I guess the microphone is on. Thank you. Bill Donovan was just reminding me. Bill's Vice President of the bank, and he's been with the bank for, I believe, a couple of years longer than myself. Bill and I used to do a bit of a dog and pony show at the annual meeting, and we'd have poster boards that we'd move back and forth. It's gotten a little bit more high tech over the years, but I think the quality has been sustained. I want to welcome you all. Good afternoon. My name is Bob Gaughen. For those that don't know me, I'm the Chairman and Chief Executive Officer of the bank. Welcome all of you to the 189th annual meeting of Hingham Institution for Savings.
This is our 33rd annual meeting as a publicly traded company. It's a real pleasure to be conducting this meeting in person, after the couple of years in which we had to do the whole thing, in, on Google Meet or Zoom. It's great to be here in person with all of you. I have some introductions that I need to do. First, we have with us today all of the members of our board of directors who are seated here with us. Additionally, I want to introduce Arthur Regan of Regan Associates. They have been designated by the board of directors as the Inspector of Elections and have occupied that role for the last 29 years, actually. Additionally, we have with us Martin Caine and Michael Patterson from Wolf & Company.
Michael, you want to stand up, too. Marty is not the only one who gets to. Yeah. Our independent certified public accountants. Samantha Kirby, who has joined us from our counsel, Goodwin Procter. Good to see all of you here. We're going to conduct the meeting this afternoon in two parts. First is a formal portion of the meeting, and that deals with the fourt proposals that are in the proxy notice, and we'll deal with those in order. After we've concluded the formal portion of the meeting, we will ask our President, Patrick Gaughen, to review with us on the activities of the bank this past year.
Then after Patrick has conducted that review, we will have a question- and- answer period, which will entail both questions that were submitted to us in the line and also any questions from the live audience. So, before we begin the formal portion of the meet, some housekeeping items that I should address. The first is this meeting is being recorded, and all general Google Meet attendees will be participating in listen-only mode. They've been invited to ask questions prior to the meeting, and we'll address those questions when we get that portion of the meeting. Third, as noted in our proxy materials, all voting will be either in person or by proxy. Electronic voting is not available. Fourth, I would ask that everyone silence their cell phones during the meeting.
Appreciate that. I also wanted to draw your attention to the safe harbor statement that we will now put on the screen. It's what I call the "reverse Miranda warning." You've all got an opportunity to take a look at that. With that, we're here today to consider the following business items that are described in the proxy. First, the election of directors. Second, the election of [inaudible]. Third, advisory vote on executive compensation. Fourth, an advisory vote on the appointment of the independent registered public accounting firm. At the beginning of the meeting, I will note that I've received an affidavit certifying that the notice of the annual meeting and proxy statement was sent to all shareholders as of record March first, 2023, and that was mailed on March 10th.
Is there any shareholder currently present who wishes to vote in person? I have to ask that, although I don't know that anyone has ever responded to that question. Nobody wants to vote now? Okay. Very good. With that, I will call upon Regan Associates to furnish us with a count of the shares present, personally or through proxy. Mr. Regan.
Sure. On this chilly February 30th anniversary of MEI Day, there are at least 1,875,866 shares, or 87.36% of the outstanding shares present, either personally or by proxy.
That being the case, I will declare a quorum present. The first matter to be voted on by stockholders is the election of directors. The nominees for election are five individuals, nominated by the Board, to class two directors for three-year terms, each to hold office until the 2026 Annual Meeting and until their successors are duly elected and qualified. Those individuals are Brian Kenner, Stacey Page, Geoffrey Wilkinson, myself, and Patrick Gaughen. Do I hear a motion that those nominees be elected as directors? It's moved and seconded. Is there any discussion on this motion? Hearing none, we'll now proceed to a vote. I'll ask Mr. Regan to announce that.
Mr. Chairman, each nominee received at least 1,154,526 shares voting for their election for well in excess of a plurality of the shares voted among directors.
The holders of a plurality of the shares present or represented and entitled to vote at the meeting having voted for the nominees, I hereby declare that the nominees have been so elected. Next matter to be voted on by the stockholders is the election of the Clerk of the Corporation. The board has nominated Jacqueline M. Youngworth as the Clerk to serve until the 2024 annual meeting and until her successor is duly elected and qualified. Do I hear a motion to that effect?
Approved.
Having been moved and seconded. Mr. Regan, I call upon you to announce the vote.
Mr. Chairman, our candidate, Youngworth, received at least 1,848,447 shares voting for her election, which represents a stunning 99.3% of the shares voting on this item.
Excellent. The holders of a plurality of the shares present or represented and entitled to vote, having voted for the election of Jacqueline Youngworth as the clerk, I declare her so elected. Next item, is the so-called say on pay resolution. The proposal calls for an advisory vote on the approval of executive compensation. Do I hear a motion to that effect? Moved and seconded. Any discussion on that motion? Hearing none. Mr. Regan, I'll ask you to communicate the vote on that motion.
Mr. Chairman, say on pay proposal received at least 1,485,958 shares voting for, which equals over 95.8% of the shares voting on the matter.
Thank you. The holders of a plurality of the shares are present, represented, and entitled to vote. Having voted in favor, I'll declare that proposal as having been passed. The next and final item to be voted on by the stockholders is to ratify, on an advisory basis, the appointment of Wolf & Company as the bank's independent registered public accounting firm for the fiscal year ending December 31, 2024.
Moved.
It's been moved and seconded. Any discussion on the motion? Hearing none. Mr. Regan.
Mr. Chairman, the accountants received at least 1,832,645 shares voting for their appointment for an incentive, 97.7% of the shares voting on this item proposal.
The more than a plurality having voted in favor of that motion, I will declare the motion is carried. That concludes the formal items that need to be addressed by the shareholders. Prior to moving on to the presentation this afternoon. I'd like to take a moment to acknowledge the anniversary that Mr. Regan noted a bit earlier. This is the 30th anniversary of a very significant event in the history of our bank. That is the 30th anniversary of our successful proxy contest back in 1993, by which we removed prior management. As dissident shareholders at the time, gained a majority on the board of directors and reoriented the institution to one that was focused on long-term performance and value creation for the benefit of all of our stockholders.
Don't know who that young soul is down in the corner scowling, but he doesn't look happy at all. That's for sure. Some of you will recall that some of you will, many won't. In the four years preceding that proxy contest, the bank had done a public offering four years earlier and raised some new capital. Then proceeded in the ensuing four years to lose all of that capital. At the time of this proxy contest, 10% of the bank's total assets were non-performing. Just as a matter of, you know, comparison, at that point, were we to have that percentage today, that would mean about $400 million in non-performing loans. Which, as opposed to, at the end of the first quarter, we had 1/100th of 1%.
I think one home equity loan that was non-performing. so it was a difficult situation. I will say in the immediately ensuing years, it required real focus and discipline to address those challenges and to set the bank on a path of enduring growth and success. it was a challenging time and a challenging position. You know, I remember purchasing shares in the initial public offering at around $10 a share and then some short period of time before the proxy contest, buying shares for $1.8 per share, $1.8 per share. Those shares have had numerous fluctuations over the years, and the road forward and upward has not always been a straight and smooth road. Nonetheless, our focus on long-term value creation has never wavered.
The values and determination of those individuals that engendered that contest, my dad, Tom Youngworth, Jim Consentino, those values continue to motivate us, motivate us today, that same sort of determination. I will say there are significant challenges that face the industry today and our bank. Among them, the most significant inversion of the yield curve in over 40 years. This anniversary serves as a reminder to me and hopefully to all of us that we've faced significant challenges in the past, and we have great confidence in our ability and the ability of a very talented management team today to successfully meet the current challenges and those challenges of the future. I didn't wanna let this anniversary go by without commenting on that, and we can now get rid of that picture. That's all I'm saying.
That annual meeting, you saw the picture of the annual. That annual meeting, I think we've got about 80 people here today. That annual meeting had 300 attendees, many of whom did not like each other very much. Let me put it that way. It was a very different annual meeting and one that we remember quite clearly. With that, I'm gonna turn the podium over to our President, Patrick, and we'll take questions and answers later. Yes.
I guess that's a couple of pieces. First, the financial results, right? Shorter, because this is the part where I talk and you don't get a chance to ask any questions. The second part, the operating highlights. These are some things that aren't directly in the financial results that I think are worthy of note that have occurred over the last year. Finally some question and answer. For that section, we had about 75 questions that we received in advance in writing. A lot of those are quite similar to one another, so we're gonna do some consolidation there. We're gonna take questions from shareholders and anyone who's here in the room. My hope is that we'll go every other until we hit 4:00 P.M.
We've got a board meeting at 4:30, we'll hang out for a little bit after 4:00, that's when we'll try to call time. This quote, "Banking is a very good business unless you do dumb things," Warren Buffett. Bob Wilmers, who's the longtime CEO of M&T Bank, had a variant on this, which is that you could do a lot of dumb things in banking as long as you don't make bad loans. We'll see which one of those quotes is relevant to the situation we find ourselves in today. What we do, commercial real estate lending, residential real estate lending, commercial and personal deposit banking. We go through these same slides every year because I think it's really important for folks to understand that the bank has a particular focus.
We've been in these businesses for 30 years with some tweaks and some adjustments along the way that we'll get into. That focus is a, I think, a critical element of our success. What we don't do, this print is a little bit smaller because there's a lot more on here. I think we've slightly amended this since last year. The big highlights, no C&I lending. We lend on commercial real estate. We don't make small business loans. We don't do asset-based lending, leasing, C&I loans and lines. We don't do any SBA lending. I can take the asterisk off. The PPP loans are gone. We don't do any leveraged lending. We don't have a fund banking business. We don't do any consumer lending of any kind, credit card, both auto, RV, personal line.
If anyone has any ideas of things that fall into these categories that we don't have on the slides, please let me know and we'll update them for next year. Investments, we have some investments as principal, but we don't do anything from an advisory perspective. No trust, no wealth management, no advisory, no insurance brokerage, which I think I've noted in the past. There's at least one Massachusetts bank that has a substantial insurance brokerage operation that they've found some success on. It's something that's common here. No secondary market residential mortgage. On the residential side, we keep what we originate. No tax credit lending. No solar, no cannabis banking. Cryptocurrency, I think this is the addition this year. We don't hold any of it on the balance sheet. We don't have deposits from crypto firms.
We don't lend into that ecosystem. Finally, participations. We originate for our own account. We don't buy into other banks' loans. With one unique exception, we don't sell pieces of our own loans. We think it's important that we control that relationship that we have with our customers. There we go. Capital allocation, not in order of priority, but the things we find attractive organic growth. That 30-year period is 100% organic growth. We've never bought anything else. We've never really considered buying anything else. That's using capital to reinvest in the core businesses, the lending business, the deposit business first in existing geographies. For most of our history, that was here in Massachusetts and then more recently in Washington, D.C., and then in the San Francisco Bay Area.
Minority equity investments, some public, some private, focused on financial services. It's important to understand this is not an alternative to the others. Some of this is capital that we have on the balance sheet that we need to support the loan book. Dividends, maintaining appropriate leverage through regular and special dividends. Typically, this has been our preferred method for returning capital to the owners. Finally, repurchases, which we've talked about for a number of years, but we've never done. Non-attractive. Again, something that we like to emphasize every year, control equity investments in other banks. I use that phrase in comparison to minority equity investments or passive equity investments.
When we're buying a piece of another bank in a public market, whether that's particularly liquid or perhaps less liquid, we're doing the same thing economically as banks that are making control investments in other banks that are acquiring. Fundamentally, it is the same thing. The one thing that we lack is control. The one thing that we don't pay for is control. Acquisitions typically come with very high prices. A loss of focus, we think, and the cost synergies are generally elusive. If anyone could find them, if anyone could find them, we don't see them in most cases. It's something we're very skeptical of.
Generally, our belief is that with the exception of a handful of serial acquirers in the industry who create tremendous value over time, that most of these are done for the benefit of management and not for the benefit of the owners. Last year's financial results, getting into it. First earnings. As a reminder to everyone, these are GAAP earnings, so these include both the headwinds and tailwinds from our equity investment portfolio. About $38 million last year, quite a bit lower than 2021. That's a reflection of two things. First, the performance in the investment portfolio, and second, the onset of some compression in the net interest margin. In terms of a return on equity, again, this is on a GAAP basis. We just eked out a return slightly above 10%, which I would describe as modest.
Certainly modest in relation to 2021, 2020, 2019, 2018. In looking over the last 10 years, one of the things that we talked about last year is that there'll be periods where we will probably over-earn and periods where we'll under-earn. One of the things I noted last year was that nearly a 21% return on equity, we were probably doing something in 2021 and 2020 where we were putting capital away for years where that return on equity would be a little bit lower. We're seeing that now. We saw that in 2022, and I think we're seeing that this year. Having said that, you know, in comparison to Massachusetts savings banks, the returns were perhaps adequate. I don't really know how that differs from modest.
Shareholder equity book value per share, almost $180 to close in 2022, a five-year CAGR between 15% and 16%, down a bit, obviously, I think from last year where we were well north of 16% on a five- year basis. Given that, we have not really engaged in repurchases over time, and given that the payout ratio is relatively small relative to the capital we generate in the business, and given the fact that we, you know, have not been engaged in mergers and acquisitions that would materially change the share count and introduce a much more complicated question of the difference between book value per share and tangible book value per share, we think this is I think an important indicator of whether we're creating value for the ownership over time.
It continues in the mid- 15% to I think be quite satisfactory. Low-cost leadership. A couple of things to note from last year, an efficiency ratio just under 25%. In terms of the industry, fairly good compared favorably to what we see. Operating expenses as a percentage of total assets is 70 basis points. Also a favorable comparison, I think a little bit better than the prior year. As the balance sheet continued to grow, we continue to get some leverage on our operational expenses. As a point of comparison, that's probably 1/3 of what we would see in similarly sized, in similarly situated banks in the United States, and possibly even a little bit less than 1/3 .
One of the things that we've touched on in the past that is really important is where does that come from? The product of two things. First, structural choices, and the second, operational choices. Those are, I explained maybe more usefully is first game selection and then, game play. Game selection is the businesses that we choose to operate in and the businesses that we choose not to operate in. These are the first two slides, or the first, the first two slides in the presentation. Here's what we do, here's what we don't do. Those structural choices about the business have really important implications for what the margin structure of the business looks like and what the costs look like. There are other games that have, probably much larger, but I would say gross margins.
The net interest margin is considerably higher, but the expense of running our business is also similarly high. The choices that we make with respect to structure are very important, and they're not choices. I think this is important. They're being remade all the time. The investments that we have in people, the relationships that we have with our customers in terms of game selection are long-term investments. These are not businesses that you stand up overnight. For some of the businesses that we don't do, we could not stand those businesses up overnight. It is not the case that we get to move from game to game every year. The second, operational choices. This is, you know, once you've decided to play basketball, how are you going to structure the defense? How are you going to structure the offense?
How are you going to play the game? You know, what does the composition of the team look like? What are the choices that you're making? This really gets to the operational efficiency that we talked about and the thrift that we talked about. This is similarly important. It does make a difference. It is less impactful than the structural choices. The structural choices do most of the work in terms of the efficiency ratio, the operating expenses, and margin. Finally, these are good results, but it's easy to be pleased with them and not keep up the work. It's really important, particularly in light of the fact that we've had this long run, steady growth, that we remain focused on taking unnecessary costs out of the business, because they're always there.
The onion is never fully peeled. Lending business. First, the entire portfolio. You know, we wrapped up the year a little bit over $3.6 billion over a five-year period, about a 15% CAGR in the loan book. In the commercial portfolio to some of the questions that came in noted, and we'll touch on in a little bit, a little bit more growth. Over a five-year period, about 23% CAGR in that book. That reflects a deliberate choice to tilt the portfolio towards multifamily and commercial real estate and away from residential and occupied. Avoiding loan losses. If operational efficiency is sort of one of the pillars of the model here at Hingham, I think the other is our approach to credit. What we're looking at here is net charge-offs.
Every, every year going back to, I need my glasses, 1997. The blue line is all FDIC-insured banks, and the red line is Hingham. Those are the net charge-offs at any given year. I would say that we've had a pretty good experience recovering those charge-offs in subsequent years. Certainly we haven't gotten all of it back, but we've been diligent in pursuing those losses over time. That's really critical to the model of banking. The business is highly levered. Whether you're 9 x, 10 x, 11x, 12x, 13x times levered, there's a lot of leverage in the banking business. Avoiding bad loans is really critical to compounding capital over time. We've had a great history of doing that. That's been true, you know, through this last year.
As my dad noted, we wrapped up the first quarter with 1 basis point of non-performing assets and no commercial non-performing assets of any kind. Deposits. The total deposit portfolio that growth last year, a little bit more muted. The five-year CAGR just under 11%. If you compare that to the loan portfolio at about 15%, you see there's a gap, and that gap is getting filled with wholesale funding right now. The approach. A couple of things that are important to us. First, personalized service. Second, digital excellence. And then third, no-fee, low-fee. The last one I'll really emphasize is the fact that we think a lot of the fees in the banking business, particularly in the commercial business, really don't bear any relation to costs that banks have in providing those services.
Ultimately, those are margins that are going to be under attack, and commercial customers are going to expect service at lower and lower prices. Two engines here that are worth noting. The Specialized Deposit Group, which we've talked about in the past, are larger and more complex personal, corporate, nonprofit, institutional customers. We also include our digital first balances in that group, which are accounts that folks have opened up online with us and within we haven't had a direct personal contact. The Retail Banking Group, which is, as of now, six offices here in Massachusetts, Boston, South Shore, Nantucket. We'll touch on it here, hopefully in Washington in the relatively near future. To t he Specialized Deposit Group first.
This is really the commercial deposit focus that we have. This has been, I think, a steady evolution over time. At first ladies, so a team of relationship managers that's here at our main office as well as in Washington, our largest and most complex customers. About $670 million, $660 million, I'm sorry, end of March. Pretty good growth over the last year in non-interest bearing balances, in comparison to, you know, the entirety of the deposit book, but definitely some pressure in money markets. About flat over that year. A couple things over the last year that are noteworthy. First, we had Ed Skou join the group in May, so just after this meeting last year. Who came to us from People's United, and before that, Belmont.
Sort of had known Ed for a while and had a lot of confidence in the work that he had done and built something very similar in the past, so we're excited to have him on board. Ed, were you at this meeting last year? It's just a Christmas party.
[inaudible].
Christmas party. Okay. You know, and over that year, I think there are a number of things in that group that I think have been going really well. One of the things that we're most excited about is really starting to build out a larger and stronger team of relationship managers that have commercial experience and that are more comfortable with business development, including most recently, some folks from Eastern Bank and from Boston Private. I think we have a lot of confidence in what they can do in terms of growth going forward. The retail footprint. The six branches that I talked about. Washington, we have an application with the Division of Banks here in Massachusetts right now to add branch powers to our office in Georgetown.
Right now that is supporting our Commercial Lending and our Commercial Deposit efforts. There are some things that we can't do that we'd like to do for some of our customers on the personal side, if we had those powers, and we'll expect that we'll have those soon. We've also in Washington done work over the last six months, and I didn't think Sarah made it up from Nantucket. She runs our office there, is also responsible for our Residential Lending Group to start doing some residential lending in Washington to our customers.
It's really most impactful, not because of the loan balances, but because our ability to, I think do relationship banking with our customers on the deposit side is in some measure dependent on our ability to provide them with service in terms of residential lending. It's another thing that I think will allow us to deepen some of the relationships that we have with that Washington customer base, which has grown pretty substantially. The customer support team, I think we touched on a little bit last year. As the bank has grown and the geographic footprint has expanded, getting better at how to serve customers remotely is has been important. Back. Okay. Two slides, and I think I raced through both of them. First, looking backwards.
We'll look back first on some key learnings and then looking forwards. Looking backwards, first thing I want to talk about hindsight bias, the problem with connecting decisions with outcomes. I think this relates most directly to the positioning of the balance sheet over the last year, one and a half, two years. I think I would say that in retrospect, there are some things that we probably would have done differently in terms of asset liability management, at least that we're thinking about. Over long periods of time, you know, we run a liability sensitive balance sheet and derivative of the strategy in terms of lending out apartment buildings. Over a long period of time, we think there are very good reasons why that kind of balance sheet is likely to produce superior outcomes.
And so I don't think that we see the results that we've seen over the last year is necessarily invalidating that preference in terms of the balance sheet structure. There are some things from an asset liability management perspective that we've been talking about internally, particularly around not really managing the liability side of the balance sheet, but the asset side of the balance sheet, where we've traditionally viewed our focus on apartment building lending as taking on some measure interest rate risk. That market really is not a floating rate market. It's a five, seven, 10-year fixed rate market. And the floating rate debt in the multifamily space is for credit reasons, debt that's very, very unattractive. I think there are some people that are finding that out now.
There are some things, we've talked about in terms of either sort of swaps at the portfolio level or at the loan level, which are, you know, pay fixed, receive variable swaps. That could mute some of the danger from a true tail risk scenario, which is what we're encountering now. No changes, but something we're thinking about. Changes to the borrowing program. Historically, it has been very inefficient to manage the liability structure of the borrower on the balance sheet by borrowing a lot of duration from our own loan bank. There are moments in time where that has not been true. There have been times when I think we could have been more opportunistic, and that's something that we've talked about as well. Finally, the importance of key people.
This is a learning that gets relearned every year, which is that we've grown. You know, 30 years ago, the balance sheet was about $130 million or $140 million in size. At the time of the proxy fight, we're a little over $4 billion now. The importance of the people on the team to accomplish the outcomes that we want cannot be understated. I think that's been true over the last year and over the last two years. When we see opportunities, I think, to level that team up and to attract some folks that are really talented, whether they're customer-facing on the loan side or on the deposit side, or if there are areas operationally where we really need to upgrade. We have never made one of those decisions and regretted it.
If anything, when we've waited, we've waited too long to make some of those changes. Did I just raise my hand? Yes. There we go. Looking forward. Key challenges. You know the elephant in the room, funding challenges. Clearly, the funding conditions right now are the key challenge in terms of the bank's balance sheet. Without a doubt. The 3/10 inversion at 170 basis points give or take, you know, unprecedented in 40 years. Very, very difficult for us to work through. Really no way around that. There are no magic solutions to that other than looking for deposits that are cheaper, making loans that are of high quality, that are higher yielding, and waiting because it is an unnatural condition and it will resolve. Credit quality, and this is folded as well.
There's a lot of conversation right now, about asset liability management, about interest rate risk management. That conversation is well placed. Ultimately, what kills banks is bad loans. What has in particular killed banks is bad loans that were underwritten at times when they were seeking higher yields to compensate for more expensive liabilities. Maintaining the discipline that we've had around credit quality, I think is absolutely key. Commercial lending: a couple of points here. First, market disruption. Second, San Francisco . I think I'll wait until we touch some of the prepared questions on this one. The last several months have been exciting in the banking industry.
Certainly in the industry overall, and in particular here in Boston, and in San Francisco, although our presence there and I think our knowledge of that market is more limited than it is here. Silicon Valley Bank, as I think everyone here knows, had bought Boston Private Bank a number of years ago, and that was an $8 billion-$10 billion balance sheet here in Boston. Unlike a lot of the composition of the Silicon Valley Bank balance sheet, whether it was venture debt or venture-associated deposits, you know, Boston Private was a much more classic Boston commercial bank. They had commercial real estate. They had C&I. They had a wealth management operation. The deposit portfolio was much more granular.
At roughly $10 billion, that was the largest bank failure in Boston in 30 years since the Bank of New England, which I think I've talked to some folks here about. Really an incredible disruption in the marketplace, from the perspective of customers that have commercial lending needs, have commercial deposit needs. I think a tremendous opportunity for really all the banks in Boston right now. There's another bank, which has received a lot of, I think, attention in the press, which had a significant presence here in Boston. That disruption in the marketplace, that turmoil, is an opportunity that doesn't come along very often for us. As I think folks know, the— there is considerable difficulty in getting high-quality commercial deposit relationships to move. You know, these are long sales cycles.
They're long development cycles. They're often fairly complex in terms of how they're structured. It is often the case that they're leaving their bank as opposed to being wooed away by someone who's calling on them. The disruption that we see right now in the marketplace is it's a challenge, but for us, I think we perceive it primarily as an opportunity. In San Francisco, that's doubly true given the geographic concentration of some of the issues that we see in the industry. It also means that there are some opportunities from a team perspective that has been more difficult to capitalize on in the past or really have not been present.
Some folks that themselves have very high quality relationships with customers on both sides of the balance sheet, they're open to talking now, in a way that they would not have been a year ago or two years ago. Because frankly, some of the banks in question were banks that people enjoyed working at, and the customers had great relationships with and were known for excellent service. Those were very difficult recruiting conversations to have, and we're having those in a way right now that we have not had in some time. Scaling SDG. You know, really the team and the process. This touches on a little bit of what I was saying about market disruption. You know, these are also not individuals that we're going out and hiring fresh out of college. They're experienced commercial bankers.
They don't move very often. The opportunity to find them, to recruit them, to build them into our process, the benefits and the relationships that they have with customers, and then to offer their customers some of the unique things that we can do is a tremendous opportunity. It's easy to talk about it. The challenge is implementing it. The challenge is actually finding them, actually moving them, actually getting them integrated into the process and doing that work with customers. Right now, the team is primarily here in Boston. We've got two folks that are down in Washington for SDG.
We know that there are opportunities in San Francisco and in Washington, which I don't really refer to as a new market anymore, that we're probably not effectively targeting or capturing because of how the team is configured and where folks are. Looking in those markets, particularly in Washington right now, to supplement what we have there is something that's important for us. Then finally, process improvement, eliminating waste. I touched on this before. Easy to talk about, hard to do. There's no end to the peeling of the onion of costs. Every year, as we've grown, as we've added new processes, we bring new people in. There's new work that we have to do to take the waste out. No shortage of challenges here, without a doubt.
With that, I'd like to transition to questions. I think we're gonna start from the audience, and then we'll go every other with—t hank you. With the written questions. Cristian.
From a perspective, how much of that can you give a sense that what the range of opportunities in the portfolio today, commercial loans?
Yeah. I think there are a couple of questions there. I probably should have been taking some notes on them. Values are clearly down. I think across the board in every one of the product classes that we look at, whether it's multifamily, office, retail, industrial, special purpose. I think there isn't really a single answer to your question. Because I think it varies by product class. I think it varies by geography. You know, on one hand, and thankfully, we have virtually none of this. San Francisco office over the last 12 months has not performed well to the extent that there are even transactions occurring in the office to allow you to mark those assets. I mean, that's clearly a very distressed class of assets.
In looking at multifamily properties, particularly here in Boston and Washington, where I think we have better insight because we have deeper books, we're doing more transactions, we have deeper customer bases. We're having more conversations with borrowers about what they're thinking about doing, whether they're thinking about selling or buying. We have some insight into what pricing might look like, even if there aren't transactions that are occurring. You know, that decline seems to be somewhat more muted. I'd be hesitant to put an exact percentage figure on it. It's not impactful from an LTV perspective for us on those classes of assets. The overall look, the overall commercial look, the weighted average LTV, and this is gonna touch on a question that Chris Crawford had.
I don't think Chris made it today. I just got it in writing. is just shy of 54%. That's the entire commercial book. The multifamily weighted average LTV is slightly higher than that, office industrial are lower. Office is just below 50%. Roger.
As rate go up, why is the loan? [inaudible]
Yeah. I think one of the things in looking at last year, I'm gonna give someone else credit for part of your question, if that's all right with you, Roger. Is we had someone who asked. I liked it because it really is direct. As you can see, we did have. Well, I'm not seeing it here, but I'll paraphrase it, and then I'll answer yours. The question was something along, how do you think about the loans that you did in the first half of 2022? I think there's really two answers to that question, and it's gonna impact the answer to your question. From a credit perspective, we feel really good about them. You know, the assets that we were underwriting, I think remain high quality today.
The leverage on those loans was low, even if we were to remark the underlying value of those assets pretty aggressively. From a credit perspective, I feel very good. From a capital allocation perspective, you know, would I like to have that capital available to lend more today? Yeah, I would. You know, do I think that at the time we were insisting on being paid appropriately on those loans? You know, in retrospect, the answer is probably no. Prospectively, it's difficult to say. I think when we saw the environment shifting, we clearly did shift how we were pricing. You see in 2022, there's a fair amount of growth that's concentrated in the first two quarters of the year. In the third quarter and the fourth quarter, that growth slows down pretty dramatically.
Some of that was a choice that we made in terms of how we were pricing and structuring. A fair amount of that was the market, to the extent that things were much, much more quiet. There were fewer opportunities for us to lend. What that means is that from a, from a loan yield perspective, as, I think some folks know, but probably worth touching on, you know, the commercial book is primarily adjustable, and it adjusts in the following way. When we write commercial real estate loans, they're typically for an initial five-year, seven-year, 10-year fixed period. Then after that, there are a series of what we call legs. It'll be fixed for five, and then it'll be fixed for another five-year leg at some adjustment to an underlying market index.
For another five years, another five years, so on and so forth. It's more unusual to see loans that adjust every year, and it is even more unusual to see loans that are truly floating, so floating above prime daily or monthly. What that means is that in looking at 2022, you know, a lot of the lending that we did earlier in the year was not impactful in a positive way to that loan yield. It came early, it didn't come late. It came at rates that were lower, not higher than in retrospect, I think what we would have wanted.
I think that the driver in terms of whether we can continue to lend at higher rates and those higher rate loans will improve the yield in the portfolio is really a question of what does the underlying activity look like for our customers? Are they refinancing? Are they purchasing? Are they doing that business? For some period of time, particularly late last year, it was a very, very. I think that that was probably, based on the conversations that we've had with them, I think that was probably a function of the fact that there was a very, very high degree of uncertainty about what the path of short and medium-term interest rates would look like.
As that uncertainty has, I would say, come out of the market, to the extent that there is uncertainty at this point, it really revolves around disagreements about whether the forward curve is accurately pricing rate cuts. What that's doing for our underlying customers, giving them some greater sense of this is what the rate market is going to look like. I might not like it right now, but I have some confidence the volatility is lower. I'm gonna sell, I'm gonna buy, I'm gonna refinance. I'm gonna be engaged again. I think we've seen that in terms of conversations that we're having with borrowers in terms of the level of activity that we have in terms of the new loans.
Obviously, that's something that is difficult to say for certain, but I feel more confident the opportunities to buy and make high-quality loans at higher rates are there today than I would have been four or five or six months ago. Those rates vary. If we're talking about, let's say, very high quality, stabilized multifamily, or industrial or maybe even retail, depending on the location and configuration. You know, right now that range is from, say, 5.75%-6.75%. At the higher end, it might look a little bit more like a shorter-term bridge loan, in preparation for some construction or potentially a very low leverage bridge loan on an office asset that one of our multifamily borrowers is teeing up for conversion. Construction firmly starts with a 7%.
We see other market participants a little bit lower than that. Particularly the life companies are a little bit lower. That I think gives you a sense of the range of where the new loans are, I think, and what we're seeing.
Can I-
Sure.
Okay. Just a follow-up to that question. A lot of those loans were finance loans. You go back first quarter. My question is, if you're not finding people at higher rates, are you looking to move on? That's not.
It's both. Yeah, it's both. The question, and I think I should have been repeating the earlier ones, because we don't have a mic that we're passing around, and the folks who are remote might not hear this related to the fact that over the, let's say, the last two years, our use of borrowings has increased. In substantial measure, we use those to fund some of the lending we did in 2021 and 2022. Is that fair? Okay. The question related to whether we were looking for opportunities to replace those borrowings or to make newer, higher yielding loans. I think the answer to the question is yes.
On both sides of the balance sheet, to the extent that we can attract deposits, that are either no cost, which is great, non-interest bearing relationship commercial, or even at lower cost than our wholesale funding, then every one of those things is attractive to the extent that we can swap that out with online bank or with other sources of wholesale funding. On the loan side, yeah, there's a range of things that occur there. The biggest lever is new loan originations. I think one of the things that's been particularly challenging over the last year is that the market environment was not one that was conducive to growth. That was, like I said, really a function of our borrowers.
In looking back at previous periods where we had increasing short-term interest rates, sometimes that was pretty sharp, sometimes it was more gradual. In those periods, we're able to deploy capital pretty smoothly through those periods because our borrowers were still active. That was not true over the last six or nine months. The biggest thing we can do to lever that gap open in terms of NIM is new loan originations that are of high quality and they're at the rates that we're talking about. That's impactful. The second piece relates to the contractual repricing. There are loans that are flowing through that are adjusting. There are loans that are maturing, that when they mature, we have an opportunity to take a look at that and revisit what the rate looks like.
Then there's a somewhat smaller category, but dimes turn into dollars, where there are things that we're often called on to do, whether it is approving transfers of ownership or partial sales or partial releases of collateral from blankets, where in a, I would say, more normal interest rate environment, we would generally look at those things from a credit perspective. We would ask, you know, if we're releasing this collateral, we're going to want to pay down of some kind. We're really thinking about it through a credit lens. That's not true right now. When we're looking at those right now, we're also looking at what is the in-place rate on that loan, what are the in-place rates on other loans now.
You know, one of the pieces of consideration that we're looking for if a borrower wants to change something about that arrangement is a change in the rate. It's both sides. The crowbar works in both directions.
Just to follow that one.
Saying on the loan side, we're working that in terms of new loans, in terms of some attractive rates on those loans, and working the existing portfolio in terms of any opportunity to adjust those rates. On the funding side, we've had some success in terms of growth of Retail and Commercial Deposits. In the first quarter, we had about a 20% annualized growth in deposits, and that's in an environment that a lot of folks have had difficulty in growing those deposits. I think that is also assisting us in dealing with some of those funding costs.
I'm gonna try and take a couple of co-written ones here that I think are worthwhile because I think some of them touch on some bigger pieces. We had two questions that were somewhat specific to San Francisco, and I mentioned earlier that I wanted to defer that piece. The first, and rather than paraphrasing, I'll just read them to give them the credit. [Ebert Vilnez]. Your recent entry into the San Francisco market coincides with the city experiencing some of the worst CRE problems in the country. Are you considering pausing or reevaluating this market entry? Why do you believe it is prudent to enter one of the riskiest CRE markets in the country? Somewhat differently, there's another question from Adam Mead.
As I understand it, underlying our overall credit strategy in the expansion into the D.C. and San Francisco markets is the notion that cities have fundamental characteristics that attract individuals and businesses. What have you learned on this topic over the past three to five years, and how have your views changed, if at all, post-pandemic? I think with respect to that first question, are you concerned pausing or reevaluating this market entry? The very short answer is no. And I think the reason for that is that we see the three markets that we operate in, Massachusetts, where we've operated historically, which is the bulk of the balance sheet, Washington, where we're, I think, in our seventh year now. In the loan portfolio there's just over $1 billion, and there's a very substantial deposit portfolio as well.
Most recently, San Francisco. We see these, and Adam alluded to this in his question, as being really phenomenal opportunities for the long-term deployment of capital into multifamily assets because of the structural features of those markets that have attracted people over time. Some of that relates to the underlying growth drivers in those markets. Some of it relates to the way in which those markets have constrained supply over time, particularly of multifamily assets. Those constraints around supply are very important for our business. There's a real tension when we're operating in urban markets like this between supply restrictions.
In Washington, really, we're talking about development restrictions, we're talking about the height cap in the district, the lack of available land, relative paucity of potential development opportunities in Boston, those things are pretty much the same in San Francisco. All those factors are present. The regulatory environment for development in San Francisco is a very, very difficult one. It takes almost 700 days on average to receive a building permit for a multifamily property that you want 700 days. To be fair, it's 684 days. I was rounding up slightly.
That's after you have zoning—
That's after you have zoning and all of your entitlements. That's a really, really substantial limitation on the ability of developers to bring new products into the marketplace. That constellation of features, the underlying growth drivers, the underlying demand drivers, combined with some of these things that from a supply perspective, make it really difficult to add new supply over time. Those are things that in the long run for a lender on multifamily properties are very attractive. In any given year or any given two or three-year period, I think there are gonna be cities that face, you know, pretty significant challenges. I think there's no doubt that the Bay and San Francisco in particular has faced some challenges during the pandemic that are unusual.
One of those challenges probably relates to the fact, and I think this is evident in the 700- day timeline for a building permit, that the restrictions that they have there may be too tight. It's possible to make it so difficult to introduce new supply that you choke off the vibrancy of the city. You know, I think there are, without a doubt, some governance challenges there. In terms of what we're looking to do there, it was not that we thought we were gonna do something in 2021 or 2022 or this year where we were gonna enter a marketplace and immediately understand it and immediately make money in it. You know, the things that we're doing in these markets, we intend to be doing it for a very, very long time.
There are other markets in the United States that have had very significant increases in rents that I think would not be viewed conventionally as risky CRE markets to adopt the questioner's word. The real risk that I perceive in these markets over time is the risk that you have substantial overdevelopment and that you have substantial boom bust cycles. Let's say a market in the Southeast, without naming names, where there's a substantial inflow of new residents, rents skyrocket. It is very easy to build. A lot of new supply comes online, and then over time, those rents collapse. That kind of volatility is very, very dangerous for lenders. We don't see that in the markets that we operate in.
San Francisco is probably somewhat more volatile in terms of the multifamily assets, than Boston and D.C., and has some unique features, in terms of rent control that Boston and D.C. either don't have or don't have to the same degree. No, there's no pausing or reevaluating. To the extent that our exposure to the market is very, very small, I would rather be making loans, at a time when buyers and sellers are transacting at depressed levels. If our buyers think they're getting really good deals from sellers at 10%, 15%, 20%, 25%, 30% of where they may have been—i t's difficult to say a year ago, but let's say three or four years ago to get right before the pandemic.
I think those are great times for us to be doing business. Because it probably means that the existing lenders in a market like that are dealing with problems that they already have, and are more reticent to do new business. We're lending on relatively depressed values, and we're doing it at the same LTVs that we would otherwise be doing it. Our exposure to the assets is even lower. I would rather be getting into this at a time when there are a lot of negative headlines than when there are a lot of positive headlines about a given market or a given city. Derek? I'll touch on the second piece and then the first. The short answer is that there really isn't a direct opportunity cost trade-off.
The capital that we hold to support the entire balance sheet, I would always have some portion of that committed to equity securities, whether marketable or private, right? It's not as if the choice to hold those investments, if we didn't, it would immediately release capital that we could use to repurchase, or dividend, or remove from the business and give back to owners. It's not really a direct opportunity cost trade-off. It probably would be if we were really constrained in terms of our total risk-based capital, because there is some surcharge from a risk-based capital standpoint for our equity portfolio, but we're not. We have a lot of that. With respect to buybacks themselves, again, something that historically we had really never considered, right?
If we went back on these slides further back, you wouldn't see it show up. Two years ago, we started talking a little bit more about it internally, and we started including it on the list of the four things that we see here. I would say that it's something that is in the toolkit. We don't have a standing authorization from the board, and we don't have an approval in place, with our regulators for it, both of which would be required to do it. The bank, as I think folks may know, is somewhat unusual in that we don't have a holding company, which means that in thinking about repurchases, we're not doing so from a holding company.
We're doing so from the bank level, which means there's a different regulatory process involved there. Without commenting on what someone may or may not have told you, I think I would say in general, if we were to repurchase, it would be driven by valuation. It would not be driven by a desire to offset dilution. That's not something the board has in place in terms of an authorization right now. That's probably not the long pole. You know, the long pole is probably the conversations that we'd be having with our regulators about that. The details of which probably are not appropriate for this thing. That's a conversation that we have pretty regularly internally. I think that the real opportunity cost is not between repurchasing and the equity portfolio.
The real opportunity cost relates to the question of whether there's a significant volume of high-quality loans that we can lever that capital using. That's the real trade-off in terms of thinking about dividends, repurchases, and lending. I think if there were to be an extended period where we couldn't identify high-quality loans, I would start thinking differently about the various forms of the capital allocation, whether it's dividends or repurchases. I think the real priority there, is if we can make loans at some of the rates that we're describing that are high quality and that have very low credit risk, I'd prefer to use the capital there.
I think that despite the last couple of quarters, we remain of the opinion that the growth that we have experienced historically in the loan portfolio could be available in the market as it, as it loosens up, so to speak.
I would agree with that. Yeah. I think if I wasn't clear enough earlier, I think what we see in the market now is suggestive of there being significant opportunities to lend. It's hard to know what that means exactly in terms of dollars. You know, that's something that six months ago was, there was some question about. I think now there's less question that those opportunities are gonna materialize. At exactly what price in terms of rates? That's a little bit trickier. The volume of it somewhere in there, I think there's a lot greater confidence that we have that will be there.
Just behind Cristian. Rob. Yes, thanks, Rob.
Without getting into specific numbers, I think we have some of that roll in our disclosures. I could find it for you. I think that the sort of real driver that you can see is that that growth is relatively smooth. Up through 2022, we deployed a lot of capital on the books. And 2022 plus 5 is 2027. On the other hand, there's a decent piece of the book before that does roll along every year. Typically, those are at some margin, the five-year Home Loan Bank Classic Advance rate. It's sometimes a negotiated point, but those margins might range from anywhere between 175 basis points-200 basis points over the five-year Classic Advance to sometimes if it's a smaller loan or maybe, you know, perhaps a little bit less competitive, 300 basis points.
When they hit the adjustment points, you know, it's a loan-by-loan thing, and they'll adjust based on those, based on those margins. I wouldn't want to leave anyone with the impression that that's all going to happen this year or next year. It's not. I mean, I think that, you know, we need to be clear-eyed about the fact that growth is an important component to restoring them to where we've seen it in the past. It's not just a matter of letting the book roll along and adjust. I think at this point we probably see, I don't think our view is a particularly unique one. There's a greater skew in the forward curve down than up.
There are some things that we did in the first quarter in terms of borrowings, where we pushed out a little bit of duration, and did some things in our borrowings with the Federal Home Loan Bank that tried to capture some of what we saw in the forward curve and pull forward, you know, some of what the market saw in terms of the direction of short-term interest rates. But that was modest. It was not a sort of wholesale restructuring. I think because our belief is that we're probably entering a period in which it would be a real mistake to take off some of the liability sensitivity that we've historically had. If we were going to do pay-fix, receive variable swaps or other forms of hedging, the time to do that was probably in the past.
That horse is out of the barn, that milk has been spilt, whatever the metaphor is that you prefer. At that time, it's probably not now.
[audio distortion] focused on the percentages of the portfolio that adjust going forward. One of the unknowns there will be the payoffs in the portfolio. You know, as you know, multifamily sales nationally declined by about 75% last year. No transactions. The market was bound up. To the extent that there's a feeling that that market is starting to loosen, transactions are going to happen, that will be beneficial in terms of, you know, potentially seeing some pay downs and payoffs that haven't been occurring more recently. That'll be interesting to keep an eye on.
One thing to note there as well that is not immediately intuitive is that you would imagine that the payoffs would be concentrated in loans that have rates sort of at or substantially above where current market rates are. You'd imagine people would be leaving, would be leaving debt in place. That's not what we see or have experienced in the relatively limited volume of payoffs that we've been seeing so far this year. It seems to be picking up. It is more the case that there are other economic drivers behind why they're transacting, either why they're selling or why they need to relever a portfolio to generate capital to buy something new because they think that's very attractive in terms of pricing.
It's not the case that the payoffs are just coming in in a way that is much higher than the portfolio yield. It's symmetric, or if anything, it's probably somewhat biased in favor of some lower rate stuff coming out, which is a little bit surprising at first. I think you'd imagine that it'd be concentrated. It's also the fact, I think it's a feature of the portfolio in terms of its leverage. The leverage in the portfolio is very low compared to what we see in the industry. What that means is that when our borrowers want to access any of that equity, they need to talk to us about that. They either need to sell to unlock it, or they need to come to us for a second mortgage or a blanket.
When we look at that, we're going to look at the rate on first and we're going to look to it. They can run the risk of trying to encumber the property and not telling us. That would, of course, be a mistake because our documents are prohibited. That's quite rare. There are opportunities in there to get things moving. One of the things that I wanted to take in writing, and Cristian, I think you alluded to this a little bit, there's some questions about the office market. A couple of questions. I'm not going to name names because there are a bunch of people who wanted to ask about office. As you look at your office loan book, what mitigants do you see to the challenges facing the asset class, Taylor Finch?
Abra Yilmaz, 18% of the bank's CRE loans are in the office sector, which has been disproportionately impacted by work from home trends post-COVID. How's the bank managing this office exposure? Can you provide a quantifiable assessment of the risks surrounding office CRE? Felix had a very similar question. What's the exposure to office in the CRE portfolio? The office book's about $550 million, give or take, or close to or has payoff this month. I think it'd be useful to sort of walk through what it is, where it is, what we're hearing from those borrowers and what we're seeing. Of that, about 15% of the portfolio is in two loans. They're, I think, our second and third largest loans, and they're made to two national nonprofit organizations in Washington, and they finance their respective owner-occupied headquarters.
Those are banks, I'm sorry, those are borrowers that we've got full balance sheet relationships with. They're extraordinarily low leverage, such that even if we were to look at the value of those assets today, and I'd rather not speculate on that, given these are the specific borrower relationships we have. Even if we were to mark those very, very aggressively, we would remain at a very low LTV. That's about 15% of the portfolio is just in those two relationships and are probably our two safest loans. There might be some others that would be close runs, but it's about $80 million in those two. There's about another 10% of the portfolio, which is office that really our residential multifamily customers has acquired and are in various stages of repurposing for residential. They're conversion. They go into that portfolio, but we're not looking to—
No one is returning to work in those buildings unless they're going to be working from their apartments in a few years. Those two chunks, that roughly 15% that's taken up by the two unions, and then roughly 10% that's taken up on the conversions is about 25% of the portfolio, which is a pretty big chunk. The remainder of that is slightly weighted to Boston. We've got a decent portfolio of office loans in Washington. I think one of the things that we've benefited from is that Washington historically has had a very weak office market. Even prior to the pandemic, there are some features of the office market in Washington that I think have given lenders there rightfully a fair amount of concern. The first is there's a clear oversupply of market in the central business district downtown in Washington.
A lot of it is dated, is not of high quality, and occupancy levels and inversely vacancy levels in that market were, I think, about were low and high before the pandemic. Washington also has a fairly sizable, I wouldn't say suburban and exurban office market, a lot of which developed out in Rockville, and a lot of which developed out along the Dulles Toll Road going up to the airport. Interestingly enough, a lot of those buildings are very high quality. They're relatively new, they're beautiful, you can see straight through them. There are no tenants. The primary driver is that you've got a lot of companies, particularly in the Dulles Corridor, where the tenancy would be related to government contracts, and that sort of came and went.
When it went, no one was gonna take down a 150,000 sq ft building. You could not demise and break up into smaller pieces. I think one of the things that we benefited from in Washington was the fact that the market already had some distress in it. When we were making loans, when we were thinking about who we wanted to face as borrowers, when we were thinking about assets that we liked or didn't like, you know, work from home and remote work, I think has really changed how some office markets has functioned. It certainly had an impact on Washington. Washington, everyone was skeptical about office in the first place, and that was not true elsewhere.
You know, I think certainly in San Francisco, there were a lot of folks who looked at class A office in the central business district, in the financial district, let's say four years ago, before COVID, who looked at those assets, and believed that they were incredibly low risk. You know, that they were uniquely situated, that there was incredible long-term tenancy, that there was lease protection, that no exit. I think that turned out not to be true, and I think both for investors and, you know, office there and probably lenders as well, there are gonna be some real costs to that, and that wasn't true in Washington. In Boston, we have some larger properties. It's fairly unusual, that we have single tenancy. Those two loans that I talked about are really exceptions to the rule.
It's more often the case that those are buildings that are broken up, that have, you know, floor plates that accommodate 2,000 sq ft-5,000 sq ft tenancies, 2,000 sq ft-10,000 sq ft, as opposed to big battleship or aircraft carrier-type buildings. We have a fair amount of office by number, a fair amount of loans that are really buildings like this or small office properties in a Hingham or a Wellesley or an Andover or, you know, small town center, sometimes CPAs, sometimes lawyers, sometimes doctors. That book's about 125 loans, give or take.
That gives you some sense of if we have concentration in one side of the book in terms of a lot of dollar and a relatively small number of loans, then the remaining, you know, 110 loans, give or take, are quite small and are fairly diverse. We don't have a really significant volume of what I would call investor office. You know, where it's non-owner occupied, and it's large, and it could have ended up, you know, maybe with a life company or in a CMBS market. That's not something that we've done very much of.
2 loans that you mentioned, the two largest office loans, were both very low LTVs. They're essentially owner occupied by two largest labor organizations in the country. Been around for a long time, I don't think their business model is threatened right now. They're doing okay.
They are. Which strangely enough leaves Hingham Institution for Savings is probably the largest creditor of the labor union movement in the United States. We're giving Marty Walsh, who's down in Washington for so long, although now we have, of course, lost him to the NHL. For those who are not aware, the former mayor of Boston, who was the Secretary of Labor for a number of years. Derek? Can I borrow your glasses? Yeah. I think the primary, the primary governor or the primary constraint over a longer period probably is unrelated to what you're asking about, but I'll touch on that in a sec. I think it really does relate to funding.
You know, we've had a model over a long period of time that I think we can sustain, which involves a significant component of wholesale funding. We think there are good reasons for doing that. We think that given the ability to take the portfolio of multifamily loans, pledge it to Home Loan Bank, and get relatively low-cost funding over a long period of time all in. It's important that's a piece of the balance sheet structure. In the last few years, we've pushed on that a little bit. I think what that means is the real governor in terms of scaling relates to how we fund the balance sheet, how we attract commercial deposits.
Because it is not yet clear to us that that will have the same scale dynamics as the deposit funding that we attracted over the, let's say, the last 10 years or the last 20 years. I think that's something where we're really looking to SDG to do that work. The ability of every one of the relationship managers there to first develop the business and then second, I think, serve the business in such a way that it stays with us and refers, you know, friends, family, customers, counterparties, it refers other business to us. I think that that is a governor that we're working on. You know, I think that that's an important governor in terms of what the growth path looks like.
I think in terms of the, of the assets and the loans, so for Washington and for San Francisco, I have been to see everything. Like I said, this is our seventh year in Washington, and it's not really a new market anymore for us. It was a market that we had some knowledge of. Before, we had equity investments there. I had lived there for about a decade with my wife. A number of folks on our board had lived there, had gone to school there, had children or have children, live there. We're probably at a point in Washington where, I'm not going to be going and putting my hands on every two- or three- family that we're looking at. I think that that's probably all right.
I think our knowledge of the marketplace, of our borrowers, of the neighborhoods and the submarkets and the dynamics of what's going on in the city are such that, if I go look at that after the fact, it's probably okay. I have a lot of confidence, I think at this point, in our ability to look at those and say, you know, I've got a four or five-unit building. It's in this neighborhood. It's on this street. It's at this corner. It's constructed this way. The units are sized this way. We've got a number of other properties in close proximity to it. Here's what they're getting. You know, if it's a two by two, two bedrooms, two bath, how big is the unit? Does that rent look sensible that the borrower is coming to us with?
I think we've got a lot better insight to that. In terms of San Francisco, I think that it'll be quite a while before I take my hands off that. I think it's really important if we're lending in a market that is newer, that we understand every one of the risks that we're taking directly. You know, I think there's no substitute for going to a building and putting your hands on it. You will never, ever from a borrower or from a broker get pictures of the things about the building that are unattractive. I mean, it will be a sunny day, and it will be the building in its finest light. You need to go look at it. They'll never take a picture of the abandoned gas station across the street.
That could be a 21A issue or an environmental issue. I'm sorry. There's no substitute for putting hands on it. I think that's going to continue for some time. The core of our credit model, which is, I think, distinct, is not whether my dad or myself have gone out to put hands physically on a building, although I do think it's important. I think the core of the credit model is the fact that we have a very different system in terms of approving loans. I think our thinking on this is somewhat contrary to the industry's thinking.
Every loan, whether it's a $50,000 loan or a $50 million loan, is approved by the executive committee of our board, which is about half of our board of directors, including a number of the folks that have very long and deep experience looking at credit here at Hingham. That every two weeks for nearly 30 years, have sat down and looked at loan proposals and talked about buildings and challenged assumptions about what appropriate rents and expenses are and who is this borrower and do we know them and do we have confidence in them? Even if the numbers maybe don't line up, we have a long relationship and we can understand that. Conversely, these numbers look great, but we have some real concerns about who the counterparty would be.
There's no substitute for that discussion happening every two weeks. I think that that core of the credit process, the involvement of the executive committee, the involvement of our board of directors, so everything above $2 million are full board reviews. Later this afternoon, you know, we're going to be talking about the individual buildings and individual loans. I think that core of the credit model, I think, is scalable for a long time because it hasn't fundamentally changed since we started doing this here at Hingham 30 years ago. I think there'll probably be some marginal changes, and there have been over time. We've changed those limits. You know, it used to be the case, the board looked at virtually everything, and over the years, that number has risen and has changed.
I think that that's. There's got to be a limit at some point, but I don't perceive where it would be at this point. I think it's scalable for a long time. We look at a really significant volume of loans at the executive committee. The more that we do, I think the better that we become at it in terms of preparing the packages, structuring them in such a way that directors can see, you know, what are the key highlights of the transaction, what are some of the things that might be risks in this instance. Allow them to get to decisions really quickly, so that we can spend our time maybe talking about those loans that are more complex or less clear.
It's out there, but we keep pushing it back, I think is the short answer. When I think about limitations to scale, I don't think about our credit process. I think primarily in terms of how we generate deposit funding.
Complement to that, Patrick commented on the involvement of the Executive Committee and the Board of Directors in our credit process and indicated that it is highly unusual. And many of our competitors think it's—t hey're stunned at the involvement that our Board has in the credit process. Many of the managers, CEOs, presidents of banks will say to me, "That's just not appropriate, Bob. Why is the Board involved in credit decisions?" You know, most of our balance sheet is in loans, and if the Board is not gonna be involved in the loan side at all, what are they doing? This afternoon we'll have a full Board meeting, a monthly Board meeting.
I think there's 10 or 12 loans on that agenda. We'll talk about them, we'll look at them, you know, the tires get kicked and modifications get made. The Board is highly involved. A majority of our board, talking about the newest market, San Francisco, a majority of our board has gone out with Patrick and myself and visited the loans that we've done in San Francisco, have looked at the neighborhoods in San Francisco and made an attempt to familiarize the board with what those neighborhoods look like, and so forth. We've done that in D.C. also. You know, we can keep doing that. We've got, as Patrick said, a long runway. We can vary the size that maybe Patrick looks at and myself. That can be increased.
We've increased the dollar amount that requires the full board approval over the years. We can do that gradually, in a fashion that will allow us to maintain the kind of quality that we have historically had.
Felix. Did you send in some questions? Did you send in some? Oh, okay. A different one. Okay. Yeah. I mean, I think that the answer is that we need to close that gap a little bit. We're not gonna close it all the way in the sense that there'll be a piece of the balance sheet that's always wholesale funded. We need to be growing deposits more quickly, both in terms of the operating deposits, and in terms of the reserve funds and money market CDs. We've got to close that. That's really the governor that I'm talking about. Those two figures over time they can't be meaningfully different forever.
If, if they were to be so, you'd continually be shifting the funding composition of the balance sheet in a greater direction towards wholesale funding. Not something we wanna do. We have the capacity to do it. The latent capacity in the balance sheet because of the fact that we're a multifamily specialist, where we get so much availability at the home loan bank. There's a latent capacity to do that in any given year, but we can't do that forever. Cristian.
Can you talk a little bit about the competition in the Commercial Real Estate Lending Business? Are you considering competitors pulling back on it?
I think there are some competitors that have exited the market entirely. I possibly won't. There are some that are not as active. It's difficult to paint with a broad brush. I mean, I think there are obviously a lot of banks that operate in the markets that we operate in, whether we're talking about Boston or Washington or San Francisco. I think it's likely the case that some of the deposit challenges that we see generally across the industry right now are leading to competitors having a somewhat lower appetite for lending than they might have had a year ago. I think that one challenge is that the kinds of assets that we prefer, which is to say multifamily, in particular, is still an asset class that's performing relatively well.
To the extent that lenders are pulling back, they may be pulling back on assets that we didn't really lend very much on or were less focused on in the past. To the extent they wanna lend, they wanna lend maybe in multifamily, so that competition's there even if the overall conditions are perhaps less favorable for what they're doing. Over last year, it would be impossible to characterize the competition from the agencies. I mean, really, we can't talk about competition. We get a very similar question from our regulators, and, you know, those conversations are obviously confidential. I think it would be okay to describe this interaction, which is the question that comes every year. You know, who do you see as your primary competitors so on and so forth, and the answer is always you.
Which is to say Fannie and Freddie, in the apartment market are just, are brutal competitors. I mean, they're tremendous originators. They do a lot of volume. They work through a lot of different correspondents. They're, they're entirely non-recourse credit. They're typically higher leverage. There are some things about what they do that are unattractive, where banks can compete. They're very able competitors, and over the last year, they've been in or out of the market, and it really I couldn't tell you why. You know, there are periods where they've been very active and other periods where they have not. We still see a fair amount of life company competition, particularly when we're looking at industrial properties.
It is usually the case, and this has been true historically, that when we're competing against life companies, it's because we look very attractive relative to other banks from a pricing standpoint, and the borrower is not looking to maximize leverage. So life companies are typically much more conservative underwriters than banks in general in terms of leverage. From a funding perspective, you know, their cost of funds, so to speak, is very different dynamics than banks. You know, whether it's a bank like Canon that's more liability sensitive, they tend to have a higher cost of interest funding, or another bank that has a lower cost of interest funding. Both of those costs of funds are gonna be higher in the current environment than what the life companies are looking at.
If there's something they wanna do, they can also be a pretty ferocious competitor. I do think in terms of competition, one thing that's probably worth noting, and it may be a little bit too early to say, is really what's happened over the last two months in San Francisco has had a very substantial impact on that market from a multifamily lending perspective. Some of the folks that have been mentioned in press and some others played a very significant role in that market. They were very aggressive lenders. They had very deep relationships with larger borrowers, medium-sized borrowers, and smaller borrowers. You know, when you look at our portfolio, we've got loans on two- families, and we've got loans on several hundred unit complexes, and really everything in the middle.
In this market, we might not see some of those names on a four-family or a five-family or a smaller portfolio, whereas in San Francisco, that has not been true. We spent a lot of time over the last couple of years knocking on doors and talking to customers and looking at transactions. Often we were being used to sharpen the terms that that borrower would ultimately get from another more local bank. I think it remains to be seen how that may evolve now, but I think it's almost certainly the case that some of the, let's say, historic relationships that those customers had are no longer gonna be available to them.
You know, if we had a good conversation a year ago, two years ago, three years ago, and we were the second run or the third run, then our position there is clearly a better one now. Now whether we can capitalize that, you know, capitalize on that and turn that into real business and actually establish some new relationships or take relationships where we're a small share and lever them into something bigger, that's a different question. The opportunity doesn't capitalize on itself. We have to do the work. Anybody else in the room? Nothing. How we doing on time? Yeah. We're close. Maybe a couple more. I enjoyed it. These were actually a couple, these were a couple of questions from Taylor Finch, and I'll put them together.
I should also say, since we're recording this, folks will have the opportunity to—w e had about 70 questions that came in writing. Thank you for all of them. By my count, we've probably touched on about five or six of them. We're gonna take this and consolidate it. I'm gonna do my best to put this in an 8-K and file it so that we can respond to more of this in writing because some of these are really, really great questions. These questions from Taylor Finch. You may be the only bank in the United States on a lean improvement journey. How would you describe this journey as been with the level of organizational knowledge and embracing of lean principles? How has it transformed your bank to better serve your customers?
Where do you see the edge over the competition most clearly? In what part of your operations has standard work yielded the most benefit? I think what Taylor is probably picking up on is there's a phrase that you'll see in some of our public filings, in the press release and in the K as well, I think, where we talk about this concept of continuous improvement. Which is really something that comes out of a body of work, or a set of principles called lean, which really comes out of the manufacturing industry, and in particular, it comes out of Toyota. It's gone by a lot of names over time, but Toyota's most closely associated with it. Lean is the shorthand that's sometimes used to describe it.
Without I think going for too long, I think a little bit of historical context around that, and I'll connect it with something that I talked about in the slides earlier. There's, I think, a view, and it is a mistaken view that there is a trade-off in banking between efficiency and quality. Which is to say that if you're running an efficient company or an efficient bank or an efficient organization, that you must be compromising on something. You know, what have you cut that is exposing you to some kind of risk? And it's a very deeply ingrained view, and it's clearly wrong.
The idea being that if you're efficient, you must be compromising on credit quality, or you must be compromising on, maybe sort of the quality of your operational process or your customer service or some aspect of your risk management. I think our view is that that's clearly wrong, and that the more efficient we can become, the more that we can reduce costs and improve quality being a kind of big concept at the same time. It's possible to reduce those costs and make better loans and have better process discipline, at the same time. That really comes out of this concept that comes from Toyota.
If we go back 40 years, I think that's about right, 1980, maybe a little bit before, you've got a lot of imports from the Japanese market. Toyota really led the way where the U.S. car manufacturers — and my wife is from Detroit, so I've had this conversation before where the stakes have been higher. The U.S. car manufacturers responded to the entry into the U.S. market of Toyota. They said, "Listen, these cars are cheap. They're not safe. Yes, they are less expensive. They're more competitive, or they're more competitive price-wise than what you're paying to us, GM or Ford, but the cars aren't safe. You know, Toyota has compromised on quality.
There's no way they can make this car and sell it profitably at this price point." There was a really, a dramatic misunderstanding by the U.S. auto manufacturers of how lean production was working at Toyota. It turned out that not only was Toyota manufacturing these cars at a far lower price point, and therefore able to sell them into the U.S. market at a far lower price point than the U.S. manufacturers. The cars were much, much safer, dramatically so. In fact, it was, it was amazing how unsafe, that generation of, U.S. manufacturers were. The reason was, and again, this is shorthand, the level of discipline that Toyota had built into their operational processes through this bundle of tools that are commonly referred to as lean, was just incredible.
You know, they were very, very focused on taking waste out of the process. By taking waste out, they were controlling for errors. You know, if there was an imperfection in the manufacturing process, they didn't just wave it on. They'd stop the line. They'd identify the root source, the root cause of that problem, they'd fix it. They wouldn't have to find out at the end of the manufacturing process, there's a problem with the car, send it all the way back to the beginning, and waste the time and the energy of the people in manufacturing.
I think that one of the things that we saw and that Taylor kind of captured and clearly picked up in this, you know, little dog whistle I guess, is that it is possible to pursue greater efficiency in our business while simultaneously pursuing higher and higher levels of quality. Higher quality in terms of the loan book, higher quality in terms of our operational processes, and I think higher quality in terms of our risk management and compliance approach. And we've made, I think, a fair amount of progress there, but we're very early on that journey. I mean, 70 basis points of expense on total assets and 25% efficiency ratio.
I continue to see more opportunity ahead of us to take waste down and make our processes more disciplined and more efficient than we have behind us. There's more work ahead than there is behind us, without a doubt.
Patrick gave you a lot of efficiency at the bank. He's right. A lot of folks will look at a more efficient operation, and they'll say, "You must be sacrificing someplace." There's very good data indicating that the more efficient the bank gets, the better its credit quality. A lot of folks would say, "Well, you know, other places have more credit analysts than you do. They've got more structure than you do." Their performance of their loan portfolio is substantially lower than ours. There's a direct correlation. That is right. Again, I congratulate him on what he has done in terms of our organization. We always thought we were pretty efficient. We really didn't know what that meant.
Thank you, Ed. It's the work of everybody that we have on the team. I mean, I think that one of the key takeaways from what Toyota did was that it did not. There were a couple of folks that had some of the key theoretical insight. I won't talk about Toyota for too long. I can see you're checking your watch.
I don't wanna do a George H.W. Bush here, but-
One of the key things about what they did was not that there were one or two or three people that were kind of core in the management group that were pushing this change. It was everyone in the organization, particularly in the manufacturing line itself, was empowered to identify opportunities where the process didn't make sense or was inefficient, and to raise those opportunities up and then quickly get them corrected. I think that one of the core things about Lean is that participation of everyone on the team, in finding that waste and taking that out.
The team that we've had, I touched on this a little bit before in terms of the importance we see people and needing to upgrade and moving quickly on the—t he team that we've had has done a phenomenal job at that over a long period of time. I think it's amazing that their energy for improving how we do business is undiminished. No one's resting on their laurels saying we did a good job. There's more work to do.
Questions you want to take or I take?
There's 65 questions.
Sorry.
Okay. The hour having arrived, 4:00 P.M., I'm gonna say that both Patrick and myself really enjoy the annual meeting. We enjoy it when the sun is shining economically and when the sun is and when we get a little rain too. We appreciate the stockholders and investors and folks from the organization attending today. It's great. We enjoy the interaction. I thank you for coming, and I will entertain a motion to adjourn the meeting.
So moved.
Motion's been made and seconded. All in favor say, "Aye."
Aye.
None opposed . Thank you very much. Have a good afternoon.