Earnings Call Transcript
Bank of Marin Bancorp (BMRC)
Earnings Call Transcript - BMRC Q1 2025
Krissy Meyer, Corporate Secretary
Good morning, and thank you for joining Bank of Marin Bancorp's earnings call for the first quarter ended March 31, 2025. I am Krissy Meyer, Corporate Secretary for Bank of Marin Bancorp. During the presentation, all participants will be in a listen-only mode. After the call, we will conduct a question and answer session. Joining us on the call today are Bank of Marin President and CEO, Tim Myers; and Chief Financial Officer, Dave Bonaccorso. Our earnings news release and supplementary presentation, which were issued this morning, can be found in the Investor Relations section of our website at bankofmarin.com, where this call is also being webcast. Closed captioning is available during the live webcast, as well as on the webcast replay. Before we get started, I want to note that we will be discussing some non-GAAP financial measures. Please refer to the reconciliation table in our earnings news release for both GAAP and non-GAAP measures. Additionally, the discussion on the call is based on information we know as of Friday, April 25, 2025, and may contain forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those set forth in such statements. For a discussion on these risks and uncertainties, please review the forward-looking statements disclosure in our earnings news release, as well as our SEC filings. Following our prepared remarks, Tim, Dave and our Chief Credit Officer, Misako Stewart, will be available to answer your questions. And now I'd like to turn the call over to Tim Myers.
Tim Myers, CEO
Thank you, Krissy. Good morning, everyone, and welcome to our quarterly earnings call. We delivered a solid first quarter driven primarily by positive trends in our net interest margin and deposit growth while we continue to effectively manage our expenses at an appropriate normalized run rate. Our improved financial performance and continued benefits from prudent balance sheet management fueled a 36 basis point increase in Q1 year-over-year in net interest margin and a 67% improvement in Q1 year-over-year earnings per share growth, which drove tangible book value per share growth in the first quarter. On a broad basis, we continue to have stable asset quality within our loan portfolio with a slight decline in nonaccrual loans and an increase in classified loans, which was largely driven by two relationships downgraded due to unique issues with each borrower. The decline in nonaccrual loans was the result of the proactive sale of an acquired loan due to the rapidly deteriorating financial condition of the borrower and declining collateral value. The loan was placed on nonaccrual in Q4 2023 and the sale resulted in a modest charge-off, more than half of which was reserved for in Q4 of 2023. While there is broad macroeconomic concern regarding the impact of economic, fiscal and trade policies, to date, we have not heard of anything within our portfolio that indicates a meaningful amount of increased risk. Our banking team, reinforced with two new client-facing bankers in the first quarter, is doing a more consistent job of developing attractive lending opportunities and generating improved loan production, while still retaining our disciplined pricing and holding firm on structure and underwriting criteria. While overall loan demand remains fairly consistent, due to the efforts of our banking team, we are seeing a larger volume of opportunities within our markets. During the quarter, total loan originations were $63 million, including $48 million in new fundings. Commercial loan originations were $49 million, with $43 million in fundings, which is a fivefold increase from our level of commercial loan originations in the first quarter of last year. Our originations were a well-diversified mix of both commercial and commercial real estate loans across geographic markets, industries and property types. While we had a solid level of loan production in the first quarter, that production was exceeded by payoffs, paydowns and reduced construction line utilization, which Dave will discuss in greater detail. Our total deposits grew in the first quarter, including an increase in noninterest-bearing deposits that kept our overall mix of deposits relatively consistent, with noninterest-bearing deposits comprising 43% of total deposits. The deposit growth was due to a combination of deposit inflows from both new relationships added during the first quarter, as well as inflows from existing clients. The growth represents a combination of expanded balances from commercial, small business and consumer clients. While we see some banks looking to win business with assertive deposit pricing, we are not seeing any material losses due to rate. Our customers continue to bank with us for our service levels, accessibility and commitment to our communities and not entirely based on rate. As a result, in early January, we made meaningful deposit rate reductions in response to the December Fed funds rate cut, which helped drive further expansion in our net interest margin in the first quarter. The deposit cost reductions have continued into April, as we are now able to make smaller rate adjustments outside of the Fed funds rate adjustment cycle. Given our improved financial performance and prudent balance sheet management, our capital ratios remain very strong, with a total risk-based capital ratio of 16.69% and a TCE ratio of 9.82%. With that, I'll turn the call over to Dave Bonaccorso to discuss our financial results in more detail.
Dave Bonaccorso, CFO
Thanks, Tim. Good morning, everyone. We generated $4.9 million in net income for the first quarter or $0.30 per share, both of which are 67% higher than the first quarter of last year as we continue to benefit from the balance sheet repositioning and expense reduction actions we took during 2024. Our net interest income was down slightly from the prior quarter to $25 million, primarily due to a lower balance of average earning assets, partially offset by a 6 basis point increase in our net interest margin. The expansion on our net interest margin was attributable to a 7 basis point decrease in our cost of deposits, while our average yield on interest-earning assets was unchanged from the prior quarter despite an approximately 30 basis point decline in the average Fed funds rate during the quarter. Our average yield on loans was unchanged from the prior quarter as higher rates on new loan production were offset by the payoff of some higher-yielding loans, mostly in our construction portfolio. Due to our deposit growth, we had elevated levels of cash balances during the first quarter. In late March and continuing into April, we accelerated our redeployment of this excess liquidity into new loan fundings and securities purchases, which we expect to positively impact our net interest margin in the second quarter. Our noninterest expense increased by $2.9 million from the prior quarter due primarily to seasonally higher expenses as accruals for salaries and employee benefits reset in Q1, as well as relatively low salaries and employee benefits expense in Q4 2024 due to adjustments in incentive bonus and profit-sharing accruals. Additionally, in order to better serve the timing needs of our nonprofit community, we moved up the timing of our charitable contribution cycle. Last year, nearly 90% of our charitable contributions occurred during Q2, whereas this year, the vast majority of our contributions were pulled forward into Q1, with $403,000 of contributions made in the quarter. We expect approximately $60,000 in contributions in Q2, followed by $20,000 each in Q3 and Q4. The $403,000 of contribution expense in Q1 2025 compares to $30,000 in Q4 2024 and $12,000 in Q1 2024. Those differentials are worth approximately $0.0175 per share after tax. Excluding salaries and related benefits and charitable contributions, our Q1 2025 noninterest expense declined almost 1% compared to Q4 2024 and almost 3% compared to Q1 2024. Moving to noninterest income. We had an increase of more than $100,000 from our prior quarter, primarily due to higher earnings on BOLI. Most other areas of noninterest income were relatively consistent with the prior quarter. Our total deposits were $3.3 billion at March 31, which was an increase of $82 million from the prior quarter, $26 million of which came in noninterest-bearing deposits. As Tim mentioned, this was attributable to inflows from existing clients, as well as the addition of new client relationships. Our average cost of deposits declined 7 basis points in the first quarter as we have passed through rate cuts to our deposit customers without seeing any material rate related outflows. And during April, we have continued to see a decline in our cost of deposits. Disciplined credit management remains a hallmark of Bank of Marin as well. Due to the stability in our loan portfolio, our provision for credit losses, which was $75,000 during the first quarter. The allowance for credit losses declined slightly to 1.44% of total loans from the prior quarter, which was largely driven by the payoff of construction loans that require a higher level of provision. Loan balances of $2.07 billion at the end of the first quarter were down $10 million from the prior quarter. While we had strong new loan production, this was offset by loan payoffs for a variety of reasons, including decreased line utilization on construction loans, paydowns on tenant and common and purchased real estate mortgage loans and the proactive sale of an acquired loan that had been on nonaccrual. Given the continued strength of our capital ratios, our Board of Directors declared a cash dividend of $0.25 per share on April 24, the 80th consecutive dividend paid by the company. With that, I'll turn it back over to you, Tim, to share some final comments.
Tim Myers, CEO
Thank you, Dave. In closing, we believe we are very well positioned to continue generating solid financial performance in 2025, as we expect to continue to see positive longer-term trends in our net interest margin and revenue. While there is more economic uncertainty now than at the beginning of the year, our expectations for a higher level of loan growth this year continue to be based more on the additions to our banking team we have made and the higher level of productivity that we are now seeing, rather than any expectations that we would see a meaningful increase in market-wide loan demand. As such, we continue to expect to see improving loan growth this year, and our loan pipeline continues to be very healthy. While we always tightly manage expenses, we will also continue to take advantage of opportunities to add banking talent that we believe will help support the continued profitable growth of our franchise, while also investing in innovation and technology to further enhance our level of efficiencies and the quality of service we provide to our customers. With the strength of our balance sheet, we believe we are very well positioned to increase our market share, add attractive new client relationships, generate profitable growth and further enhance the value of our franchise in 2025 in the coming years. And while we did not repurchase any shares during the first quarter, with our high level of capital, we can continue to evaluate repurchases as we look at the best uses for our capital at any particular time and make the decisions that we believe are in the best long-term interest of our shareholders. With that, I want to thank everyone on today's call for your interest and your support. We will now open the call to your questions.
Operator, Operator
Thank you. Our first question will come from Andrew Terrell at Stephens. You may now unmute your audio and ask your question.
Andrew Terrell, Analyst
Good morning.
Tim Myers, CEO
Good morning.
Andrew Terrell, Analyst
Maybe we'll start with the end. Tim, you have notable capital. The stock trades at 9% of tangible assets, and growth is still somewhat sluggish. Can you discuss the expectations for the buyback moving forward? Are there any other capital actions we should be considering, perhaps a broader perspective on capital to begin with?
Tim Myers, CEO
Sure. So we just went through our exam with the regulators. We will be meeting with them soon to talk about our capital plan, dividend request and all that. So we continue to contemplate it. We saw the authorization in place from the Board, and we agree that buying back below tangible book is a wise thing to do. We were just on the sidelines, if you will, pending the outcome of the exam and discussions about some of the other strategic options. As you note, there are some available. And so that's where we are at right now.
Andrew Terrell, Analyst
Understood. Okay. And then could you maybe provide a little bit more color on that? I think it was three commercial loans that moved into classified. Obviously, not a massive dollar amount, but I just want to understand what those 3 credits were? Any commonalities between them and just kind of expectations working forward with this?
Tim Myers, CEO
Yes. So the vast majority of that was really within two credits. One is a contractor and the other is real estate multifamily. So no relation between the two, performance issues unique to each of them. Operational on the contractor side and a shift in strategy on the multifamily from short-term furnished rentals to longer term. And so both are expected to be profitable this year. We don't currently expect any further deterioration, but we felt it prudent to put those in that bucket for the time being.
Andrew Terrell, Analyst
Got it. Okay. And then, Dave if I could ask around just the expense expectations. Is the right way to think about the expense base in the coming quarters just normalizing the charitable contributions down to that? I think it was $60,000 next quarter. Any other puts and takes we should be thinking about for expenses in the coming quarters?
Dave Bonaccorso, CFO
At a high level, looking back to 2021, our compound annual growth rate of expenses has been around 4%. This is a reasonable starting point for annual modeling. In 2024, we experienced an increase of nearly 3%, despite not meeting some key internal goals, which led to lower incentive compensation than expected. This provides the overarching framework. In the first quarter, we accelerated contributions that would typically occur in the second quarter. For the rest of the year, we anticipate an additional $100,000 in contributions expense. Some factors unique to the first quarter, like payroll taxes, insurance adjustments, and 401(k) matching, are on the higher side but will begin to decrease. Additionally, project-related expenses are likely to increase starting in the second quarter. Overall, I would recommend referring to our annual trends from the past couple of years and making adjustments from that baseline.
Andrew Terrell, Analyst
Perfect. Okay. Thank you very much for the questions.
Operator, Operator
Our next question comes from Woody Lay at KBW. Please go ahead.
Woody Lay, Analyst
Hi, good morning guys.
Tim Myers, CEO
Hi, Lay.
Woody Lay, Analyst
I wanted to start on deposit growth. It was pretty impressive to see in the quarter. But was there any seasonality impact in there? Do you think all of this growth is pretty sticky? And if it is sticky, what do you attribute the growth to? Is it some new hires that are making progress? Or just thoughts there?
Tim Myers, CEO
So it's kind of the flip side of the coin we've had a couple of other quarters, Woody, where we do get some big seasonal inflows, if not seasonal episodic with our customers. We did have another 1,000-plus accounts opened up. That total dollar amounts, maybe one-third of the total. So we get the inflows, outflows, we expect tax outflows in this month. So it is really hard to say the exact, where that will land. But yes, agreed. I think we continue to do the right things. There's the C&I effort. If you take in the commitments, the unused commitments, C&I was at 20% of our loan originations. That's the second quarter in a row, I think, where we've been up there. And certainly, that brings some deposits. But it's a combination of all the above. And I would hate to speak to my ability to forecast how those fluctuations go because we do have those large DDA customers that have in and outflows.
Woody Lay, Analyst
Yes. I appreciate the color there. And then maybe turning to deposit costs. It sounds like you did some heavy lifting in early January. But do you think there is room to continue to move deposit costs lower here if all equal, rates stay the same?
Tim Myers, CEO
I mean, I'll let Dave Bonaccorso answer that. I mean we think we have some flexibility, but obviously, we start testing some limits at some point, but go ahead, Dave.
Dave Bonaccorso, CFO
Yes. Clearly, it’s easier with the support of a cut in the Fed funds rate. In this context, we have performed better than the asset liability management modeling assumption we shared. As you mentioned in an earlier report, our beta increased in the first quarter compared to the fourth quarter, which is a positive sign. Regarding your question about whether we can do anything independent of Fed funds rate cuts, in April we actually reduced rates on approximately $260 million in balances by an average of about 6 basis points. While this isn’t significant, it translates to about 0.9 basis points for interest-bearing deposits and about 0.5 basis points for total deposits once fully phased in. This shows that we are able to make adjustments, and we will continue to evaluate this.
Woody Lay, Analyst
Got it. And then maybe last for me, just shifting over to loan production. First quarter remained strong, both offset by some payoffs. I mean how did production trend towards the end of the month? And just given all the macro uncertainty, are you seeing customers opt to delay deals at this point?
Tim Myers, CEO
I'll start by saying it's encouraging to see that our loan originations for this quarter were comparable to those in the fourth quarter. This has been a positive outcome from the new hires we've made. While we are not experiencing a surge in overall demand and there is plenty of uncertainty in the market, we are benefiting from the production generated by our new team members who have strong relationships with clients and their existing pipelines. Currently, our pipeline is approximately 50% larger than it was at the same time last year due to these originations. This trend seems promising and sustainable, though predicting the timing is always challenging. The flow typically increases towards the end of the quarter, but the good news is our pipeline remains robust, and we aren't starting from scratch. We added another new hire in San Francisco, in addition to the two we hired earlier in the quarter in Sacramento and one in another market. We are optimistic that we are bringing in the right talent to maintain and enhance this trend. Regarding paydowns, they have remained relatively flat compared to last year and decreased over the quarter. Most of these paydowns, amounting to only a few million dollars, were due to funding outside the bank. The majority stemmed from asset sales or deleveraging, with a small portion from workouts. Notably, consumer loans, specifically the residential mortgages we obtained during our securities repositioning, TIC loans, and some indirect auto loans made up the largest segment of paydowns. These factors aren't significantly influencing our commercial banking activities. We are managing what we can control regarding paydowns and are focused on keeping origination activity strong to balance any effects from paydowns.
Woody Lay, Analyst
That’s great. Color. Thanks for taking my question.
Operator, Operator
Our next question comes from Jeffrey A. Rulis at D.A. Davidson. Please go ahead.
Jeffrey Rulis, Analyst
Good morning. I have a question regarding the margin. It seems that the spot rates and the March average show a positive trend, and I appreciate your comments about ongoing efforts to decrease it. Do you happen to have the March average for the net interest margin?
Dave Bonaccorso, CFO
Yes, it was 2.85%.
Jeffrey Rulis, Analyst
Okay. And Dave, do you have any comments?
Dave Bonaccorso, CFO
There's distortions in Q1 with the day counts, the 31, 28, 31. So that's the March number. But the overall quarter is impacted by the differences in day counts.
Jeffrey Rulis, Analyst
Just in the release, it sounds optimistic about further improvement on the margin. Is there anything else to address regarding liability sensitivity? Cuts would likely help, but what are the expectations for the margin moving forward?
Dave Bonaccorso, CFO
Yes. I believe you touched on an important point. This quarter, we are a bit more sensitive to liabilities compared to last quarter. A straightforward way to understand this is that we have about four times as many floating rate liabilities as floating rate assets. Assuming our floating rate assets have a beta of 100%, our floating rate liabilities would need to have a beta greater than 25% to maintain balance. As I mentioned, all of our floating rate liabilities are non-maturity deposits, and we recorded a beta of 40% this past quarter, which is a positive indicator for improvement. During our last quarterly call, the market was anticipating around 50 basis points in cuts for the year, but as of last Friday, we were looking at 90 basis points. This is favorable for us in terms of margin.
Jeffrey Rulis, Analyst
Thank you. I have a few questions regarding expenses. First, are charitable contributions managed by the Board, or can the management make decisions on that? In terms of overall expenses, you mentioned managing them while also being open to strategic opportunities. Are there any plans for cost rationalization, especially considering the stagnant loans? So that’s two questions: one about charity and the other regarding potential cuts.
Tim Myers, CEO
The answer to your first question about the Board is yes, we budget charitable contributions. We have a long-standing practice of allocating at least 1% of pretax profit to the communities we serve. The communities are aware of this commitment. As a traditional community bank, we maintain branches in many of our markets and engage actively with them. Many of our people serve on local boards, which is an essential aspect of our operations. Regarding total contributions, we have seen a decrease alongside our PPNR and asset growth. This quarter, the changes were notable because we have followed a more formal giving process in recent years, with funds typically distributed quickly. This year, by moving the distribution to the second quarter, we received feedback from the communities indicating that this timing would be more impactful and easier for them to plan around. We simply adjusted the timing and slightly reduced the total amount allocated. In any case, the Board considers these contributions as part of our overall budgeting process. I hope this answers your question, Jeff.
Jeffrey Rulis, Analyst
Yes, I understand the acceleration, that's fine. Year over year, it's a similar amount when considering the overall approach. You mentioned it earlier. Are you contemplating any further expense reductions this year, or are you currently focused on maintaining your budgeted investments without considering additional cuts to expenses?
Tim Myers, CEO
So we did our staffing reductions last year, if you'll recall, and I think we are pretty comfortable with where we're at. We're being selective in our hiring. Our expense run rate is down, and Dave can talk about that. And yes, there was some noise in the quarter regarding the personnel-related expenses and the charitable contributions and sponsorships. But our overall run rate continues to trend positively. So you want to talk about the run rate?
Dave Bonaccorso, CFO
Yes. And there were some comments in the prepared remarks around this, but obviously we have noise pretty much every year, Q4 and Q1 related to salaries and related benefits, and then we had the charitable contributions noise this quarter. So yes, on a sequential quarter basis, we are down almost 1%, setting aside salaries and related benefits and also charitable contributions. And then for that same breakout, we're down almost 3% from a year ago. So I think that's evidence that we're managing it pretty tightly in the areas that are not affected by some of the noise we had this quarter. One thing I just wanted to add on charitable contributions, we break that out separately in our financials. And that number will be down this year optically, but some of that has been reallocated to community sponsorships, which has rolled into other expense. And so it is a similar level of community commitment that we've had in recent years just kind of hitting two buckets this year rather than primarily in contributions alone.
Jeffrey Rulis, Analyst
Got it. Appreciate it. Thank you.
Operator, Operator
Our next question comes from David Feaster at Raymond James. Please go ahead.
David Feaster, Analyst
Hi, good morning everybody. We touched a bit on the broader uncertainty just given the trade wars and all that. And obviously, you've got more tailwinds for originations, just given the new hires that you've alluded to. But I was just hoping you could touch a bit on the pulse of your clients in this backdrop? Are you hearing any concerns or are you anticipating maybe slower pull-through of the pipelines or maybe more potential fallout or anything? Just kind of curious what you're hearing from your clients today and their willingness to continue to invest just given the uncertainty?
Tim Myers, CEO
Hi, David. I would say the one segment, by and large, David, we are not hearing a ton. But we're not in a big manufacturing base or other areas that are going to be more immediately affected. We don't have a lot of agricultural businesses in our market and do even less of what there is. So we are not impacted by some of the noise you hear out there and nor are our clients. The one area we are hearing it is with the nonprofits, less around the trade wars than fiscal economic policy or general politics about what kind of funding is going to be available as pass-through from federal through state to local. And so I think the biggest fear we have when we do bank a lot of nonprofits, albeit more on the deposit than the credit side, is fear over funding levels.
David Feaster, Analyst
Okay. Maybe on the other side, I mean, you guys are obviously very conservative and take a very conservative approach, disciplined approach to credit. Actually, reputation and historical asset quality speaks for itself. But just given the uncertainty and trade wars, have you changed any or adjusted any underwriting criteria or anything like that? Or has your approach to credit management or risk rating change at all? Just kind of curious what you're thinking.
Tim Myers, CEO
No, it hasn't. And I would say this, just like when we talk about commercial real estate in San Francisco for the last couple of years. We are not a really very policy-driven credit underwriter. We are a very traditional underwriter, sources of repayment, risk mitigants, who the borrower is, the loan purpose. And so we're always going to ask those questions. So when you have times of uncertainty, again, whether it's a decline in leasing activity in San Francisco and rental rates or potential revenue streams from a company that might be impacted by tariffs and/or trade wars, that's all going to be part of the discussion. But what it doesn't fundamentally change is how we are going to look at that service coverage or leverage appetite on C&I borrowers. So it's really more of an approach, and that approach is easily adaptable to changes in the market. Does that answer your question?
David Feaster, Analyst
Yes, that makes sense. Also, could you share your plans for deploying the strong core deposit growth amidst slower loan growth? We've noticed some liquidity build-up this quarter. While I know it's not urgent, are you considering securities purchases, or would you prefer to wait to support loan growth, or just let it sit in cash to earn interest?
Dave Bonaccorso, CFO
We increased our purchases of securities towards the end of Q1, and this has continued into Q2. Overall, we experienced robust growth in deposits and an increasing loan pipeline. Additionally, like many banks, we faced tax-related outflows in April, which we monitored before deciding to make some securities purchases that we executed late in March and continued into April. In terms of yield, those securities purchases were 40 to 50 basis points above the yield on cash during March and April, illustrating how we are investing at these higher rates.
David Feaster, Analyst
Okay, that’s helpful. Thanks everybody.
Operator, Operator
Our next question comes from Timothy Coffey at Janney Montgomery Scott. Please go ahead. Please unmute yourself using the mute on the bottom tab of the Zoom screen.
Tim Myers, CEO
Tim, you there? We can't hear you.
Operator, Operator
We will move on to the next question, which is coming from Adam Butler at Piper Sandler.
Adam Butler, Analyst
Hey, everyone. This is Adam on for Matthew Clark. Good morning. Just to get a better idea of some of the potential NIM expansion we could be seeing going forward on the asset side. I appreciated the commentary in the release that loans are coming on higher than the portfolio yield. And you guys have a decent proportion of loans that are fixed and repricing upward. I'm just curious, in a flat rate environment, how you see loan yields trending up? And if we got a 25 bps cut, how you'd expect to see loan yields move as well in the quarter? And do you guys have a spot rate on loans in March?
Dave Bonaccorso, CFO
Give me a moment on that and I will get back to you. Let me address the question first, and then I can provide that level. The statistic we usually share is the year-over-year monthly change in loan yields. This quarter, the change is not significantly different from last quarter. Specifically, in March 2026, we anticipate the monthly loan yield will be 25 to 30 basis points higher than it was in March 2025 due to natural repricing in the loan book, as you mentioned. There can be some variability on a quarterly basis. This assumption includes a flat balance sheet, with all funds reinvested into the same product. Factors like prepayment speeds and the effects of nonaccruals could also impact those numbers. While there are several caveats, this gives you an idea of how things might progress over the next year. Only about 7% of our loans are floating, so overall, the impact on net interest margin from that is not significant. However, it is noticeable—this quarter, it was worth a couple of basis points. This quarter, we experienced about a 30 basis point average decline in the Fed funds rate, which is slightly more than your 25 basis points question, but it's a good benchmark to consider.
Adam Butler, Analyst
Okay. That's helpful. And then most of my other questions have been asked and answered. But I guess on the credit side of things, I know that you guys historically have a very low loss rate. This quarter was kind of a one-off situation. But I'm just curious on your go-forward outlook. Are there any loans that or any credits that you are watching more closely? Do you think charge-offs should trend much lower? I'm just curious, how you are thinking about future charge-offs going forward?
Tim Myers, CEO
If we categorize the situation, the CRE loans on non-accrual haven't changed this quarter; there's been no worsening, but we also didn't see it level off as we had anticipated. So, no updates there. The two loans we downgraded are unrelated, and both are expected to turn a profit this year. Overall, in our credit portfolio, the bucket of loans we classify as graded, meaning either monitored or worse, is at its lowest since the third quarter of 2023. We will continue to see fluctuations as loans move in and out of classifications, which will be reported, but we aren't observing any deterioration in the overall portfolio. In fact, amid these fluctuations, we're still seeing a number of upgrades. I think that sums it up.
Adam Butler, Analyst
Very helpful. Those were all my questions. Thanks for the time.
Dave Bonaccorso, CFO
Adam, I can say that the monthly loan yield for March is very close to the quarterly average. The figure I have may not account for all tax adjustments. I'm hesitant to provide a specific number, but it's essentially aligned with where we were for the quarter, and that's a monthly rate.
Operator, Operator
Our next question comes from Timothy Coffey at Janney Montgomery Scott.
Timothy Coffey, Analyst
Good morning. Thank you for your understanding. I apologize for the interruption during the Q&A due to a fire alarm in my office. Tim, I heard you mention earlier that there is limited exposure to agriculture, which is mostly accurate. However, you do have connections to the wine industry and possibly related sectors. Can you share what feedback you are receiving from those clients and if there are any concerns regarding that industry?
Tim Myers, CEO
Yes, sure. I'll defer on the wine specifically to Misako. Tim, she's also an expert as a credit officer in that area.
Misako Stewart, Chief Credit Officer
Yes, we have wine clients in our portfolio, but it's approximately 3% or less of our total exposure. While we do have loans to some vineyards, tasting rooms, and manufacturing facilities, our underwriting is based on the cash flow of the winery business rather than relying on harvests. We do not have crop wines and do not lend directly to growers. As you may have heard, the industry is facing some challenges, so we are closely monitoring our borrowers. Most of the loans are secured with low loan-to-value ratios, and we have minimal exposure to exporters, as most of our wineries have limited export markets. Overall, we are staying in close contact with these clients and are not currently seeing major issues in that portfolio.
Timothy Coffey, Analyst
Okay, that's great to hear. I appreciate the insight. Tim, regarding business development, it appears that a few quarters back we began to notice significant client outflows from the acquired banks in 2023 towards more local banks like yours. Based on your earlier comment about one-third of new deposits coming from new clients, is this trend still ongoing where clients are shifting from larger institutions to smaller, service-oriented banks?
Tim Myers, CEO
Yes. I do think that's an overall trend. I do think it is somewhat episodic. I think there were some people, and this is just my color. And so just answering your question to the best my ability, I think there was some outflow early on where you have people just say I don't want to be part of a much larger organization coming out of some of the ones that failed. Then you had a group that said, well, let's just see what this is going to be like. And maybe in that is the inertia group, nothing changes. And then after they have that experience at a money center institution, maybe that's not the care and the level of attention that I grew accustomed to. But if they are dealing with the same people, good bankers can help smooth that over for their clients. So then you have people start to leave, and then you kind of have this. And I think that's where we're at, is the people we've continued to bring over, although it has been more one-offs than maybe some of our peers that take big teams, now we're seeing the benefit of them talking to those clients and saying, I have a lovely home for you, as you said, a smaller community-oriented institution. So there's no question that's playing into the demand, but it's really hard to predict kind of the cyclicality, if you will, of that. Does that answer your question?
Timothy Coffey, Analyst
Yes, it does. I appreciate that. Finally, for Dave, as we examine the investment portfolio as a percentage of average assets, it has clearly decreased year-over-year. I believe it’s around one-third of average assets now. Do you think that is the appropriate level for the current environment, or is it possible to reduce it even further and possibly increase cash reserves?
Dave Bonaccorso, CFO
We still like the portfolio to be lower. With the idea, of course, trying to allocate more of that part of the balance sheet to loans. So that's the name of the game. But if you are asking about the trade-off between cash and securities, setting aside any loan growth, I think we have the right amount of both these days. So I don't see any need to stockpile cash. I think we are pretty on top of looking ahead with forecasting tools where we think we're going to be where the needs are, when the growth is going to come in loans and deposits from a seasonal perspective and trying to match cash to that and having any excess go into securities at some premium yield wise relative to what we're making in cash. Does that answer your question?
Timothy Coffey, Analyst
It does. It sounds like you've got the right amount of liquidity for what you see in front of you?
Dave Bonaccorso, CFO
Absolutely. We have lots of cash flow coming off the securities portfolio. I think the remainder of the year, we have $150 million that rolls off at 3.5%. So you're seeing cash today, you're picking up 90 basis points there. And we have, I think, a little over $200 million coming next year. So the securities portfolio can definitely fund the loan growth we are expecting. And again, any excesses will be dropped back into securities.
Timothy Coffey, Analyst
Okay, well I appreciate. Those are my questions. Thank you.
Dave Bonaccorso, CFO
Thanks, Tim.
Operator, Operator
We have no further questions at this time. I will now hand it back to Tim Myers for closing remarks.
Tim Myers, CEO
Thank you again, everybody, for the questions, for listening in. And as always, if you need further information, Dave and I are both available to you. Look forward to talking to you next quarter.