If you keep yours down a little bit, that'll help me. Appreciate that. For those of you that don't know me, I'm Bob Gaughen. I'm the Chairman and Chief Executive Officer of the bank. On behalf of the Board of Directors, I want to welcome you to the 191st Annual Meeting of the Hingham Institution for Savings. This is our 35th anniversary of our initial meeting as a publicly traded company. We're going to conduct this meeting again this year in person and via Google Meet. I think we've got an equally significant attendance online following along on Google Meet with us today. We have with us all of the members of our Board of Directors today. We also have a few other folks that I should introduce. First, Artie Regan of Regan Associates.
They have been designated by our board as Inspector of Elections again this year. Thank you, Arthie We also have with us Marty Kane and Molly Ebert from our CPA firm, Wolf & Company. If you have any really tough questions, you can ask them how they're doing. Today, we're going to again conduct the meeting in two parts. First, the formal portion of the meeting that involves those five proposals that are set forth in our notice of meeting, proxy statement. After we have dealt with the formal portion of the meeting, we will adjourn that. We will move on to a presentation from our president, Patrick, with regard to the activities of the bank this past year. After that presentation, Patrick and I will be available here to respond to questions.
We've received a number of questions digitally, and we'll go through those first, and then we'll take questions from the floor. A few housekeeping items. First, this meeting is being recorded. Second, all of the Google Meet attendees are attending in listen-only mode. Third, as noted in our proxy materials, all voting is done either in person or by proxy. Electronic voting is not available. Fourth, I would remind myself to silence my cell phone, which I think I've done. Let me see. I have. Lastly, I want to draw your attention to the Safe Harbor statement here somewhere. Someone just did that because this isn't working. That's the so-called, I call it the corporate Miranda warning that we have. With that, we will proceed to the formal portion of the meeting.
It should be noted that I've received an affidavit certifying that the notice of the Annual Meeting and proxy statement was sent to all stockholders as of record March 3rd and were mailed on March 10th. I will inquire as to whether there's any shareholder present that wants to vote in person. If so, Mr. Regan will give you a ballot. I assume everyone's already voted. Okay. Very good. Going there. At this point, I'm going to call on Mr. Regan to furnish us with a count of the shares present personally or by proxy.
Mr. Chairman, on this very pleasant last Wednesday in April, there are at least 1,898,480 shares present either in person or by proxy.
That being the case, I will declare that the quorum is present and the first matter to be voted on by the stockholders is the election of directors. The nominees for election to five Class 1 director seats for three-year terms are as follows: Ronald Falcione, Kevin Gaughan Jr., Julio Hernando, Ryan T. Joyce, and Robert K. Sheridan. Do I hear a motion that the nominees be elected as directors of the bank to serve until the expiration of their respective terms and until their successors are duly qualified?
So moved.
Second.
Having received that motion, is there any discussion on that motion? Anything at all? No? Given that fact, we'll now proceed to a vote. I'll call upon Mr. Regan to announce that vote.
Mr. Chairman, each nominee for director received at least 1,118,263 shares voting for their election, which is in excess of both the majority of the outstanding shares and a plurality.
The holders of a plurality of the shares present are represented and entitled to vote at the meeting. Having voted for the nominees, I hereby declare them to have been elected. Next matter to be voted on by the shareholders is the election of Mrs. Jacqueline Youngworth as clerk of the bank to serve until the year 2026 in the Annual Meeting and until her successor is duly elected and qualifies. Is there a motion to that effect?
So moved.
Second.
Is there any discussion on that motion? Motion can be made and seconded. I'll call upon Mr. Regan to announce the vote.
Mr. Chairman, our Jackie Youngworth received an impressive 1,477,045 shares voting for her election as clerk of the bank, which represents 98.96% of the shares voting on the matter. Outstanding.
Great job, Jackie. All shareholders present, having been given the opportunity to vote, I will declare Mrs. Youngworth again elected as Clerk of the corporation. The next item of business 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 approve the compensation of the company's named executive officers as disclosed pursuant to the Securities and Exchange Commission's compensation disclosure rule?
So moved.
Second.
Having been moved and seconded, is there any discussion on this motion? Any at all? Hearing none, I'll call upon Mr. Regan to announce the vote.
Mr. Chairman, at least 1,166,898 shares voted to approve the bank's named executive officer compensation, which is in excess of both the majority of the outstanding shares and a plurality.
Thank you, Arthie. The holders of a plurality of the shares present are represented and entitled to vote. Having voted in favor, I will declare that motion has carried. The next item for consideration involves the vote on the future frequency of say-on-pay votes. As you know, shareholders can decide whether to have that done annually or to do it up to, I think the requirement is a minimum of every three years. The board has recommended that we do that every year. We believe that it is in the best interest of shareholders to have regular annual input on that if they so wish. The next item for consideration is the board's recommendation that that frequency be established as an annual frequency. Do I hear a motion to that effect?
So moved.
Moved and seconded. Any discussion on the motion? Hearing none, I'll call upon Mr. Regan to announce that vote.
Mr. Chairman, at least 1,326,180 shares voted to have the so-called say-on-pay votes occur each and every year. That number is in excess of both the majority of the outstanding shares and a plurality.
That vote, having received a plurality of the vote, I will declare the same as having been approved. Next item and the final item to be acted on by shareholders is to ratify on an advisory basis the appointment of Wolf & Company as the bank's independent registered public accounting firm. Do I hear a motion to approve the appointment of Wolf & Company as the bank's independent registered public accounting firm?
Second.
Having been moved and seconded. Any discussion on that motion? Any discussion at all? Hearing none, I'll call upon Arthie to announce that vote.
Mr. Chairman, at least 1,889,610 shares voted for the appointment of Wolf & Company as the bank's independent auditors. That number is also in excess of both the majority of the outstanding shares and a plurality.
That motion, having received a plurality of the shares, I will declare the same to have been adopted. Before we move to adjourn the formal portion and we move to Patrick's presentation, I'd like to say a couple of words with regard to the way we've opened this meeting for 32 years. In the beginning of the meeting, I have, without fail, recited which Annual Meeting this is. This year, this is our 191st Annual Meeting, our 35th as a publicly traded company. This year, that history really did strike me in the sense that when you think about this bank and you think about this organization, we have survived and prospered through civil wars, world wars, great depressions, great recessions, smaller wars, smaller recessions, smaller depressions. We've done that with tremendous durability and resilience.
This year, as we emerge from an historically challenging period of interest rate increases and yield curve inversion, I'm reminded of that durability and that resilience. I want to thank all of our colleagues, our President, and our board for their efforts and their stewardship of this institution and for their contributions to that resilience that we have again shown. With that, as there is no further business to come before the meeting and the formal portion of the meeting, I would like to hear a motion to adjourn. So moved and seconded. All in favor say aye.
Aye.
Opposed no. So voted. Thank you very much, Patrick.
Thank you. Before I launch into it, Dan and Kayla in the back, is this volume okay? I have gotten some feedback in prior years that I do not project or speak loudly enough, but I'm trying to take that on board. First, thank you to the board of directors. As my dad said, everyone is here today, all of our colleagues that are here. In particular, I wanted to thank Kayla and Dan and Caitlin and Mike and Adam. Kayla, our Chief Marketing Officer, Dan, our CIO. Adam, Caitlin, and Mike are all in our IT group for helping put this together. Lucy Romanowiz, where is Lucy, is behind John Louderhand. Thank you for your hard work. Linda Roy as well. We, like my dad said, have been doing this for 35 years, public company, with, I think, two exceptions. We have always done it here.
One being the meeting at South Shore Country Club, which we have never gone back to after getting control of the bank in 1993. The other was, I believe, in 2016 or 2017 at the Old Ship Church, which is a couple hundred yards this way. We did that because the Hingham Historical Society was renovating this building, so it was not available to us. I recite that because we do the meeting every year, and it can be easy to take for granted the work that those folks put into pulling this off, both in terms of the space and in terms of the technology component. I wanted to express my appreciation to them. I also feel badly. We have some folks that help out on AV, and I actually do not know the two of your names. Ariel and Roger, thank you for your help.
With that, I want to launch into the substance. The format is the same as the prior year's First Financial Results for 2024, and we're going to touch on the first quarter of this year a little bit, the operating rates, and then finally questions. Somewhat fewer questions here than last year, but we also have folks in the room that I know have questions and are interested and engaged with business of the bank. We'll probably alternate back and forth until we run out of time. I would just say, before we get to that point, please make them difficult. This has been the front of the slide deck for a number of years. Banking is a very good business unless you do dumb things. Warren Buffett with two Ts. It is a true statement, as I think we've talked about in some recent years.
It is possible to do dumb things. No one is immune from that. I certainly have done some of those. The core elements of the business, which make it an attractive one, I think are still present. I think there is still a great deal of truth here, and it is helpful to remind ourselves of this. Two slides, again, that we cover every year. It is interesting, particularly in our conversations with bankers that are considering joining Hingham, that have watched videos of prior Annual Meetings. These two slides are the two slides that are most often referenced in the conversations that we have with them. I think that is because there is a simplicity to our business, and the explicitness with which we define the things that we do not do is important, and it resonates with good bankers.
It resonates with bankers that have a clear idea of what they want to do for clients and a clear idea of what they do not want to do or where they do not think that banks often add value. First, what we do do, commercial and personal deposit banking, commercial real estate lending, which, as everyone here, I think, understands, but is worth repeating for us, is primarily multifamily lending or lending on property where there are people living in it. That ranges from five-plus-unit apartment buildings. That could be 200 units. It could be 100 units. It could be a triple-decker in Dorchester or Somerville. It could be apartments in the city that have ground-floor retail or office in them. Most of what we do on the commercial real estate side, someone lives in. Finally, residential real estate lending.
For us, this is value-add for our clients. This is lending that solves a problem that they have. It's often non-conforming. It's often lending to our existing customers in our client base, whether they're commercial real estate customers or perhaps nonprofits or other institutional customers on the deposit side. It's not a garden-variety conforming loan that you could walk into any bank and get. It's something that we need to do for them that delivers some special value. We need to solve a problem they can't get solved somewhere else. What we don't do, I won't read the whole list off. It's basically everything else in the universe, and we group it into a couple of things. C&I lending in all of its varieties, we don't do.
I think we have a limited number of C&I loans that we have with some nonprofit customers, a school, another local nonprofit, but you count them on one hand, and they're less than $1 million. Consumer lending, again, this is a broken record for folks that have been at these meetings before or have heard me speak. If it moves, we don't lend on it. Cards, boats, auto, RV, personal lines, all of it. Investments, we don't touch. Insurance brokerage or underwriting, we don't touch. Interestingly, a business that in recent years has changed in Massachusetts. In prior years, we've talked about how other community or somewhat larger banks have done very well at that. Eastern Bank in Massachusetts was a great example of that. They recently sold their insurance business. Secondary market residential, as I said, we don't sell our loans in the secondary market.
Tax credits, solar, cannabis, crypto, and then finally, participation. I lied. I did read all of it. I apologize. Capital allocation, no changes from prior years. First, we're looking to invest organically in the balance sheet in growth and loans and deposits. Our view is that over a long period of time, that's where the most attractive returns are likely to be. There may be particular moments in time where returns are attractive elsewhere in the structure. Over 30-plus years, funding organic growth and reinvesting in the business has been the highest source of durable returns through time. Second, minority equity investments. We have a portfolio of equity investments, some public, some private, primarily in banks and financial services, but with some significant investments elsewhere. We like it for a variety of reasons. We don't pay control premia. We have liquidity.
It generally isn't a business that we think we can understand. It's either similar to or adjacent to the core operating business that we run. Third, dividends, both regular and over time special, as everyone knows. We did not pay a special last year. Finally, repurchase, which is something that historically we have not done, but we discussed extensively last year. I think going forward is something that is on the plate in a way that it has not been in the past. Not attractive acquisitions. When we took control of Hingham 32 years ago, the balance sheet was about $140 million in size. We're at about $4.5 billion now. As everyone knows, that was everyone in the room, but perhaps others might not. That was 100% organic. We've never bought another bank. We've never acquired branches from another bank.
We've never done purchases of loan portfolios. The key thing is that we really are not in the acquisitions business. The reason for that is that over time, we are suspicious of its ability to add value for owners. We are suspicious of the ability of banks to deliver better service to clients. We generally have not found in studying acquisitions elsewhere that the opportunities that are created for our colleagues, for our staff, are good ones. To the extent that it does not serve the owners, it does not serve the staff, and it does not serve the clients, one might be left wondering who does it serve. Generally speaking, our view is that that's management teams. As we've discussed before, we, for better or for worse, manage the bank, but think of ourselves as owners first and bankers second.
This remains as unattractive as it has in the past. 2024, the financial results. I think I've trimmed a couple of slides out of here, so it should go a little more quickly this year. There we go. $28.2 million in earnings for last year. Better than nothing. Better than 2023. Not really satisfactory from our perspective in terms of the returns on equity that we've historically earned, which have been in the low to mid-teens over time. 2020 and 2021 were particularly exceptional years, in part because of the shape of the yield curve, in part because of the contribution from our investment operations. One of the things that we talked about in April of last year and was the subject of, I think, a lot of discussion.
Most of the questions in reviewing last year's questions really revolved around this was, at what point did we think that the shape of the yield curve would uninvert or, put differently, when did we think that the operations of the bank would start to return towards a more normalized level of earnings? We absolutely hit that point last year, probably in the first or second quarter. From a trajectory perspective, the performance in the first quarter of this year, I think, for that out, we're going to get to it a little bit. We've seen a substantial increase in the net interest margin in the core operating earnings, which are the earnings that we normalized to remove any gains and losses from our securities, from our investment operations. There really was a turn early last year.
To my dad's point, I think everyone in this room, all of our colleagues, deserve a great deal of credit for the work that we did to move through that period. I think it is also worth noting these are GAAP earnings. I should maybe stop because I'm presuming something. Generally accepted accounting principles require that we report both our core earnings from the bank and then any gains or losses on our investments, regardless of whether we sell them, which are referred to as unrealized gains. In 2020 and in 2021, that substantially added to earnings. In 2022, there were unrealized losses. In 2023 and 2024, the investment operations helped us significantly through this period. Operating earnings in 2024 were somewhat weaker than this, but the portfolio was very helpful. I think it's important to be transparent about that.
Return on shareholder equity. This goes to my point earlier. $28 million in earnings is nothing to sniff at. On the other hand, what we're really looking at is what is the return on the equity that we've been entrusted by the owners to manage? Historically, that has been a low to mid-teens number, which is kind of a satisfactory one to us and at the top of the industry in the last two years. In 2023 and 2024, in particular, that number has been somewhat lower. Remarkably, it compares favorably to savings banks here in Massachusetts. Although I don't know that that makes me feel any better about my performance in that respect. Shareholder equity, book value per share. This is a key measure. This you'll find in our quarterly press releases.
This is something that I think quite a bit about: five-year compound annual growth rate and book value per share. This is the total stock of equity in the bank divided by the number of shares outstanding. There are a couple of things that impact this. One, what do we earn every year? That is the core operating earnings. That is the investment gains or losses. Two, what do we return to the owners in dividends every year? Three, what is the share count? This is where the question of repurchases comes into play. This five-year CAGR of 11.3% is actually very high for the industry. I think it is probably still in the top decile. It might even be somewhat higher than that. It is fairly low for us. If we were to look at the last five years, it probably would be the lowest.
Some work to do here, but still comparatively not bad. Low-cost leadership. Again, something we talk about every year, the efficiency ratio of over 60% looks positively astronomical if you follow our efficiency ratio over time. For the industry, it's probably right in the middle of the pack. In thinking about the efficiency ratio, it's influenced by two things. The numerator is the expenses of running the bank. The cost of leasing this room today, the electricity in the building, our IT budget, our people, everything. The denominator for the efficiency ratio is net interest income and non-interest income combined. What this means is that the efficiency ratio is fairly sensitive to changes in net interest income or net interest margin in percentage terms. In the last two years, we've seen this rise quite a bit. In the low 60s is very high for us.
We pair that with another ratio that we've tracked over time that we've talked about, which is total operating expenses as a percentage of total average assets for the year at 67 basis points. This compares to an industry figure probably around 230-240 basis points. It gives a sense of what the structural efficiency is in the bank. It is important when we think about the direction of the net interest margin as it was falling, as it troughed, and then as it's rising now. This really is a measure of how much of that increase in NIM we get to capture in the form of earnings. The more efficient that we are, the more of that increase we capture. In this respect, it's very, very positive. It's the product of two choices, choices that we talk about every year. One is game selection.
The other is game play. Game selection, which is the structural choice, is the question of what we do and what we do not do. The operational choice or game play is how we play. How we deploy technology to take cost out, how we try to recruit and retain and develop higher quality bankers that can, in turn, attract and retain more profitable customers. That is really about play, not about selection. Top three words have stayed the same for a number of years. Astute observers will see that we actually did not grow the loan book last year. It actually shrunk just a little bit. We had a decent year in terms of originations. We had some strong payoffs in our construction book as well as in the perm book. The loans that we made last year were good ones.
I don't think it's the case that this is necessarily going to grow every year. There's a bit of deleveraging in the balance sheet where we accumulated capital and we replaced some wholesale funding deposits, and we focused on making good loans. Net charge-offs. This is a tough slide for everybody to see in the room. If you've been able to bring it up on your phones using a QR code, it might be helpful. What we're looking at here is net charge-offs at hand and net charge-offs for all FDIC insured banks. Step away from the microphone. That's what I thought. From 1994. We extended this a little bit this year to capture the entire run that we've had here at Hingham. The blue bars are net charge-offs at all FDIC insured banks for that year.
The red bars are the charge-offs at Hingham for the net recoveries. To stop for a moment because I'm not sure that everyone necessarily understands what this is. A charge-off is essentially when we recognize that we have lost money on a given loan. Net charge-offs reflect two things. One, the loss, and two, the recovery if we experience any of it. Is that sound right, Marty?
Right. Good.
Good. What you can see here over time is that we have not been immune to credit issues. We certainly have not been immune to losses. There are some years, particularly if you look in 2008, 2009, 2010, 2011, where we peak, I think it's seven basis points of net charge-offs in the midst of the great financial crisis. It really pales in comparison to what we see in the industry.
I think the point of emphasis here is that while it is certain that we have made mistakes and we will experience losses in the future, over time, remaining focused on credit quality is critical because net charge-offs really are the bank killer. Credit quality is the bank killer. There have in recent years been issues at First Republic or Silicon Valley or Silvergate that were primarily liquidity-driven and not credit-driven. In looking back over long cycles, credit is the thing that I think about when I wake up. It is the thing that I think about when I'm going to sleep, much to the chagrin of my wife who's here. There we go. Deposits, a somewhat lower five-year CAGR.
This masks what I think has been some really strong performance over the last year, both from our specialized deposit group and our retail banking group in core relationship non-interest-bearing deposits. Although we have growth here, under the surface, there's been a lot of remixing from higher cost time deposits into lower cost savings, money market, and most beneficially, checking deposits, and particularly in the last year, non-interest-bearing deposits. This is the last five quarters. This is essentially where we were a year ago when we met here. When we look back over the last year, I think it's 23% growth year over year in checking deposits. Again, driven in both SDG and the retail banking group, closing in on a million. That growth accelerated in the first quarter of this year. I think we're at 30% annualized.
Really, the product of the approach, personalized service, digital excellence, low or no fee in the two engines that I've talked about. The specialized deposit group, very similar to what we talked about last year, but it's worth checking in and reminding folks what they do. This describes two pieces to the group internally. Lee, I apologize for pretending that about half of your team belongs here. This is the customer-facing relationship managers and bankers that are developing new business with customers, existing and new prospects, as well as the team that supports them. Our cash management specialists are working with those clients to open those accounts, get them set up, tear them down, switch signers, handle issues, really the full range of servicing issues that those clients have. For larger, more complex service-intensive customers, that service model, that experience is something that's very, very valuable.
They do not get it at larger banks. If they do get it, they often have to pay quite a bit by way of fees. It is a model that we have had some success with and that we continue to invest in from a recruiting standpoint. That is true here in Boston. It is also true in Washington and in San Francisco. We have Phil from San Francisco actually physically present here today. Thanks, Phil. Okay, first quarter. A couple of things I wanted to touch on here. Loan growth basically flat over a year ago. Some good strong originations in the first quarter paired with a lot of payoffs that we like to see in the construction book and the perm book, some of which are at fairly low rates, so we will take them.
Deposit growth, I think about 10% year over year, 9% year over year at the end of the first quarter. Really strong growth in checking deposits in the first quarter, 30% annualized. On the income statement, if we looked at the net interest margin in the first quarter of last year, about 84, 85 basis points, 150 in the first quarter of this year, exiting a quarter somewhat higher. As the assets mechanically reprice as we originate loans at higher pricing, does the funding cost fall? We continue to benefit from extraordinary efficiency in the bank. It really is a core part of what we're doing. The investment portfolio contributed a little smidge in the first quarters. We've talked about that is composed of a number of holdings, many of which we've owned for over a decade now. Our approach is not a short-term one.
Our expectation is that it contributes over time, but not necessarily in any given order. A couple of topics here that I wanted to talk about, some of this we'll address in some of the questions. First, credit quality. Breaking it up into a couple of pieces, multifamily Washington, San Francisco, San Francisco probably being the least germane to the conversation here. We still see in the markets that we're operating in a fair degree of health in the multifamily markets. Vacancy remains fairly low. Rent growth continues to be fairly strong in Boston, in Washington, and recently in San Francisco, which is a somewhat new development. The reason for that, we talk about this a little bit in our filings.
We've talked about this a little bit here, is that all three markets are fairly supply-constrained markets, which means that for a variety of reasons, whether it's the regulatory environment, whether it's the supply of all land, it is somewhat difficult to create new multifamily supply in these markets. What that means is that in pairing that with a relatively high level of demand, again, both three markets are affluent, urban, coastal. There are some strong demand drivers, even, and we'll touch on this in some questions, even in Washington recently. You tend to see fairly steady low to mid-single-digit growth in rents, which over long periods of time from a lender perspective is important. In the multifamily market, I think we still see a fair degree of health.
In terms of funding conditions, I talked a little bit about the stabilization of the margin, growth in checking deposits. Although we've repositioned the balance sheet in some ways, we still remain overwhelmingly liability-sensitive. Our position is still for somewhat shorter-term rates to fall. Finally, scaling SDG, and I talked about this a little bit before, investing in that team, continuing to recruit relationship managers, continuing to identify really talented cash management specialists that work with that team to work with clients, and figuring out how we can find more customers that are a good fit for our model. We have a lot of business that we gather through referral. We have a lot of business that we have attracted through some forms of marketing. We're continuing to try to figure out how to do that more effectively in greater size and more efficiently.
Finally, I will not dwell on it, but process improvement, eliminating waste. This is simply something that goes on every year. I do not really have anything new to report on that topic. That takes us to questions. For that, I am going to sit down. We can start from the prepared, or if someone in the room has something, we can start in the room and move to the prepared. Anyone in the room with a question other than what? Yes, sir.
You elaborate how the coach in Washington.
We still have half the prepared questions. This has been something that there has been, I would say, an increasing level of interest in over the last month or two. I will probably equivocate a little bit, and then I will share some firmer thoughts, which is I think it may be too early to tell.
I think it's probably worth taking a question and breaking it into a couple of pieces. I think the first piece is what has GSA broadly defined said that they plan to do with the federal workforce, with the office footprint for the federal government. I think a second question is to what degree is that aspirational or rhetorical, and to what degree is it real? I think the third question is to the extent that we believe that some portion of that is real, how does that impact what we do? Let me try and take those sort of three in sequence. What has been rhetorical or aspirational is obviously very expansive. It's a significant portion of the federal workforce. There is a fairly high concentration of either direct employees in the federal workforce in the DC area or indirect employees. Particularly USAID.
USAID is primarily a contractor-staffed or was a primarily contractor-staffed agency. There were a number of prime contractors for USAID, think like a CommonX, for instance. Aspirationally, sort of a lot of changes in terms of the workforce. I think it's a little bit unclear to me rhetorically or aspirationally what the direction is for DOGE on the real estate footprint. GSA, which is essentially the U.S. government's landlord for its real estate needs. Landlord is the wrong word. I'm sorry. Broker, facilitator. Has for a long time been trying to figure out how to rationalize the footprint of owned and leased real estate, right? That's not new with DOGE, but there does seem to be really a new energy to it. What parts of it are real? I mentioned USAID because I think that that is absolutely a real impact.
Those jobs do not appear to be coming back. I think it's likely that there are other areas in the federal government where there are going to be significant reductions in the workforce. We can see some evidence of this coming out in some of the claims data. Federal government employees do not file for state unemployment. There is a separate system, but we can see some evidence of it there. With respect to what is real in real estate, I'm not sure. I think that is very early. The question is, how does it impact us? Thankfully, we do not have a government contracting lending business. In looking at other banks in the Washington, DC area, government contracting, which is really a form of C&I lending, has been a fairly popular business over time and for somewhat obvious reasons.
The businesses were doing business with the federal government, and those appear to be contracts that were money good. That lending business was a fairly popular one. I think that there are components of that business that are in real trouble right now, particularly if you had been lending into the USAID pyramid. Maybe if you're in defense and security, it would be a little bit different. I think that significant lending into office space that is primarily tenanted by GSA, I have some real concerns about that. The two things that I would say I'm most concerned about generally would be those two. We don't really do those two things. We have no government contracting lending business.
We have one property, two properties with GSA tenancy, and they're very, I would say, special purpose, and they're in the defense and intelligence as opposed to a Department of Agriculture or education or a kind of general purpose lease. I think there are going to be real impacts there. I think the next question is, what is the indirect impact on the economy in Washington? Because that's where it's most likely to show up for us in multifamily. It would be most likely to show up on the demand side, right? A lower demand for multifamily housing, higher vacancy, potentially reduced rents. I'm not seeing evidence of that yet.
In looking at both the data that we see from our borrowers and in looking at the kind of general data that we can get about the market, vacancy remains low, and rent growth remains fairly healthy. It remained healthy actually through December, January, February, which cyclically is not a great time for month-over-month apartment rents. It is very—I remember I think we talked last year, you own some apartments in New York, right? Yeah. I mean, that is not a great time to be raising rents. I am not seeing it there yet, but I am cautious about what that might look like. One of the reasons that I am cautious about what that might look like is that I do not know how much of the impact on the workforce will be real. I do not know to what extent the market may react dynamically and absorb it.
We regularly advertise for bankers in Washington on both the deposit and loan side, and we often advertise some of our operational roles as well. I'd say in the last three months, we've been getting some resumes from federal government employees who look like great folks. They look like they have a strong background. They don't have the subject matter knowledge that we need, but they seem smart, talented. I think they'll land on their feet. In thinking about the impact on us, it's not just a question of whether there's some demand that comes out because of DOGE. It's a question of whether the private sector elements of the Washington economy can absorb some degree of labor coming out of government at the margin. My instinct is that they probably can, but without knowing the amplitude of these things, the real size, it's difficult to tell. Yeah.
I supplement on that a little bit in the sense that there's a great deal of uncertainty. If the reductions are as substantial as indicated, it could be some negative impact. On the other hand, this countervailing influence in terms of the return-to-work mandate, does that bring more people in terms of rental pressure in the city? That's a potential positive. As Patrick indicated, as of right now, it's difficult. I mean, through March, there was still the rental increases were healthy in March. Metro ridership was up in March over a previous year. Some positive indicators, and it leaves us, I guess, with a level of uncertainty.
I'll probably add that whether this is cynicism or not, people have been talking about making the government more efficient for a very long time. The government has probably become more efficient in some senses, but in absolute terms, it has continued to grow. If I was thinking about measuring the impact of DOGE this year, it's difficult to tell. The uncertainty is pretty high. If we reframe the question, it was, what will the impact be if we go out and measure it five years from now? I have a higher degree of certainty. If we said seven to ten years from now, I have a fairly high degree of certainty that that impact will be muted over that time.
I wasn't kidding. You took about half the questions.
I'll alternate a little bit. I'll take one from here, and then we move back to the room. This was from Adam Mead. Adam, would you like to read your question? Okay. This is a good one. As of December 31, 2024, let me give this a little bit of color. This question from Adam is related to some of the investments that we've made in other banks that, for a variety of reasons, we've now disclosed in our filings. To give you some color for the question, I'm about to read. In Adam's words, as of December 31, 2024, ChainBridge Bancorp, Patrick speaking, this is the Bank of Virginia, disclosed four Reg O loans at 7% of capital. Founders Bank disclosed three at 19%, and National Capital Bank had one at just under 20%.
Just to add for everyone's benefit, a Reg O loan is a loan to an insider of the bank. Regulation O is a federal regulation that governs how banks lend to insiders. We do not. Adam again. I share Hingham's view of the risks of insider loans. I am wondering, A, your thoughts in general of investing in other banks that seek to mitigate, not eliminate these risks like Hingham. B, any updates or information you have on these loans that might be useful to Hingham shareholders. I have a couple of thoughts here. For everyone's benefit, maybe I should have done this at the beginning or the end.
Since 1993, we have had a policy that, with the exception of passbook loans or loans that are secured by a deposit account, we don't make loans to insiders of the bank or their affiliates that are covered by Regulation O. Regulation O provides a mechanism for banks to make those loans. And there's a number of different requirements. It's essentially that they be done on an arm's length basis, that the pricing be similar to that which the public receives, and that the loans be approved by an independent board of directors. So there's a way to do it, and we've never done it. Our view, and Adam was stealing some language from us, is that it's best to eliminate some of the risks that are associated with lending to insiders rather than mitigate them through Reg O.
I would say that I would not apply that standard, and we have not applied that standard to some of the banks that we've made investments in. Now, I think one of the things in making equity investments in other companies, and particularly in banks, that we're looking for is an alignment between the owners of the bank, management team, and the board. To the extent that it is possible, we're trying to determine whether those are people of integrity. I think that our way has worked well for us. I would not necessarily expect to see it elsewhere. In fact, I think our way is somewhat unique. I think if we did that, it probably wouldn't do very much investing. In those instances, ChainBridge is a bank that was formed by Peter Fitzgerald in McLean, Virginia. It's 17, 18 years old now.
It's a fascinating company. National Capital Bank is a bank in Washington. It is, I think, the oldest bank in the district, formed in the district, 1854 or thereabouts. It was formed by the Diddon family, who has been involved in the management of the bank since its formation. Finally, Founders, which is a more recent de novo in Washington. In all of those instances, my impression, my belief, is that the management, A, has a significant personal investment in the bank. There is real economic exposure that they have there that aligns them with other shareholders. Two, in all three instances, Peter at ChainBridge, Randy Anderson, Jimmy Olipsen, the Diddon family at National Capital, and Martin and his team at Founders. I think our impression is that in all three instances, they are people of integrity.
To the extent that they're doing residential loans to insiders, that doesn't impact my view of their integrity, of the degree to which I think that they're doing an outstanding job in some instances running those banks on behalf of owners, and so I'm comfortable with that.
I think as you said that, I don't think I've ever seen another bank that prohibits any loans to insiders other than ours. As Pat said, we wouldn't be investing in very many banks.
Since you're here, do you have any follow-ups on it, Adam? I didn't mean to put you on the spot, but.
No, I'd love it if more banks were like that. Yes. The risks are heightened. I guess maybe a follow-up is, do you have any insight into those loans?
They're primarily residential. Yeah. I think ChainBridge, obviously, is relatively new. Founders is much younger. National Capital has been around for a long time. One of the things that's difficult in thinking about that tension is it is oftentimes the case that those are good loans, right? I mean, they're to individuals that have good, strong balance sheets. They may be residential and/or occupant loans. They may be low leverage. When you think about a bank that is in a de novo phase or ChainBridge, which is relatively young, I mean, these are banks that have networks of relationships in their communities, whether it's the folks that are serving on the board, whether it's staff, whether it's the principals. I can appreciate the tension that they face in looking to eliminate or mitigate those risks. In looking to eliminate or mitigate those risks, thank you, Kayla, versus trying to make good loans and grow the bank and kind of get the business going. I think there is a dynamic tension there. I don't think that it's I don't think it's a choice for everyone.
Residential loans, as a percentage of the entire loan portfolio, has absolutely come down the last decade or so. Long-term, call it five years out, is it feasible that residential be less than 5% of the total portfolio?
Kayla, do you think people could hear that, or should I repeat it? Oh, good. Okay. Good. I think it is somewhat unlikely that it would be below 5%. I can kind of start with the easy version of the question. I think that it's likely that over time, it will be a smaller portion of the balance sheet in terms of residential and/or occupant lending. I think there are some structural reasons why that's the case.
When we lend to you and your primary home, you have a great deal of success. Ten years from now, you buy a second house. We finance your second house. This is a beach house. It's out in the Outer Banks. Ten years later, you're still doing really well. You decide you're not spending as much time at the beach, and you want to buy a house in the mountain or Blowing Rock River. Okay. You're now probably in the top 1% of residential occupant owners in the country, right? Owning three homes. Most people, probably seven. If we think about homeownership, people just, they own one house. They might move. The net exposure won't change for us. We'll finance the first house. You'll sell it. We'll finance the second house. Whereas if you look at the apartment building business, it's just the dynamics are very different.
You might buy a three-family. You might live in one unit, and then you'll move out, and you'll buy a second one. Now you own two buildings, six units, and now you buy a third building. We can continue to do more and more and more business with you. In the context that we were talking about earlier, where a lot of business comes from, it's existing customers. The dynamic is that we tend to do more and more business with a customer over time. That grows. If we have a great relationship, we finance that customer's house, but we don't do it again and again and again. Structurally, over time, the balance sheet does change.
I think there are some other drivers, which is to say that the residential owner-occupant mortgage business has changed in the last 10 to 15 years in ways that make it somewhat less attractive, in part because prior to Dodd-Frank, we could do some things for customers that are much more difficult to do now in terms of non-conforming lending. The number of areas where we're doing something where we can be safe because we can push leverage down, where we can be compensated appropriately in terms of price, and we can solve a real problem for the customer, right? The customer feels like, "I wanted to do this thing. I couldn't get my existing bank to do it. I couldn't walk into a Bank of America to do it.
I certainly couldn't go online and get Rocket Mortgage to do it. That space has gotten smaller over time. That is the space that we'd really like to operate in because it's a better business. I think that that's likely to trend down over time. In absolute numbers, I would expect the portfolio to grow over time because to the extent that in both the deposit side of the balance sheet with our commercial real estate borrowers, we're looking to deepen those relationships, then we should be financing more of their primary and secondary residences. That will not affect balance sheet composition, but it does say something about the growth of the portfolio. Any follow-up on that, or is that kind of weird? Long-term needs to check out 70% of the total levels, or do you have an internal local rate very much?
I'd say it's somewhere in that neighborhood. To the extent that it's a commodity business, it's not one that has attractive returns for us. A shorter repricing question. I don't want to give Adam all the questions. That's fine. We'll just work through the list. Yeah. Again, from Adam Mead, it's been about a year since you instituted shorter repricing. Can you talk about your experience, how borrowers have reacted, and competitors following suit? What I think Adam is making reference to, and if I'm wrong, I'm putting words in your mouth, Adam, correct me, is historically, we, along with a lot of other participants in the multifamily market, had made multifamily loans that were fixed for five years, adjusted at a margin, typically to the Federal Home Loan Bank for an additional five years. Those loans might have had two, three, four, five-year legs.
The repricing event came every five years. There were some things about that that turned out to be not so attractive. In particular, at that first repricing, you really only get one bite at the apple. There were some other folks that were writing 5-1 structures, so fixed for five and then adjusting every year. About a year ago, I think it was a little bit more than that, we moved to a 5-1 structure where for our multifamily loans, fixed for five and then floating annually. We really have not seen very much borrower reaction at all. I think it reflects the fact that to the extent that no one really will accept a prepayment penalty beginning in the first day of the sixth year, because we could do that, right?
We could structure it differently with meaningful prepayment penalties that reset each time the rate resets. To the extent that no one's willing to accept that, and we say, "Okay, we're not willing to give you the new five-year rate fix," there really does not seem to have been a lot of borrower reaction at all. I think everyone has taken it and in a current environment may assume that they will have the option to refinance in that period at potentially lower rates anyways without expressing my thoughts on whether that's correct or not. It may be that borrowers aren't sensitive to it because they believe that they're not giving up very much of value. I'm not totally sure, but I think that's the case.
I'd also say we have some questions in terms of what we're doing in terms of reducing sensitivity to interest rate changes in the future. There's a number of things that Pat will comment on, but I think that that one particular change in the longer term is going to be the most significant change we possibly could have made. It's not impactful today. It's not impactful next year. Over time, the portfolio, primarily of commercial real estate loans, when that is repricing every year, that should give us a great deal more control over future rate cuts. Yes, sir. What's the percentage that borrowers would actually extend their loan after the actual five years? As a borrower myself, most of the time I don't have an exact number on that, but it's substantial. Pardon me? Except the option.
I think the critical thing to note here, and this is a little bit of a difference, is that typically the structure that we will use is not actually an option that you're required to exercise. The loan would not be a five-year loan with a five-year maturity, an option to extend the maturity. It would be a 10 or a 15-year loan with an initial fixed rate period for five. The repricing occurs automatically, as defined in the note. They do not have an option to get out of the loan. Oh, they do. I mean, that in particular is the issue. Typically, we use what are referred to as step-down prepays. 4321, 5321. There is not a maturity. They can actually prepay once the prepayment penalty has run off.
In that fifth year, let's say it's a 5-1, and it's a 10-year note. There's a five-year period where it's fixed. At the end of the fifth year, it resets for the sixth year at, let's say, the one-year home loan bank plus 300. It stays at that rate for one year. At the end of the sixth year, it resets for the seventh at whatever the then one year is plus 300. You don't need to pay a fee to extend with us. You don't need to exercise an option. All of that is defined upfront, as opposed to a five-year bullet where it matures at five. There's an option in the loan documents where maybe you need to, I don't know, you need to do something to exercise that option. You need to give us notice.
Maybe you need to pay the loan down, or I don't know, some other form of. Yeah. If you want to raise security, where there's double 1%. Do people pay off in that year? No, I'm saying do you have that in your own? Oh, yeah. We're typically open in the fifth year. Yeah. I would say that most of our sort of garden variety structure would be a five-year fixed rate period with a 4321 or 3221 in the 1, 2, 3, 4. And it's typically open in the fifth year. I would say that we don't see, and I don't know that I would be in a position to give you good hard data on this, but I don't know that we see a huge amount of payoffs in that year.
I think when we see payoffs, it's typically sale-driven or it's refinance-driven because they're acquiring something else. It's not that that activity is getting concentrated in the open window because if they come early and pay a point to get out, they're doing that because the economics make sense in some other way for them. Obviously, if rates have moved against us, their inclination is not to pay it off by refinancing. They want to hold on to that beneficial rate. The one-year situation will allow us to address that properly. The real issue that the change addressed is that if you happen to reset for a new five-year leg at a relatively low point in rates, then the borrower, I shouldn't say you, I'm sorry, but the borrower has the advantage of that lower rate, and we have no prepayment protection.
Now, we might not want it if the rate's low enough. On the other hand, if it was sort of a kind of a middling curve environment, we may want that because there is a new five-year fix, and we would expect some kind of protection back. To the extent that nobody wants to do that, we change the structure to a 5-1. It seems to have worked fairly well. We'll really know probably about three years from now, two and a half years from now, because we'll start to see those come in, and we'll have the ability to see how heavily do we negotiate those. People look to take them from floating one-year adjustables back to fixed. What kind of consideration do we want for that? What can we get? That's hard to know.
So far, to your question, Adam, there's been no pushback on that. That's a good. Tim, I apologize. Tim Zeng. So his question, what are the realistic goals for the liability side of the balance sheet over the long term in terms of the mix of the different funding sources? In other words, what are the different factors that will determine the mix between non-certificate deposits, Federal Home Loan Bank borrowings, certificate deposits, etc., over the next 10 years, and what are the bank's goals in that regard? I think here the important thing to think about is that we're looking at the lowest all-in cost to fund the balance sheet through cycle. That all-in cost has an interest component. It has a non-interest component. The interest costs are fairly obvious, which is to say time deposits are typically very expensive.
Higher-rate money markets are somewhat less expensive, but also more expensive. Checking accounts with respect to interest, they do not pay interest. Obviously, very attractive. The wholesale sources, broker deposits, listing services, the Federal Home Loan Bank tend to be the most expensive from an interest perspective. The non-interest costs are somewhat more difficult to ascertain. These are our expenses in acquiring and servicing different kinds of funding. There are some areas in which it is pretty obvious. The Federal Home Loan Bank essentially has no non-interest cost. We do not market to them. We do not have relationship managers that are responsible for servicing that funding. Historically, we have funded a very significant portion of the balance sheet with some forms of wholesale funding. That has typically been the Home Loan Bank. There is a reason for that. It is very inexpensive from a non-interest perspective.
It is stable in the sense that we can borrow at different duration points. It's open every day. It's open in size. We get excellent availability on our multifamily collateral there. The Federal Home Loan Bank's mission in terms of housing, and in particular, affordable housing, is one that aligns with the kind of things that we lend on. That's historically always been an important piece of the balance sheet. I think it'll continue to be an important piece of the balance sheet in terms of how we fund the liability side. The deposit side of liability funding. If we were to go back 15 or 20 years ago, it is, I suppose, explicit in the name of the bank, Hingham Institution for Savings.
The balance sheet had more of a savings bank composition to it, which is to say more time deposits, more money markets, typically at higher rates. If we were to go back even further, you would find a time when savings banks were not allowed to offer demand accounts, checking accounts. This historical kind of dichotomy between trust companies or commercial banks and savings banks is one in which savings banks tended to have higher-cost funding and did not tend to have significant non-interest funding, if any at all. That has been something that we have been working to change. I think our view has been that there are ways of doing that that might not necessarily involve the trade-off that I have been talking about in terms of cost on the expense side and cost on the interest side.
Twenty years ago, if you wanted more kind of retail customers, you needed to open a branch. You had a physical investment. You had staff. You probably had significant marketing. In looking at the profile of how branches develop, typically, the first couple of years are very expensive. They tend to have very low growth in checking deposits. It tends to be promotional CDs. It tends to be more expensive money markets. That really was the only thing on the table. I think that has changed. It has changed because the potential customer for the bank, the potential market that we're talking about, when we talk about customers that are well served either by our retail banking group or by our specialized deposit group, is very, very different today than it was twenty years ago.
What that means is that we should be able to fund over time to Tim's question because he was asking about goals. We should be able to fund a greater and greater portion of the balance sheet with a funding mix that is both less expensive from an interest perspective and less expensive from a non-interest expense perspective or cost perspective. We should be able to do more of that because the audience of customers is broader. It's a national audience. It is not just the folks that are in close proximity to our office here in Hingham. It's an audience that I would say is increasingly poorly served. There are fewer and fewer alternatives where there is a service model that is not fee-driven that for larger and more complex customers that have service needs, it serves them really well.
Yeah, there have been significant changes in all three of the markets, particularly here in Boston in the last several years. Those clients, they want their bankers to help save them time, particularly those more complex customers. To the extent that we can do that and our relationship managers and our service teams can serve more and more of those customers, and those customers are on average somewhat larger, I think a more meaningful portion of the balance sheet should be funded in lower-cost MMDA and in checking. I can say with great certainty that we will never get to the point that ChainBridge is at where nearly 90% of a billion-dollar-plus balance sheet is in checking accounts. They've done an extraordinary job. It's a very niche business. I think that would be an unrealistic goal. We don't have that.
If we were at 15% or 16% now, and I was looking 10 years into the future, I would expect that number to be much higher. Some of that depends on the growth in the total balance sheet. I do not think it would be unreasonable to be funding closer to 25%-30%-35% of the balance sheet in checking over a longer period of time. I think that could be a stretch in certain respects, but I think that would be a reasonable goal. It reflects the breakdown in norms around geographic proximity that I talked about. It reflects, I think, our awareness, our increasing awareness of some more specialized verticals in the deposit area where we can provide something in terms of service that others might not.
I think maybe an increasing awareness that we do not need to be price takers. We do not need to be price takers. Kayla, if you need me to be louder, you can speak up too. Okay. We do not need to be price takers in the way that we thought in that area, that there are some things that we can do there that will build meaningful non-interest-bearing deposits. I think we are doing some of the work on that now. I would say in response to another question that is related, one of the biggest medium and long-term threats to your ability to grow core deposits significantly is the people. Years ago, it was always, "The bank is not convenient to me. I need a branch here." That is not the case any longer. It is really the quality of the relationship manager.
It's the quality of the cash management services. We've got some great people in that area. We continue to look for additional folks. The geographic boundary is coming down. We have a school in Alaska that we provide all of their banking services for, the payroll, etc., etc. A school in Alaska. I mean, it's remarkable how an entity like that is not bound by geography. They don't seem to have any concern at all that we're located out here on the East Coast, and they're out there in Alaska. There is tremendous opportunity there, but our ability to grow is really dictated by the quality of the people. That particular customer came to us from a national bank. For folks that know anything about the Alaska banking market, I'm sure we have a lot of them here. It's fairly consolidated.
Wells Fargo has a significant piece of that market. They had been very—I mean, they were across the street from their existing bank. It was not physical proximity. It was service. That service is really about the people that were banking them. The question of how do we find those customers? How do we talk to them about what we are doing? How do we help them see there is an alternative to the way that they are banking now is something that we spend quite a bit of time thinking about and working on? It is not the case that we are just looking at customers that are geographically proximate to us. It is also not the case that we are looking at pure digital delivery to those customers. There was another question that came from Kobe Gochabe. Gunner, did I pronounce that correctly? That is how I pronounce it.
Oh, okay. If I got it wrong, I can blame you. What steps is the bank taking to remain competitive in an increasingly digital banking environment, especially as fintech companies and larger institutions enter the market? I want to pair these questions together because I do not think it is the case that that broader audience is a potential market for us because we are delivering in a purely digital way to them. It is not the case that we can serve that client in Alaska because we have a website and a business online banking presence and an app that has certain functionality. I think that those things are probably necessary, but they are not sufficient. They are probably not the thing that really drives whether the customer makes a choice to move.
What really drives that decision is the experience that they have with our people, whether it's the relationship managers in SDG or whether it's the cash management specialists that support them. I apologize to Kobe a little bit, but I think that the question of remaining competitive in an increasingly digital banking environment is really one about pairing the right people with digital solutions that work for the customers. I think there are some things where the solution is somewhat more specialized. For instance, we have some solutions when it comes to escrow management, particularly for security deposits for tenants. We have some other customers that use it for some other specialized purposes where there really is a unique customer problem and a particular digital solution to that problem that we're delivering. I do think that that matters there.
I think the bigger thing is the way in which the initial conversations, the way in which the service interactions occur, because that's really what will get us in the door over time. I think figuring out how to deliver digitally, yeah, I think it's necessary, but I don't think it's sufficient to Kobe's question. I think there is a different, probably would be here for a lot longer question here, which is historically, people have done their banking with banks. To the extent that banking functionality is embedded in the software that companies use to run their businesses and to the extent that that may change the way in which potential customers interact with us.
The examples that I often use in the apartment business, whether it's Yardi or Billium or some of the other higher-end property management software in which a lot of the rent collection, the payments, the accounting is built into the software that's running the business themselves, our clients are not coming to our online banking tools. They're kind of interacting with us indirectly using those products. I think that's a very interesting question in terms of what that means for the business over time. My sense is that that people layer, the quality of the relationship managers and the cash management specialists, is probably a significant defense to that kind of disruption because things are going to go wrong at the integration layer. When they do go wrong, I think the quality of the people that can address those issues is going to be really important.
Anything from the floor? Any questions from the floor? I've noticed recently, I mean, going as far as shopping it is, that banks are offering for multifamily better rates by bringing in deposits into their solutions. Whether it's 10% or 15% of the loan amount, is that something I just want to know your thoughts about that? Yeah. Over time, we've focused more and more on trying to do business with customers in the multifamily market where we are one of, if not their primary operating bank. And so historically, we'd always required a deposit relationship of some kind. And then we started to focus a little bit more, and we wanted to see that it was actually being used. We saw rent collection. We saw expenses being paid. And we did that for a couple of different reasons.
One, we did it because the deposit funding was valuable to us. Two, we did it because we could see 15 units in this building. Are there 15 rents coming in? We could build some P&L on buildings using the deposit accounts that was of some value to us. Say that we kind of moved from some relationship to an operating relationship. In the last year, two years, we have started building in some minimum balances. They are typically a function of the gross rent on the building. The thinking is that if the gross rent on this building is X in a given month, we are looking for some multiple of that, so a couple of months. Now, if we did all our math backwards and figured out that is not 15% loan balance. That is usually somewhere in the low single to mid-single digits. The funding is valuable.
It's never really going to fund the business. There's just not enough liquidity in the universe of multifamily borrowers to fund what we're doing. It helps a little bit on the margin. I'd say it's probably a little bit more of a credit tool in the sense that if somebody doesn't keep a couple of months of gross in the account, they might be running things a little tighter than we would want them to. In those discussions, we learned something about borrowers. You can't keep two months of gross in your bank account. It's a three or four family, and that HVAC system's 15 years old, or you're going to find out real quick you should keep a little more cash in that business. That's the minimum requirement to bring down. In Hingham, for instance, where they're offering a better rate than others.
I think our view has been, with the exception of the agencies, on multifamily, typically very competitive. From a rate perspective, we're probably already where that enticing rate is if it's low leverage and it's in the box that we want. I will say, though, that at Loan Committee, there's a great deal of scrutiny placed on those balance sheets and why the deposits aren't with us. The frequently asked question, I'm sure the lenders would tell you that. There's always an explanation to look for. Why is that money over at Bank of America or shouldn't be here? Let's see. We got a hard stop today at 4:00 P.M. I got to move quickly. I've been yapping. Christian Olipsen. Christian, I think, contributed 6 or 7 of the 14 questions, so I should help him out here.
In the chairman's and president's letter in the 2024 annual report, you wrote that we are making, "We are making certain changes to our model that will reduce our sensitivity to outlier inversions." Could you please elaborate on this? I think there's a number of different things that are going on here. One, there has been some gradual extension of our wholesale liabilities, both in our brokered book and at the Home Loan Bank. Certainly not out three or four or five years, but some extension from 6 to 12 to 18 to 24 months, which is very helpful. The other thing that we've been looking at this year, and I think I talked about it a little bit last year, historically, we have not used derivatives either at the balance sheet level or in customer transactions.
In a customer transaction, what would be referred to as a back-to-back or a mirror swap, where at the outset of the loan, we essentially fix the margin in place on that loan. At the balance sheet level, we're talking about doing things that adjust the sensitivity of the balance sheet to particular outcomes. Historically, we've not done either one of those two things. In looking at some banks that are similar to ourselves that navigated this period particularly well, there is a really well-run bank in California called River City. It's principally a multifamily lender. There was a really effective use of interest rate caps, which are essentially one-sided derivatives that the bank could purchase. If the reference rate, short-term interest rates, were to rise above that cap, that begins making payments to us for counterparty loans.
That has been something that we've been thinking about as a relatively efficient, relatively low-cost, relatively low-risk, depending on the nature of the counterparty. I think that's something that we could manage as a way to address the risk that we've seen in the last two years of what is a relatively infrequent inversion, but they do happen. If they happen in sufficient amplitude, they can be very painful to us. To Christian's question, that is one of the things that we've been thinking about. What we've been doing has really been the extension of some of the wholesale liabilities. I think, to some extent, the focus on non-interest-bearing deposits, which we've been growing over the last year. Christian had a couple of other questions, and I'll address those in sequence.
One question: if the Fed funds rate and the entire Treasury curve remain the same for the next year, do you expect your net interest margin to increase? I think this is probably a fair question. We have historically not provided any guidance with respect to either the balance sheet or the income statement. Without sort of speaking in specifics, I think it's fair to say that if we think about where we are originating new loans, where we think about how the loan portfolio is repricing, so we can see when loans reprice and we have some expectation of what they should reprice to, that we have seen over the last year, and I think we expect to continue to see a fairly steady climb in the yield on earning assets, driven primarily by repricing and to somewhat lesser extent by new loans.
On the liability side, we can see as time deposits come back to us what those CDs are currently priced at, what we would replace them at today for our borrowings or other wholesale funding. We know when those mature, we have some sense of where they would reprice today, that on both sides of the net interest margin, both the yield on earning assets and our liability costs, even if nothing were to happen this year, we would be benefiting in both dimensions. I'd prefer to not say exactly how much because we really do not know. It is an imprecise art to model this. I think we would have pretty strong confidence that even if nothing were to change, we have a tailwind in our back in both respects. I think I addressed both of Robin Hollenstein's questions.
The other DOGE questions that we touched on. Yep. Just a little bit more about what's changed to make you more strongly consider a stock buyback and then what would the logistics of that look like if you were to undergo such a transaction? Could you say that just a little bit louder? Yeah, absolutely. What's changed to make you more strongly consider a stock buyback this year? And then what would the logistics look like if you were to do that? I think probably the I wouldn't say that the thinking has changed this year. I would say that it is something that is more salient to us and has become more salient to me, probably starting a year ago, maybe a little bit earlier. And maybe a little bit earlier than that, actually. There's a couple of drivers there.
I want to spare everyone the roughly 45 minutes we spent talking about this last year, but I think it's worth going through it again. What is the expected return on the deployment of capital inside the business organically, right? If those returns don't appear to be adequate, then I think you need to think about what you're going to do, right? Is it dividend appropriate? Is repurchase appropriate? In thinking about repurchase, there is a great sensitivity to price, right? I think that is a significant driver. Really, those two variables are the most significant things. What is the expected return over some reasonable period of time by investing organically in the business, which for us is growing the balance sheet, leverage capital? What is the price that you would pay in a repurchase relative to those prospective returns?
If we were to look over long periods of time, I would say that that did not make sense because the prospective returns were attractive and the price that we would pay in a repurchase was too high. I would say that I never want to comment on prospective returns, so I'm not going to talk about how I think about that right now. I would say that in recent years, the price has been potentially more attractive. Again, we haven't done it. It's not at the top of the list, but it has been a conversation that we've had in a way that we really never had it before. In terms of the logistics, the bank does not have a holding company, which means that in order to repurchase stock, we need to do and think about a couple of things.
The first thing that we would need to do is we would need to apply to the FDIC for permission to repurchase stock. That is not something that you need to do in a holding company because in a holding company structure, typically, the bank would dividend capital up to the holding company, and the holding company would make those repurchases. That is not subject to FDIC review. That is something that we would need to look for approval for. I would say that is something that we are very familiar with. At that point, it really is a question of how one could best execute a buyback, what the size might look like. Historically, the stock has been fairly illiquid, which makes that challenging. I am speaking in a very long time period. Recently, that has not been the case.
I think the logistics are somewhat easier now than they would have been. I think we would need to make that application. I think in terms of execution and liquidity, it's probably easier now than it would have been 20 years ago. There are some tax implications. There's a relatively new tax on share repurchase that would apply. There is a tax implication for us because we lack a holding company that effectively imposes a penalty on roughly the first $2 million of stock that we would repurchase. As we've grown, that fixed dollar penalty stays the same. If we were to go back 15 or 20 years, that $2 million penalty in terms of repurchases would have been the same in 1996 as it is now.
As you think about the capital base of the bank growing over time, the impact of that penalty becomes smaller and smaller and smaller. It is probably one reason why I would think about it maybe today in a way that I would not 10 or 15 years ago. I think we have time for one more question, either one that you have that was submitted or one from the floor. Anything from the floor? One more. Can we get an update on San Francisco purchasing, the brand new job there, and then any reduction in the next couple of years on the brand new? I have to update you that Patrick is looking constantly out there. I have only news of failure. We have been looking. I would say I have been looking more in the last year than in the year before that.
If we go back to this meeting last year, Phil Denichi, who works on our specialized deposit group, had been with us for probably two months. He was our only on-the-ground person out in San Francisco. Since then, we've added two folks in the cash management team, Jackie Stozzi, Brian Harvey, who joined our commercial real estate group. We've been having a lot of conversations with building owners in a couple of different areas in the city. I would say that the office market in San Francisco really is a tale of two cities. Larger institutional buildings, still a ton of distress, right? If you're looking at something that's 150,000-200,000 sq ft, 10 stories, 15 stories, the towers, there's a lot of vacancy, and there's effectively no incremental value above the fourth or the fifth floor.
That isn't true in the smaller owner-occupant space, so let's say sub 10,000 sq ft in attractive areas of the city. We don't need that much space. If we did that, we would carve pieces up like we've done on Nantucket and find other uses for them. In the sort of most attractive areas in the city, we've been looking in Jackson Square in particular, in the North Financial District. We've looked at some other things up in Pacific Heights. We've looked in Cal Hollow. In that market, that market's pretty healthy. We really haven't been able to find someone who would part with something that we liked. To the extent that we're going to buy it and we're going to hold on to it, I want to make sure that it's something that works for us over a long period of time.
I don't want to rush into it. The lease space that we have is fine. I think it's probably likely that at some point in the next year, we'll expand into somewhat larger space given the team. In terms of buying something, I'd rather do nothing than do the wrong thing there. I would also say that I have some sensitivity to the amount of work involved. If we're going to buy it, we're going to buy it. We're going to own it for a long time. We want it to be something that reflects the bank that our staff enjoy working in, that our clients enjoy visiting. That requires some work. Construction projects increase in difficulty exponentially as you move physically away from them.
To the extent that we could find something that did not require the level of work that we put into Washington or Nantucket or this building when we did it 15 years ago, I'd prefer to do that. From sort of a business perspective, I think we had a really great year in San Francisco on the deposit side last year. I was thinking about making Phil stand up so that we could look at him. We had a really strong year. I think great growth in core relationships. Really pleased with the folks that we have on the team there. Some of the folks in the cash management team are supporting East Coast clients that are out in San Francisco, and they've done a great job. Brian's relatively new. Brian joined us at the beginning of this year.
Last year was a very slow year in San Francisco, I think, for us, and I think for everyone, really. I am somewhat more hopeful that we'll see a little bit more activity there this year. One thing that we talked about last year was the extent to which the environment in San Francisco was changing. I would say the elections in San Francisco in the fall. Phil, you correct me if I'm wrong about this, but I think the environment in the city, particularly in the business community, but I think amongst others, I think the environment's very different. I think there's a great deal more optimism that what Daniel Lurie has been doing is changing the feel of downtown San Francisco in a way that I think we always anticipated would occur. I couldn't have given you a bet about timing.
We always believed that the fundamentals were there, that it does seem like they're making real and material progress. I think we see some evidence of that in our data. For the first time in a number of years, we've seen much stronger rent growth in San Francisco on the multifamily side. In some of the office market, which is not something we do a lot of, but we can see some of it, there has been in smaller high-quality buildings, kind of like the ones that I'm talking about, maybe a little bit larger, more demand in a way that might not have existed a year ago or two years ago. Now having arrived, I want to thank you, Patrick, and thank everyone for joining us this afternoon. It's always something that Patrick and I enjoy, listening to questions from shareholders and getting some feedback.
Thank you all, and thank you.