Title

Presentation

HomeStreet, Inc. misses on earnings expectations. Reported EPS is $0.27 EPS, expectations were $0.4.

Operator: Good afternoon and thank you for attending today’s First Quarter 2023 Earnings Release Call for HomeStreet Bank. Joining us on this call is Mark Mason, CEO, President, and Chairman of the Board. I would now like to pass the conference over to our host, Mark Mason. Please go ahead.

Mark Mason: Hello, and thank you for joining us for our first quarter 2023 earnings call. Before we begin, I’d like to remind you that our detailed earnings release and an accompanying investor presentation were filed with the SEC on Form 8-K on Monday and are now available on our website at ir.homestreet.com under the News & Events link. In addition, a recording and a transcript of this call will be available at the same address following our call. Please note that during our call today, we will make certain predictive statements that reflect our current views, the expectations and uncertainties about the company’s performance and the financial results. These are likely forward-looking statements that are made subject to the safe harbor statements included in Monday’s earnings release, our investor deck, and the risk factors disclosed in our other public filings.

Additionally, reconciliations to non-GAAP measures referred to on our call today can be found in our earnings release and investor deck available on our website. Joining me today is our Chief Financial Officer, John Michel. John will briefly discuss our financial results, and then I’d like to give you an update on our results of operations and our outlook going forward. John?

John Michel: Thank you, Mark. Good morning to everyone, and thank you for joining us. In the first quarter of 2023, our net income was $5.1 million or $0.27 per share as compared to net income of $8.5 million or $0.45 per share in the fourth quarter of 2022. In the first quarter of 2023, our annualized return on average tangible equity was 4.1%, our annualized return on average assets was 22 basis points, and our efficiency ratio was 87.2%. These results reflect the continuing adverse impact, the significant increase in short-term interest rates has had on our business. Our net interest income in the first quarter of 2023 was $6.3 million lower than the fourth quarter of 2022. Due to a decrease in our net interest margin from 2.53% to 2.23%.

The decrease in our net interest margin was due to a 52 basis point increase in the cost of interest bearing liabilities, which was partially offset by 11 basis point increase in the yield on interest bearing assets. Yields on interest earning assets increased as yields on investment securities improved and the adjustable rate loans, loan yields increased due to increases in the indices in which their rates are based. The increase in the cost of interest bearing liabilities was due to the overall higher deposit and borrowing costs. Our cost of borrowings increased 64 basis points during the first quarter, while the cost of deposits increased 56 basis points. Our effective tax rate for the first quarter of 2023 was 22%, which is the expected tax rate for the rest of 2023.

A provision for credit losses was recorded during the first quarter of 2023, compared to a 3.8 billion provision for credit losses in the fourth quarter of 2022. The provision for the first quarter of 2023, primarily related to the net charge-offs realized in the quarter as overall portfolio loan balances only increased $60 million. Going forward, we expect the ratio of our allowance for credit losses to our loans held for investment portfolio to remain relatively stable and provisioning in future periods to generally reflect changes in the balance of our loans held for investments, assuming our history of minimal charge-offs continues. Our ratio of non-performing assets to total assets remained low at 15 basis points. The increase in non-interest income in the first quarter of 2023 as compared to the fourth quarter of 2022 was primarily due to a $1.1 million increase in single family lending gain-on-sale activities.

The $2.1 million increase in non-interest expenses in the first quarter of 2023 as compared to the fourth quarter of 2022 was primarily due to higher compensation and benefit costs, partially offset by lower information services costs. The higher level of compensation and benefit cost was due to seasonally higher benefit costs primarily employer taxes and 401(k) matches, and a reduction in deferred costs due to lower levels of loan production. Additionally, the benefits of lower levels of staffing resulting from layoffs in our loan origination operations in the first quarter were offset by the impact of raises given during the first quarter and the employees added from the acquisition of three branches in Southern California. I will now turn the call over to Mark.

Mark Mason: Thank you, John. The banking industry experienced significant turmoil during the first quarter, driven by the now historically record velocity and magnitude of the Federal Reserve’s increases in short-term rates during this cycle. As with other banks, we experienced some marginal deposit outflow in March beyond that, which we have experienced to date, from deposit competition as a few depositors move funds from community regional banks to national banks, very few actually. Consistent with our peers however, these appear to be substantially abated in April. We’re fortunate in this environment that our level of uninsured deposits is among the lowest in banking at 14% of deposits at the end of March. However, we expect rate based competition for deposits to continue till the Federal Reserve stops raising rates and ultimately reduces rates.

While we have not seen any material deposit or anxiety, we took steps at quarter-end to improve our liquidity position. At quarter-end, we held substantially more cash than we would in the normal course over $300 million more. And while we are unlikely to continue this practice, we felt a temporary increase in on-balance sheet liquidity was appropriate at that time. Also where appropriate, we are working with a few of our customers to secure additional FDIC insurance coverage either through changes in account vesting or through the IntraFi ICS and CDARS’ programs. Additionally in the quarter, we utilized the Fed bank term funding program, which for us is a lower cost wholesale funding option, which provides for a fixed rate funding that could be refinanced without penalty, the rates decrease.

We’ve used this program to replace FHLB borrowings in part given the lower rates, term structure, and greater collateral utilization. At quarter-end, our contingent funding availability was $6 billion, representing 6x the level of uninsured deposits and 85% of total deposits. During the first quarter, we significantly reduced our level of loan originations and continue to offer very competitive promotional price deposits, which allowed us to attract and retain deposits without immediately repricing our existing interest bearing deposit base. Over time of course, customers in our non-promotional deposit products are expected to migrate to the better yielding and promotional products, though this migration has been slow. However, this ongoing migration is part of the continuing increase in our overall deposit costs.

The competitive rate environment has resulted in reductions on a net interest margin, which are expected to continue until rates stabilize in later fall. Today, based upon commentary from the Federal Reserve, that time appears to run through the end of this year. We have not experienced material identifiable deposit loss, related to concerns about deposit security and other than seasonal tax payments, we’ve seen stability in our deposit balances in April. We are fortunate to have a valuable retail deposit franchise with customers who will invest in certificates of deposit and money market deposit accounts at rates well below brokerage money market funds, treasuries, and wholesale borrowing rates. Additionally, based on our experience, we expect many of these new promotional deposit customers will convert to full relationship core deposit customers over time.

In addition to our ongoing organic deposit gathering, we acquired three retail deposit branches from Union Bank, U.S. Bank in Southern California. During the quarter, these branches experienced higher than anticipated levels of run-off both before and after our transaction closed on the 10th of February. The balance in deposits acquired was $373 million, which declined to $322 million at March 31 due to a number of factors, including greater customer concerns than we expected about the relative size and branch footprint of HomeStreet versus U.S. Bank. Deposit outflows due to the rate sensitive environment, depositor security anxiety caused in-part by turmoil in the banking industry, and data driven conversion challenges that cause frustrations experienced by deposit customers.

We constructively work through these conversion issues with U.S. Bank, which resulted in a reduction to the deposit premium we paid. As a result, we did not pay a premium for a majority of the post-closing runoff we experienced in the quarter. And the additional goodwill recorded from this acquisition was substantially lower than originally anticipated, reducing the impact on our tangible book value. Despite of these challenges, we’re excited about the branches and teams that joined the bank and our opportunity to now grow our customer base in these new communities. These communities have only been served by large national banks and until this transaction, they did not have a community bank choice. In the first quarter, we recorded a $0.6 million addition to our allowance for credit losses.

This addition primarily relates to replenishing the ACL for the minimal level of net charge-offs as the loan portfolio barely increased during the quarter. Charge-offs in the quarter were $0.6 million and non-performing assets remained low at 0.15% of total assets. Total delinquencies were slightly higher in the quarter at 41 basis points versus 29 basis points in the prior quarter. While delinquencies remain low, an increase in the over 90-day past due and still accruing category was due to one residential construction loan that matured at the end of 2022. This project, which has a substantial level of over collateralization has been completed and sales are now occurring. So, we have no concerns about it. Overall, we are happy with the velocity of sales in our residential construction book.

Generally, today we are getting a higher level of project completions and payoffs than new projects. This developer conservatism is appropriate for this point in the cycle, despite the ongoing low level of homes available. We expect homebuilding loan volume to begin growing again once rates stabilize and mortgage rates return to normal spreads. Our loan portfolio remains well diversified, with our highest concentration in Western State’s multifamily loans, one of the lowest risk loan types, historically. Our delinquencies, non-performing assets, and classified assets remain at historically low levels. Our portfolio is conservatively underwritten with a very low expected loss potential. Credit quality remains solid, and we currently do not see any meaningful credit challenges on the horizon.

We are continuing to experience the cyclical downturn in commercial real estate in single family mortgage loan volume, which fell to historically low levels in the fourth quarter of last year, but only marginally improved in the first quarter. One of the largest challenges for us has been the impact on prepayment speeds, which continue at historically low levels, particularly for multifamily loans. We are generally not making any new multifamily loans today with the exception of Fannie Mae DUS loans, which we sell. We’re focused today on working with our existing borrowers to create prepayments or to modify existing loans to advance more proceeds where appropriate or extend fixed rate periods in exchange for increasing the interest rate on these loans.

Over time, we expect these efforts to make a meaningful improvement in both the size and yield on our multifamily portfolio. As previously noted, only – during the first quarter, we grew our loan portfolio by only $60 million or 1%. We are continuing to limit our loan portfolio growth focusing our loan origination activity, primarily on floating rate products such as commercial loans, residential construction loans, and home equity loans. We are also experiencing diminished demand for loans generally, mostly due to uncertainty regarding the economy, and the overall higher level of interest rates. Accordingly, we are anticipating only a modest increase in our loan portfolio in 2023. At March 31, 2023, our accumulated other comprehensive income balance, which is a component of our shareholders’ equity was a negative $86 million.

This represents a sizable $4.60 reduction to our tangible book value per share, but it is not a permanent impairment in the value of our equity and has no impact on our regulatory capital levels. Given the available liquidity, earnings, and cash flow of our bank, we don’t anticipate a need to sell any of these securities to meet our cash needs, so we don’t anticipate realizing these temporary write-downs. While our current lower level of profitability is less than adequate to us, it has been materially driven by the exogenous interest rate environment. We look forward to an environment of stable rates whenever that comes can provide for improved financial performance for our bank. Until that time, we are doing all we can to limit balance sheet growth, maintain liquidity, defer or reduce expenses, reduce staffing to required levels without damaging our business.

As we shared last quarter, the significant uncertainty of future interest rates, deposit flows, and the economic environment among other things make providing guidance on the timing and levels of financial targets too difficult at this time. We expect to return to such guidance after these uncertainties have substantially subsided. Our long-term goal is to meet or exceed our peers with respect to our financial performance remain. And I’ll repeat my comments from last quarter. We acknowledge the relative disadvantages of our existing model in an environment such as the one we are experiencing today. We note that while this period of lower earnings is painful and somewhat unexpected, our higher than expected earnings both 2020 and 2021 was similarly great and unexpected.

The current structure that makes our bank more sensitive to cyclical changes in interest rates allows us to over rate environments. While we have worked to reduce the impact of this cyclicality, it’s important to acknowledge through the cycle earnings performance. I repeat these comments again not to excuse our current low level of earnings, but to put them in perspective. With that, this continues our prepared comments today. We appreciate your attendance and attention. John and I would be happy to answer any questions you have at this time.

Operator: Thank you. We have the first question on the phone lines from Matthew Clark of Piper Sandler. You may proceed with your question Matthew.

Matthew Clark: Hey, good morning.

Mark Mason: Good morning.

Matthew Clark: First one for me, just on the margin, I saw the spot rate in the deck on deposits, but could you give us a sense for what the average margin was in the month of March?

Mark Mason: I love to, but we don’t disclose monthly margins, Matt. Sorry.

Matthew Clark: Okay. And then the branch deposits that you acquired, the 322 million at the end of the day, what was the weighted average cost of those? And I assume you use those to replace brokered CDs, could you just give us or remind us where brokered CD stand at the end of the first quarter?

Mark Mason: With respect to brokered CDs, they generally track Fed funds either above or below. Last year, brokered CDs were generally below Fed funds. They’re a lot closer today.

John Michel: May I. Actually in response to your question for last quarter on Page 18 of our earnings release, we have included the balance of broker deposits, brokered out, so you can see what the balances are.

Mark Mason: And so cost of funds…

John Michel: The cost of funds on new branches when we acquired them were less than 20 basis points. Obviously, we put them in our system and it increased the cost slightly. But I don’t have the exact number of what they are right now, but they should be a little bit higher because our rates were a little higher, but not substantially.

Matthew Clark: Okay, got it. And then what’s the plan for the $2 billion of borrowings? Do you feel like you’re going to hold on to those for a while until things, kind of settle down and then pay them off with cash or just trying to get a sense for the excess liquidity situation?

Mark Mason: Well, we’re not going to carry the high level of cash through the quarter or next quarter. We did that at the end of March out of a view that demonstrating more on balance sheet liquidity would be important to certain people at this time. I don’t think we think that’s necessary today, because market anxiety from what we could tell has largely abated. So, $300 million of those borrowings is going to – has already gone down. It is our plan to reduce our borrowings down to about $1 billion over the forward look, right. So, we plan on doing that through continuing to raise primarily certificates of deposit balances. And we continue to raise new money there. So, how long that will take is a little uncertain at this point. We’d love to have it done by year-end. We may not. It’s likely to continue into next year.

Matthew Clark: Okay. And then on your criticized classified trends, any update there in terms of the rate of change between year-end and this quarter? And then if you had it, the reserve on office CRE?

Mark Mason: First office CRE, we haven’t made an office CRE loan in several years now. And those that we have on the books are, you could characterize as suburban office, small office. If you look at the detail in our investor deck, you can see it’s pretty granular as well, and I don’t have that dollar amount of the average loan size, but its single-digit millions I think. John, you might pull that up.

John Michel: Yes.

Mark Mason: Sorry, Matt. I forgot the second part of that question.

John Michel: Criticize and cross .

Mark Mason: Relatively stable. We don’t disclose them in the quarter release. Can’t remember if we do in the 10-Q or not.

John Michel: In the call report it’s disclosed.

Mark Mason: It’s in the call report, right. So, you can check the call report for the levels, but they’re relatively stable.

John Michel: Office, the average balance is $2.4 million in our office, and total portfolio of 376. So, pretty much broken down.

Matthew Clark: Yes. So that’s – okay. Okay. And then just last one for me. Is there anything more – I know your outlook for expenses, operating expenses are flat from here, but is there anything you can do to, kind of right size expenses given the, kind of the NIM pressures that are going to persist here? And is there some consideration or thought about maybe even shrinking the balance sheet to alleviate the pressure on the funding side?

Mark Mason: We continue to work on all of those things, Matt, right. Those are the obvious levers, right. And we continue to work on expenses. We’ve had, as we noted, some additional layoffs in the first quarter. We think that we’re pretty much right at baseline staffing today. We are trying to be thoughtful and careful about not getting our lending lines of businesses so that when the rate environment changes, that we can take advantage of that though we are very lean today in those business lines. Balance sheet shrinkage, we would love to shrink certain parts of it, of course, more quickly, right. We’d love to shrink our multifamily portfolio more quickly. The single-family runoff rate is a little low historically, but not quite as bad.

And the rest of the portfolio is, sort of running at, sort of historical prepayment speeds. There are things that will change those prepayment speeds. So, the most significant one, of course, is the prospect of lower rates going forward. The multifamily portfolio has been particularly sticky, as you might expect, given the rates on the loans when they were originated. That’s why we’re very focused on working with those borrowers to provide some value to them, either in additional advances on low LTV loans or extension of fixed rate periods in exchange for increasing those rates. And we got some of that done this quarter. The typical deal with this quarter raised rates from the low-to-mid 3% range to 5% to 5.25%. That’s a meaningful change on those loans.

In those cases, we simply extended the fixed rate period for those loans. And in a pooled loans, we rebalanced some. And we have a lot of opportunity for that. I think that’s going to be easier until rates fall than trying to hope for prepayments that are unlikely to occur, but as soon as we get some relief on rates, we’re going to see more significant pre-payments. The other lending we’re doing is primarily revolving, right. And while you may see new origination levels of a certain amount, those are commitment levels and not new balances. And all of that new lending is at very current variable rates, right. Rates of between 7% and 9% generally. And we need that revenue, right. Because given our marginal funding rate of 7% to 9% loan, still has a lot more substantial spread than our net interest margin today.

But we’re looking for other ways to reduce the balance sheet. I just don’t know if the magnitude will be as great as given some relief on prepayment speeds. Those are the things that we continue to work on, while continuing to think of new and more attractive ways to raise new deposits. Obviously, a very competitive market.

Matthew Clark: Great. Thank you.

Operator: Thank you. We now have of Clutch Investment. You may proceed.

Unidentified Analyst: Hi. I’ve got several questions, one strategic and three tactical. I’ll ask the strategic question, and then just please give me some color on this. And that is, I’m just a little very puzzled. You’re a premier outstanding financial institution in one of the best states in the nation. And why in the world would you want to put your foot into a in one of the worst states in the nation with very high taxes, high crime, and extremely poor governance? Now, I’ve read your review. I read the 24,000 accounts. But I mean, you’re four hours away by plane. I mean do you have the skill set and the overview? And I mean of all the places I want to have increased my presence, anything in California banking has a huge discount to sort of economic value, because only 750,000 people left the state last year.

I mean, all you have to do is look at the out-migration of U-Haul, and there’s no state in the nation that comes anywhere close to 750,000 people voting with their feet. I’ll go through the strategic. Those are the strategic question. Just give me some sense as to why you thought that a four-hour plane right away was where you want to be and sort of plant your flag and say, – and I understand the idea of community banking and you’re playing with franchises, but where does that go? I mean can you take someone from North Carolina and then say, “Gee, we want to put you in Southern California to be the manager.” How is that going to work? How do you think that – strategically, where do you see yourself moving in Southern California?

Mark Mason: Well, I appreciate the question. I don’t know if you know my background or other members of management, we all came from Southern California. And so…

Unidentified Analyst: But you’re out there now though, but go ahead.

Mark Mason: But I’m – we’re not headquartered there. If you’d allow me to finish. So, look, to grow, you have to have an attractive product, and you have to have a reasonably sized market, right? The markets in the Pacific Northwest are incredibly small relative to Southern California. Southern California arguably is the largest individual market in the United States. We’re very familiar with Southern California. We entered Southern California many years ago at this point. We’ve acquired two banks. We’ve acquired a number of branches. We’ve opened a number of de novo branches. Today, about a third of our branches are in Southern California. So, our decision to add to that branch network was a fairly easy one, in particular, because these three new branches are in smaller communities that match up well with community banking.

The deposits in those branches are super sticky. They’re primarily small consumer balances, which today are highly valuable. They are very rate-insensitive, and we match up very well with those markets. And so, look, I completely understand your negative comments on California. They are spot on. However, California is not going anywhere. It’s still going to be a very large market forever, and we’re already there, and this decision was a fairly easy one, and timely.

Unidentified Analyst: Okay. Three other just simple tactical questions. Do you have in the immediate future, some kind of – if I were looking at what you have now, I’d be very aggressive in the buyback and I’d encourage all my management and all my employees to buy the stock and have some, kind of signaling from the Board members that each Board member acquires 10,000 shares of stock at 11, I mean this is absurd. If you have a real book value of close to 30 and the stock’s 11, I mean, there’s a real phenomenal disconnect and lifetime opportunity. And that type of signaling, just signaling by buying a thousand shares, it gives a tremendous comfort to the market that you guys are putting your money where your mouth is.

Mark Mason: Understood. As a company, we’re not in a position to buy back stock at this time, right.

Unidentified Analyst: I saw that.

Mark Mason: Right. So, love to, and we’ve done a lot of that over the last several years. We’d much rather have been purchasing stock today, obviously, but that’s on the cards. We discuss with our Board the opportunity. We have requirements for our Board members to own a certain amount of stock. I believe it’s 3x their annual retainer, which is not insignificant. And I think most, if not all of them, are close to that, but we do discuss it. At the end of the day, it’s an individual decision, but we do discuss that. We’ve never been faced with this, kind of low stock price. And so, we’ll see what happens which points we’ll take.

Unidentified Analyst: Two other quick tactical questions. There’s a difference between goodwill and book value. And if I understand this correctly, there’s the assets that went into some, kind of impairment. But those basically roll off after 4 or 5 years. So the question is, those assets that were now at a market rate less than what you purchased, is the maturity, for the most part, about 5 years or 4 years? I mean, you’re going to have about 20% of that bucket come back into book value every year. Is that about right?

John Michel: It would be for the core deposit intangible, that is correct. You’ll be amortizing that over a period of years. But the goodwill is not amortized. It’s based on the books.

Mark Mason: Or are you talking about the securities value?

Unidentified Analyst: No, I’m talking about the security roll-off. I mean those things, the maturity those securities roll-off.

John Michel: Oh got it. I’m sorry.

Mark Mason: That’s what I thought. So, the average duration in the portfolio today is 4 or 4.5 years, right? So, your calculation is, kind of correct if you think about back of the envelope, right?

Unidentified Analyst: Yes. Yes. That’s what I’m looking for.

Mark Mason: But maybe the more practical consideration is that discount might come back sooner with a . And so between the two, it’s obviously coming back, right.

Unidentified Analyst: And the last question is, maybe have you gone back to some of your, you know 19% of your deposits are above the 250 level. If you have a large $5 million or $7 million, $10 million deposit, have you ever done these reverse repos where you say, “Look, your money is good. Don’t worry about it. We will give you a piece of our investment account.” Have you – can you go back to your individual people who have large deposits and find a way to, sort of give them comfort to stay in the game?

Mark Mason: First of all, it’s 14%, not 19%, a level

Unidentified Analyst: I was reading off your news release, but that’s okay. Go ahead.

Mark Mason: I think it’s 14%. But I do want to make sure we got the right number. So, not reverse repos, but we do use the IntraFi products, ICS and CDARS. And if you’re not familiar with those, you might check it out – okay, you are familiar. And that’s really the best way because then, we can get them a 100% FDIC insurance with rates that we customize to each customer. And we are doing that. I’m surprised – I guess I feel fortunate that we don’t have many customers that have had much anxiety. I feel good about that, but where we have had some, they do want to stay with us. They don’t want to go somewhere. So, we have utilized the products.

Unidentified Analyst: Well, I congratulate you on all what you’re doing. We were – we’ve been major investors for a long time. But I – we see you as a Southeastern opportunity and presence. And I mean, I think good governance, low crime, responsible government is where at least we continue to put our equity assets into, because we want to stay out of states that basically can’t get their act together. I mean we don’t own any property in Chicago or Baltimore or San Francisco, and we run away from areas where governance is just too crazy to – when you have 12% marginal tax rate, everybody just worked with their feet. So, your Southeastern presence is what gives you a real premium over the time. So thank you for your good job. Please to keep doing a good job.

Mark Mason: Well, thank you. We appreciate the questions and the comments, sir.

Unidentified Analyst: Okay. Thank you.

Operator: We now have Woody Lay with KBW. You may proceed with your question, Woody.

Woody Lay: Hey good afternoon guys. Wanted to touch on deposits. So, if you adjust for the acquired balances, they were down about 10% quarter-over-quarter, which was mostly from that brokered deposit bucket. Can you just walk through the dynamics that were at play in that segment? Were the declines really from losing the deposits due to competition? Just trying to figure out what drove that decline and sort of do you think the broker deposits can continue to increase from here?

Mark Mason: So, we use broker deposits interchangeably with borrowings. We are conscious of our loan-to-deposit ratio, but we look at the cost of funds, right? And last year, the cost of broker deposits was much more attractive to borrowings. It’s a little less attractive recently. And that’s why you see the decline in broker deposits relative to borrowings, plus the attractiveness of the Federal Reserve program, I forget the initial.

John Michel: term.

Mark Mason: Bank term funding program. We decided to use some of that as well. To the larger question, though, the real small loss of deposits in the quarter, that was primarily in March. We did very well in January and February. March, I think, highlighted – everything that happened in March highlighted the yield opportunity. It’s amazing to me how slowly a lot of deposits have recognized the change in yield opportunity in the market. And it’s a good thing, and this is true for all banks, right? That our customers really are loyal to us and really do like banking with us and that they’re willing to accept a lower yield than maybe the absolute highest yield they could find some place in the marketplace. But over time, a certain number of customers, sort of each month make that decision, either to move inside of our products, let’s say, from rack rate money market to a promotional money market or a promotional CD account and/or move money out.

And you can always find – even though we have a very competitive rate structure on our promotional products, it is not the absolute highest in the marketplace, right. An example, our highest promotional CD rate today is 4.25%. Obviously, you can find them with over 5% in the market today. And it’s kind of an art, not a kind of. It is an art today to price deposits. Because if you’re not careful, you can raise your deposit costs and not increase the number of new customers that you attract. And yet, you’ll reprice existing customers at levels higher than they would happily accept. And we did a little bit of that recently. We had one point over the last month, a 4.75% higher rate. And we found that we didn’t raise materially any more new money.

We just repriced existing money at a higher level. So, we dropped it back down to 4.25%. It’s an interesting market. I do feel that, because we have such a low level of uninsured deposits, that our run-off experience to date, and that include last year’s run-off, is going to slow, I believe. Because the smaller the deposit balance, the smaller the motivation for the customer to seek higher yields. It just happens like that, right? A lot of this money sticks around because the depositors don’t have very large savings accounts. They like to move money in and out of them. They’re very happy with the service. And – but that’s the franchise, right? That’s why it has value. So, I don’t know if that’s a full answer, but that’s, sort of what we’ve experienced.

John Michel: Yeah. Woody, one other comment on the broker deposits.

Woody Lay: Yes.

John Michel: We utilized traditional broker deposits. We do not have relationships that are classified as broker deposits. We usually go through the open market and get broker deposit in that way, dealers. So, we don’t have relationships that are coming in and out, and they decided not to be with us in our broker deposits, if that makes sense.

Woody Lay: Got it. Yes. No, that makes sense. And then maybe on those acquired deposits at quarter-end, they’re about 322 million. Have you seen those balances stabilize so far in April?

Mark Mason: We believe we have, though April has seasonal outflows for taxes, and it’s a little hard right now to read through what our tax payment losses or other reductions. We’re going to know better next month.

Woody Lay: Got it. All right. And then last for me. Can you just sort of talk through the rationale of lowering the dividend to $0.10 versus suspending it all together? And maybe if you could just give us some overall thoughts on your capital position.

Mark Mason: Sure. First, we believe that we still have a solid capital position, right? Our CET1 is still about 8%.

John Michel: Over 8%.

Mark Mason: Over 8% today and substantially more level of capital at the bank, of course, right. So, we feel comfortable that we have sufficient capital today to provide for any growth. Of course, we’re not trying to grow the balance sheet and our risk profile today. Why do we lower the dividend? Well, we lowered the dividend because we are concerned that the level of profitability this year may not be sufficient to feel comfortable continuing to pay our regular quarterly dividend that we’ve had over the last year. And we do that in an abundance of caution. Part of our job as managers of the bank is to make sure that we are sufficiently conservative in distributions in relation to the capital needs of the company, the risk profile.

And today, the environment and the level of uncertainty in the environment about the range of future results led the Board with the decision to reduce the dividend. We did not eliminate the dividend because we believe the company is going to remain profitable. We are concerned about the predictability of the level of profit given the range of outcomes this year. And so, the Board determined that it was appropriate at this time to lower the dividend to a level that they felt very comfortable with.

Woody Lay: Got it. Alright. That’s all from me. Thanks for taking my questions.

Mark Mason: Thanks, Woody.

Operator: Thank you. We now have . You may proceed with your question.

Unidentified Analyst: Hi, good afternoon gentlemen. It’s . I guess my biggest concern after listening to you all speak for about an hour is, Mark, you’ve cited several times that you’re hoping and waiting for interest rates to level out or go down. And I think we all are on the same page on that, but that’s not a business strategy. So my point is, do you have a playbook where long rates go to 5% or 7%? Obviously, that’s not positive, but you need to be prepared for the worst and hope for the best. And I guess I’m just – I’m struggling with your hope of rates going down versus how you manage the business. Could you just talk a little bit about your positioning on that?

Mark Mason: Sure. Well, look, we’re essentially positioned for that today, right? Everything we do today is focused on managing the balance sheet, maintaining liquidity, having a competitive deposit product and trying to manage pressure on funding, right. My comments about a lower interest rate environment really relate to the structure of our balance sheet. I mean, the reality is, we are structured somewhat liability-sensitive. And we – this balance sheet and these lines of business, and not insignificant of which is mortgage lending, they performed better and stable to falling rate markets. And so to say our only business strategy is hoping for a decline is not necessarily true. It’s an observation on the structure of our businesses. So, hopefully, I didn’t suggest our only strategy was a hope.

John Michel: And I would add that we have taken steps to address the potential for, as you say, prepare for the worst and hope for the best. We’ve put over $1.3 billion of fixed rate financing in our – between our FHLB advances and the bank term funding program to lock in those rates. So that if rates do go up, we do not have adverse impact from that. And then that’s a significant portion of our borrowings today.

Unidentified Analyst: Excellent. And then just one other follow-up. I think in a prior comment, you had mentioned on the investments portfolio that your average duration was about 4 to 4.5 years, excuse me. So, in theory, we could be – you could be in a position where your net interest margin and your earnings per share, net earnings are going down, but yet your book equity is actually going up, because that’s being pulled back into the balance sheet. Is that a fair assessment of, kind of how those dynamics work?

Mark Mason: That could occur, right? It obviously depends on deposit costs, right, and in general, rates, among a lot of things, including loan volume and expenses and a whole bunch of stuff, right? But you’re right, that could happen.

Unidentified Analyst: Okay. And then just a funny clarification, but you had said deposit security anxiety, is that a new like psychological disorder or how would you clarify that?

Mark Mason: Well, I don’t know what the popular term is, but when – several banks notably lost a lot of deposits in March, right. I would call that depositor anxiety, right. Now we did not experience much. In fact, it was very hard to identify any material about, but that was a marketplace issue at the end of the quarter.

Unidentified Analyst: Alright. Thank you guys.

Mark Mason: Thank you for the questions.

Operator: Thank you. We now have a follow-up from Matthew Clark of Piper Sandler. You may proceed Matthew.

Matthew Clark: Thanks for the follow-up. Just back on capital. What do you and the Board view as your most constraining capital ratio? I mean, Tier 1 is, I think, down a little bit linked quarter into the mid-8s. Total risk based at the Holdco, I think, . You have additional margin erosion coming, lower earnings. Fortunately, you cut the dividends. That’s going to help, I think, stabilize some of the capital ratios. But I guess getting back to, kind of what do you view as the most constraining capital ratio or at least the Board’s view?

Mark Mason: Well, today, I think that’s Tier 1. That’s the ratio that we believe, most sensitive today.

John Michel: We are as sensitive on the risk-based side because of our large multifamily portfolio, which is 50% risk-weighted for the most part. So, comparing to other banks, Tier 1 is – we’re a little more sensitive to Tier 1 than we are to risk-based capital measures, and the other three measures are risk-based capital measures, so…

Matthew Clark: Okay. Is there any minimum threshold that the Board wants to manage to?

Mark Mason: We watch all of them. We have internal risk appetite levels for each of the measures.

Matthew Clark : Okay. Thank you.

Mark Mason: Thanks Matt.

Operator: Thank you, Matthew. We have had no questions registered. So, I’d like to hand it back to the management team for any final remarks.

Mark Mason: Great. Again, we appreciate all of your attendance. Great questions today. We look forward to talking to you next quarter. Thank you.

Operator: Thank you all for joining. That does conclude today’s call. You may now disconnect your lines and enjoy the rest of your day.