll turn it over to Brad for additional comments.

Brad Adams (Executive VP, Chief Operating and Financial Officer)

Thank you, Jim. I'll be relatively brief this morning. There's not a whole lot of complexity here in my mind. Net interest income increased by $1.3 million, or 2.1%, to $62.9 million for the quarter ended relative to the prior quarter total of $61.6 million, and increased $3.1 million, or 5.2%, from the year-ago quarter.

Exceptionally pleased with the ability to grow net interest income from the levels that we saw over these comparable periods. Taxable equivalent securities yields increased by 18 basis points during the quarter, although loan yields were about five basis points lower. The increase in securities yields largely relates to some maturities and re-laddering effects that we started on early in the quarter.

As we've talked about in the past, we've done an exceptionally good job on making sure that we've got pretty significant large chunks of cash maturing on a regular basis as we can step into a different rate world. Overall, we're exceptionally well positioned. I'm pleased with what we've been able to accomplish there.

The total yield on interest-bearing assets decreased by only two basis points over link quarter to 570, but that was more than offset by a 13 basis point decline in the cost of interest-bearing deposits and a 35 basis point decrease in the cost of interest-bearing liabilities in the aggregate. The end result was a 20 basis point increase in the taxable equivalent NIM to 4.88 for the quarter from 4.68 last quarter. Obviously, this is exceptional margin performance and surprised us a bit.

The source of that surprise was largely allocated to deposit flows during the quarter. Deposit growth accelerated throughout the quarter and has been exceptionally strong. Obviously, you can see the power of the ability to grow deposits in an environment such as this. As we sit here today, I'm exceptionally pleased with our liquidity position as we approach the potential closure of the Evergreen Bank Group transaction.

This gives us a ton of flexibility and obviously feel very good about where we are, Overall period end total deposits increased by $84 million. I don't have any grand prognostications this quarter. I always feel like a more balanced person in general when I believe the curve accurately reflects the balance of risk in the greater economy.

Relative to last quarter and many times over the last two years, expectations have become much more realistic relative to absolute economic conditions and federal deficit constraints. We have been on the sidelines as it relates to the securities portfolio here recently because we see outside risk for spreads widening in the near term.

As a result of the rate cuts to date and their impact on market indices, margin trends for 2025 are expected to be stable to modestly down from here. Sustained success on the deposit front positions us exceptionally well to ramp profitability beyond our initial expectations as it relates to the pending merger with Evergreen. This is perhaps my largest area of optimism, as the loan-to-deposit ratio is quite low at 81% and gives us some room on the absorption of those assets and doing better on the margin side than perhaps we initially expected.

Old Second should continue to build capital, as evidenced by the 130 basis point improvement in the TCE ratio over the past year, which means we have added an astonishing $1.75 of tangible book value over the last 12 months, particularly impressive when you consider the branch purchase, which was done with cash.

Evergreen will absorb some of this capital cushion; however, Old Second will still have an exceptionally strong and flexible capital position. A buyback is in place and is on the table after the merger is finalized. Non-interest expense was materially on track this previous quarter, increasing only $183,000, primarily due to salaries and employee benefit increases due to annual raises and the increased payroll tax associated with the front-loaded of spike in the first part of the year.

Non-interest expense is running higher year over year, increasing $6.3 million compared to the quarter end of March 31, 2024, due again to higher salaries and benefit expense, occupancy costs, core deposit and tangibles, and OREO-related expenses. OREO-related expenses were high in the Q1. They were high in the Q4, but they should come down back to normalized levels beginning in the Q2.

Much of the year-over-year increase is attributable to the five branches acquired in late 2024 from First Merchants, in addition to the OREO operating expense increase that we talked about. For 2025, employee benefit expenses are expected to be a bit of a drag, as we talked about. Overall, we are hopeful we can keep expense growth in the 4% range, consistent with our expectations shared last quarter. That's really all I have with that, I'd turn it back over to Jim.

James Eccher (Chairman, President and CEO)

Okay. Thanks, Brad. In closing, we feel this is a pretty solid quarter for the company. We're confident in our positioning and the opportunities ahead of us. We're pleased with the progress we made on the credit front and optimistic that future quarters will be very good. We're off to a strong start in 2025, and we're optimistic about the year ahead. That concludes our prepared comments this morning, so I'll turn it over to the operator, and we can open it up to some questions.

Operator (participant)

Thank you, sir. Ladies and gentlemen, at this time, we'll be conducting our question-and-answer session. If you would like to ask a question, please press Star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press Star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the Star keys. One moment, please, while we poll for questions. Thank you. Our first question is coming from Chris McGrath with KBW. Your line is live.

Christopher McGrath (Analyst)

Hi, Brad. Good morning, guys.

Brad Adams (Executive VP, Chief Operating and Financial Officer)

Hey, Chris. Good morning, Chris.

Christopher McGrath (Analyst)

Brad, maybe you start on the margin. I heard your odd performance comments. It's really incredible where the margin is. If the forward curve comes up to first and you get two sweet cuts this year, I mean, your message is basically we're going to be flat even with the cuts. Is that kind of roughly flat to modest down from that 490, 4.88 level?

Brad Adams (Executive VP, Chief Operating and Financial Officer)

I said I was not going to do any grand prognostications, but I will do it anyway. I do not think we are getting three rate cuts. I think inflation is stickier, but more importantly, I think it is political at this point. I think that there is not going to be a ton of support for what is largely a tariff/political environment in terms of that.

It is awfully tough to cut rates in this scenario, particularly with what happened last time when you talk about yields actually going up along the curve. I would say that whereas before, just because everybody else would be talking to three rate cuts, whereas before, I would have said seven basis points of margin decline. With the contribution from Evergreen, I would probably say it is four with each rate cut from these levels. It has been softened quite a bit.

Some of that, obviously, is deposit pickup as well and just the margin levers that we have with them coming on board. Overall, I'm significantly more bullish on the margin than I have been for probably over a year.

Christopher McGrath (Analyst)

Okay. And then the other piece of the NII is what you're doing with the participations, pushing them out. What's left to go on non-core loans? Where do you think or do you think that the loan book has bottomed or any kind of thoughts there?

James Eccher (Chairman, President and CEO)

Yeah. That's a good question, Chris. I mean, we've had that purchase participation book since West Suburban. Keep in mind, that represents about 25% of our classifieds, so we've been trying to aggressively push out as much of that as possible. It becomes challenging, particularly on the syndication front when you don't have a voice at the table, per se. We've got another, I'd say, $200 million that we're going to want to continue to try to exit over the next 24 months. We've made good progress. We've got some more lifting to do there, but overall, we're pleased with how the book is repositioning.

I think that, Chris, one thing that we've done a particularly good job of is, and we've talked about how big our efforts were to get on the front part of credit. I feel like we've done what we said we were going to do. I also think we've been aggressive in perhaps being pessimistic in our worldview and making sure that we're not holding credits that we could potentially get out of if things get worse. Our credit outlook today is significantly better than it's been in two years. That's for darn sure.

Christopher McGrath (Analyst)

Okay. All right. Awesome. Thank you.

Operator (participant)

Thank you. Our next question is coming from Terry McEvoy with Stephens. Your line is live.

Terry McEvoy (Managing Director and Senior Research Analyst)

Hi. Good morning, guys.

James Eccher (Chairman, President and CEO)

Hey, Terry.

Brad Adams (Executive VP, Chief Operating and Financial Officer)

Hey, Terry.

James Eccher (Chairman, President and CEO)

Morning.

Terry McEvoy (Managing Director and Senior Research Analyst)

I mean, you've worked through office, worked through healthcare. I guess my question is, are there any new segments emerging out there in CRE or C&I, just looking?

James Eccher (Chairman, President and CEO)

Yeah. I think if there's one area that we're seeing a couple of credits come onto our radar, it's more in C&I at this point. Nothing material. We had a couple of credits, one in manufacturing and one in a solutions-based drug wholesale company that missed projections that we've downgraded. We've started proactively taking reserves against those.

By and large, you're right. We're through office. We're working our way through healthcare. We feel pretty good about where we're at, but a lot of that C&I book has obviously seen a pretty rapid increase in cost of capital, so a little bit of stress on that book. Aside from those two credits, we're not seeing any new red flags.

Terry McEvoy (Managing Director and Senior Research Analyst)

Thanks. As a follow-up, have you noticed any trends among your lower balance deposit customers, call it late in the quarter or here in April? I'm thinking just balances or card transactions overall.

James Eccher (Chairman, President and CEO)

Card transactions are down significantly, but that's a trend that started almost a year ago. We have seen significant slowdown and a move down in average balances on the low end. It actually somewhat mitigated, and some of that's probably tax-related, just with refunds flowing in. We are a very granular deposit base. I think everybody knows that by now.

We have seen kind of weakness in balance levels and transaction activity in that deposit base starting over a year ago. I would not say there's anything that's different here. I think that if I'm reading your question right, I think largely what people should be looking for is that stress moving up the income stratification rather than starting at the bottom end because it started at the bottom end some time ago.

Terry McEvoy (Managing Director and Senior Research Analyst)

Yep. That is what I was asking. Thanks for taking my questions. Appreciate it.

James Eccher (Chairman, President and CEO)

Thanks, Terry.

Operator (participant)

Thank you. Our next question is coming from David Allemann with Raymond James. Your line is live.

David Allemann (Analyst)

Good morning, everyone.

[crosstalk] Hello, David.

We're only a few weeks removed from Liberation Day with the tariffs, but in your recent conversations that you and your team have been having with your commercial clients, what is their sentiment like? Are you seeing deals getting pulled? Are you seeing pause? Just trying to get a sense on loan demand expectations.

James Eccher (Chairman, President and CEO)

Yeah, David, it's probably similar to what you're hearing from other banks. We've had these conversations, and certainly it's ranged from the equipment leasing side that activity remains actually pretty decent, maybe down a little bit as far as new activity from a year ago to commercial real estate, particularly on the investment side where it pencils down. We're not doing anything until we get some clarity around tariffs and uncertainty. By and large, it's wait and see we are not projecting a lot of growth in the Q2 we're hopeful with some clarity we see an uptick in loan demand in the second half of the year.

David Allemann (Analyst)

Got it. Thanks for the color, Jim. As you look at the reserve level, reserves came down a bit in the quarter, You had non-performers up i think there's a risk of economic forecasts currently. Where they are today sounds like you sound pretty stable, but I think there's a sense that these are going to worsen. What was the math you went through at quarter end in coming up with the reserve?

Brad Adams (Executive VP, Chief Operating and Financial Officer)

We have a situation where criticized, classified, non-performers have been trending down significantly for the better part of two years. I do not think we are in the same boat as everybody else here. Our trend is not more negative at this point, even with the uncertainty that is out there.

We have been very aggressive in addressing credits that we believe there is some potential weakness in. I would have been a much more pessimistic person. I was a much more pessimistic person a year ago than I am today. You can call us a leading indicator or whatever else or early in terms of this stress, but I do not see a second wave right now. Certainly, broad macroeconomic weakness will result in losses for us, but I feel exceptionally good about where we are at this point.

David Allemann (Analyst)

Great. Thanks, Brad. Appreciate the color.

Operator (participant)

Thank you. Our next question is coming from Nathan Race with Piper Sandler. Your line is live.

Nathan Race (Managing Director and Senior Research Analyst)

Morning, guys. Thanks for taking the questions.

James Eccher (Chairman, President and CEO)

Hey.

Nathan Race (Managing Director and Senior Research Analyst)

I think last quarter we were talking about maybe charge-offs getting south of 20 basis points going forward. Obviously, had some cleanup with the one C&I credit here in the Q1, but just generally, how are you guys thinking about the charge-off trajectory both near term and then when you're later on Evergreen that has historically had slightly higher loss history relative to peers just given their operations?

James Eccher (Chairman, President and CEO)

Yeah. I think you're right. We certainly, as it related to the one large C&I credit, when you have a credit that's in bankruptcy, you get unpredictable results, particularly as it relates to equipment options. We felt, given the strong quarter earnings, we decided to take the final charge on that. While we're hopeful that we get some recovery on this, we elected to put this one behind us.

You heard our comments regarding the clients and substandard and criticized, those are the leading indicators that should hold well for future credit deterioration. While the charge-offs are a little bit higher, we're optimistic that future quarters should hold up a lot better. As it relates to Evergreen, historically, they've run losses anywhere between 1% and 1.5%.

However, we got to keep in mind that contribution margins on that loan book are significantly higher, and you have to look at those two factors hand in hand. They continue to be exceptionally well reserved, and we're optimistic about adding that vertical to our lending team.

Brad Adams (Executive VP, Chief Operating and Financial Officer)

I realize that our tone and tenor is a little bit different maybe than most, but one data point that I had for people is that our individual specific allocations for individual credits on the commercial side right now is lower than it's ever been. The number of individual allocations hasn't been this low in three and a half years. In terms of problems, we believe we've dealt with them.

Nathan Race (Managing Director and Senior Research Analyst)

Understood. That's helpful. Appreciate that. Brad, just going back to your expense comments, and I apologize if you touched on this as I hopped on late, but I think you mentioned you're hopeful to get back to 4% expense growth for this year, which would imply a decent step down, close to $40 million or so over the next few quarters is that kind of how you're thinking about it, just with some of the noise in the Q1?

Brian Merton (Analyst)

Yes.

Nathan Race (Managing Director and Senior Research Analyst)

Okay. Great. I believe that's all I had. Thanks, guys.

[crosstalk] Cool. Thank you. Thanks.

Operator (participant)

Thank you. Our next question is coming from Jeff Rulis with D.A. Davidson. Your line is live.

Jeffrey Allen Rulis (Managing Director and Senior Research Analyst)

Thanks. Good morning. Just to check in on the growth front, I appreciate the comments on sort of pushing out some participations and still to go, starting from kind of a net down on loans. I guess for the full year of James trying to back into expectations on growth for the full year sounds pretty guarded, but any detail on that side?

James Eccher (Chairman, President and CEO)

Yeah. Obviously, the acquisition, which is going to give us some more growth, I would be thrilled with low single-digit growth that would come second half of the year. Keep in mind that risk-adjusted returns today are not overly attractive in several areas. We'll be very careful and prudent on what we're putting on the books obviously, with the margin that we're carrying right now, we're not going to just grow for the sake of growing. Having said that, we are optimistic that the second half is going to be much better than the first half.

Listen, six months ago on this call, when I said that we had a realistic shot of growing net interest income in the quarter and the first part of this year, I could feel the eyes crossing on the other side of this line, not believing that number. It is about, basically, as Jim mentioned, risk-adjusted returns. You know what? It is not always entirely about growth. It is about making money.

There are times in this business, given the cyclicality and the volatility that we have seen, that it is not time to grow. I said last quarter that growth looks much more attractive and that we would consider loan purchases. I think that is still the case. I think that I got very confused two weeks ago when we saw equity markets going down and at the same time treasury yields going up.

That's been a very interesting couple of weeks in terms of what interest rates are doing. I do see significant risk to spread widening at this point, as I mentioned a few minutes ago. I think there will be attractive yields available it is something we will consider in order to generate growth on that front. When you've got the balance sheet flexibility that we do, you've got a lot of optionality. It is an interesting time. Uncertainty creates opportunities. Most importantly, I'm exceptionally pleased with both where we are and how much money we're making at this point.

Jeffrey Allen Rulis (Managing Director and Senior Research Analyst)

Brad, leading into that margin strength, I think that's kind of the point of the discussion. Do you have a March average for the net interest margin?

Brad Adams (Executive VP, Chief Operating and Financial Officer)

I do not off the top of my head it was not down from February, I can tell you that. It trended higher. That has been a function, as I alluded to earlier, of the strength in the deposit generation. I am very hopeful that continues. If it does, we have a ton of balance sheet flexibility over the next six months. It is a nice position to be in as a CFO. It makes me generally a happy person, and I treat my kids better, and they tend to upset me less. All smiles around here.

Jeffrey Allen Rulis (Managing Director and Senior Research Analyst)

Fair enough. I guess the last question, Brad, you mentioned kind of looking at that buyback, but you kind of conditioned it with post-deal close. What precludes you from being active in the short run?

Brad Adams (Executive VP, Chief Operating and Financial Officer)

Reg.

Jeffrey Allen Rulis (Managing Director and Senior Research Analyst)

Sorry?

James Eccher (Chairman, President and CEO)

Reg M precludes us from being active in the short term. Otherwise, I would be.

Jeffrey Allen Rulis (Managing Director and Senior Research Analyst)

Okay. In the coming pre-deal, I mean, you locked out the entire time, or is there any windows?

James Eccher (Chairman, President and CEO)

Yeah. We're not.

Brad Adams (Executive VP, Chief Operating and Financial Officer)

Yeah.

Jeffrey Allen Rulis (Managing Director and Senior Research Analyst)

Till we close. Till we close. I would say that we're optimistic that our timetable for that closure will come to fruition. I know it's your last one, but maybe one more. The tax rate, you've been kind of in that mid-24 range. Is that a good number to use ahead?

Brad Adams (Executive VP, Chief Operating and Financial Officer)

Normally, I like to go out the five or six basis points on that question, or decimal points, rather. But hell, I do not know. Yeah, around here.

Jeffrey Allen Rulis (Managing Director and Senior Research Analyst)

Okay. Thank you.

Brad Adams (Executive VP, Chief Operating and Financial Officer)

All right. Thanks, guys.

Operator (participant)

Thank you. Once again, ladies and gentlemen, if you do have any questions or comments, please press star one on your telephone keypad. Our next question is coming from Brian Merton with Janney. Your line is live.

James Eccher (Chairman, President and CEO)

Hey, Brian.

Brian Merton (Analyst)

Hey, guys. Congratulations on the quarter. Most of my stuff was asked. Just, Brad, I think one big picture question think you talked about the margin, I think last quarter, you talked about the seven basis points maybe now it's four with Evergreen.

I mean, as far as I think you talked about where it could bottom if we all the different scenarios, if we do see cuts, whether we don't see cuts just trying to understand. I mean, if we don't see cuts and that's more your scenario, kind of where you think the margin may bottom now that we've stepped up much higher than we thought versus if we do get a couple of cuts. I thought last quarter was kind of in that 435-440 range, albeit that it would take a while, but just kind of big picture, kind of how would you think about that?

Brad Adams (Executive VP, Chief Operating and Financial Officer)

Yeah. I would say that the floor has been raised 10 basis points by deposit flows. It's a different world for us in combination with Evergreen now that we said our current size. We will be structurally more profitable absent any significant credit events on that front. For us, obviously, we're an exceptionally high-performing company when rates are high.

And you've heard us say in the past that a high and flat yield curve is a panacea for us. I mean, and that's where we are today. Investors shouldn't be surprised by strong margin performance and a high and flat yield curve because that's where we do best. As we talked about a couple of months ago with the Evergreen announcement, we will do better in a lower rate environment, but it will still remain true that a high flat curve is good for us.

I do not see, wearing my macro hat for a minute, I do not see a lot of ways out of that given the balance of risk between growth and inflation at this point. We have seen a stickiness to inflation that I see no reason for that to stop or go away anytime soon, especially not with all this tariff nonsense.

That is not going to help that. I also do not think the Fed is particularly accommodative to backing off the inflation fight when a lot of it is self-induced from the executive branch. I do not see any reason to lurch into any changes, and I do not see any reason to be pessimistic about our margin performance in the near to moderate term.

Brian Merton (Analyst)

Okay. As far as where it's the bottom end would be just 10 basis points higher than you're thinking before for now until we see a little bit more.

Brad Adams (Executive VP, Chief Operating and Financial Officer)

Yeah. Yeah.

Brian Merton (Analyst)

Okay. Gotcha. Maybe just one last one on credit, given the big improvement we saw this quarter. I think you guys have been talking about that. Just, and Jim, you talked about where the criticized and classifieds are today.

Much lower than they have been, Brad just mentioned credit on the individual credits. Is there any room that directly from here in terms of credit quality, just the cadence of improvements in non-performance? Is there anything big that's out there within there that's going to be coming due, or it just should be a steady as you work through these, see some decline down in the non-performance? Just.

James Eccher (Chairman, President and CEO)

Yeah. I mean, the goals that get kicked are working even lower, right? I mean, I do not think we will have the magnitude of the decline in percentages that we had this quarter, but we are optimistic we have been very internally focused to try to improve the balance sheet, and yeah, we think we can make incremental improvements throughout the rest of the year.

Brian Merton (Analyst)

Okay. Yeah. Just nothing big i just wanted to make sure there's nothing else that you would present to hop that it could come out. Okay. Thanks for taking the questions, guys, and great quarter.

James Eccher (Chairman, President and CEO)

Thanks, Brian.

Operator (participant)

Thank you. As we have no further questions on the lines at this time, I would like to hand it back over to Mr. Eccher for closing remarks.

James Eccher (Chairman, President and CEO)

Okay. Thanks, everyone, for joining us, and thanks for your interest in the company. We look forward to speaking with you next quarter. Bye.

Operator (participant)

Thank you. This concludes today's conference, and you may disconnect your lines at this time. We thank you for your participation.