Bank of Marin Bancorp - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 delivered margin expansion and strong deposit inflows, but EPS declined sequentially on higher seasonal OpEx and a proactive loan sale charge-off; diluted EPS was $0.30 (vs $0.38 in Q4 and $0.28 in Q3), tax-equivalent NIM rose to 2.86% (+6 bps QoQ) and deposits grew $82.0M to $3.302B.
• Versus consensus, EPS missed by $0.015 and revenue was modestly below, reflecting elevated Q1 expenses (payroll taxes, 401k matching, bonuses) and $403k in charitable contributions pulled forward into Q1; management nonetheless affirmed an expectation for NIM improvement in Q2.
• Credit quality remained stable: non-accruals fell to 1.59% and allowance was 1.44% of loans; classified loans rose to 2.77% on downgrades of a contractor and multifamily relationships; management expects no further deterioration in those credits.
• Liquidity and capital are robust (net contingent funding $1.917B; TRBC 16.69%; TCE 9.82%); dividend maintained at $0.25, and buybacks are under consideration pending regulatory discussions—potential stock catalyst if authorized at a discount to tangible book.

What Went Well and What Went Wrong

• What Went Well

  • “Deposit growth was strong during the first quarter even as we made thoughtful reductions in deposit rates,” with non-interest bearing deposits at 43.2% and total deposits up $82.0M QoQ.
  • Commercial loan originations accelerated: $49–50M originated and $43M funded, ~5x Q1 2024, with diversified mix; pipeline ~50% higher YoY and continuing into April.
  • NIM expanded 6 bps QoQ to 2.86% on deposit repricing; March NIM was ~2.85% and management cut rates further in April (6 bps on $260M), supporting near-term margin trajectory.

• What Went Wrong

  • EPS down QoQ ($0.30 vs $0.38) as non-interest expense rose $2.9M (seasonal payroll taxes/401k reset, bonus accruals, stock comp) and $403k charitable contributions shifted to Q1; NII declined $284k on lower average earning assets.
  • Classified loans increased to 2.77% (from 2.17%) on downgrades (contractor, multifamily) totaling $13.5M, though management does not expect further deterioration.
  • A proactive sale of a deteriorating acquired NOO CRE loan resulted in an $809k charge-off (most previously reserved), contributing to $825k net charge-offs in Q1.

Transcript

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. I would like to turn the call over to Tim Myers.

Tim Myers (President and 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 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 non-accrual 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 non-accrual 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 non-accrual in Q4 2023, and the sale resulted in a modest charge-off, more than half of which was reserved for in Q4 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 non-interest-bearing deposits that kept our overall mix of deposits relatively consistent, with non-interest-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 9.18%. With that, I'll turn the call over to Dave Bonaccorso to discuss our financial results in more detail.

David 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 six basis point increase in our net interest margin. The expansion on our net interest margin was attributable to a seven 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 non-interest 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 timely 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 contributions expense in Q1 2025 compares to $30,000 in Q4 2024 and $12,000 in Q1 2024. Those differentials are worth approximately $0.013 per share after tax. Excluding salaries and related benefits and charitable contributions, our Q1 2025 non-interest expense declined almost 1% compared to Q4 2024 and almost 3% compared to Q1 2024.

Moving to non-interest 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 non-interest income were relatively consistent with the prior quarter. Our total deposits were $3.3 billion at March 31st, which was an increase of $82 million from the prior quarter, $26 million of which came in non-interest-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 seven basis points in the first quarter, as we had passed through rate cuts to our deposit customers without seeing any material rate-related outflows. During April, we have continued to see a decline in our cost of deposits. Discipline credit management remains a hallmark of Bank of Marin as well.

Due to the stability in our loan portfolio, our provision for credit losses was just $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 tenants in common and purchased real estate mortgage loans, and the proactive sale of an acquired loan that had been on non-accrual.

Given the continued strength of our capital ratios, our Board of Directors declared a cash dividend of $0.25 per share on April 24th, 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 (President and 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 and the coming years.

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 (participant)

If you would like to ask a question, please click on the raise hand button at the bottom of your screen. Once prompted, please unmute your line and ask your question. We will now pause a moment to assemble the queue. Thank you. Our first question will come from Andrew Terrell at Stephens. You may now unmute your audio and ask your question.

Andrew Terrell (Managing Director and Research Analyst of Regional Banks)

Hey, good morning.

Tim Myers (President and CEO)

Good morning, Andrew.

Andrew Terrell (Managing Director and Research Analyst of Regional Banks)

Maybe we'll just start at the end there. Tim, I mean, you've got pretty impressive capital. The stock trades at 90% of tangible. Growth is still a little bit slow. Just talk us through expectations around the buyback moving forward. Any other capital actions we should be contemplating? Maybe just big picture on capital to start?

Tim Myers (President and CEO)

Sure. We just went through our exam with our regulators. We'll be meeting with them soon to talk about our capital plan, dividend request, all that. We continue to contemplate. We still have 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 that's where we're at right now.

Andrew Terrell (Managing Director and Research Analyst of Regional Banks)

Understood. Okay. 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 just want to understand what those three credits were, any commonalities between them, and just kind of expectations working forward with this.

Tim Myers (President and CEO)

Yeah. The vast majority of that was really within two credits. One is a contractor, and the other is real estate, multifamily. 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. Both are expected to be profitable or both expect to be profitable this year. They do not currently expect any further deterioration, but we felt it prudent to put those in that bucket for the time being.

Andrew Terrell (Managing Director and Research Analyst of Regional Banks)

Got it. Okay. 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?

David Bonaccorso (CFO)

Sure. Sure. At a high level, going back to 2021, our compound annual growth rate of expenses has been about 4%. That's arguably a reasonable place to start any modeling on an annual basis. In 2024, we were up almost 3%. That was in a year in which we did not meet some important internal goals, so that caused incentive comp to be lower than it would have been otherwise. That's kind of the overarching framework. This quarter, or in Q1, I should say, we pulled forward contributions that were normally in Q2. We expect for the remainder of the year, as we laid out, and released another $100,000 or so in contributions expense. Things that are unique to Q1, like payroll taxes and insurance adjustments and 401(k) matching being on the high side, I mean, those will start to drift lower.

I would say some project-related expenses that really kick off probably more in Q2 will start hitting. Those are the various puts and takes there. Again, I would kind of steer you back to what we have done the last couple of years on an annual basis, and then you can adjust from there.

Andrew Terrell (Managing Director and Research Analyst of Regional Banks)

Perfect. Okay. Thank you very much for taking the questions.

Tim Myers (President and CEO)

Thanks, Andrew.

Operator (participant)

Our next question comes from Woody Lay at KBW. Please go ahead.

Woody Lay (Managing Director)

Hey, good morning, guys.

Tim Myers (President and CEO)

Hi, Woody.

Woody Lay (Managing Director)

Wanted to start on deposit growth. It was pretty impressive to see in the quarter. Was there any seasonality impact in there? Do you think all of this growth is pretty sticky? 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 (President and CEO)

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+ accounts open up. That total dollar amount is maybe a third of the total. We get the inflows, outflows. We expect tax outflows in this month. It's really hard to say where that'll land. 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 second quarter in a row, I think, where we've been up there. Certainly, that brings some deposits. It's a combination of all the above.

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 (Managing Director)

Yep. Appreciate the color there. Maybe turning to deposit costs, it sounds like you did some heavy lifting in early January. Do you think there's room to continue to move deposit costs lower here if all at equal rates stay the same?

Tim Myers (President and 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. Go ahead, Dave.

David Bonaccorso (CFO)

Yeah. Obviously, it's easier with the cover of a Fed funds rate cut. In that regard, we've done better than the ALM modeling assumption that we disclosed. I think, as you noted in an early report you put out, our beta accelerated in Q1 relative to Q4. Positive from that perspective. On your question about, I think what I'm hearing is, can you do anything away from Fed funds rate cuts? The answer is, in April, we actually cut rates on about $260 million in balances by an average of about six basis points. It's not huge. It ends up working out to about 9/10 of a basis point for interest-bearing deposits, about a half basis point for total deposits, fully phased in. Demonstration that we can do it, and it's something we'll continue to look at.

Woody Lay (Managing Director)

Got it. Maybe last for me, just shifting over to loan production. First quarter remained strong, but it was all set by some payoffs. I mean, how did production trend toward the end of the month? Just given all the macro uncertainty, are you seeing customers opt to delay deals at this point?

Tim Myers (President and CEO)

Yeah. I'll start at the end there. We're not seeing that. We're not going to pretend that the loan originations—let me step back. It was very exciting for the quarter to have the origination. It's been a long time since we've had a Q1 that equaled our Q4 origination. We really are seeing the benefit of some of the hires we've made. We're not seeing a rising tide of demand. There's no question. There's a lot of uncertainty out there. What we're seeing is production from the people we're hiring with former clients, with their pipelines. Our pipeline is about 50% higher than it was a year ago this time with those originations. We're seeing a nice trend that appears sustainable, but you can never predict the timing. It's pretty even. Obviously, it always kind of gets backended towards the quarter.

What's nice is the pipeline's still high, and we didn't get all that through and then have to start rebuilding. We are pretty enthusiastic. Again, that's new hire driven. We did add another new hire in San Francisco on top of the two we hired early in the quarter in Sacramento and one of our markets here. We remain optimistic that we're getting the right people and the right shares to continue and smooth out that trend. On the paydowns, it's pretty flat to a year ago, down for the quarter. Very little of that, maybe a couple million dollars, was things that were funded outside of the bank. The biggest chunk continues to be asset sales or cash deleveraging, small amount of workouts. It was really disparate.

In fact, I think the single biggest component within there of type was consumer loans, the residential mortgages we acquired as part of the securities repositioning, TIC loans, and some indirect auto loans. It is not really part of a trend that is affecting our commercial banking activity. Nonetheless, they are paydowns, but we seem to be controlling to the extent we can those we can control. We just keep that origination going and the lateral offset the former here.

Woody Lay (Managing Director)

That's great color. Thanks for taking my question.

Tim Myers (President and CEO)

My pleasure.

Operator (participant)

Our next question comes from Jeffrey A. Rulis at D.A. Davidson. Please go ahead.

Jeffrey A. Rulis (Managing Director and Senior Research Analyst)

Hi. Good morning.

Tim Myers (President and CEO)

Hi, Jeff.

Jeffrey A. Rulis (Managing Director and Senior Research Analyst)

Question on the, I guess, on the margin, just kind of following back up. It sounds if you look at spot rates and the March average, the trend is good there. And then kind of got your commentary about continuing to make efforts to lower. I guess as we look at the margin, do you have a March average on the NIM?

Tim Myers (President and CEO)

Yeah. It was 285.

Jeffrey A. Rulis (Managing Director and Senior Research Analyst)

Okay. Dave, anything on?

David Bonaccorso (CFO)

There's distortions in Q1 with the day counts, the 31, 28, 31. That is the March number. The overall quarter is impacted by the differences in day counts.

Jeffrey A. Rulis (Managing Director and Senior Research Analyst)

Just in the release, it sounds optimistic of further improvement on the margin. Anything else to kind of from a liability sensitivity is there. Obviously, cuts would likely help. Just expectations on the go-forward margin.

David Bonaccorso (CFO)

Yeah. I think you hit on it. We're slightly more liability sensitive this quarter than last quarter. Maybe an easy way to think about it is we have roughly 4x as many floating rate liabilities as we do floating rate assets. If you assume the floating rate assets have 100% beta, it just means that our floating rate liabilities need to have a beta above 25% to keep pace. As I noted, the entirety of our floating rate liabilities are non-maturity deposits, and we had a 40% beta this past quarter. We're tracking well there to improve. I think when we gathered last time on our last quarterly call, markets were expecting about 50 basis points in cuts for the year. At least as of Friday, we were looking at 90. That's to the positive for us margin-wise.

Jeffrey A. Rulis (Managing Director and Senior Research Analyst)

Great. Thanks. Maybe a couple of questions on the expense side, just to follow up. First, on the charitable contributions, is the board engaged? Or does that need to be approved at that level, or is that a management call? Overall expenses, you talked about managing them, but also being opportunistic on strategic items. I guess, do you consider any other cost rationalization given the kind of flat line on loans? Is that on the table? Two-part on the charity and then looking at any cuts potentially.

Tim Myers (President and CEO)

The answer to your first question about the board, yes. When we budget, we budget charitable contributions. We have a long history at the bank of trying to give at least 1% of pre-tax profit to the communities. The communities know that. We are a traditional community bank in the respect that we have branches in our markets, or at least a lot of them, and behave that way. We are very actively engaged. We have a lot of people on boards. That is a very big part of what we do. In terms of the total contributions, we are down with our PPNR and, as you mentioned, the asset growth. The total contributions are less. The reason it got highlighted this quarter is historically, we ran a very, over the last few years, I would say, a formal process, like a grant-giving process.

The money would all leave in relatively a short period of time. Because we're doing it in our second quarter, the feedback we got in the communities was it'd be more impactful, easier for them to budget, etc., if we brought it up. We just accelerated the timing. That's the only thing different in what we did other than reduce the total amount. Again, yes, it is something the board looks at as part of our overall budgeting process. I hope that answers your question, Jeff.

Jeffrey A. Rulis (Managing Director and Senior Research Analyst)

Yeah. I get the—before that's okay. I mean, year-over-year, it's a similar amount. I'm just thinking about just generally the approach. You touched on it. I guess the part of—do you look at further expense rationalizations this year? At this point, that's to be something that you've got your budgeted investments. Right now, you're not looking for any other cuts on the expense side?

Tim Myers (President and CEO)

We did our staffing reductions last year, if you'll recall. I think we're pretty comfortable with where we're at. We're being selective in our hiring. Our expense run rate's down. Dave can talk about that. Yes, there was some noise in the quarter regarding the personnel-related expenses and the charitable contributions and sponsorships. Our overall run rate continues to trend positively. Do you want to talk about the run rate?

David Bonaccorso (CFO)

Yeah. There were some comments in the prepared remarks around this. Obviously, we have noise pretty much every year, Q4 and Q1, related to salaries and related benefits. We had the charitable contributions noise this quarter. On a sequential quarter basis, we're down almost 1%, setting aside salaries and related benefits and also charitable contributions. For that same breakout, we're down almost 3% from a year ago. 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. That number will be down this year optically. Some of that has been reallocated to community sponsorships, which has rolled into other expense.

It's a similar level of community commitment that we've had in recent years. It's just kind of hitting two buckets this year rather than primarily in contributions alone.

Jeffrey A. Rulis (Managing Director and Senior Research Analyst)

Got it. Appreciate it. Thank you.

Operator (participant)

Our next question comes from David Feaster at Raymond James. Please go ahead.

David Feaster (Managing Director of Equity Research Team)

Hey. Good morning, everybody.

Tim Myers (President and CEO)

Hi, David.

David Feaster (Managing Director of Equity Research Team)

We touched a bit on the broader uncertainty, just given the trade wars and all that. Obviously, you've got more tailwinds for originations just given the new hires that you've alluded to. 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 (President and CEO)

I would say the one segment, by and large, David, we're not hearing a ton. We're not in a big manufacturing base or other areas that are going to be more immediately. We don't have a lot of ag in our market and do even less of what there is. We're not impacted by some of the noise you hear out there, 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. I think the biggest fear we have, and we do bank a lot of nonprofits, albeit more on the deposit than the credit side, is fear over funding levels.

David Feaster (Managing Director of Equity Research Team)

Okay. Maybe on the other side, I mean, you guys are obviously very conservative and take a very conservative approach, disciplined approach to credit. That's your reputation. And historical asset quality speaks for itself. Just given the uncertainty in trade wars, have you changed any or adjusted any underwriting criteria or anything like that? Or has your approach to credit management or risk ratings changed at all? Just kind of curious what you're thinking.

Tim Myers (President and CEO)

No, it hasn't. I would say this, just like when we talk about commercial real estate in San Francisco for the last couple of years, we're not a really very policy-driven credit underwriter. We're a very traditional underwriter, sources of repayment, risks and mitigants, who the borrower is, the loan purpose. We're always going to ask those questions. 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. What it doesn't fundamentally change is how we're going to look at debt service coverage or leverage appetite on a C&I borrower. It's really more of an approach. That approach is easily adaptable to changes in the market.

Does that answer your question?

David Feaster (Managing Director of Equity Research Team)

Yep. That makes sense. Maybe just last one for me. Given the strong core deposit growth you've seen, the slower loan growth, we've seen liquidity build a bit this quarter. I know it's not burning a hole in your pocket. I'm curious, your plans to deploy that? Is there any interest in securities purchases, or you'd rather just wait to support loan growth or even just let it sit in cash here and take the interest rates on that?

Tim Myers (President and CEO)

We accelerated some of those securities purchases late in Q1. That has continued into Q2. Maybe more big picture, we had, as you noted, strong deposit growth. We had an accelerating loan pipeline as well. We also typically have, like many banks, tax-related outflows in April. We were monitoring all those things before pulling the trigger on some securities purchases, which we ultimately did late in March. That has also continued into April. Relative to the yield on cash today, those securities purchases have been 40-50 basis points above that in March and April to give you a sense of how we are deploying that at higher rates.

David Feaster (Managing Director of Equity Research Team)

Okay. That's helpful. Thanks, everybody.

Operator (participant)

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 (President and CEO)

Can you hear me there? We can't hear you.

Operator (participant)

We will move on to the next question, which is coming from Adam Butler at Piper Sandler.

Adam Butler (Assistant Vice President and Research Analyst)

Hey, everyone. This is Adam, on for Matthew Clark.

Tim Myers (President and CEO)

Good morning, Adam.

Adam Butler (Assistant Vice President and Research Analyst)

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. 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. If we got 25 basis points cut, how you'd expect to see loan yields move as well in a quarter. Do you guys have a spot rate on loans in March?

David Bonaccorso (CFO)

Give me a moment on that and come back to you. Let me answer the question, then I can give you that level. The statistic we've tended to share is the year-over-year monthly change in loan yields. That delta is not much different this quarter compared to last quarter. Which is to say, in March 2026, we expect the monthly loan yield to be 25 or 30 basis points higher than where it was in March 2025. That is just natural repricing in the loan book for the reasons you cited. There is obviously some noise that can impact that on a quarterly basis. That assumption, of course, includes a flat balance sheet, reinvesting everything back into the same product. Things like that. Of course, you got to get the prepayment speeds correct. Positive and negative impacts of non-accruals can affect that as well.

It comes with a fair number of caveats. That gives you a flavor for how things could progress over the next year. Only about 7% of our loans are floating and freely floating. The short answer is there's not a huge impact to NIM from that perspective. I mean, it's noticeable. I think this quarter was worth a couple of basis points. That gives you a sense of the potential impact there. In this quarter, we had a 30 basis point average decline in the Fed funds rate. That's a little more than your 25 question. That's a good number to work off of.

Adam Butler (Assistant Vice President and Research Analyst)

Okay. That's helpful. Most of my other questions have been asked and answered. 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. I'm just curious on your go-forward outlook. Are there any loans or any credits that you're watching more closely? Do you think charge-offs should trend much lower? I'm just curious how you're thinking about future charge-offs going forward.

Tim Myers (President and CEO)

If you put it in different buckets, if you look at some of the CRE loans that we've talked about that are in on non-accrual, we didn't have any change this quarter. No worsening, but flat in terms of our expectations. No change there. As I mentioned earlier, the two we downgraded are unrelated and both expect to be profitable this year. If you look at our credit portfolio overall, loans we consider graded, so watch or worse, that total bucket is the lowest it's been since the third quarter of 2023. We're always going to have things move in and out when two loans outside move into substandard. It's reportable. You're going to see those numbers. We really aren't seeing any deterioration in the overall portfolio. Actually, behind all this noise, continue to have quite a few upgrades. I think I would leave it there.

Adam Butler (Assistant Vice President and Research Analyst)

Very helpful. Those were all my questions. Thanks for the time.

David Bonaccorso (CFO)

I'll just say the March monthly loan yield, very close to the quarterly average. The number I have may not have all the tax adjustments. I'm reluctant to give you a specific number. It's pretty much right on top of where we were for the loans or where we were for the quarter. Excuse me.

Adam Butler (Assistant Vice President and Research Analyst)

Okay. Thank you.

David Bonaccorso (CFO)

That's a monthly rate that wouldn't include the impact of fundings that happened late in March. It is not a spot rate.

Operator (participant)

Our next question comes from Timothy Coffey at Janney Montgomery Scott. Please go ahead.

Timothy Coffey (Managing Director and Associate Director of Depository Research)

Good morning, gentlemen. Thanks for the opportunity to ask a question.

Tim Myers (President and CEO)

Hello, Mr. Coffey. How are you doing?

Timothy Coffey (Managing Director and Associate Director of Depository Research)

I'm good. I apologize for the last bit on the Q&A. Somebody hit the fire alarm in my office, so I decided not to unmute while it was going on.

Tim Myers (President and CEO)

Sorry.

Timothy Coffey (Managing Director and Associate Director of Depository Research)

Tim, I heard you earlier talking about the lack of exposure to ag. And that's mostly true, right? But you do have exposure to the wine industry, maybe wine-adjacent businesses. Can you tell us kind of what you're hearing from those clients and any concerns you might have about that industry?

Tim Myers (President and CEO)

Yeah, sure. I'll defer on the wine specifically to Misako. Tim, she's also an expert as a credit administrator in that area, so.

Misako Stewart (Chief Credit Officer)

Yeah, we do have wine clients in the portfolio. But it's really, I want to say, about 3% or less of our total in terms of exposure. And while we do have loans to some of their vineyards and tasting room manufacturing facilities, we really underwrite to the cash flow of the winery business. And so we're not underwriting to harvest. And we don't have crop lines. And we don't lend to growers directly. Having said that, as I'm sure you've seen and read, that industry is facing some challenges. And so we are staying really close to our borrowers. The majority of it is secured with low loan-to-values. And yeah, and we don't have, in terms of any exposure to exporters, I think the majority of our wineries, if any, have very little kind of export markets that they sell to.

We continue to stay very close to those clients, stay on top of what's going on. And for the most part, we are not seeing major issues in that portfolio.

Timothy Coffey (Managing Director and Associate Director of Depository Research)

Okay. Great. Thank you. That's fantastic color. I appreciate that. Tim, in terms of business development, it seems like maybe a couple of quarters ago, we started to see some meaningful outflows of clients away from the acquired banks in 2023 to some of the more local banks like yourselves. I mean, given the commentary you made about a third of the new deposits coming from new clients, is that trend continuing where we're starting to see clients move out of the bigger institutions into the small service-oriented institutions?

Tim Myers (President and CEO)

Yeah. I do think that's an overall trend. I do think it's somewhat episodic. I think there were some people, and this is just my color. And so answering your question to the best of my ability, I think there was some outflow early on where you had people just say, "I don't want to be part of a much larger organization coming out of some of the ones that failed." You had a group that said, "Let's just see what this is going to be like." Maybe in that is the inertia group of nothing changes. After they have that experience at a money-centered institution, maybe that's not the care and the level of attention that I grew accustomed to. If they're dealing with the same people, good bankers can help smooth that over for their clients.

You had people start to leave. You kind of have this. I think that's where we're at is the people we've continued to bring over. Although it's been more one-offs than maybe some of our peers that took 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. There is no question that's playing into the demand. It's really hard to predict kind of the cyclicality, if you will, of that. Does that answer your question?

Timothy Coffey (Managing Director and Associate Director of Depository Research)

Yeah, it does. It absolutely does. I appreciate that. A final question for Dave. As we started looking at the investment portfolio and as percentage of average assets, clearly it has come down year over year, right? Is it getting to, I think it is about a third now of average assets. Is that the right level, you think, for the current environment? Do you think you could even get smaller and perhaps build up some more cash?

David 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. That is the name of the game. If you're 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. I do not see any need to stockpile cash. I think we're 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 (Managing Director and Associate Director of Depository Research)

It does. It does. It sounds like you've got the right amount of liquidity for what you see in front of you.

David 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%. You are sitting in cash today. You are picking up 90 basis points there. We have, I think, a little over $200 million coming next year. The securities portfolio can definitely fund the loan growth we are expecting. Any excesses will be dropped back into securities.

Timothy Coffey (Managing Director and Associate Director of Depository Research)

Okay. Great. I appreciate it. Those are my questions. Thank you.

Tim Myers (President and CEO)

Thanks, Tim.

Operator (participant)

We have no further questions at this time. I will now hand it back to Tim Myers for closing remarks.

Tim Myers (President and CEO)

Thank you again, everybody, for the questions, for listening in. As always, if you need further information, Dave and I are both available to you. Look forward to talking to you next quarter.