Hingham Institution for Savings Stock

Maybe the 2 people out there that I haven't met. My name is Bob Gaughen, and I'm the Chairman and Chief Executive Officer of Hingham Institution for Savings. I'm joined this afternoon on the dias by our President and Chief Operating Officer, Patrick Gaughen. And on behalf of our Board of Directors, I want to welcome you all to our 192nd Annual Meeting. This is our 36th Annual Meeting as a publicly traded company. So welcome, everyone. We're again conducting this meeting in person as well as by Google Meet this year. And I don't know if can tell me how many people are on Google Meet this year. Perhaps 30 right now. About 30 right now. Okay. That's good. That continues to increase.

So I have a few folks that I should introduce. First is Mr. Arthur Regan, seated to my far right. He is with Regan Associates, and they have again been designated by the Board of Directors as Inspector of Elections. Also, James McGough, who is with us from Wolf Company of Massachusetts, our independent certified public accountants. And I don't know if Samantha Kirby from Covington & Burling is with us. I have not seen her. They are our securities counsel. And I think she may have been tied up in some traffic this afternoon. So again, we're going to conduct this meeting as we have for many years in 2 parts. The first is the formal portion of the meeting, which involves those 4 proposals that are contained in the notice of meeting that you all received. After those items have been addressed, we will adjourn the formal portion of the meeting, and we will move on to the informal portion in which our President will review with us the activities of the bank and the achievements of the bank since our last meeting. And lastly, we will then open up the meeting to questions. We've received a number of questions in advance online, and we'll also open it up to questions from the floor. We'll be entertaining those questions until 4:00 p.m. or such earlier time as you may all get completely bored and leaped.

But before we begin the formal portion of the meeting, there's some housekeeping items that I should review with you. The first is this meeting is being recorded. Second, all general Google Meet attendees are in listen-only mode. Third, as noted in the proxy materials, all voting is to be done either in person or by proxy. Electronic voting is not available. Fourth, I'd ask everyone to silence their cell phones, which I think I've done. I believe I've done. And lastly, I want to draw your attention to the -- we've got it. All right. Me do it. The safe harbor statement that is on the screen with regard to so-called forward-looking statements.

And with that, we're here today to consider the following business items that are described in your proxy materials. First, the election of directors; second, the election of the Clerk; third, the advisory vote on executive compensation; and fourth, the advisory vote on appointment of the independent registered public accounting firm. We're going to consider each one of those in turn as they appear in the notice of meeting. It should be noted that I received an affidavit certifying that the notice of annual meeting and proxy statement were sent to all stockholders of record as of March 2, and that was mailed on March 10. So is there any shareholder present who -- physically present who wishes to vote in person. Please raise your hand. So for the 15th year in a row, no one wishes to vote in person, which is good. I'd now call upon Mr. Reagan to furnish us with a count of the shares present personally or through proxy. Mr. Regan?

Mr. Chairman, your continuing trust in me as inspector of elections over these many years is deeply appreciated. You've been a true and loyal client. On this day, there are 1,972,228 shares or 90.29% of the outstanding shares represented either in person or by proxy.

There being 1,972,228 shares of common stock represented at the meeting out of a total of 2,184,250 shares, I will declare that a quorum is indeed present.

So the first matter to be voted on by stockholders is the election of directors. The nominees for election are 5 Class II directors for 3-year terms, each to hold office until the 2029 Annual Meeting and until their successors are duly elected and qualified. So the Class II directors that have been nominated by the Board are Brian T. Kenner, Stacey M. Page, Geoffrey C. Wilkinson, Sr., myself and Patrick R. Gaughen. Do I hear a motion that the nominees be elected as directors of the bank to serve until the expiration of their respective terms?

So moved.

Any discussion on the motion? Any discussion at all? No. Okay. We'll now proceed to a vote. All stockholders present having been given the opportunity to vote either personally or by proxy. I'll call upon Mr. Regan to announce the vote.

Mr. Chairman, each nominee received at least 1,458,639 shares voting for their election, which is substantially above the plurality of the shares voting on the item.

The holders of a plurality of the shares present or represented and entitled to vote having voted for the nominees, I hereby declare that the nominees have been so elected. So congratulations.

Next matter to be voted on by the stockholders is the election of the Clerk the election, the Board has nominated Jacqueline Youngworth as the Clerk of the bank to serve until the year 2027 Annual Meeting of Stockholders and until her successor is duly elected and qualified. Do I hear a motion to that effect?

So moved.

That having been moved and seconded, any discussion on that motion? Hearing none. All stockholders present having been given the opportunity to vote either personally or by proxy. I'll call upon Mr. Regan to announce that vote.

Mr. Chairman, our Jackie Youngworth received 1,538,632 for shares, representing an impressive 97.55% of the shares voting on her election.

The holders of a almost unanimous vote. Having voted for the election of Mrs. Youngworth as Clerk, I hereby declare that she has been so elected.

Next item of business is the so-called say-on-pay resolution. 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 rules and as outlined in our proxy. It's been moved and seconded. Is there any discussion at all on this particular motion? Any? Hearing none, we'll proceed to a vote. Mr. Regan?

Mr. Chairman, a total of 1,492,079 shares voted in support of the bank's say-on-pay proposal, which is again substantially above the plurality of the shares voting on the matter.

The holders of a plurality of shares present and entitled to vote having voted in favor, I hereby declare that proposal to have been passed.

Next item and the last item to be voted on by the stockholders is the ratification of the appointment of Wolf & Company, P.C. as the bank's independent registered public accounting firm for the fiscal year ending December 31. Do I hear a motion to approve the appointment of Wolf & Company. Any discussion on the motion at all? Hearing none, we'll proceed to a vote. I'll call upon Mr. Regan to announce that vote.

Mr. Chairman, exactly 1,963,878 shares voted for the ratification of Wolf & Company to remain the bank's independent auditors. That number was 99.58% of the shares voting on this proposal. They must be exceptional accountants.

They are. It's been a long and good relationship. The holders of a plurality of the shares present having voted in favor of the appointment of Wolf & Company, I hereby declare such proposal to have been adopted.

As there's no further business to come before the formal portion of the meeting, I'd now like to entertain a motion to adjourn that portion of the meeting. Do I hear such an other? That's been moved and seconded. Oppose no. So voted. So with that, I will turn the meeting over to our President for commentary with regard to this past year's performance and our strategies. Patrick? Thank you.

Thank you. Okay. I've gotten feedback in prior years that I don't speak up. So we have a new AV team in the back who is doing a phenomenal job, and we're excited to have you folks here for this meeting this year.

A couple of things before I get started. First, I wanted to thank all the members of the Board of Directors that we have here. I wanted to thank Samantha Kirby, who's traveling today, our counsel at Covington, who I believe is watching on Google, but wasn't able to be here in person. I wanted to thank the employees of the bank that are here for their work over the last year. It was a strong one, I think building on some really positive momentum.

So in the course of the presentation and the question and answer, I'm sure I'll talk about some individuals. But before getting started, I wanted to make sure that I thank everyone for their work and for their contribution this year. I wanted to thank some of the nonemployee nondirector shareholders that are here, a number of whom are long-term partners of ours at Hingham. And we appreciate the trust and confidence that you placed in us, and I appreciate having you here for the meeting.

And we have one individual who came from Texas. And I didn't ask if I could use his name, so I'm not going to call them out and embarrassim, but I appreciate you coming up and your interest in the bank and your partnership.

So as has been the case in prior years, I'm going to go through a couple of things, an overview of the results from the prior year, both the balance sheet and the income statement. We're going to talk about the first quarter a little bit, and then we're going to talk about some of the key opportunities and challenges for the next year. And we're going to go through some questions. We have a pretty healthy set of questions on a range of topics. And as we did last year, I think probably what we'll do is start with questions from the room, and then I'll alternate with those that we received in advance, and we'll see whether we get to 4 or whether he needs to cut me off.

Okay. So let's get through it. The safe harbor statement we dealt with before. The agenda for the informal portion of the meeting, I just reviewed. Banking is a very good business unless you do dumb things. There's a section at the end where we'll talk about the dumb things that largely I did over the prior year.

What we do? So none of this will be new to folks that have been at the annual meeting or have watched this before. I apologize in part for the repetition, but our business is in large measure defined by a focus and a simplicity and that focus and simplicity is the product of repetition. And that repetition is talking about the things we do and the things we don't do. And so we do this internally, not just at this meeting every year.

So first, commercial and personal deposit banking; second, commercial real estate lending, which has always been a core focus of the bank since we took control in 1993 with a focus on multifamily and mixed-use properties. And then finally, residential real estate, which is owner-occupied real estate, and it's generally relationship-based lending. All of the things that we don't do. There are some things that I meant to add to this that will make it for next year.

First, commercial and industrial lending is a category. So lending to businesses that's not secured by real estate. asset-based lending, leasing, C&I loans and lines, SBA lending, leverage lending, which sometimes folks would describe as cash flow lending, oil, gas, mining, minerals, if it is not a piece of real estate, we're not lending on it, consumer lending, so credit card, marine, auto, RV, any personal lines. We are not active in any of these businesses directly on our balance sheet. We have exposure to some of them through our equity portfolio.

As we've talked about before, they can be very good businesses done by others. They're not businesses that we understand. Investments, wealth management, trust, investment advisory, always a highlight to spend a little bit of time on, not a business that we think we have differentiated capabilities in, where we think that there are probably better options for our customers and where we're neutral in terms of referring customers to others.

Also a very difficult business to make profitable for shareholders for some reasons we've talked about before. Insurance brokerage or underwriting, the brokerage function is something you sometimes see at other banks, maybe a little less common now than 10 years ago, but still a common business line. We don't do that, obviously. We don't underwrite or carry risk directly. We have some substantial insurance investments in our equity portfolio, but it's not in our core business. Secondary market residential mortgage. So this goes back to what I was saying before. Really, it's a relationship focus in the residential business. It's not garden variety conforming loans that we sell into the secondary market. We have relationships with these customers. And to the extent we can, those are full balance sheet relationships that cross their personal deposit banking, their mortgage, their mortgage on a separate home, their business, the nonprofits they may serve on the boards of.

We don't purchase tax credits. We don't do any solar lending. We'll probably move that up to C&I next year. No cannabis banking in cryptocurrency, no deposits, no lending on cryptocurrency, no ecosystem participation, no involvement with any stablecoin projects, although we have some indirect exposure again through some of our equity investments. And then finally, commercial mortgage participations. We don't buy pieces of other banks loans, and with some de minimis exceptions, we never participate out. We want to control the relationship that we have with our clients.

Capital allocation. Again, we're going through the literally here. The things that we find attractive, first, organic growth, reinvesting in the existing business. Sometimes that investment is on the income statement in the form of additional people and talent. And sometimes it's in the form of the balance sheet, which is to say capital that we use to support growth in the loan portfolio. That's true in both the existing geography. At one point, existing referred to Boston and new referred to Washington, D.C. and San Francisco. This is probably something that will change next year as those geographies are fairly well established, especially our Washington business.

Minority equity investments, both public and private, although focused on marketable public equities with a real focus on financial services, banks, insurers, the payment networks, rating agencies and technology. We have some investments in some other areas, but those are the primary focus.

Dividends, the focus here, and there are some questions on this that we received in advance, maintaining appropriate leverage, both through the regular dividend and the specials, which are periodic and based on the capital needs of the bank. And then finally, opportunistic repurchase of shares, again, focused first on valuation, there is some tax drag that we've talked about in the past. I won't dwell on it, but it is an option that is on the menu, and we have regulatory approval for that. And we have a standing authorization that we put into place in December of last year. And we expect to keep that in place going forward in the event there are opportunities to deploy it.

Nonattractive control equity investments, which is a 3 word phrase for acquisitions. Again, the same reason that we've talked about in the past. Typically, the prices paid are too high. There's a real loss of focus and the cost synergies are usually elusive.

Okay. Now we get to 2025. First, earnings. This is expressed in millions on a GAAP basis, we made $54.6 million in 2025. I think folks can see the challenges that we faced in 2023 and 2024, in particular, $26 million and $28 million is nothing to shake your fist at, but not the performance expectations that we had from a return on equity perspective, which we'll get to in a minute. 2025, we saw a couple of things start to come together. One, the net interest margin started expanding again. That's a product of the repricing of both of our assets and our liabilities.

The mix of the funding started to shift. So we'll talk a little bit about the increase in noninterest-bearing checking deposits, which has been substantial and is an important driver in how the earnings of the bank are changing and the source of those earnings. And then finally, our investment portfolio, where we had a strong year in 2025. I would say, as I've said for many years, the contribution of our investment operations may, in any given period, be positive or negative. And over time, we expect it to be material and positive. But in any given period, it may be volatile in any direction.

Return on shareholder equity, again, back up over 10% to 12% in 2025, not consistent with where we historically have been in the mid-teens over a long period of time. I'm not sure I would even describe 12% as satisfactory, at least to me, but directionally correct and very good.

Book value per share. So the 5-year compound annual growth rate in book value at 9.9%. The dividends, both regular and special are in addition to that, ending the year at about $220, having started that period about $165, steady continuous compounding of book value over a long period is the real indicator of whether we're generating value for our owners.

Low-cost leadership. Part of what we see in 2025 as the net interest margin normalizes is we're seeing the efficiency ratio return to historically where we've been in the 30s. That's for the entire year. We ended the year a little bit lower in the fourth quarter. And I think we're starting to see the operational leverage that we had throughout the COVID period and from the 2022 to 2024 period where interest rates were higher. We're seeing that operational leverage, I think, shine through here.

67 basis points of operating expenses to total average assets is probably 30%, give or take, the average bank of our size in terms of what we're spending to maintain the balance sheet. Structural and operational choices. Again, this is something we talk about every year. The efficiency ratio is a product of 2 sets of choices. One is structural, which is the kinds of businesses that we're in. And then the other is operational, which is how we run those businesses, game selection and game play. I think we remain very, very focused on taking unnecessary costs out of the business and finding new and creative ways to do that.

Disciplined loan growth, 5-year CAGR, a little bit under 10%. Again, most of that coming in the 2021 to 2022 period. The loan portfolio over the last several years has been relatively flat even as it's repricing internally and the yields are improving. Originations have basically been keeping pace with payoffs and amortization, which is, I think, something that we are not satisfied with over the long term. In any given period, there may be good reasons for it over the long term. It's not something that's satisfactory to us.

From a credit perspective, this is the net charge-off performance of the bank, again, since the current management and ownership group took control in '93. The industry is in blue. So where you see those lines, that is the net charge-offs for that year for all FDIC insured banks. In good periods, you see that roughly between, let's say, 50 and 70 basis points a year in the crisis period, so from 2008 through 2012 you see that far in excess of 100 basis points upwards of 200-plus basis points.

Hingham is in red. And the first row here is empty. Some of you might need to come up to see these numbers. We maxed out at 7 basis points in 2009, an industry in which -- or a year in which the industry was at 252 basis points. That doesn't mean that throughout that entire period, we didn't have challenges with loans and their performance. We certainly had loans that have paid late, that have gone delinquent that we've had to foreclose on, where we've had to pursue the personal guarantors, where we've had to exercise our remedies as the lawyers would say. But when the rubber meets the road, the real test of the portfolio is what do those charge-offs look like over a long period of time. And I think the performance there is a strong one. And again, no charge-offs in 2025. That 1 basis point, if you can see it in 2020 was on a residential loan out in Nantucket. It wasn't...

It wasn't Sara's fault. -- it was our...

It was my fault. We can agree to share the blame. But in any event, for the folks that are remote, Sara Congdon runs our office out on the Nantucket and is a commercial lender and is a very active residential lender. She's kind of a stalwart banker in the community, and that 1 basis point was not her.

Noninterest-bearing deposits. So what we're looking at here is noninterest-bearing deposits as of the end of the first quarter of every year going back to 2021. Historically, in looking at different kinds of bank balance sheets, particularly here in Massachusetts, you had commercial banks. Those banks tended to do a fair amount of C&I lending. That lending tends to come with operating deposits. Those balance sheets tend to have greater percentages of noninterest-bearing deposits. Historically, savings banks, of which we are one by charter and by name, tended to have balance sheets where the deposit composition was more certificates of deposit and money markets, savings accounts and a lower contribution from noninterest-bearing deposits because those banks historically didn't do any C&I lending, and it was not really a focus of their deposit program.

That's something that over the last 5 years, the last 3 years, the last 2 years, we've been very focused on changing about the bank and really driving an increased share in the deposit book from noninterest-bearing deposits. And we've been doing that in a couple of different ways that we've talked about. I'm going to talk about in a moment. But I think in the last 2 years, in particular, we've really seen some of the work that we're doing pay off.

And I think a lot of that has to do with the people that we have in this room and some folks that weren't able to make it, the relationship managers and our specialized deposit group and some of our managers in our retail group and the business development efforts that they've been engaged in and some of the increased focus, I think we've brought to the types of customers that we're best suited to serve.

So some really substantial growth there and something that we're focused on sustaining and something that we certainly saw in the first quarter of this year thus far. That deposit approach that I just talked about, really, there's 2 engines. There's the specialized deposit group, which is here in Boston, in Washington, in San Francisco. These are relationship managers that have direct relationships with our largest and sometimes most complex customers. And you could think about these as being essentially second story bankers. They're not in what you would think of as classic retail branches.

And a real focus of their activity is not just managing the relationships that we have with existing customers, but is primarily developing new business from new customers that are a good fit for Hingham and for whom we are a good fit, which is to say customers that need personalized service for whom an 800 number is not sufficient, customers who need digital solutions that solve problems for their business, for their nonprofit, for their organization and then customers that benefit from the fact that we have a really low fee or in a lot of cases, no fee approach to our commercial customers. So we don't offer what in the industry is referred to as analysis checking in which we charge them a bunch of fees that are very complex and then have an offset in the form of what's called an earnings credit. It's a very simple proposition. It's very easy for our relationship managers to take to prospective customers and explain and it reflects, I think, our view of the right way to build relationships with those customers, which is one based on shared value. I talked about all this stuff already.

In terms of the focus here, again, we're actively recruiting in all 3 of those markets in Washington, in Boston, in San Francisco. The focus of the group is on new business development. Some of that is driven by our relationship managers. Some of that is marketing driven. And over time, I think we've gotten better at targeting some specific verticals where we are a good fit, particularly verticals that don't have credit needs and where the service proposition is one where we're not competing on rate. They're not rate-driven deposits. They're noninterest-bearing, they're focused on service.

And then finally, upgrading digital banking tools. This is primarily for our commercial clients, although there are some benefits for our personal clients as well. And there are some questions that we have here on that, and I'll spend a little bit more time later on that.

The first quarter of 2026, so on the 3 balance sheet items here, loan growth is essentially muted. We had decent deposit growth. We had very strong noninterest-bearing deposit growth, and that was not temporary, and it was largely through growth in new relationships, including some substantial ones that we think will be long lasting. In terms of the income statement, we continue to see a steady expansion in the net interest margin, which is a function of that methodical repricing of the assets over time and of the liabilities. Our borrowing costs continue to fall. Our deposit costs continue to fall and our assets continue to reprice slowly maturely upward.

From an investment portfolio perspective, again, as I noted before, in any given period, those results may be very positive. They may be very negative. It's not really a period that we measure ourselves against.

Some of the key challenges in terms of looking forward. So first, I want to talk a little bit about credit quality. I think there's a couple of things that are top of mind for us here. One is affordable multifamily in Washington, which I'll talk a little bit more about in response to some of these questions. But that market segment in Washington, so particularly subsized affordable multifamily in the district has had some real challenges over the past year. Those challenges seem to be the product of some accumulated stresses in the marketplace that may date back earlier to COVID times.

I think there are challenges that there is some consensus on in terms of why they exist, difficulty evicting nonpaying tenants, difficulty evicting tenants that are safety risk to others, difficulty collecting rents, some really tenant-friendly regulations that I think made it very challenging for landlords in that segment of the market to operate. I think some of those challenges are pretty well known, and you can see them emerging in the loan portfolios of a number of different banks in Washington.

I think they're also well known politically. So at the end of 2025, there were some really material changes in the rent laws in Washington, something named the Rental Act that made some very significant reforms to TOPA, which is the Tenant Opportunity to Purchase Act. It's something that is unique to Washington that I think preserved a lot of the protections for tenants against the worst landlords, but rolled back a lot of the protections that made it difficult for landlords to operate in that segment.

So I think it's a mixed story. It's something that we're watching carefully. We see it in some portions of our loan book. And it really is that affordable segment. I think the market rate, the multifamily outlook in Washington, it's not as promising as in San Francisco, but it's a much healthier market. Rent control in Massachusetts, something we talked a little bit about in the annual report. We haven't had rent control here in Massachusetts for a long time. There is a ballot measure that will be on the ballot this fall that would bring rent control back.

I think our view, having been long-time multifamily lenders here in Boston and with a real focus on affordability, our view is that rent control would be substantially negative for affordability here in Massachusetts and for the economy. It's a view that's shared by essentially all mainstream economists regardless of their political favor. And I think it's something that we certainly hope either does not pass or is addressed by the legislature afterwards and bounded or made more reasonable if they can do that.

But I do think that, that is having an impact on the market here in Massachusetts, particularly when it comes to new construction or acquisitions. It's something that we're hearing consistently from our customers that there is a little bit of a chill and something that they really want to wait and see. Very significant rapid changes in rent laws can have market impacts that none of the participants really anticipate.

I think looking at New York post 2019, in particular, is an illustrative story there. The growth opportunities, particularly in San Francisco, but also in Washington, D.C. right now from a deposit perspective. I think we're seeing a lot of momentum there in terms of growth in noninterest-bearing deposits and new customer relationships. I think we see the same on the loan side, particularly in the Bay Area and particularly this year.

Scaling SDG, our specialized deposit group, looking out over the next year, one of the key challenges that we face every year is finding, recruiting, attracting and retaining really highly performing talent that can bring meaningful new business to the bank because they have the ability to develop that business and they have the ability to manage those relationships. That's a challenge every year. There are very few pay players out there in the world, and those are the players that we want here at hand. And that takes a lot of time and focused attention, and I think we've had a great deal of success, but there's a lot of work left to do.

And there are some particular verticals, particularly in Washington, D.C., where we've either done some work or we're doing some exploratory work that are specialized in terms of the nonprofit sector or foreign mission banking or political banking, where we think there's some real differentiation and it's something that we're working on, and it's been a big driver of what we've seen for growth in the last year.

And then finally, process improvement and eliminating waste. I think we are in the early days of deploying tools that will allow us to take very substantial waste out of our business and share those savings with our customers and with our owners and with our staff. And I think there is substantial potential there. Some of it we're seeing and realizing now, but most of it is untapped as of yet.

That takes us to the end of my prepared slides. So maybe we could open it up for questions here in the room. And if there are no questions, then we can go to the questions that we received in advance.

A microphone for this gentleman...

My question was regarding realized losses for banks. So we had them at around 30% 2022, 2023, and it's gotten down to about 11%, 12% cumulative basis. My question is regarding to all the macro trends going on right now with like inflationary pressures from capital expenditures, Iran oil, what is your assessment around that risk for the banking industry in general?

I'm going to restate a little bit of what you said. And if I misstate it, get up again and ask another question. So part of what -- do was talking about at the beginning was this idea of unrealized losses. So for everyone's benefit, when banks hold fixed income securities, so U.S. treasuries, mortgage-backed securities, corporate bonds, when they purchase those instruments, they can elect either to hold them to maturity, which means they promise to never sell that bond until it matures and the principal is repaid or they can elect to hold them in what's called available-for-sale status, which means that they may sell that bond at any time.

Over time, based on either the change in interest rates or the credit quality of the obligor on the bond, the value of that bond may go up or it may go down. And for the purposes of the conversation we're having right now, we're really talking about how the value of those bonds declines when interest rates rise significantly. And so when we look at the industry as a whole, starting in 2022 as the Fed began to raise interest rates, there were banks that had substantial fixed income portfolios. They held those securities either in hold to maturity or in available for sale, HTM or AFS.

And as the value of those bonds fell, there were unrealized losses that began to show up on their balance sheets, particularly if they classified them as available for sale, hold the maturity allows you to pretend that you haven't lost any money.

I would say in normal times, that's not necessarily relevant to the operations of a bank, unless it becomes particularly severe or unless they need to use those securities as a source of liquidity, which is to say they need that cash and they need to sell them. And when they sell them, they realize the loss, and they may need to go into the hold to maturity book. I apologize for the accounting lesson. When they do that, there are losses in that portfolio that had never shown up on the balance sheet before that need to be realized. And that interplay, I think, sat at the heart of some of the challenges that the largest failures faced in 2023. So looking at Silicon Valley or First Republic in particular. So a little bit of an accounting lesson first.

The # 2 point, Joe, I know you know this, but for everybody else in the room, we don't really own any bonds. So it's an interesting conversation as we look out across the industry, but it's not one that's terribly germane to us. We have less than $10 million in fixed income securities that are principally subordinated debt investments in other banks, oftentimes banks that we have equity investments in. So not a material piece of the balance sheet.

And although I have a very healthy eco, I do not confess to have any differentiated insight into how oil around inflation, the sort of macroeconomic volatility and challenges that we have right now will play out for the industry, maybe other than to say that the duration of the fixed income investments that are held in bank balance sheets now is quite a bit lower than what you would have seen in 2021 and 2022.

So to the extent that we saw a situation in which interest rates started rising again, I think the impact on those banks would probably be significantly less now than it was then because that duration is shorter, the price impact of that rise in rates will be more muted if we see it show up. Is that a fair treatment?

I'll take one of these on first, and I should have brought my glasses or printed them out a little bit larger. The first question is from [ Todd Wenning ] and I'll just read these out and directly quote them and respond to them. There are some that are similar, and so we'll compress them together.

So the first one, now that the minority investments portfolio is over $100 million, do you have any plans to hire a dedicated portfolio manager to oversee research allocations and risk management? If not, how do you prioritize your time between bank operations and the portfolio going forward?

I wrote out some notes. I don't have those in this version. I mean the short answer, Todd, and thank you for the question. Todd is an investment manager who's out in Ohio and has been a long-time friend of the bank, a great investor.

The short answer is no. And I think the longer answer is that we don't view those 2 things, bank operations and our investment portfolio as being competing priorities for discrete segments of our time, particularly my time. And I think our perspective is that our operating business, our time operating and our time investing are 2 sides of the same coin. And the time spent on one really benefits the other in some ways that are often unexpected. And I think given that the portfolio remains relatively concentrated, in a small number of companies that we held for a long period of time, our ability to manage that portfolio, I think we feel very comfortable with that.

I wanted to walk through a couple of examples of how really these 2 things can't be pried apart and hiring a dedicated portfolio manager, whether internal or external, I think we would lose some things that are valuable to us. And I kind of had 3 different things I wanted to touch on.

The first is where the operating business leads to some kind of insight that we can put to work in the investment portfolio. The second is the reverse. So something that started in the investment portfolio, which gave us some kind of differentiated operational advantage. And then finally, some thoughts on capital allocation. I think this is probably the broadest topic, but it's the one that's most important to us. And so first, operations to investments.

11 years ago, we, like I think a lot of companies at that time, ran most of our work on Microsoft platforms. So if you were to come to the bank, you were using Microsoft Office, you were using Excel, you were using PowerPoint, you were doing it on a Windows desktop computer. You were using file storage solutions and our applications were running on Windows servers. And those servers were here at the bank.

I don't think there's any window, but we could point to where in the main office is. And for a variety of different reasons, about 11 years ago, we made a number of really substantial changes to that. And that was driven by our desire to simplify our IT environment, and it was driven by our desire to to save money and become more efficient. And it was driven by our desire to facilitate collaboration within the bank, both here in Massachusetts, but across a broader team as it was growing as the bank was growing.

And so we ripped all of those Microsoft products out from [indiscernible]. I think we maybe have -- Dan, what do you think like a couple of Excel licenses left for a very specific reason. We got rid of Microsoft Outlook. We transitioned everything to what was then called G Suite, what would later be named Google Workspace. We started shifting all of our server environments to GCP, Google Cloud Platform. I'm going to get to the point in a minute.

These were originally operational decisions that were about becoming more efficient internally and facilitating collaboration and becoming more secure from an IT perspective. But they gave us some insight into what Google was doing with its productivity solutions and with its infrastructure business. G Suite would later become Workspace. Workspace would be folded into cloud. Google Cloud Platform, which was Google's trade name for their competitor, AWS, was part of the same segment.

It gave us exposure to a piece of the business that we felt at the time was probably underappreciated. And based on that insight, we started investing in Alphabet, Google's parent company. And that was a decade ago, a little over. And as we continue to work with their products, as we saw how that segment of the company was changing as we grew to understand their search business as a customer, particularly the use of PPC, pay-per-click ad products, we started investing more.

And so over a 10-year period, we've committed more and more and more and more capital to an investment where the original insight came from our operations. That insight and our experience using the products and particularly our experience in the last 3 years, watching how their cloud segment was evolving and seeing how they were integrating artificial intelligence into different aspects of the business, whether the search business or cloud platform gave us the confidence to continue committing capital to that investment. And it is our largest investment. It is our most profitable investment by far, it is the product of integrating our operating and investing businesses. And if we had separated that function out, I'm not sure that we would have had the ability to do that.

The second one, investments to operations. So we've talked before about the investments that we have in other banks. And those investments started with a review of the performance of that company, and we made that investment because we thought that, that company was generating or capable of generating superior returns on equity, that those returns were defensible, that they had good reinvestment opportunities or capital discipline and the owners were -- the managers were owner oriented. So we made those investments because we thought that we would make money. And additionally, over time, we learned things that were valuable to us operationally. So we had local market knowledge. We had introductions to trusted service providers. We had some warnings about folks that we shouldn't lend to or some endorsements of folks that we should, that kind of operational knowledge is not something that a dedicated portfolio manager would be capable of gathering for us. That -- it has to be the basis of the relationships that we build with those management teams and those relationships are the product of the investments that we've made. So it flows in the other direction.

And then finally, capital allocation. So going back to this slide, we have a very clear sense of how we allocate capital here at AIM. One of the things is this obvious aversion to acquisitions. We talk about it every year. I don't think we could be more clear about it. And I do think it's fairly obvious that in the banking industry, acquisitions don't work out well for the shareholders of the acquiring bank. There's very good data about that. It is possible over a long period of time to start believing that, that is the only way to do business and that all acquisitions are bad.

I think one of the things that we have learned or have acquired some humility about is there are some companies that we have investments in, particularly outside the banking sector, where they've generated tremendous value for their shareholders. through multi-decade acquisition programs, generally acquisitions in which they are sharing risk with the company that they were purchasing, companies that are very owner-oriented.

Fortunately or unfortunately, our equity portfolio is now, for the most part, public. You can see that in our securities filings, and there are some industrial companies that we own that we've been long-time investors in that have done a great job at that. I think that sense of humility we get from looking at how they've done it differently is something that's valuable to us and again, something we wouldn't have from a dedicated portfolio manager that was doing that on our behalf. Anything from the room? Dave will get you, mike.

[indiscernible].

Yes. So it's a loan for $30.6 million to a joint venture between Toll Brothers and L&M Development, which is a New York affordable housing developer primarily financed by Goldman. The loan was originally made to finance the land in the second portion of the 2-phase development, which they called Banner Lane. You'll also hear us refer to it as Surumcorda because that's the name of the neighborhood. That area or that neighborhood was a sort of large block of public housing that was leveled. It was acquired by Toll and L&M. It was leveled. It was part of a broader redevelopment in that area of Washington that's referred to as NOMA.

And when we first originated the loan, Toll and L&M were already coming up out of the ground and going vertical with the first phase, which if you look at it on the map, is 2 apartment buildings that are on the south part of this parcel. Our loan was secured by the land in the north part of the parcel.

And originally, Toll and L&M's intention was to seek construction financing to do essentially what they did in the first phase. There are some slight differences. The entitlements for the second phase are a little bit broader. The unit count is a little bit higher. There's a little bit less public space. But essentially, we were lending on the land, and we anticipated that they would be obtaining construction financing in the way that they did in the first phase.

When we got to the maturity, they had not obtained that financing. And Consequently, they said, we're not going to go vertical. It's too expensive. The construction costs, we think, are too high. I think there are some other complicating pieces, which is to say, and we didn't understand this last year, but we understand it now that Toll is in the process of divesting its ownership in all of its multifamily assets, both stabilized student housing and the development portfolio to a firm called Kennedy-Wilson. So the loan matures in the spring of last year in April. Up until that point, they had been, I think, exploring different solutions. But I think the Toll was no longer committed to multifamily development.

I don't want to comment on the partnership between the 2 partners in the joint venture, but that was not something that I think was facilitating a good solution either. There was an unconditional partial repayment guarantee that was toll and L&M. And when I say toll, I mean the parent company, not TDSC, entity 1, throw away, whatever. We told them you owe us that money. They paid us that money. There's also a conditional guarantee. That guarantee obligates both the parent companies to do a number of things, some of which I'm going to talk about now, some of which I'm not is in the event that we need to litigate them. I don't want to disadvantage the bank.

The core one, I think, for our purposes is that toll and L&M have unconditional obligations in perpetuity to pay the real estate taxes, the insurance and secure those sites from now until Kingdom come. And so there is an opportunity cost to us in the sense that we have capital that's tied up in that land that we're obviously not earning any current return on. There is not carry cost in the form of taxes or insurance or site security or liability. And so what we've been doing over the last year is having conversations generally on a direct basis with potential buyers -- and those conversations have been focused on whether the current entitlements make sense, whether the site needs to be re-entitled, what the appropriate density would be, what the city might be interested in seeing there, the site because of its history is, I think, of particular interest to the city.

So unlike either a smaller or a simpler project, it has taken us a great deal of time, and I think will take additional time for us to figure out what a buyer looks like that maximizes our recovery from the project. And if we have to spend that time, I want told to pay for it, which they do now. If we were to foreclose, we would have obligations from a tax insurance, et cetera, perspective. So I would say that, that's something that we have teed up and ready to go. And when we find a buyer that we think is a good solution, then we're going to foreclose right away. But until then, they're going to eat the carry.

Yes. So we appraised that land last spring. We have appraised it again this year. The appraisal from last year is considerably higher. The appraisal from this year is much closer to the loan amount. I think it's something that we look at every quarter. There's a couple of different valuation inputs from an allowance perspective that we think of. One is those appraisals that we receive. One is the kind of feedback that we get from the market in terms of value.

And then another is what we see going on between those appraisals in terms of sales of other land parcels in D.C., but particularly in this area of D.C. And when we look at those different factors, I would say we take those factors and we use them to determine whether we should establish a specific reserve inside our general reserve for the property.

We don't disclose our reserve allocations in our press release. We do in our 10-K, which will be out next week. I would say that the longer that we continue to hold the property, the more likely it is that we'll establish some specific reserve against it. I think our view right now is to the extent that a specific reserve is necessary, it's not going to be a very large one.

Other questions.

Trying to bring the equity portfolio back with multifamily altogether. So I understand, like you said, we're in the early innings of the whole AI adoption and everything. Is there any thought that in terms of the whole banking industry and then also I understand multifamily is a bit higher on the total pool for like payment priority. But is there any worry that portfolio skewed towards more white collar might have issues going forward? Or is that something that you think we even have that good of an insight into right now? That's my question.

Did everybody hear about the question? I can probably speculate in a couple of different directions. I mean, there is probably good reason to think that artificial intelligence will be most disruptive at stages in the economic value chain that have historically been folks that are more educated and serve in kind of, I'll call them, information jobs. And so I don't know that I'd argue against that. I don't know that I feel strongly that that's an emergent risk that's right around the corner.

My instinct is that to the extent that the benefits of artificial intelligence are distributed differently that individuals that have the capacity to learn and master and probably most importantly, stay at the edge of developments around how to use those tools will be people that will benefit and that those people may be in white collar roles now, right? So it may be that it's more disruptive for whatever their existing work is, but it also creates new opportunities for them at a faster pace than it might for others.

But we're starting to push out at the balance of both my circle of confidence and my circle of confidence. I'll do another one from the from the submitted list. So Yossi, it's from Israel. Patrick, what is the biggest bottleneck for loan growth right now, market competition, interest rate pressure on customers or something else?

Yes. I think as I noted earlier, we have seen essentially no net growth in the portfolio for several years now. That doesn't mean that we haven't been originating, but it has been a little bit of a red Queen situation where our originations are only replacing the runoff in the portfolio. And I think there are some reasons for that and some challenges or bottlenecks, as Yossi put it. But there are probably more compelling reasons why we should be able to surmount those.

We operate in 3 markets that are very deep, that have substantial product of the kind that we like in terms of smaller and non-institutionally owned multifamily property. I think in the last couple of years, there have probably been a couple of headwinds or bottlenecks. Construction is clearly one of them. We see very little now, whether it's for sale or to hold for multifamily construction that that is sensible. I think that's true across all 3 of the markets, Washington, San Francisco and Boston. It's a function of construction costs, but it is in significant measure, I think, a function of the uncertainty that our borrowers face in those regulatory environments. And that's particularly true here in Boston.

I think if we were having this conversation, what do you think, 6 or 7 years ago, historically, Boston was not the easiest geography to build in generally because it was difficult to find buildable land. But from a regulatory perspective, there was a lot of alignment between the leadership and the city and the development community and the trades around what needed to be done to create more housing, whether market rate were affordable, whether for sale or for rent.

And I think our perception now, both direct and from conversations with our customers is that the city has become progressively less friendly to development, particularly in Boston itself, and it's been going in that direction at a time when other jurisdictions in Boston, particularly Cambridge, have been liberalizing zoning and trying to speed up permitting and entitlement. So I do think that's a bottleneck. I think that's something that we would like to see change both from a business perspective, but also as folks that live in the city -- and from a community development perspective, affordability doesn't work if we're not creating new supply.

So I think that is one challenge. I'm hesitant to point to others. There's always market competition. I mean we operate in competitive markets. We want to lend on attractive projects. And so I think that that's always present. We do see, I think, the same level of competition that we've seen from the agencies in the past. I think a real headwind is in construction.

And obviously, the construction portfolio pays down over an 18-month period. And if you're not replacing it, that's a significant -- can be a significant drawdown on the overall portfolio. I would note that we have recently added a new lender in the San Francisco market. Nathan is with us today somewhere out there, there he is. And we have an additional lender joining us in the D.C. market. So we're optimistic about what those folks can also achieve.

I think we have a lot of confidence that the opportunities are there, and we need to do the things that unlock them. Any questions from the room? Kenner?

Digital customer question. So I come to the meetings, I hear about the 3 hubs in Boston and D.C. and San Francisco. And then I read in the annual reports about a fourth kind of customer that might be in Colorado, might be in Alaska, might be in Minnesota. How do you think about the -- is that a fourth hub? Or how do you think about particular opportunities for growth for digital type customers?

Yes. Welcome to everybody here Gunner's question. okay. I think those customers tend to -- they're served out of one of those 3 places from a personal perspective. And they're digital in the sense that they interact with us primarily in a digital way. But that's probably true of virtually all our customers that are concentrated in Boston, Washington and San Francisco, right? So we see them less often physically if it's a nonprofit in Colorado or a school in Alaska or what have you. But I think if we actually looked at how we interact with them, there's a personal relationship with a relationship manager in our specialized deposit group.

And there's probably depending on the complexity of the organization, a personal relationship with one or more folks in our cash management group that support the relationship managers kind of the problem solvers, if you will. And they just don't come into our offices very much. And sometimes we go see them. But in many cases, we don't. I think that the acquisition mechanism may be different, which is to say that if you looked at the geographies where we have offices, certainly, our existing customer base, but even some portion of the new incremental customers we attract, we're meeting them in person.

We're going to their offices. They're coming to ours. But that probably was prompted by some outreach by someone on our team or a piece of marketing material. And I think if you looked at what the journey or the story would look like for those customers that are farther afield, it looks very, very similar. It's a referral from someone that they know. It's a piece of marketing content that they got.

They reached out to us or we reached out to them based on some feature of the organization that we thought was attractive. And there were a set of conversations about how they currently bank now? Are they happy? Are they not? If they're not, why? Walk us through the friction points, let us sort of demo our solutions for you. For the most part, those are all done virtually, whether that person is close to us or not.

They make a decision to move forward. We have an onboarding process that is digital from start to finish. If you want us to deliver a remote deposit capture scanner, if you have a super high volume of checks, we will. But we also FedEx and it works pretty well. Fred's miss gone, but the company is not. It does a great job. And so I think to your question, I think we just see them as part of the existing business rather than something that's separate. I think those are 3 geographies in which there's a lot of concentration of talent and economic activity.

And so some of it is where we think our customers are, some of it is where we think really talented relationship managers might be. So it might even be more about them than it is about the customer and they're able to serve a broader footprint. I think one of the things -- and this goes to this interplay of investing in operations, we certainly have some investments in other banks where they are not physically proximate to their customers in large measure. But they've built a service architecture that solves a problem for that customer in a way that no other bank can. And that's why they've been successful.

Anyone else from the floor? If not, we've got some others here for some time.

I'll skip through some sections. Adam Med, this is a question on derivatives. In 2025, you initiated a $25 million nominal interest rate collar that began in March of '26. Are you thinking about additional protection? Will the level of protection change depending on loan volume? And how does the annual reset after the initial 5-year period for CRE loans factor into your thinking?

So we did do that last year. It became effective this year, very small in relation to the balance sheet. I think we may have talked about this a little bit. It really was about building the capacity to do these transactions in the future. So setting the tools up, testing the relationships, figuring out how we trade with our counterparties, understanding the accounting impact, understanding what the accounting disclosures would look like, getting daily pricing information on a variety of different instruments.

I don't know that it necessarily prefigured any great change in how we use derivatives to manage certain types of risk exposure. We haven't done anything since then. We talked a little bit last year about this. There is -- and again, this goes back to investing and operating is all one thing. There's a bank out in California. The balance sheet looks very similar to ours in some material respects called River City. And River City's liability composition and asset composition looks very similar to ours going into 2022.

They managed that challenge from an interest rate perspective much more effectively than we did. And they did it using some derivative instruments that were fairly simple and in retrospect, a common sense. I think they were very, very smart about that.

And some of what we've been doing in the last year is at least making sure that we have the tools in place where if the conditions are appropriate, we not only have the technical capacity to do it, but we've spent enough time studying the market and watching pricing and understanding how it will impact the balance sheet that we have some confidence because if we see those opportunities, we need to develop those things in advance.

So nothing new since then, but some color on our thinking. Anything in the room? Dave, I appreciate that you're getting your squats in. But you don't need to stand up on everyone when I say it, I'll let you know. You're going to give it to...

[indiscernible] leverage ratio, I'm not going to mistaken changing I don't know how. How are you thinking about those changes? Is it going to change anything for the bank on capital allocation...

Okay. So for others and then for the folks on the live stream, Gio is asking about changes in what's called the community bank leverage ratio. So there are a lot of different measurements of equity capital in banking. And if I start talking about them in too great detail, everyone will get up at leave, except maybe for Gio.

For everyone's benefit, the community bank leverage ratio is a regulatory concept that's existed for some time. And what it is, is it provides an option to banks. If they have a leverage ratio, historically, it has been in excess of 9%, then they can opt not to calculate their total risk-based capital. Total risk-based capital is a much more complex calculation. And depending on the structure of your balance sheet, it may be significantly higher or somewhat closer to what your basic equity to assets ratio might look like. And there are a lot of different things that go into that.

For our purposes, it is most significant because we enjoy favorable regulatory capital treatment or risk-based capital purposes on multifamily loans that meet certain criteria. And as I say this, I can see all our commercial lenders in the room smiling or smirking depending on their degree of self-control because the calculation of whether those multifamily loans are qualified for this favorable treatment requires a very specific set of information about the performance of the properties.

And I would say that we usually get almost all of it. But in order to qualify for this treatment, you need to have all of it. And right now, either there are discussions going on or there's been a decision. It's not something that I've paid a great deal of attention to because I think that we will -- it's very unlikely we're going to elect community-based leverage to lower that threshold from 9% to 8%, which is to say banks that have equity to assets in excess of 8% can avoid this calculation of risk-based capital. We have substantially more than either, so we could elect it at any time.

There are some operational costs, as I was just alluding to, to do that work on our multifamily book. But I think that it's unlikely that we're going to elect to make that change. We're already doing most of the work on those loans from a performance perspective for our own credit analysis purposes, the ongoing review. So the incremental expense is not terrible.

From an industry perspective, I'm lowering CBLR is intended to free up capital and encourage lending. I think that's pretty unlikely. I don't think that we see a lot of change there. I don't think the leverage ratio is the constraining or as Yossi put it, the bottleneck factor for lending activity for a lot of banks.

One from Advance, Tyler Buckridge. Tyler have been with us here at [ Hingham ] for a while now at the Home Loan Bank. You've said you do not anticipate principal loss in the newer DC foreclosures and resolutions. How should shareholders think about the difference between avoiding principal loss and the broader economic cost, including lapsed time, workout expense, foregone redeployment opportunities and management attention? It's a great question because there are all of these other costs that can flow through the income statement, some of which are visible, some of which are intangible on assets that require additional attention.

I think what Tyler in particular, might have been referring to is some other loans that we have in D.C. that we're in the process of working our way through right now, where we anticipate the value of the collateral that we're receiving is significantly in excess of the principal owed to us and probably in excess of all of the transactional costs from an accounting perspective that we'll incur, whether it's transfer taxes or attorneys or what have you.

I think the real cost is the cost that no one will be able to measure in the balance sheet, and that's management attention, which is a scarce good. We don't have an unlimited amount of it. And it needs to be used in a lot of different areas. So I think that's an area where we're always cognizant of the value of that time. That's a great question from Tyler. Anything else in the room? 26 minutes, we'll speed run it.

Let me touch on. There's a couple of questions, Pat, with regard to our policy with regard to nonaccrual. I don't quite understand why after 30 years of repeating that policy in every 10-Q and 10-K that we need to go over again, but I think we do.

No, it's worth talking about. So there was a question, several loans that were foreclosed on in January 2026. This is from Nate Strickler. Several loans that were foreclosed on in January 2026 were not classified as nonperforming at December 31, 2025. Can management explain the bank's policy for classifying loans as nonperforming and how those specific loans met the criteria for performing status at year-end? I think I would probably start by noting that the premise of this question is inaccurate, which is to say that the bank did not foreclose on any loans in January 2026.

We did issue some foreclosure notices and foreclosed in March. But as everyone who's gotten married knows, there's a substantial difference between getting engaged and getting married. There is also a substantial difference between issuing a foreclosure notice and actually foreclosing. So those are 2 pools of properties. I think we talked about these a little bit in the press release. One is free loans -- those loans were in various stages of delinquency at December 31. None were 90 days past due. I think 2 were current. That's a relationship with a multifamily property owner in Washington.

We issued the notices in January as soon as the loans were late, which on the commercial side is 10 days. We also looked at the rest of that borrower's balance sheet and identified other collateral that was not security for our loans, but we thought we could access and immediately filed legal actions to do that. And those loans then show up as nonaccrual at the end of the first quarter as appropriate.

And based on how quickly we moved in that instance, we have been negotiating a settlement agreement with that customer, and we anticipate receiving in exchange for some releases, significantly more collateral than we are owed, both in terms of our principal exposure and in terms of our cost. One of those loans that I suspect he was referring to, we issued the notice in January. We foreclosed in March. We have an assignment of the bid, and we anticipate selling that property in May, and we anticipate absolutely no loss on that at all.

The question with regard to the nonaccrual, our policy is if you're 90 days past due, it's nonaccrual. That's been the policy for years. It's probably an industry standard. And those loans were not 90 days past due at year-end. But we did move promptly on them and they're being resolved.

A couple of questions from Christian. Do we have any in the room? From Christian Ollison, who has had questions in years past. First, are deposits at your Washington, D.C. branch covered by the unlimited deposit insurance for Massachusetts Thrifts? The answer is yes. Second question, same Same questioner. Do you think most of your large depositors are aware of and fully appreciate the unlimited deposit insurance that you provide?

I think the answer to the first part of the question is yes. I think the answer to the second part is it's valuable to them in varying degrees. Some of those customers, it's very important. I think some of them bank with us because of the surety that the bank provides as opposed to the surety that they get from unlimited deposit insurance.

So I think it's a little bit of both. I'm going to quickly touch every time I look up, I'm looking for a question, but I'm racing the 4:00 time line, and there are some folks that put some good thought into some of these. Casey Poulos -- can you share any open-ended thoughts on the new digital banking interface that you're switching to, new functionality for clients, aesthetic, difficulty of switching, why now, et cetera? Anything worth sharing? So as we were talking about a little bit last year, historically, both our core processor, which maybe in layman's terms, we can think of this as the ledger system.

So this is the system that records all of the transactions on all of our deposit accounts and all of our loans. That core processing system has been at Fiserv or a firm acquired by Fiserv for as long as we've been at. There are 3 primary providers of core processing services to banks, FIS, Jack Henry and Fiserv. Historically, those firms provided that service.

As the nature of serving our customers changed, those firms also built other pieces of software that they put on top. So digital banking for personal customers, for business customers, mobile apps, remote deposit, different kinds of payment solutions. Historically, the cores all had the center and they all had the surrounds. If we look at the last 15, probably more importantly, the last 10 years, there has been the development of solutions that sit at the edge that faces the customer, development of solutions by software companies that are, I would say, more focused on the needs of our end customers that have different approaches to software development that are faster to iterate more quickly that are more responsive to feedback, that have engineering programs that have built the software in such a way that it is more performant, that it is more reliable.

And they have been slowly working their way into this market segment, selling to banks. The banks have been dissatisfied with the solutions that the cores have provided around the edge. Last year, we made the decision that we were no longer, I think, happy with what we had from our existing provider from a digital banking perspective, and we were going to look at alternatives. That was driven in response to Casey's question by the increasing focus that we have on 2 types of customers.

One is commercial customers that are more complex that have different kinds of digital banking needs. Two is personal customers sometimes that have some complexity, their personal affairs, but are not proximate to our branches. So our current solutions, we do not have a way of providing digital wire transfer capabilities to personal customers in our personal banking tools. We have a workaround. We put them in our business products, and it works, but it's a workaround.

And so as these 2 segments have grown, we knew that we had a gap in terms of service. We knew that there were solutions out there that were superior to what we had, and that drove the decision to explore those solutions and ultimately in the last 6 months, we both engaged Q2 for a new set of solutions and have terminated or provided notice of termination to Fiserv on some of the solutions. A couple of things from a functionality standpoint there is much better self-service for our complex customers.

So for our business customers, for our institutional customers where it's not just Bob and Patrick that are on the account. There are signers, there are bookkeepers, they are individuals that are interacting with the accounts to make certain kinds of payments, but not others, individuals that have access to some sub-entities, but not others. Right now, we manage all of the user configuration for those customers on our own.

With this platform, we won't. Our customers want that, and we want that. It's a win for both of us. The reporting tools are much more robust, again, for our sort of complex commercial customers, that's important to them. The payment solutions are superior. And I will confess that it's not ugly, Rich? I'm not saying that that's the current solution set. But since Casey brought up aesthetics, I'll pick that up. The aesthetics are not just a matter of taste. They relate to how easy the products are to use for our customers. So the user interface is an important one.

From a difficulty in switching perspective, I am hesitant to say because we have not completed the conversion. We anticipate doing that on a final basis for the entire customer set in September. We have done a lot of -- we have the solutions up and live, and we're testing it internally, and we have some friends and family that have access now. And it's not a simple process, but it's one where if you have discipline about running tight operational processes, it is achievable.

And I think we're going to be in a position to do that with minimum impact to our customers. And although I don't anticipate how we're going to monetize some of that knowledge again, we're doing it in such a way that we could benefit from what we've learned about this transition. So it's a good question. It's really driven. Let's go back to this one. It's really driven by the customers. It's getting pulled out from us by the change in the customer mix. Any in the room? Anybody have a joke? No. No. As the Internet name goes, that's a trap.

Okay. Walker Koughlin, I don't think we've had a question from before, so welcome. Hayes equity investment portfolio is now a meaningful percentage of total capital.

My understanding is that unrealized gains and losses flow directly through earnings and regulatory capital ratios. Could you discuss how you determine the appropriate size of the portfolio, how you evaluate the risk of a significant market drawdown could impair capital ratios and why retaining capital for equity investments is preferable to returning that capital to shareholders. I hope this question doesn't come off as contentious. I won't read the last part.

I like the last part.

I'm a big fan of how you have all run the bank. I don't know if that's necessary. And Walker next year bring as many contentious questions as you want. It's an important question. I mean, obviously, it's something unusual that we do here that's not done elsewhere. It's worth spending some time talking about it. Walker is correct.

GAAP requires those changes to flow through our earnings, and they are included in regulatory capital, which is a little bit different than changes in the value of bonds. Yes. I think from our perspective, it's something that we've done for a long time. It's something that's generated value for our owners. It's something where we think there are real benefits from operating and investing in the same structure. And ultimately, it is not correct to view that as capital that could be simply returned. It's not excess.

It's capital supporting the leverage balance sheet of the business. So it would be really more a question of how we allocated it internally, which is to say, would we hold more cash? Would we invest in fixed income securities? Would we do something different in one portfolio. So it's not appropriate to think about those 2 things as competitive.

From a risk perspective, I mean, we've had -- gosh, I don't know how many significant market drawdowns while we've had a significant equity portfolio here at the bank, whether it was March of this year, April of last year, the 2022 in the fall, March of 2020, we've had some big ones. Probably COVID would have been the largest one. And I think the important thing from our perspective is the portfolio is sized in such a way that we can weather extraordinary drawdowns.

We model that every quarter, both independently for the portfolio and then as part of an enterprise stress test for capital. And to the extent that we see drawdowns of that kind in the future, I think we view them as opportunities to put capital to work sometimes on very attractive pricing in businesses that we're long-term investors in and have a deep understanding of. So I think we see those as opportunities as well as potential threats.

Anything else from the room?

Another one from Christian Ollison. Approximately, how much do you expect the percentage of your funding that is from retail and business deposits to increase or decrease over the next 5 years or so? I think a couple of observations on this one. First, I think we would be comfortable saying that 5 years from now, retail and commercial deposits will be a larger portion of the funding mix than they currently are.

I think we figured out how to source and generate those deposits more cost effectively than was possible 15 or 20 years ago in ways that sometimes approach the fully loaded cost of funding on wholesale.

Two, I think it's important to note that 5 years from now, wholesale funding will be a very important part of the balance sheet. It's been an important part of the balance sheet for over 30 years. We have a long relationship with the home loan bank, which makes a great deal of sense given the structure of our balance sheet. So we're not using the home loan bank to fund a significant fixed income portfolio of bonds, as has been the case elsewhere.

We utilize them to fund the balance sheet that's focused on multifamily housing and on residential development, which is the mission of the system. So I think it's a partnership that works well for us and shareholders as owners collectively here, but also for the home loan bank system and for the community.

Third, and I think this is the thing that I would have the most confidence in. I'm very confident that if we look out 5 years from now, that noninterest-bearing deposits will be a significantly greater portion of the balance sheet than they are today. And I say that with greater confidence than my comments on retail and commercial deposits generally because retail and commercial deposits can sometimes be price sensitive.

The noninterest-bearing deposits that we're generating in the specialized deposit group in particular, but to a lesser extent in retail are sometimes tied to relationships or business segments where we're building or enjoy very durable long-term relationships with those customers. And we may enjoy some competitive advantages that are not generally present in banking.

And I think that those advantages or advantages that we are likely to continue to enjoy, and they exist in markets where there is substantially more opportunity than we currently bank on the balance sheet. So I feel very confident that the focus that we have there will drive a balance sheet that 5 or 10 year sense does look very different in terms of noninterest-bearing checking deposits.

Those noninterest-bearing checking deposits had an increased 20% trailing 12, and that has been accelerating in the first quarter of this year. So I agree with you that there's tremendous potential there for very significant growth in that portion of the deposit mix.

And I would say it's the central focus of everyone on the team that faces our deposit customers, less so certificates of deposit or money markets or the rate products. Christian had another question, Christian Ollison, Christian. I noticed that your regulatory capital ratios have been trending up a little. What, if anything, do you expect to do to align these ratios more with where you have kept them historically, including loan growth, size of your equity portfolio, dividends, stock buybacks, et cetera.

I mean I think the answer, it could be all of them or some of them in different measure depending on the opportunities that we see. I think the preferences that we've talked about in terms of capital allocation are pretty clear. First, organic growth in loans. the investment portfolio via the minority investments.

And then finally, the regular dividend as compared to special dividends as compared to repurchases. And that's really a function of whether we have the opportunity to repurchase the prices that we think are attractive. And so it's some mix of those tools. But I would say that it's something that we're aware of. It's fundamentally a levered business.

The return on equity is something that we're sensitive to. A very similar question came from Tim Zang. So maybe I'll skip that one.

A few questions from David Yap, really focused on the affordable segment in Washington. Some of these we've covered. He had a specific question. With the backdrop of Washington, D.C. affordable housing market under pressure, can you share what percentage of the $1.3 billion loan portfolio in Washington are loans to affordable housing segment. And we have about $75 million of exposure to multifamily properties that have some kind of subsidy.

So that's either housing choice voucher program, vouchers or buildings that enjoy building level H contracts, which is a form of subsidy that runs to the building, not to the tenant. And there are some specialized Washington, D.C. programs that are a little bit smaller, but that's about $75 million in total there.

The significant majority of our multifamily exposure in Washington is market rate. Tyler had another question, which with Greg Abel now serving as Berkshire's CEO, Warren Buffett remaining Chairman, has the leadership transition changed your view at all of Berkshire, the core long-term holding within Ingham's equity portfolio? Or is your investment thesis unchanged? Again, this is Tyler Buckridge. -- it's been a long-term investment for us. It serves a number of different purposes. And I would not be so arrogant as to say that I'm in a position to sit in judgment of Greg Abel. He's a phenomenal operator.

I will say when you get to Omaha tomorrow, maybe you'll be in a better position to assess...

Possible, although, unlikely.

Well, it has -- we have reached the 4:00 hour. Patrick, I want to thank you very much for the presentation and also the very -- the detailed answers to some very good questions. I want to really express our appreciation to both the folks that are here in the room today, but also the folks online and all of those folks that submitted some very detailed and sophisticated in many instances, questions for Patrick to respond to. So thank you very much, and thank you all, and we look forward to seeing you back here next year.