Earnings Call Transcript - OSBC Q1 2025

Operator, Operator

Good morning, everyone and thank you for joining us today for Old Second Bancorp, Inc.'s First Quarter 2025 Earnings Call. On the call today are Jim 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. And 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. Jim 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 on 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 first quarter of 2025 and ROA was 1.42%. First quarter 2025 return on average tangible common equity is 14.70%, and the tax equivalent efficiency ratio was 55.48%. First quarter 2025 earnings were significantly impacted by several items. $575,000 in MSR mark-to-market losses or about $0.01 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, the profitability of Old Second remains exceptionally strong and balance sheet strengthening continues with our common tangible equity ratio increasing 30 basis points from last quarter from 10.04% to 10.34% in the first quarter 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 first quarter 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 remained stable and exceptionally strong. For the first quarter of 2025, compared to the prior year like 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 pay down 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 a GAAP and tax equivalent basis and improved approximately 20 basis points compared to the prior linked quarter. First quarter of 2025 reflected a decrease in total loans of $41.1 million from the prior linked quarter, primarily due to net paydowns in commercial real estate owner-occupied and multifamily portfolios during the quarter. Furthermore, we have purposely reduced our purchase participation portfolio, which declined by $46 million or more than 10% in the quarter. Since the West Suburban acquisition, our purchase participation portfolio has declined by $376 million or nearly 49% as we have intentionally repositioned our loan book. The historical trend of 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 the loan committee remains relatively modest compared 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 uncertainties play out over the coming three to six months. Tax equivalent loan yields reflected a 5 basis point decrease during the first quarter of 2025 compared to the linked quarter, but a 4 basis point increase year-over-year. Total cost of deposits was 82 basis points for the first quarter of 2025 compared to 89 basis points for the prior linked quarter and 71 basis points for the first quarter of 2024. Net interest margin has improved due to a 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 securities 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 and remediation efforts. Specifically, we recorded $4.4 million in gross loan charge-offs in the first quarter of 2025, $3.4 million related to 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 in 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 first quarter of 2025. Our total OREO balances are now down or have declined by $18.7 million quarter over linked quarter, which contributed to a 27.2% reduction in nonperforming assets since year-end 2024. Substandard and criticized loans decreased in the first quarter of 2025. Total criticized loans now totaled $116.7 million and decreased by 42% or $84 million from one year ago. In the first quarter of 2024, criticized loans were $200 million. First quarter 2025 balances represent a decline to their lowest levels in three years since May of 2022. So we're very pleased with this performance. Classified and nonaccrual balances continue to improve significantly on both a year-over-year and linked quarter basis. Total classified assets declined by $52.2 million or 37% year-over-year as of March 31, 2025. Special mention loans also continued to improve dramatically. These balances are now down 51% from a year ago. The allowance for credit losses on loans decreased by $41.6 million as of March 31, 2025, or 1.05% of total loans from $43.6 million at year-end, which was 1.1% of total loans. Unemployment and GDP forecast 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 global tariff volatility was considered within our modeling. The change in provision level quarter-over-linked quarter reflects the reduction in our allowance allocations on substandard loans, which largely relates to the 42% reduction in criticized assets year-over-year. Noninterest income continued to perform well with growth in the first quarter of 2025 compared to the prior year like 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 first quarter of 2025, compared to the prior linked quarter, and prior year like 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 linked quarter and slightly more than the prior year like period. Other income increased in the first quarter 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 continues to be strong with total noninterest expense for the first quarter of 2025 at $183,000 more than in the prior linked quarter. Our efficiency ratio continues to be excellent as a tax equivalent efficiency ratio adjusted to exclude core deposit intangible amortization, acquisition costs and OREO costs was 55.48%, compared to 54.61% for the fourth quarter 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.

Bradley Adams, Chief Operating Officer and Chief Financial Officer

Thank you, Jim. I'll be relatively brief this morning. There's not a 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's total of $61.6 million, an increase of $3.1 million or 5.2% from the year ago quarter. I'm exceptionally pleased with the ability to grow net interest income from the levels that we saw with these comparable periods. Taxable equivalent securities yields increased by 18 basis points during the quarter, although loan yields were about 5 basis points lower. The increase in security yields largely relates to some maturities and re-laddering effects that we started on early in the quarter. We've talked about in the past, we've done an exceptionally good job of 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-earning assets decreased by only 2 basis points over linked quarter to 5.70%, 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 net interest margin 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. You can see the power of the ability to grow deposits in an environment like 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. Overall, period-end total deposits increased by $84 million. I don't have any grand prognostications this quarter and always feel like a more balanced person in general when I believe the curve accurately reflects the balance of risks 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 outsized 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 was 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 and 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. The buyback is in place and is on the table after the merger is finalized. Noninterest expense was materially on track with the previous quarter, increasing only $183,000 primarily due to salaries and employee benefit increases due to the annual raises and the increased payroll tax associated with the front load of FICA in the first part of the year. Noninterest expense is running higher year-over-year, increasing $6.3 million compared to the quarter ended March 31, 2024, due to higher salary and benefit expenses, occupancy costs, core deposit intangibles, and OREO-related expenses. OREO-related expenses were high in the first quarter, and they were high in the fourth quarter, but they should come down back to normalized levels beginning in the second quarter. 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'll 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, Operator

Thank you, everyone. We will now begin our question-and-answer session. Our first question comes from Chris McGratty with KBW. Your line is open.

Christopher McGratty, Analyst

Good morning guys.

James Eccher, Chairman, President and CEO

Good morning, Chris.

Christopher McGratty, Analyst

Brad, maybe start on the margin. I heard your outperformance comments. It's really incredible where the margin is. If the forward curve comes to fruition, you get two to three 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 4.90% to 4.8% level?

Bradley Adams, Chief Operating Officer and Chief Financial Officer

I initially said I wouldn't make any bold predictions, but I'll share my thoughts anyway. I don't foresee three rate cuts coming. I believe inflation is more persistent and, importantly, the situation is now more political. There won't be substantial support for what's primarily a tariff and political climate. It's quite challenging to lower rates under these conditions, especially considering what happened last time with yields actually rising along the curve. Previously, I might have predicted a 7 basis point decline in margin just because others were discussing potential rate cuts, but now I would estimate it to be around 4 basis points with each rate cut from these levels. This outlook has been adjusted considerably, partly due to the deposit growth and the margin dynamics we have with Evergreen joining us. Overall, I am significantly more optimistic about the margin than I have been in over a year.

Christopher McGratty, Analyst

Okay. Can you share your thoughts on what you're doing with the participations, particularly regarding noncore loans? Do you believe the loan book has reached its lowest point?

James Eccher, Chairman, President and CEO

Yes. It's a good question, Chris. I mean, we've still had that purchase participation book since West Suburban. And keep in mind that it represents about 25% of our classified. So we've been trying to aggressively push out as much of that as possible, becomes challenging, particularly on the syndication front when you don't have a voice at the table per se. But 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. So we've made good progress. We've got some more looking to do there. But overall, we're pleased with how the book is repositioning.

Bradley Adams, Chief Operating Officer and Chief Financial Officer

I believe we have done a particularly good job in pursuing our credit strategy as we had planned. We have been proactive and perhaps somewhat cautious in our outlook, ensuring that we are not retaining credits that we could exit if conditions worsen. Our credit outlook today is significantly better than it has been in the past two years.

Christopher McGratty, Analyst

Okay. All right, awesome. Thank you.

Bradley Adams, Chief Operating Officer and Chief Financial Officer

Thanks, Chris.

Operator, Operator

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

Terry McEvoy, Analyst

Hi, good morning guys.

Bradley Adams, Chief Operating Officer and Chief Financial Officer

Hey, Terry.

Terry McEvoy, Analyst

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

James Eccher, Chairman, President and CEO

Yes. I think if there's one area that we're seeing a couple of credits come on to our radar, it's more in C&I at this point. Nothing material. We had a couple of credits, one in manufacturing, one in solutions-based drug wholesale company that missed projections that we've downgraded. We've already proactively taken reserves against those. By and large, you're right, we're through office. We're working our way through health care. 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 in that book. But aside from those two credits, we're not seeing any new red flags.

Terry McEvoy, Analyst

Thanks. And then 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? And I'm thinking just balances or card transactions overall?

Bradley Adams, Chief Operating Officer and Chief Financial Officer

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. But we're a very granular deposit base. I think everybody knows that by now. But we've seen kind of weakness in balance levels in transaction activity in that deposit base starting over a year ago. So I wouldn't 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, Analyst

Yes, and that is why I was asking. Thanks for taking my questions. Appreciate it.

Bradley Adams, Chief Operating Officer and Chief Financial Officer

Thanks, Terry.

Operator, Operator

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

David Long, Analyst

Good morning everyone.

James Eccher, Chairman, President and CEO

Good morning, David.

David Long, Analyst

We're only a few weeks past Liberation Day with the tariffs. In your recent discussions with your commercial clients, what is their sentiment like? Are you noticing any deals being withdrawn or any pauses? I'm trying to understand the expectations around loan demand.

James Eccher, Chairman, President and CEO

Dave, it's probably similar to what you're hearing from other banks. We've had these conversations internally. 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, and we're not doing anything until we get some clarity around tariffs and uncertainty. But by and large, it's wait and see. We are not projecting a lot of growth in the second quarter. We're hopeful with some clarity, we see an uptick in loan demand in the second half of the year.

David Long, Analyst

Got it. Thanks for the color, Jim. And then as you look at the reserve level, reserves came down a bit in the quarter. You had nonperformers up. I think there's a risk of economic forecast currently where they are today, it 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?

Bradley Adams, Chief Operating Officer and Chief Financial Officer

So we've got a situation where criticized classified and nonperformers have been trending down significantly for the better part of two years. I don't think we're in the same boat as everybody else here. Our trend is not more negative at this point even with the uncertainty that's out there. We've 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 the stress, but I don't 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 Long, Analyst

Great. Thanks Brad. Appreciate the color.

Operator, Operator

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

Nathan Race, Analyst

Good morning guys. Thanks for taking my questions.

James Eccher, Chairman, President and CEO

Hi, Nate.

Nathan Race, Analyst

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

James Eccher, Chairman, President and CEO

Yes, I agree with you. We experienced some unpredictable results due to a significant commercial and industrial credit bankruptcy, which affected our credit business. Given the strong earnings for the quarter, we decided to take the final charge on that. While we are hopeful for some recovery, we chose to move forward from this situation. We've noted the declines in both substandard and criticized assets, which are leading indicators that suggest potential improvement in future credit quality. Although charge-offs were somewhat higher, we remain optimistic about the performance in upcoming quarters. Regarding Evergreen, they've typically had losses ranging from 1% to 1.5%. However, we must consider that the contribution margins on that loan portfolio are significantly higher, so these two factors need to be assessed together. They are also very well reserved, and we are enthusiastic about expanding that segment within our lending team.

Bradley Adams, Chief Operating Officer and Chief Financial Officer

So I realize that our tone and tenor is a little bit different maybe than most, but one data point that I add for people is that our individual specific allocations for individual credits on the commercial side right now are lower than they've ever been. The number of individual allocations hasn't been this low in 3.5 years. So in terms of problems, we believe we've dealt with them.

Nathan Race, Analyst

Understood. That's helpful. Appreciate that. And Brad, just going back to your expense comments. 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 first quarter?

Bradley Adams, Chief Operating Officer and Chief Financial Officer

Yes.

Nathan Race, Analyst

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

Bradley Adams, Chief Operating Officer and Chief Financial Officer

Cool, thank you.

James Eccher, Chairman, President and CEO

Thanks, Nate.

Operator, Operator

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

Jeff Rulis, 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, Jim trying to back into expectations on growth for the full-year. It sounds pretty guarded, but any detail on that side?

James Eccher, Chairman, President and CEO

Yes, the acquisition is expected to provide us with additional growth. I would be pleased with low-single digit growth in the second half of the year. However, it’s important to note that risk-adjusted returns are currently not very appealing in several areas. We will be cautious and prudent about what we are adding to our books. With our current margin, we won’t pursue growth just for growth’s sake. That said, I am optimistic that the second half will perform significantly better than the first half.

Bradley Adams, Chief Operating Officer and Chief Financial Officer

Listen, I think six months ago on this call, when I said that we had a realistic shot of growing net interest income linked quarter in the first part of this year, I could feel the eyes crossing on the other side of this line, not believing that number. So it's about basically, as Jim mentioned, risk-adjusted returns. And you know what, it's not always entirely about growth; it's about making money. And there are times in this business given the cyclicality and the volatility that we've seen, that it's not time to grow. I said last quarter, the growth looks much more attractive and that we would consider loan purchases. I think that's 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 risks to spread widening at this point, as I mentioned a few minutes ago. And I think there will be attractive yields available. So it's something we will consider in order to generate growth on that front. And when you got the balance sheet flexibility that we do, you've got a lot of optionality. So it's 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.

Jeff Rulis, Analyst

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

Bradley Adams, Chief Operating Officer and Chief Financial Officer

I don't off the top of my head. It wasn't down from February, I can tell you that. So it trended higher. And that's been a function, as I alluded to earlier, 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's a nice position to be in as the CFO. And it makes me generally a happy person, and I treat my kids better, and they tend to upset me less. So all smiles are out here.

Jeff Rulis, Analyst

Fair enough. I guess the last question, Brad, you mentioned considering the buyback, but you noted that it would be after the deal closes. What prevents you from being active in the short term?

Bradley Adams, Chief Operating Officer and Chief Financial Officer

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

Jeff Rulis, Analyst

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

Bradley Adams, Chief Operating Officer and Chief Financial Officer

Yes, we're not... until we close.

James Eccher, Chairman, President and CEO

Until we close, I would say that we're optimistic that our timetable for that closure will come to fruition.

Jeff Rulis, Analyst

I know I said 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?

Bradley Adams, Chief Operating Officer and Chief Financial Officer

Normally, I like to go out to 5 or 6 basis points on that question or decimal points rather, but I don't know, yes, around here. All right. Thanks, Jeff.

Operator, Operator

Thank you. Our next question is coming from Brian Martin with Janney. Your line is live.

Brian Martin, Analyst

Congratulations on the quarter, everyone. Most of my questions have been covered. Brad, I have a broader question regarding margins. Last quarter, you mentioned a 7 basis point margin, and now it seems to be at 4 with Evergreen. I'm trying to understand your perspective on where it might bottom out. Considering different scenarios, such as not having any cuts versus experiencing some cuts, how should we think about the margin now that we've reached a much higher position than we originally anticipated? Previously, you indicated a range around 4.35% to 4.40%, but acknowledged it would take some time. Can you provide some clarity on this?

Bradley Adams, Chief Operating Officer and Chief Financial Officer

Yes, I would say that deposit flows have raised the floor by 10 basis points. It’s a different scenario for us, especially with Evergreen, given our current scale. We will be structurally more profitable unless there are significant credit events. Clearly, we perform exceptionally well when interest rates are high, and we’ve mentioned before that a high and flat yield curve is beneficial for us. Given our situation today, investors should not be surprised by strong margin performance in such an environment. As we discussed a couple of months ago with the Evergreen announcement, we will still perform better in a lower rate environment, but it remains true that a high flat curve is advantageous for us. Looking at the macroeconomic situation, I don’t see many options given the current balance of risks between growth and inflation. Inflation has shown stickiness, and I don't foresee that changing soon, especially with ongoing tariff issues. Additionally, I don’t believe the Fed will ease off its focus on combating inflation, particularly since much of it is self-induced by the executive branch. Therefore, I don’t expect any drastic changes, and I remain optimistic about our margin performance in the near to moderate term.

Brian Martin, Analyst

Okay. As far as where we would, if the bottoming would be just 10 basis points higher than you were thinking before for now until we do a little bit more.

James Eccher, Chairman, President and CEO

Yes.

Brian Martin, Analyst

Got you. And then maybe just one last question on credit, given the significant improvement we saw this quarter. I think you all have been discussing that. Jim, you talked about how the criticized and classified assets are currently much lower than they have been. Brad just mentioned individual credits as well. Is there any potential for further improvement in credit quality, particularly regarding non-performance? Is there anything significant coming due that we should be aware of, or should we expect to see a decline in non-performing assets as we work through these?

James Eccher, Chairman, President and CEO

Yes. I mean the goal is to continue to work these even lower, right? I mean I don't think we'll have the magnitude of the decline in percentages that we had this quarter, but we're optimistic we've been very internally focused to try to improve the balance sheet. And we think we can make incremental improvements throughout the rest of the year.

Brian Martin, Analyst

Okay. Yes, just nothing big. I just want to make sure there's nothing else that was in the hopper that could come out. So okay. Thanks for taking the question guys and great quarter.

James Eccher, Chairman, President and CEO

Thanks, Brian.

Operator, Operator

Thank you. As we have no further questions on the line 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, Operator

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