Good afternoon, everyone. For those that don't know me, my name is Bob Gaughen, and I'm the Chairman and Chief Executive Officer of the bank. On behalf of the Board of Directors, I wanna welcome you to the 188th annual meeting of the Hingham Institution for Savings. This is our 32nd annual meeting as a publicly traded company. It's a real pleasure for me to be able to do this in person again this year. It's been a couple of years. We've gotten by with the Zoom. This year, to be able to do it both in person and via Zoom, we've got a whole bunch of folks attending in that fashion is great. Hopefully we'll be able to continue to do this in both formats going forward.
Just a few introductions that I need to make. We have present with us today Arthur Reagan, who has been designated by the board of directors as the Inspector of Elections, a role in which Arthur has served for, I think, 27 or 28 years now. It's good to have you with us, Arthur. We also have with us Matt Menard from our external auditors, Wolf & Company of Massachusetts. Attending via Zoom is Marty Caine, the partner on our engagement. Additionally, Samantha Kirby from our counsel, Goodwin Procter, is also attending via Zoom. We're gonna conduct the meeting today in three parts. The first part is the formal portion of the meeting in which we consider the four proposals that are outlined in your proxy statement.
After we have concluded addressing those proposals, we will adjourn the formal portion of the meeting, and we will then move to what we have traditionally done, which is acknowledging one of our colleagues who has made some really outstanding contributions to the bank this past year. After we have accomplished that, we will move forward to a presentation from our President, Patrick Gaughen, with regard to the progress and accomplishments of the bank this past year. After that, we will move to a Q&A session. We've received a number of questions digitally. For those who are on Zoom, you're in listen-only mode, and you will be able to submit questions using the Q&A feature in Zoom, if you so wish. Otherwise, we will entertain questions from the floor also.
With that, I also wanna note that all voting is to be done in person or by proxy. Electronic voting is not available. With that, I'm gonna ask Mr. Reagan to indicate the presence of a quorum. Arthur.
Mr. Chairman. On this particularly brisk last Thursday in April, there are an aggregate of 1,800,385 shares represented either in person or by proxy.
There being sufficient shares in attendance, I will declare a quorum as present. It should also be noted that I have received an affidavit certifying that the notice of the annual meeting and proxy statement was sent to all stockholders of record as of March 1, 2022, that the same was mailed on March 11. Is there any shareholder present who has not voted, who wishes to vote in person today? None. Okay. Thank you. The first matter to be voted on by stockholders is the election of directors. There are five Class One directors who are nominated by the board for three-year terms, each to hold office until the 2025 annual meeting and until their successors are duly elected and qualified. Those individuals are Howard M. Berger, Kevin W. Gaughen Jr., Julio R. Hernando, Ronald D. Falcione.
Falcione, and Robert K. Sheridan. Do I hear a motion that those nominees be elected as directors of the bank? We have a motion and a second. Is there any discussion on this motion before we proceed to a vote? Hearing none, we'll now proceed to a vote, and I'll call upon Mr. Reagan to announce that vote.
Mr. Chairman, each director nominee received at least 1,359,018 shares voting for their election, representing over 92.8% of the shares voting on this item.
Thank you, Arthur. The holders of a plurality of the shares present are represented and entitled to vote at this meeting. Having voted for the nominees, I hereby declare those individuals elected. Next matter to be voted on by the stockholders is the election of Mrs. Jacqueline M. Youngworth as the clerk of the bank to serve until the year 2023 annual meeting of stockholders and until her successor is duly elected and qualified. Do I hear such a motion?
I move.
Second.
It having been moved and seconded, is there any discussion before we proceed to a vote? Having no discussion, all stockholders present having been given the opportunity to vote, I call upon Mr. Reagan to announce that vote.
Mr. Chairman, our Jackie Youngworth received a tremendous 1,871,700 shares voting for her election as clerk, which translates to a spectacular 99.53% of the shares cast on the proposal. Brava.
The holders of a plurality, and obviously more than a plurality of the shares present or represented and entitled to vote, having voted for the election of Mrs. Youngworth, we will declare that, she has been so elected. The next item of business is the so-called say-on-pay resolution. The proposal calls for an advisory vote on approval of the executive compensation as outlined in our proxy. Do I hear a motion to adopt that proposal?
Moved.
Second.
Been moved and seconded. Is there any discussion on that motion? Hearing none, I'll call upon Mr. Reagan to announce the vote.
Mr. Chairman, a very supportive 1,401,760 shares voted for the executive compensation proposal, which is over 95.7% of the shares tabulated on the matter.
The holders of a plurality of the shares eligible to vote and present and represented either by proxy or in person, having voted in favor of the say-on-pay resolution, I declare that proposal to have been passed. The next item to be addressed is the proposed amendment to Article Sixteen of the bank's amended and restated charter. As required by the charter, this proposal, unlike the previous proposals, requires the affirmative vote of 80% of the outstanding shares whether or not the shares are actually voted. Do I hear a motion to adopt that proposal?
Second.
Moved and seconded. Is there any discussion on that motion? Hearing none, I'll call upon Mr. Reagan to announce the vote on that motion.
Mr. Chairman, on the charter amendment proposal, 1,451,888 shares voted for its passage, representing an impressive 99.16% of the cast shares and 67.8% of the outstanding shares.
Less than 80% of the outstanding shares having voted in favor of this proposal, I declare the same as not having been adopted. It's worth noting that this proposal, if adopted, would have given shareholders greater rights to amend the bylaws of the corporation. While this proposal was endorsed by the board and supported by all of the inside shareholders, apparently the other shareholders are sufficiently content with the way our bylaws have been since 1989 that they did not wish to vote in a sufficient number to approve the proposal. The genesis of the proposal, I mean, we've always been satisfied with the status of our articles of organization and bylaws, but the genesis of the proposal was a comment from one of the proxy advisory services last year.
They apparently thought that it was significant that the bylaws, that the charter be changed. Apparently, as I said, the outside shareholders are quite satisfied with our existing status, so we gave them an opportunity consistent with the proposal from ISS, and that's the status of that. It is a little ironic that, being one of the few banks in the country that management arrived here as a result of a dissident shareholder proxy contest, that someone might think that the outside shareholders don't have sufficient access to the conduct of the affairs of the bank, but we'll let that pass. As there is no further business to come before the formal portion of the meeting, I would entertain a motion to adjourn. All in favor say aye.
Aye.
Opposed: no. Voted. This is the point of the meeting at which we take a moment to acknowledge one of our colleagues who has really performed in an outstanding fashion during the course of the year. Now let me say, the S&P Global performs an assessment of all the banks in the United States every year. This past year, they categorized the banks up to $3 billion in assets, community banks between $3 billion and $10 billion in assets, and then those banks over $10 billion. Of all the banks in the United States this past year between $3 billion and $10 billion in assets, your bank was ranked number one out of all those banks. There's a lot of banks in the United States between $3 billion and $10 billion.
Based on a review of relevant financial metrics, Hingham Institution for Savings last month was rated the number one bank in the country, between $3 billion-$10 billion in assets. That accomplishment is not something that is the work of one person. It is really the work of an entire team, striving for excellence and a continuous improvement. I am honored to work with all of the folks, many of you here today, in that effort, and I'm very proud of that achievement. We are recognizing one individual, and that individual is Selam Eyassu. Selam joined us a couple of years ago from the Congressional Bank in Washington. Selam is an assistant vice president and relationship manager.
She works with some of our larger and more sophisticated deposit customers in the specialized deposit group, and she has done an absolutely fantastic job, holds herself to some very high professional standards, and has been very successful in assisting the entire bank in developing our deposit relationships. Patrick will comment later on the significant increases in commercial checking accounts that we have developed in the last couple of years. Selam has worked not only in the Washington market, but also in the Boston marketplace. I think she started to also work in the San Francisco marketplace a little bit. It really is pretty remarkable what she's been able to do. We congratulate Selam and thank her very much for her efforts in that regard.
With that, I meant to indicate we're gonna do Q&A this afternoon until 4:00 P.M., at which point we'll adjourn. I think I've given sufficient amount of time to Patrick for his presentation and the questions that will inevitably follow up. With that, thank you very much, and I'll turn it over to Patrick.
Does everybody here and at home have coffee for this?
Okay. Excellent. Thank you everyone for joining both here and folks joining us remotely via Zoom. As in the past several years, we're gonna walk through this in, you know, a couple of pieces. The first, a bit of a refresher for, you know, those who are new to us and those who are not about what we do and what we don't do. A little bit of an overview of the company followed by a discussion of financial results for 2021, which were decent. A discussion of some of the operational highlights and I think some of the things that we see as key challenges going forward. We'll launch right into it.
The safe harbor statement, as in past years, I'm not going to read this for you. It's in the slide deck that is on the website. The essence of it is that to the extent that there are statements that we make today, either in this presentation or in the Q&A, that are forward-looking, essentially anything regarding the future, there are a whole bunch of verbs in there that you can read. You know, we don't undertake any responsibility to update those in the future. Okay, the pieces that I described, as in past years, beware of bankers or managers, whether investment managers or corporate managers bearing quotes from Warren Buffett. 99% of the time, those are probably intended to deceive you.
In this case, the essence of the banking business is captured here, I think so appropriately that we reuse this from year to year, which is to say that the real key to long-term performance in banking is avoiding mistakes, avoiding dumb things. It is not sort of a statement about the positive things one might do, but it's a statement about the things you need to avoid, which, as we get to, is really losing money. Now what we do, the three kind of core businesses that we've talked about in the past, commercial real estate lending, the beating heart of the bank, in terms of the asset business, something that we've specialized in since 1993.
Within that vertical, really we're talking about a focus on multifamily lending, anything from relatively large apartment complexes to portfolios of one to four family non-owner occupied buildings. In some cases, you know, we have borrowers that just have one or two or three families. That's the sort of the essence of that business. We do some office and retail and some special purpose and some industrial, but that's really a flavoring. It's not the main dish. Commercial and personal deposit banking. There are two pieces to this. The first is our Specialized Deposit Group, which is responsible for, by and large, our largest and most complex commercial deposit customers, including some personal customers that have unique needs. Then our Retail Banking Group, which is the branch-based presence.
Our office in Boston, our offices here on the South Shore, and our office out on Nantucket. Finally, residential real estate lending, which for us is not a mortgage banking business. As I think everyone here knows and everyone joining us remotely knows, we don't sell our residential loans into the secondary market. This business is really about deepening the relationships that we have with our customers across the bank, whether we have relationships in the commercial business or in the deposit side. That's something that we've also done for quite a while, and we do quite a bit of value add lending in that business, where we're doing things that secondary market lenders can't do for our customers.
More importantly, to the essence of that first quote, "What don't we do?" This list could be much larger, but these are all fairly common businesses in commercial banks of our size in the United States. First, we don't do any commercial and industrial lending at all. If it's not secured by real estate, then we don't do it. There is a de minimis exception where we've made a loan to a nonprofit here in Massachusetts, and their deposit balances cover that note several times over. Essentially, we are not in this business. We don't do any asset-based lending, we don't have a leasing business, no loans and lines.
We don't do any SBA business, which is a fairly substantial line of business for a lot of our competitors, some larger, some smaller. I think obviously no leveraged lending. On the consumer side, if it moves, we don't lend on it. If it's a credit card, boat, car, RV. Planes don't show up here, but we don't lend on those either. Personal lines of credit, we don't do them. Nothing in investment management. We get questions about this, you know, I would say frequently, given the demographics of the geography that we operate in. This is something that we've really avoided entirely. In its wealth management iteration, we don't have a trust department, no advisory.
No insurance brokerage, as particularly Massachusetts folks know, there are some banks here in Massachusetts that have fairly large insurance brokerage operations. We don't do that. We obviously don't have an insurance underwriting business. We don't sell into the secondary market. We don't do any tax credit lending of any kind in any of its iterations. It's a beautiful day outside, but we will not lend on your solar panels. We don't participate in commercial mortgages. We don't buy pieces of other banks' loans, which is, I think, a fairly common practice. With one limited exception, in a relationship that we have with a bank where we're an investor, we don't sell pieces of our loans. We don't do that for a couple of reasons.
On the buy side, really, you need to be able to evaluate the risks in these transactions directly. In looking at the history of banks that have failed or have come close to failing, buying into larger banks' participations or not seeing those risks directly is a real common theme. It's one of the few commonalities in looking at a lot of bank failures. Then on the sell side, one of the reasons that we don't sell, as is common elsewhere, is we wanna be able to control the relationship that we have with our customers, and we wanna be able to control the terms of what we're doing with them.
If in the future we wanna restructure that transaction or combine it with something else, we wanna have the flexibility to do that. A lot of things that we don't do, and I won't belabor that point. Capital allocation. As we've talked about in the past, I think it's important that this be upfront. You could imagine that the bank's capital that all of you as owners have entrusted to us to leverage and run the business. Every year, we generate more of it, and we need to make some decisions about what we're gonna do with it. Management, whether at banks or at other companies, should not feel like that money is theirs. It belongs to the owners.
Every year, we need to be able to make a credible case that we can invest that incremental capital at attractive rates of return. Given the ownership structure of the bank here at Hingham, we have great alignment from the board and the extended families through the shareholder base. In thinking about those priorities, organic growth is always the priority, and that's the expansion of our lending and deposit businesses in both the existing and new geographies. Massachusetts obviously being the oldest and deepest market. Washington, probably not a new geography anymore given how long we've been operating there. Maybe we could call it emerging. And then San Francisco obviously being somewhat new in this past year.
Second, minority equity investments, some public, some private, focused on financial services and technology, much of which is financial in nature, in terms of financial infrastructure. Third, dividends, so maintaining appropriate leverage. We have had a regular and a special dividend since the change of control in 1993, since shortly thereafter. An important, I think, governor on our use of capital in the bank, and I think keeps us honest about ensuring that the organic growth and the equity investment opportunities that we make are hitting the appropriate hurdle rates in terms of returns. Finally, repurchase. This is something that I think we are open to. We've talked about that in the past.
It is generally not an option that provides the same kind of returns that one might see from the others. If conditions were to change, then I think that's something that we would be open to. There are some tax implications that we've talked about before because the lack of a holding company here at the bank. As we grow in size, that becomes a little bit less relevant. Our ability to actually execute that in meaningful size is something that we're always sensitive to. Historically, that has been somewhat difficult. What's not attractive, control equity investments, which is three words that probably could have been substituted with one, which is acquisitions.
In almost all cases that we look at, when we look at the industry, those acquisitions involve prices that are too high. There's a loss of focus from the management team, and the cost synergies are elusive. We are very skeptical of the ability of almost all participants in the market to generate value for their owners through acquisitions. It is almost always the case in the situations that we've looked at that those acquisitions are undertaken to benefit management and not owners. That's not who we're here for. 2021, like I said a little bit earlier, was I think a good year. I think we should all be somewhat cautious, given how good a year it was, both in the core business and in our investment operations.
There'll be periods where we perhaps over earn compared to our long-term returns, and then other periods where perhaps we under earn. Last year was a very unusual positive year. These are GAAP earnings which include the results of our investment operations, which last year and the year before were very positive. A little bit over $67 million, which was a record, but we were also employing a record amount of capital in the business, which speaks to this question of returns on equity. It's not the actual earnings, it's the earnings relative to the capital we have in the business. Last year was a phenomenal year. You know, over 20%, superior to 2020 and 2019.
Probably at the high end of what we've done and what we're capable of achieving given the structure of the balance sheet. Certainly, I think favorable compared to some other groups. As we've talked about before, that's not really the standard against which we measure ourselves. It's really sort of an internal standard. Book value per share, a five-year CAGR of 17%. Very positive results. In addition to that, obviously, the dividends that were declared last year. That five-year CAGR is something that we pay quite a bit of attention to in terms of our ability to generate long-term value for our owners. In any given year, you know, we may see returns on equity that are somewhat higher or somewhat lower.
In looking at a five-year period, you really get a good sense of whether what we're doing in the business is generating sufficient value for our customers, that they're willing to pay for it, and that allows us to generate these returns. The not so secret sauce to this, there are a couple of pieces to that. First, low-cost leadership. We are, as I think everyone is aware, very attuned to the fact that we operate in a commodity industry. By and large, there are very few competitive advantages in banking. Every bank will tell you that they provide superior service, which I think quite obviously can't be true. There are very few product advantages in banking. We are not selling a sole source product. We don't have patents around money.
The ability to deliver value to our customers is reliant on our ability to take costs out of this model. That's really the product of two things that we've talked about in the past. The first are structural choices. That's that first slide that says, "These are all the things that we don't do." That relates to what you might call game selection. We have a couple of games that we've opted to play in, and then a variety of games that we've opted not to play in. Operational choices is really how we play. Once we're in the multifamily business or once we're focused on raising commercial deposits from a particular set of target verticals, particularly nonprofits and property managers, how do we go about doing that?
That really is where I think the concept of frugality comes into play. I think that's also where sort of the great talent of a lot of the folks on our team comes through in terms of figuring out how to do what we're doing every year just a little bit better, because that certainly does not come from management. You know, structural, those are the choices that we make. Operational, those are really the choices the team makes on the field. The lending business. The last five years, very strong growth in this business, about a $3 billion portfolio we ended at the end of the year, and that was really driven by the commercial portfolio.
Some really strong growth there, which is a function of a larger team, a really talented team of lenders and the folks in our commercial processing group, who have made this possible. Quite a bit of production here in Massachusetts, a very strong year in Washington, D.C., and really San Francisco is just getting started, so it wasn't yet a meaningful contributor. Easy to make loans, easy to show loan growth. Really the key test is do we get the money back? What you see here is the net charge-off record of the bank. These are actual realized losses on loans, net of any recoveries that maybe we had, through litigation. The blue bars that you see here are the industry.
This is the percentage of average loans any given year in the industry, that were charged off on a net basis. The red bars are Hingham. The last decade really for the industry has been a very, I think, positive credit environment. You see some strong performance on a relative basis by the industry, you know, particularly relative to the great financial crisis, which is that, you know, big spike in the middle. We've been very, very focused on not losing money. You know, not managing to a particular level of acceptable losses, but really undertaking to eliminate those losses altogether. We'll touch on this on a few slides, but we really can't forget that this is the essence of what we do.
It's very easy, I think, for people to be complacent, particularly in the industry with the loss experience the last 10 years. I think it's critical that we continue to understand that credit quality is at the heart of the business, and it's what we need to be focused on. The deposit business, a slightly lower five-year CAGR but at, you know, roughly 12%, still very strong, driven by those two growth engines that we talked about earlier, specialized deposit group and our retail business. Our digital-first efforts, while good, are not yet, from a volume perspective, delivering the kind of numbers that would move the needle on that we've seen. There are a few distinguishing features of that. You know, personalized service, again, this is really table stakes.
I would not describe it as a competitive advantage from an industry perspective. We have to be able to deliver it. We have to be able to deliver good service. When we do that for certain mid-sized nonprofits, family businesses, property managers, those other verticals, it can distinguish us against our competitors, and it can make someone move. Digital excellence. This is again, I think, a table stakes feature of the business. You know, we may not be at the bleeding edge, but we need to be in a position to offer our customers the digital solutions and the payment solutions that they need, particularly on the business side. Then from a fee perspective, this is somewhat distinct.
We've talked about this a little bit in the past, but a real emphasis on a no-fee model, particularly in the commercial business. I think we've talked through in the past why we think some of that is really required as both regulatory and market pressures start to compress operating margins on fee businesses. The two groups, the Specialized Deposit Group, had a phenomenal year last year. About 30% growth in the trailing twelve months from March 2022. I think standalone in 2021 was about 31% or 32%. About $650 million in deposits, so a high growth rate, but still growing into the size of the balance sheet at $+3 billion now.
One thing that we've been talking about for a bit internally, we have someone new joining to lead that group in a couple of weeks, and we're looking forward to that and a new role for Holly, who's led that since inception here at Hingham. The retail banking group, again, I described a little bit earlier, that's just focused here in Massachusetts, so that's Boston, South Shore, Nantucket. Over the last couple of years, we've continued to consolidate some of those branches as customers' need for that transactional activity, you know, has changed, and they interact with us on a digital basis more and more, both for payments and informational requests.
The customer support team, which is something new this year, it's really an outgrowth of some things that we did prior to the pandemic and during the pandemic. A totally remote service team for folks who are contacting us via our main customer service phone line and email and chat. Something I think we think is critical to supporting a broader geographic footprint as we grow, and I think will give us the ability to extend some of our service offerings, particularly on the retail side into the extended hours and weekends and in some areas where I think customers have some expectations. Looking forward, there are a whole boatload of key challenges. I'll touch on a couple here, and then I think maybe we'll take some of these and handle them in questions.
Yeah, the first thing is credit quality, and I emphasized this before. Really it is the A and the Z of the business. We have had an extraordinary 10 years. Our portfolio, along with a lot of others, was tested during COVID. We certainly saw some very positive performance, but I don't think we can ever lose sight of the importance of that. Some of the different geographies that we operate in. Again, I think we're gonna touch on this during some questions. There are unique challenges that we have as we grow in each one of those. Those are different and require us to, I think, approach solving them in different ways.
Scaling the specialized deposit group, and this is something where we've had a tremendous growth on a percentage basis from a zero start. I think that we think that from a leadership perspective, growing the team and deploying technology, some of which is customer facing, some of which is probably internal. There's a lot of work that we have to do there, that we're excited about. Process improvement and eliminating waste, this really is always on here. There are some questions. Again, we'll touch on this. I think it'll be appropriate actually for some questions as well. This relates to some of the ways that we're thinking about how sort of the management team and the board will evolve going forward, as the geographic focus of the business changes.
With that, I am going to switch to question- and- answer. We're gonna do this in sort of three ways. There was a good list. I'll leave that out. There was a good list of questions that we got ahead of time that folks submitted, so we'll take some questions from that list. We have some folks who are going to submit questions via Q&A on Zoom. Then obviously, we have everybody here in this room. I'm only noticing now that I sit down, I can't really quite see all of you. I think what we're gonna do is we're gonna take the next hour and 20 minutes to the extent that we need it, and we're gonna alternate through those resources.
To kick things off, I'm gonna take the first question from Adam Mead, who wasn't able to join us today. He's on a plane flight. He sent a couple of questions in. The first one, and this is one that I've heard from time to time, relates to our business in San Francisco. For the benefit of everybody here and on Zoom, I'll read the question out loud, and then we'll talk through it. First, San Francisco. I understand and support the rationale for entering the San Francisco Bay Area market. My question isn't why, but why now? Why not put more energy and focus in Washington? Is San Francisco that compelling even in the face of the time and cost of doing business there?
I don't know if Adam wanted me to add his tongue in cheek postscript, but he also asked, will these cross-country flights dash our hopes of ever achieving a single-digit efficiency ratio? I think in thinking about San Francisco, we talked a little bit about this last year. It was from the summer. It's useful to think of it as yet another step in how the bank has grown geographically, which is to say that when we first came here in 1993, there was a very limited presence here in the South Shore. Over the course of that decade, the focus of the business shifted into the city as the bank grew and as the focus on multifamily lending in particular grew.
The opening of the office in Nantucket was sort of another step in that process of understanding that we need to be more selective about the geographies that we operate in. They don't need to be physically contiguous, but they need to share common characteristics. There's some benefit to us if the kinds of customers we're banking are present in the markets. In the case of Nantucket, it was a set of relationships where a lot of our Massachusetts customers and more recently Washington customers had homes there. There's quite a bit of overlap there. It's been a step-by-step evolution of the business. Adam's question is as to why now? Have been looking in other markets for some time.
We've had some investments in our equity portfolio that were smaller than some banks in some other markets that were intended, like equity investments that we made, prior to going to Washington from an operational perspective. Long story short, we had San Francisco on the docket. COVID-19 really pulled a lot of that forward. It had always been something where it had been something prior to COVID that I think we would have thought was something five to seven years in the future. COVID really provided us with a unique opportunity that we do not think would be likely to recur. That opportunity was that the pandemic had a really outsized impact. It had a substantial impact on both credit and real estate markets in Bay.
It had an outsized impact on the markets in terms of perception of not just the sustainability of San Francisco's success, but the viability of the city. The number of headlines in The Wall Street Journal in 2020 and in early 2021 talking about the death of the Bay. You'd think that there was no one left, that everyone had moved to Texas. That was not a perspective that we shared. Our feeling was that that psychological impact on the market, both from a real estate and credit perspective, was something that we were prepared to exploit. We had already been doing the work. We had already put our eyes on the market. It was really a matter of timing. Accelerating the work in terms of engaging operational partners and conducting some of that diligence.
That really goes to the question of why now? We thought that was a unique opportunity where we could build some relationships with borrowers and with deposit customers that would not be well-served by larger banks. That the optimal time to do that would be when times are difficult and our competitors are focused on different things, because the market certainly is competitive. It's less competitive than Boston in terms of banking market. It is a competitive one. We thought that was a unique opportunity. The other dimension to that, and this relates to the question of why not put more energy and focus in Washington, is that at the same time, really started to develop, I think, substantial additional momentum in Washington, both the deposit size and balance sheet.
Some of that was a function of timing the market. Some of it was a function of the folks that we have on the team there, and folks that we were able to attract just before and during the pandemic, where we've been able to grow that business and grow that team of people in a way that gave me greater confidence that we could continue to move forward in Washington. That would not be impacted by the resources that were committed to San Francisco. Had we not been able to do that, then the attractiveness of the opportunity would not have mattered, and we would not have had the capacity to do it safely and prudently. With respect to cross-country flights and the efficiency ratio, I will confess that I have been getting even more spacious seats.
Adam may have to wait a few more years for that. I think maybe next, we could take one in person if we have any, or we can go back out to the world. Okay, well, we'll go out to the world where we had seven. We'll start at the top. This is from Peter Smoot from Israel, so longtime shareholder. Why do you avoid wealth management? How does this avoidance serve your structural operational choices? There's been a long, I think, fascination in the industry, particularly in small and medium-sized banks, with the wealth management business. There are a number of other banks here in Boston that have long-standing trust departments. Sometimes it might appear in their name. They're doing it.
Generally speaking, the attractiveness of that business to the banks that participate in it is the lack of a relationship between the fee streams that those businesses generate. Generally, it's a fee that's based on assets under management. Lack of relationship between that fee stream and the net interest margin. That's viewed as very, very attractive. The idea is that regardless of the size of net interest margins, the direction of rates, the macroeconomic environment with respect to rates, those businesses will generate fee income. One would think that it would be particularly attractive in geographies that we operate in because the demographics are, when you look at Greater Boston, Washington, San Francisco, they're quite wealthy, very, very affluent. There are a couple of things about the business that I think are problems from our perspective.
The first is we don't know how to do it very well, which is probably the reason why we don't do most of what we don't do. I think if most market participants were being honest, it would be the reason why most of them shouldn't do it either. It is a business where it is difficult to build sustainable competitive advantages. It is a business where it's difficult to build sustainable positive operating leverage because of the ability of people in the business to move from bank to bank. It's a business where I think we think that historically the fees that have been collected on assets under management are probably gonna be subject to significant secularpressure to be reduced.
I think that's something we thought all the time, and something we really see playing out in a way in which the investment management business, today is operating. It's, it's really quite ironic in some ways that, there are a lot of banks that are interested in getting into asset management at a time, when the fee structures are under such tremendous pressure. That's something that I think has never, ever been attractive to us, but there's probably a lot of fancy words in there. The key thing is we don't know how to do it really well.
I tell a story when people ask me about wealth management of another bank. I'll say in the New England region, be a little bit vague about it, that for some period of time had some content on the front page of their website that talked about investment opportunities in China. They weren't making direct investments, but it was more the phrase people use, thought leadership. I remember quite distinctly reading it and thinking, "There is no way people at that bank, as nice as I know some of them are, have any kind of particular differentiated insight into investing in China." We certainly don't.
It's reviews on. Can I supplement that?
Yeah.
You know, with regard to the wealth management trust, there is a local competitor of significant size now that has trust in their name, and it's not that many years ago now. Probably 15 years ago now. I remember talking with the CEO there and said, "Bob, we've been in the trust business since we were founded 60 or 70 years ago. We've never made any money on it until this year, and we're barely making money this year." My analysis is probably not as thorough as Patrick, but I look at a lot of balance sheets of competitors of ours, and they'll be similar size in terms of bank balance sheet, and then they'll have $4 billion under management. Somehow, when they combine the thing, they end up making, you know, a third less than we do.
They don't break down many of these companies. They'll tell you the revenue from the wealth management, but rarely do they get into telling you what the net is from that. When I look at the balance sheets and income statements of those, some of those companies, my conclusion is that they don't make any money from it. It may be, may indeed constitute a bit of a drag on their earnings. It's something we've avoided for all those reasons and because we don't know anything about it, as Patrick said.
I will say that there's someone in the room who'll be remain nameless for now, not a director or employee of the company or anything. He's a fantastic investment manager. For anyone in person, I'll point you in his direction later. Okay. I think we'll go back to the list of questions that were submitted ahead of time. This is probably an important question. Alex Cohen, this is Alex's voice. During the periods from 2004- 2007 and 2017- 2020, when we had increasing interest rates in the U.S. and a flattening yield curve, Hingham stock flattened off. Stock has still produced impressive returns for investors despite the periods. By the way, this is all Alex. I'm not sure it's right. Stock has still produced impressive returns for investors despite the periods.
I know you've spoken at previous meetings about how hedging interest rate risk does not make sense. I agree with you. What other levers might you have at your disposal to protect the bank's profits? Are there other lines of business that would either benefit from or be agnostic to a flattened curve that Hingham might be able to expand into? In your view, could this be done successfully without diversifying the already very successful bank interest? A couple of things here. First, the structure of our business is clearly liability sensitive. We're structurally liability sensitive because of the kinds of commercial real estate loans we make, which are not thirty-year loans. They're not floating rate loans. Our customer segment in multifamily real estate, although they keep substantial liquidity with us, that doesn't fund the entirety of the business.
That's why we have SVB, why we have the retail bank, that's why we have wholesale funding. I think it's important to think and maybe I would describe the way that I think about this is that we're not protecting profits in any given period. We're thinking about how to maximize returns on equity on a per share basis over a long time period. Which means that there are probably periods where we earn, as I said earlier, you know, outsized returns relative to that long-term trend, and then periods where we earn what are perfectly satisfactory returns. Looking back over history, one-year, two-year exceptions, double-digit returns on equity. Satisfactory, but not 20% or 21%.
That the choices that we've made from a structural perspective about the business mean that we need to live with both sides of that trade as it occurs. That over the long term, there are things that we can do to offset that. The first thing we're always focused on, regardless of levels or direction of rates, is establishing new relationships with strong borrowers, deepening the relationships that we have with the customers that we already have in the business. Because over time, those relationships, as the shape of the curve changes, those relationships are gonna be the relationships that give us the opportunity to source an increasing volume of high-quality assets. Those are the relationships that are going to form the core of the non-interest-bearing deposits that allow us to earn those spreads.
That's true regardless of the direction of rates. The second thing, which is implied in the first, is really being focused on not losing money. This is really important in periods when rates are falling, because that's often a period where there might be some lack of discipline in the market. There have been periods, certainly in the last 10-15 years, where we've seen that as the case. It can be true when rates are rising. We've spent some time talking in the past about what I think are some misunderstandings about the S&L crisis in the eighties with respect to how a lot of those banks failed. That was in periods when rates were rising.
There were a lot of S&Ls that looked for assets that had yields that would offset the rising price of their liabilities, and those assets had risks that the S&Ls did not appreciate. Rather than accepting the tighter margins through those periods where there were flatter curves, they resisted, they tried to protect those profits. In doing so, they put assets on the balance sheet that when your capital is levered, 10 or 11 or 12 or 13 times to one, they put assets on the balance sheet that put them under. I would say that I don't think about protecting the profits of the bank at any given period. We think about what that performance would be over a multi-year period.
Implied in that is the idea that over time there will be duration premium, which is to say that longer-term money will be more expensive than shorter-term money. Periods of inversion, flat curves, although painful for us, are in the scheme of things likely to be temporary. If you have any questions before, but rather than going right back to Zoom, I'll open that up. Yeah. Okay. Adam had three great questions, and I thought about just answering those three to start. Yeah, we'll use one of Adam's. Yeah. Okay. Again, in Adam's voice, the loan book is growing exponentially faster than the management team, the executive committee, and the board, which has given us an enviable efficiency ratio. How will you manage to maintain your high degree of supervision and touch points, such as visiting every collateral property?
I would say that's just as the bank grows. What is your current capacity in this regard, and how might the structure change as the bank grows to $5 billion, $10 billion, etc.? I have a couple of thoughts on this, and then I think you have a couple of thoughts on this as well. I'd say that currently our capacity is pretty healthy to grow the way that we're growing and in a way that is prudent and controlled and safe. There are investments that we're going to need to make, changes that we're going to need to consider as we grow. That's something that we've been doing, really the whole time, since the beginning.
At every stage of our growth, we've tended to think about how the involvement of the executive committee and board of directors, the internal configuration management team, composition of the team, how those things will function, and then the use of technology. I break down into, I think, three areas when I think about future pinch points or things that we need to be doing as we grow. The first is really thinking about our processes. We've been spending a lot of time trying to better standardize our internal processes, looking for unnecessary process loops, taking waste out, getting information in formats that allows for faster and more efficient decision-making without a loss of control at the executive committee or the board.
Looking for ways to enhance our control infrastructure, sometimes by using external vendors that are real specialists in a particular task that we need performed. Thinking about some of the risk-based standards that we have with respect to our approval levels. In particular, our executive committee has always reviewed 100% of our mortgage lending from dollar zero up to our legal lending limit. Over time, the size of the loans that our board of directors has reviewed and approved on an individual loan basis has gone up. That's something that over time, I expect that will continue to go up, and that's something the board reviews every year. From a management perspective, I think there are a couple of things here.
You know, first, as board of directors, as we think about the board as we go forward, one of the things that we've talked quite a bit about internally, and I think it will be important to maintain the involvement of the executive committee and the board in our credit process, is having some folks on the board, in Washington and San Francisco. You know, the drivers of the involvement of the board in that process have historically been twofold. One, has been a set of individuals that have tremendous personal capital or family capital at stake. There's a lot of skin in the game. Two, individuals that are in these markets and are familiar with borrowers, with buildings, with the built environments that some of these assets are located in.
As we think about those new markets and boards. The other thing internally, in terms of the management team that we spent some time on over the last year, and I think, going forward, it will be very helpful, both for the management team and frankly, for myself personally, some of the changes that we're making with respect to someone new coming on to lead the next stage of growth the next few years. Holly moving into a chief of staff role, which I think should give us a lot more leverage with respect to the size of that team as we grow. Then finally, and I think this is probably the smallest, although it's the one that comes up most often, is that I think technology is very impactful to how we continue to grow.
That there is really no one single bullet piece of technology that allows us to achieve the kind of performance that we want. It's really an approach that combines process discipline with the implementation of technology to get those results. I think that that's an area where Daniel Bagley, who joined us in the fall, we're very excited about. I think he's gonna be able to play a critical part. Dan is here. Of course, I can't see him. There he is. He's all the way in the back. Did you wanna touch on that one?
Well, I'll just supplement what you said, Patrick. This is not a new challenge. We have evolved when you think about it. When John first joined us in real estate 26-27 years ago, some odd dollars billion. We're knocking on the door of $4 billion now. We have evolved over that period of time. In fact, I just mentioned that. As many of you know, we've increased the amount of the loan size that requires direct pre-approval by the board of directors. That's gone up over time, and it's likely to go up again, and go up some more. Adam, I think it's a great question, indicates what's the task capacity, particularly in visiting every collateral property.
I think, Patrick hasn't revisited every loan that we've made in the new markets. We've looked at the particular piece of property. We've also had a program in place in which we're bringing directors to those markets. We're looking at the properties with directors to make the individuals who are involved in that process familiar with the neighborhoods and the varying values in those cities. We'll continue to evolve. What we won't change and what I think has always been at the core of our credit culture is credit decisions are made by the executive committee. The executive committee, comprised primarily of individuals with a significant portion of their net worth invested in this company. You know, they develop a certain level of expertise in terms of assessing properties.
Having skin in the game is a very important and distinguishing feature between the little red line that you couldn't see on those net charge-offs for Hingham and the big blue line, which is the industry average. I'm sure there are folks that are more sophisticated in their credit analysis than we may be, but it appears that one of the factors that impacts that net charge-off may indeed be the fact that the people making decisions here are risking their own money to a certain extent, and I think that makes a big difference. That's gonna remain at the heart of our credit culture, even though things will evolve over time as they have in the past.
Yeah. A natural lead-in to another question. This is from Yossi Gropp. I've seen a video of Mr. Robert, and in it he said there was a banker in your early days at the bank that didn't believe in your centralized loan approval process. That he, the banker, said it would never work when you were bigger. Could you please explain how the process works and importantly, how it's different from other banks your size? Yossi clearly recognizes centralized process. I think we've talked about it a little bit here. Certainly there are enough people in the room that are on the board or involved in that process. It is centralized. It's centralized at our executive committee, which is half of our board, and then to a lesser extent, at the board of directors.
For the benefit of everyone, that differs from other banks our size, smaller and larger in the sense that you might find at other banks that there is lending authority that is vested in an individual lender. Depending on that lender's experience or time with the bank, you know, potentially they could authorize loans individually or they could do so in conjunction with others. So the two lenders together might be able to make a larger loan or authorize a larger loan. That is quite different from what we do. Anybody in the room again?
No questions occurring to you as we sit here.
Okay. This is a little bit more specific. This is also from Adam Mead. How much growth in loan book last year came from existing customers versus new relationships? Interestingly enough, it was not quite 50/50. It was about somewhere between 55%-60% of our new commercial originations last year were to existing customers of the bank. Either we had a deposit relationship but potentially no lending relationship or were their existing loan and deposit customers of the bank. The remaining roughly $450 million were customers that were new to the bank. Of that, roughly 60%-70% were referrals from existing customers or from intermediaries that we had pre-existing relationships with, the attorneys, accountants, brokers, other referral sources.
Guy Baron, what are your expectations for deposit betas over the near to medium term Fed hikes? For everyone's benefit, the term deposit beta refers to the link between a bank's deposit funding costs and what I'll say is the market rate for money as expressed in let's just say the Fed funds rate. If you had a beta of zero, what that would mean is that as the Fed hikes, your deposit funding cost doesn't change at all. If you had a beta of 100, that means that 100% of the Fed's changes in rates at the short end of the curve are flowing through to your deposit costs.
Really the essence of the question is how much of the change in short- term rates that we see coming from the Federal Reserve will be passed through to our deposit base. Without getting into specifics, I would sort of emphasize again, as we talked earlier, we're clearly liability sensitive and given the structure of the balance sheet, so not just our deposit portfolio, but the entire funding balance sheet. You know, we are more liability sensitive than our peers. In periods of falling rates, that's something that we benefit from disproportionately. In periods of particularly quickly rising rates, that's something we are certainly going to suffer from. To the extent that we continue to shift the mix ever so slightly in the deposit portfolio towards commercial non-interest-bearing deposits, that has the impact of lowering that beta.
That's a process that's been playing out for well over a decade as we've tried to shift that mix. I think that's a process that'll play out over a decade more. There are no quick changes that would impact that for us. Okay, Josh. Josh, I apologize, I don't know if it's Stearman or Stearman. This is Josh's question. The record of growing capital in a shareholder-friendly manner is impressive. As the bank continues to grow, is there any concern that there will be a time when the model cannot scale up any further? We depend on high-skill individuals with a particular mindset, and you don't just find those special folks on every street corner. Josh is absolutely right about that. We don't just find those special folks on every street corner.
I think that as we talked about earlier, at every stage in our evolution, we tend to solve a new set of problems. They haven't really been terribly distinct from the problems maybe we solved the year before or the year before that, in terms of understanding the markets that we're operating in terms of understanding the operational infrastructure we need, in terms of making sure that we have the right people on the team. So in thinking about a time when the model cannot scale up any further, I don't know, I don't know that I have much of a perspective on that. I think we're focused on solving what I might call are the near-term problems. Solving the near-term problems, we'll quickly find ourselves at mile 20 or 22 in a 26-mile race.
The marathon does get run one mile at a time. Josh is right that the key limiter in the business is people. Trying to figure out how we can continue to attract very high-skill individuals to the team and offer them a place where they can excel as part of that team is something that I spend quite a bit of time thinking about. That is the limiter. It's a small team. We have at any given time right now, say between 80 and 90 full-time equivalents in the company. We have grown a little bit over the last six to nine months. That means that everybody on the team needs to approach what we're doing with a set of skills and experiences and a competence that is unusual. For some people, I think that is compelling.
We wanna find those people. If any of you are watching right now, or more likely you're watching this recording six months from now, on our website after maybe we've had an initial conversation, if that's the kind of person you are and the kind of environment you're attracted to, then we wanna talk to you or if this is a future you, we wanna keep talking to you. That really is the limiter. We need to keep getting better at doing that. Good. That was a pretty quick one. This is from someone who's anonymous. How does the bank feel about using Federal Home Loan Bank advances to grow going forward? This one I'll let you answer because I think you've got a good story for it.
Patrick knows the story. I guess it was 28 years ago when I joined the bank. My first discussion with some of the federal examiners, they said, "We note that you've got $a few million in Federal Home Loan Bank advances on your balance sheet. When do you intend on paying those back?" I looked at him and I said, "Never." Why? You know, it was thought of as, at the time, apparently by some folks at the Home Loan Bank, advances would be temporary things. You just borrow the money when you needed it, then you replace it with deposits. From my perspective then and my perspective now, money is money. We borrow it from a variety of different sources. We have deposits. We prefer DDA deposits.
Obviously, from a cost perspective, that is the most effective deposit gathering you can do. In terms of certificates of deposit, there are periods that Christian can do a lot better borrowing from the Federal Home Loan Bank or borrowing from a variety of other sources than he can from Mrs. Jones down the street who, like my dad in his later years when he semi-retired, he would spend a lot of time driving around. He would go from bank to bank seeking the highest rate on a one-year CD that he could possibly find, and driving the bankers at those individual banks crazy, looking for 10 more basis points. You know, yes, I think we feel pretty comfortable relying on Federal Home Loan Bank funding for some of our funding needs.
That's wrong. Given the rising frequency of coastal natural disasters and Hingham's concentration in coastal cities, the firm factoring this risk in either on an individual loan basis or a portfolio management basis. I think the answer is yes. It really manifests most clearly on an individual loan basis. You know, obviously, there are requirements that we have for flood insurance, which are industry-wide. I do think we have some heightened sensitivity to particularly, I would say, the problem of erosion. Some of the markets that we operate in here in Massachusetts, this is really less salient in Washington. Really not at all there. And not at all in San Francisco, given where we've been lending. We don't have anything on the beach.
Here in Massachusetts, there are some markets that we operate in where there really is a distinct erosion threat that is not captured in flood data, and particularly down in the Cape and the Islands. That's something that on an individual loan basis we're very sensitive to. There are loans that otherwise I think would have been very attractive, but they were 30-40 feet from a bluff that was moving and not 400 feet from that bluff. There are certainly a number of loans that I can think of on an individual basis where we declined to move forward because of that risk. It's invariably the case that those are valuable properties, where even at modest leverage, the dollars at risk that we might have are fairly substantial.
Going out and putting our hands on collateral like that and making an informed decision about the erosion risk is something we've done. That's not something that we're doing on a portfolio basis, though, if that answers your question. Anybody? Gunnar.
Gunnar Peterson, Hingham shareholder from Cape Cod.
Actually, Gunnar, I'm gonna hold you for a moment. I think we have a mic just for this purpose. If Eric's okay with it, you're gonna get to take it home with you.
Gunnar Peterson, Hingham shareholder from Cape Cod. I have a follow-on to Adam's first question. I remember when you went to DC, you liked the market and you liked, I think at the time you said a relatively lack of competition, just a small set of competitors. Would you say the same about San Francisco? It's obvious that the market is super attractive, but what about the competitive dynamics in there? Like, where do you see that you would fit in and have any advantages versus what I assume is a pretty aggressive set of competitors there?
There certainly is competition in both markets. The question, just in case it didn't come through on Gunner's mic, was Gunner, correct me if I'm wrong, but to sort of talk about the relative competitive dynamics in San Francisco and in Washington. In both cases, these are clearly affluent coastal dense markets where there are a lot of banks. In thinking about the competitive set for us, really we're thinking about banks in, say, roughly the $1 billion, maybe a little bit smaller, to $10 billion range, which have the capacity to offer both on an individual transaction basis, but more importantly, on a relationship basis, credit to mid-size commercial real estate investors, particularly in multifamily. The agency competition from Fannie and Freddie is present in every market. The insurance company competition is largely an invariant to market.
It's gonna be there. Really what we're talking about are banks. In Washington, there was a distinct hollowing out of those mid-size banks, going back all the way to probably 2000-ish, a little bit after. In San Francisco, the same trend has been present, and it may not have been as distinct in Washington, but it was a distinct one. In looking at that $500 million to, say, $6-$7 billion range, there were a lot of those smaller banks that had acquired, rolled up. There's some banks in the Bay Area that had been very acquisitive. There were I won't call them failures. There was some distress during the crisis that was absorbed elsewhere. There are a number of much larger banks that have a substantial presence in San Francisco.
They're not present here in Washington, where I think we've been able to compete very, very effectively. Those banks are operating at a level of the market that we just don't see here in Boston. It'd be very, very unusual on a 10-unit apartment building anywhere in the Greater Boston area to find Wells Fargo, for instance. That is absolutely not true in the Bay. The other dimension is that there are some excellent larger banks in the Bay Area that are more recently present here in Massachusetts that are very, very capable competitors that we respect a great deal.
Because of their size, particularly in the Bay, we're able to compete more effectively against them there because the timing of the market there has been so great, and that means that there are customers there who are happy, satisfied, or haven't received the attention they want. We've had some success with that as well. That same trend is present in terms of consolidation. It's not the case that we're in a rural market where there are two or three banks in any of the geographic areas that we operate in. That slightly diminished competition in that particular segment is absolutely true there and true in Washington.
That is not true here in Massachusetts, and that's a function, most powerfully of mutuality because of the degree to which this market is fragmented by the historical presence of. Did that answer your question?
Yes.
Okay. Can you touch upon the technological investments within the bank you've made over the last year, last couple of years, both on the customer-facing side as well as the back office? That question was from David. I think there's probably a couple of different dimensions to this. Maybe we start on the customer-facing side and then work in the back office a little bit. Yeah. On the customer-facing side, most of what we've done in the last couple of years has been largely incremental. Which is to say incremental improvements in the kind of core digital offerings for our personal customers, whether web or mobile, or for our business customers, whether web or mobile, or in the payments interfaces that they're working with, most notably on the wire side.
Probably the largest customer-facing investment in the last several years is the work that we've done on online account opening, which has gone through a couple of iterations. The first iteration was the use of a product from Fiserv, which provides our core ledger, for online account opening. I would say there was some success there, but we were not ultimately satisfied with that. Implemented a new product last year with a company called MANTL for online account opening.
There's some embedded things within that by way of, fraud and security, with a company called Alloy, where our ability to open accounts digitally in a totally straightforward manner from customer's first interaction with the bank as a personal customer through to the onboarding of that account and the fraud screening of that account to the funding of the account can be accomplished without any human intervention. Whereas the first generation of our online account opening platform, we could do maybe 80% of that. It wasn't truly straightforward, and there were some things in there that we still needed to be going in and managing, and we weren't satisfied with that. That was a fairly significant one on the personal side that was customer-facing.
We do have something coming up in this next year, on the business side, which will be both, I think, impactful for our customers, and a fairly significant investment for us in terms of dollars, which is a new cash management solution, for our business customers, where our current solution is something that I think that we've gotten a lot of mileage out of it. The size and complexity of some of our business customers requires, I think something much more capable. That's something we have in place, in the second half of the year.
In terms of kind of what's described as the back office or infrastructure, one of the things that we had to do as part of that project with MANTL was work with Fiserv to build out an API layer that we could use to communicate directly with our core processor. API or application programming interface, the often used and maybe cliché at this point description of APIs. You can think of them as Legos in some ways. These are things that allow us to take our core technology platform and integrate it with third-party providers in a way that we could not, and do so in a way that is not custom but is reusable. These aren't custom integrations, they're integrations. We're using a reusable set of components, Legos, for lack of a better word.
The work around that, I think in the long run is likely to be impactful, although it'll be impactful in ways that I think may be difficult to directly perceive, right now. I hope that was helpful, David. Right. Not sure about that one. Okay. Are there publicly traded banks you aspire to or feel share the same ethos and outlook as management? I mean, there are a lot of wonderful banks in the United States, some public, some private, some mutual. I'd be real hesitant to go ahead and touch on that one.
I think that there are some instances where there are management teams that, if you were to look at some of the criteria that we specify with respect to equity investments, there are some instances where there are teams that are purely owner-oriented, are clearly focused on generating returns or building businesses with a long-term perspective. Yeah. Are very careful about credit. Yeah, I wanna avoid naming any names on that one, but there are some great ones out there. Will the bank adopt fintech and blockchain technology to improve liquidity, faster transactions in the near future? That's from an anonymous participant.
I think that the banking industry, and this is something we've talked about a little bit before, I mean, fintech is a word that I would might use if I were trying to raise capital from VCs right now. The financial services industry has been using technology to improve experiences for customers and reduce waste for 50 or 60 years. The three large core processors are themselves amalgamations, particularly in Fiserv's case, of a lot of different smaller financial technology companies that either built core ledgers or built online banking products or built mobile banking products or had payment offerings. I think that the use of technology in delivering services to customers and reducing waste is not a new story. It's actually quite an old one.
I think there's no bank in the United States that hasn't adopted a strategy of using technology to some extent to improve those outcomes for customers. Where I don't think we would be as interested or focused would be in areas where the use of that technology doesn't provide a distinct, meaningful, superior experience to the customer. I would say that there are a lot of instances in which banks, particularly smaller banks that I think are trying to identify ways to stay relevant to their customers, are looking to integrate technology solutions with their core, sometimes in a way that's not terribly seamless to deliver some product or service to a customer that that customer can better obtain elsewhere.
I think we see this particularly in a lot of the varieties of person-to-person payments, where over the last several years, there's a lot of banks that have implemented direct P2P fintech integrations with their core or have been involved in Zelle, which is largely a bank-sponsored, bank industry-sponsored product. The reality is that most of the customers that had a use case to send $15 or $20 to a friend or even somewhat higher numbers, they were using Venmo, and it was a great experience, and it was an experience that the team at Braintree, which was acquired by PayPal, spent a lot of time putting a lot of effort into.
There's really no reason for us to look to add some functionality to our app or implement some sort of separately branded thing in the app to try and push that on customers. I think the key thing there is thinking about, is that thing something our customers need from us? Is that thing something that delivers unique differentiated value for them coming from us? Oftentimes the answer to that is it doesn't. Those are instances where I think we're likely to steer clear. With respect to blockchain, the advantage of that kind of technology versus what we're doing in our business in terms of our core ledgers sort of. There certainly are some larger banks that are doing some interesting things in payments with blockchains.
I don't see that we would have interest in that at this time. Anybody else here in the room? Sorry.
From Dixon Holder from Ecos. There's probably 5,000 banks or so in the U.S., with a very specific strategy of going quality and types of people, very specific types of loans. Why does no one exactly copy what you're doing?
You know, let me take that first, Patrick. It is difficult to understand, and part of it is, our strategy could be copied, but it's not only the strategy in looking at it's the execution of that strategy. Sometimes it's difficult to. We formed that culture over a long period of time. We talked about sense of credit and so forth. It's difficult to just impose that on a bank that has not developed in that direction. So I think the execution of the strategy, we would think some people might consider, and whether they could execute upon it, I don't know. The other thing is many bank managers and bank teams, believe that, offering every kind of product and this focus that we're talking about, they believe it's necessary or somehow enhances their significance.
The broader the range of products, the more complicated my task, and perhaps the greater I should be compensated. I don't know if that's the thinking, but I suspect in some instances it might be that they view a more complex, although less profitable strategy as being deserving of greater rewards. Which from my vantage point as a manager and as a shareholder, I would be much more focused on strategy and whether it can produce real returns for shareholders. It's a great question. It's difficult to answer with any great degree of specificity. Those are my thoughts on it, I mean.
I think that second piece is probably the root of the story in the sense that there is a view if you don't offer those other products and services, it may not be real banking or a sufficiently sophisticated bank or a real commercial bank would have a size of C&I business or U.S.-based lending or which would be in the leveraged lending business. There's an economic component to it in the sense that there is a belief that taking a series of return streams from just different businesses, putting them together in one bank might, that kind of diversification might be important from a return perspective. I don't know if the data bears that out.
I think the more powerful obstacle about why there are relatively few people who have copied what we do, and I would be very careful in saying that in a sense that there are some banks out there that do some things that look very, very similar to us. They do not copy us. In some ways, we copied elements of them or probably evolved for the same reasons. You know, they were not looking at what we're doing here. It was a cultural block. It was that feeling that you weren't a real bank without having those things. I think that that's very powerful. I don't think that can be overrated in terms of thinking about how corporate managers behave. That's true in banking, and I think that's probably true in other industries too.
In banking, in particular, the institutional imperative is so powerful. If I had a nickel for every time someone said that other banks do X, then we'd be talking about much higher returns. Because it is, it's a persistent refrain. I think there are a whole bunch of reasons why that's true in banking in a way that is different from other industries or maybe much more powerful. That cultural institutional imperativeness to sameness. Other people do it this way, I should do it this way. Other people have this diversity of businesses in it that are seemingly complex and difficult to understand, and therefore, if I have some people doing that must be on a freeze work at night. I think that's the driver. It's a great question.
Because there is nothing about what we're doing, like I said earlier, that's truly defensible from a product or a structure standpoint. I mean, we don't have patents. We're not sole source. To give away Semper Fi. We're not the only supplier of seat belt buckles in the United States on FAA-regulated jets. We're not selling some unusual part for fire suppression in a helicopter's fuel tank. There's nothing about what we're doing that's particularly unique and complex. Actually, in what we do, if you think about the asset class that we really specialize in, it is the least complex of the sub-product types in commercial real estate. You know, arguably, there is complexity in retail and office that is not replicated in multifamily.
Arguably, if you develop some expertise in those areas, you develop some sustainable competitive advantage. In multifamily, that is not the case. It's the most liquid, it's the area where there's the greatest transparency of costs and rents. There's no data advantage. We don't know anything about these buildings that other people don't know or can't find out. That's a big difference, I think, probably.
To add to Patrick's comment in response to your question. The same message. The herd behavior in industry is partially shaped by the fact that it's so heavily regulated, and that regulatory push promotes similar behaviors. You will hear frequently from regulators, "You do this differently," or, "Your process is different. Why is that?" They're used to seeing a certain type of behavior or activity, and it takes some effort to educate them as to why, what the rationale is for doing something differently. We frequently observe the fact that the industry itself uses a set of consultants that are. They use the same consultants. They all use the same consultants. They're getting the same advice. In many respects, that's why they act and behave the same. Advice from consultants is.
No, I like it. This one is online. This is from an anonymous viewer. What are the biggest costs you feel the bank can drive down in the short, medium, long- term? It is actually a really important question. I'm gonna answer it a little bit differently. This goes to that question of structural choices and operational choices. I think it's, and I mean this as nicely as possible. It's commonly misunderstood, I think, that we operate with the operating margins, the efficiency ratio that we have, cut or remove some costs. You know, implied in the question, what are the biggest costs the bank can drive down? I think it isn't really the way that we think about the operational leverage, the operating margin, efficiency ratio.
Because the answer is there really aren't any costs that the bank can drive down in any kind of meaningful way. If we're to look over the last couple of years, you do see some lower occupancy costs as we've taken the branch network and consolidated it. Really, the efficiency ratio is not about driving costs down. It's about figuring out how we can perform and do so with the cost structure that we have or spend more, but do so in ways that have strong operating leverage. The way that we really get that operating leverage is by finding great people. We get the most operating leverage on finding great people that compensate well and that perform.
probably the second big class is the use of technology and some of the process improvement work that we talked about. We have a strong set of internal controls and processes, but it is remarkable to me, having been at this for quite a while, how every day, every week, every month, still come in and find opportunities in our existing control infrastructure, in the existing process infrastructure, where we can make relatively simple changes to give us better control at lower cost, allow us to scale more volume over that process. Oftentimes, that's a better result for the customer. That's not writing a big check, that's not bringing a systems integrator. It's not a lot of technology. That's often something that's very simple. It's a non-answer to this question, but I think it's an important focus.
It's not about being cheap, it's understanding how do we get operational leverage. Okay. Tim Farina. This is Tim's question. Any thoughts on the equity investments as they grow as a percentage of the balance sheet? How do you think about risk reward here? Thank you. Yeah. I think there is an implied percentage of balance sheet based on where we think about leverage. When we think about the size of that portfolio return, we most often talk about it as a percentage of shareholder capital. That's something that's grown over time since we started doing that. As a percentage of shareholder capital, it's grown more rapidly during some of the periods in which we've been able to commit more capital to it because of the opportunities that we've had.
I think if you think about it as a meaningful piece of the business, both from a financial perspective, and then also in terms of the opportunities that we have that are more intangible, to engage with those businesses and sometimes with those management teams. You know, it's a long-term piece of the business. Given the investments that we have, our approach to that, which really is that partial ownership approach. What we own in that portfolio, we've owned almost all of it since the beginning. The size has changed over time, obviously. These are some companies that we've spent almost a decade now staring at. I think we think it's a meaningful piece of the business that we'll continue to do it. As we grow it will grow in terms of-
We're approaching our 4:00 P.M. hour, so I think we can do at least one more call.
Miguel Nadeau, you've touched a few times on your size competitive advantage. Can you expand on that a bit? Why is it easier for a smaller bank to provide superior service? I think there's probably some sweet spot that we're close to. There's a couple of dimensions to that. In order to provide service to the kinds of customers that we're targeting, either from a deposit perspective or from a lending perspective, you need to be big enough to do a couple of different things. One, you need to be big enough to have a team that can deliver that service, that enjoys solving problems for customers, and that you can compensate. Compensation is not everything, but it's important. You need to be big enough to have that team.
You need to be big enough to be able to afford the technology investments you need to deliver that service for customers or allow customers to consume that service from you. You need to be big enough from a credit perspective that you can have a relationship business with, borrowers that you're targeting. That's important because it reduces your cost of acquisition for every incremental piece of business. When we talk to that customer for a second or third or fourth time, it's less expensive to acquire them. Because of that relationship, it improves the odds that we capture all the deposits in that relationship. Having the size to do that is important, and that's purely a function of capital because of the way that legal lending limits work. Our legal lending limit is 20% of shareholder capital.
If you're going to bank borrowers, families, businesses in the markets that we operate in, Boston or in San Francisco or Washington, these are not places where you're going to do $10,000-$100,000 loans. It's likely that the loan size will be larger. What that means is you need the balance sheet capacity to engage in that relationship. The flip side is that you need to be small enough that there's still a very hands-on approach to credit. That means that you have the capacity to be flexible when flexibility is warranted and it's profitable to bank. You have the capacity to understand there's a credit risk here. It might flow straight through underwriting a larger bank. It might check all the boxes, but we've seen that guy before. Or what? Or that property.
You know, the business plan for that property, it sounds great, but we know that that corner has never worked for a restaurant in that space under that apartment building. There is some sweet spot there where the ability to combine all those advantages of size fits nicely with the advantages of being a little bit smaller. There's a trade-off there.
Is there another one that you think is important to answer as we approach 4:00 P.M.? We're almost done.
We had a whole bunch of questions from Connor Cochran. Connor, I apologize that we didn't touch on a bunch of these. For the questions that we didn't touch on today, I think we're gonna get them in writing via an 8-K. We did the same thing last year. Could you describe the strategy to grow the loan portfolio? It's the same strategy that we've had here in Eastern Massachusetts and Washington for however many years, which is to say, we can figure out who owns buildings that we'd like to lend on. You know, we describe that kind of class of asset. It is not a secret who owns those things.
We figure out who those people are and who those businesses are, and call them on the phone, and we try and get in touch with them, and send them mail, and I would say we knock on their doors. There's no silver bullet to what we're doing in these markets. It's making it known to the people that own the assets, the people that advise the people that own those assets, that we're interested in their business. For people that have modest needs in terms of leverage, and are willing to accept modest leverage in exchange for compelling rates, that we'd like to talk. The brick by brick is I guess the strategy.
Great. Well, the hour having arrived, say thank you to everyone, both those of you who are present physically and all those folks on Zoom this afternoon. I've enjoyed the discussion. Thank you, Patrick, for reviewing so many of those questions with us. I hope I see you all here next year. Actually more. Maybe some of the Zoom folks will join us in person next year. We'll promise to continue to improve the refreshments. With that, I wanna thank you again, and have a great afternoon. Thank you.