Mechanics Bancorp (MCHB) Q1 2023 Earnings Call Transcript

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.

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?

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 an 11 basis point increase in the yield on interest bearing assets. Yields on interest earning assets increased as yields on investment securities improved and adjustable-rate loan yields increased due to increases in the indices on 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 $0.6 million provision for credit losses was recorded during the first quarter of 2023, compared to a $3.8 million 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 investment, 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.

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 had experienced to date from deposit competition as a few depositors moved funds from community and regional banks to national banks, although very few actually. Consistent with our peers, however, these deposit or anxiety outflows appear to have 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 until the Federal Reserve stops raising rates and ultimately reduces rates. While we have not seen any material deposit 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. 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 Federal Reserve bank term funding program, which for us is a lower-cost wholesale funding option that provides for fixed-rate funding that could be refinanced without penalty if 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 priced 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 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 in our 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 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 caused frustration for deposit customers. We constructively worked 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. The additional goodwill recorded from this acquisition was substantially lower than originally anticipated, reducing the impact on our tangible book value. Despite 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 overcollateralization, 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 States 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 and 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, 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 when 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, and 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 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. 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 in 2020 and 2021 were similarly great and unexpected. The current structure that makes our bank more sensitive to cyclical changes in interest rates allows us to over-earn in declining 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 concludes 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.

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

Hey, good morning.

Good morning.

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?

I would love to, but we don't disclose monthly margins, Matt. Sorry.

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 used those to replace brokered CDs; could you just give us or remind us where brokered CDs stood at the end of the first quarter?

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.

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.

And so cost of funds…

The cost of funds on the 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. 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.

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 settle down and then pay them off with cash or just trying to get a sense for the excess liquidity situation?

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 has already gone down. It is our plan to reduce our borrowings down to about $1 billion over the forward look. So, we plan on doing that through continuing to raise primarily certificates of deposit balances. And we continue to raise new money there. 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.

Okay. And then on your criticized and 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?

First, on office CRE, we haven't made an office CRE loan in several years now. 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 it's single-digit millions, I think. Sorry, Matt. I forgot the second part of that question.

Criticized and classified are relatively stable. We don't disclose them in the quarter release; they're disclosed in the call report.

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

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

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

We continue to work on all of those things, Matt. Those are the obvious levers. 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 at baseline staffing today. We are trying to be thoughtful and careful about not gutting our lending lines of business so that when the rate environment changes, 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 more quickly. 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. The rest of the portfolio is running at historical prepayment speeds. There are things that will change those prepayment speeds. 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 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. In 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 prepayments. The other lending we're doing is primarily revolving. While you may see new origination levels of a certain amount, those are commitment levels and not new balances. All of that new lending is at very current variable rates — rates of between 7% and 9% generally. And we need that revenue. Given our marginal funding rate, a 7% to 9% loan still has a substantially larger 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.

Great. Thank you.

We now have an analyst from Clutch Investment. You may proceed.

Hi. I've got several questions, one strategic and three tactical. I'll ask the strategic question, and then please give me some color on this. I am just a little 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 difficult market 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. Do you have the skill set and the oversight? Of all the places I would want to increase presence, anything in California banking has a huge discount to economic value, because so many people left the state last year. I'm trying to understand strategically why you thought a four-hour plane away was where you want to plant your flag and say, 'gee...' I understand the idea of community banking and you're playing with franchises, but where does that go? Can you take someone from the Pacific Northwest and then say, '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?

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. We're not headquartered there, but to grow you have to have an attractive product and a reasonably sized market. 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, a number of branches, and 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. I completely understand your negative comments on California; they are spot on in many respects. However, California is not going anywhere. It's still going to be a very large market forever, and we're already there, so this decision was a fairly easy and timely one.

Okay. Three other simple tactical questions. If I were looking at what you have now, I'd be very aggressive in the buyback and I'd encourage management and employees to buy the stock and have some signaling from the Board that each Board member acquires 10,000 shares at $11. There's a real disconnect between book value and the stock price. That type of signaling would give tremendous comfort to the market that you're putting money where your mouth is.

Understood. As a company, we're not in a position to buy back stock at this time. We'd love to, and we've done a lot of that over the last several years. We'd much rather be purchasing stock today, but that's not feasible currently. We discuss this with our Board. We have requirements for our Board members to own a certain amount of stock — I believe it's 3x their annual retainer. I think most, if not all of them, are close to that, but it's an individual decision. We'll see what happens and which points we'll take.

Two other quick tactical questions. There's a difference between goodwill and book value. If I understand correctly, assets that went into some temporary impairment essentially roll off after several years. Those assets that were at market rate less than what you purchased — is the maturity profile about 4 or 5 years? Will about 20% of that bucket come back into book value each year?

If you're referring to the core deposit intangible, that is amortized over a period of about 7 to 8 years. Goodwill is not amortized; it's tested for impairment. If you're referring to the securities portfolio, the average duration in the portfolio today is approximately 4 to 4.5 years, so your back-of-the-envelope calculation is reasonable for the securities roll-off.

And the last question: have you gone back to large depositors who have balances above the FDIC insurance threshold to offer products that give them comfort to stay, such as using IntraFi or other ways to provide full FDIC insurance for large balances?

First of all, it's 14% uninsured deposits, not 19%. We do use the IntraFi products, ICS and CDARS. Those allow us to provide 100% FDIC insurance to customers with large balances with rates we can customize. We are using those products. Where customers have had anxiety, we've worked with them and found many want to stay with us. So yes, we have used those solutions.

Well, I congratulate you on your work. We've been major investors for a long time. We see you as a Southeastern opportunity and presence. Good governance, low crime, and responsible government are where we like to put equity assets. Thank you for your good work.

Well, thank you. We appreciate the questions and the comments.

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

Hey, good afternoon guys. Wanted to touch on deposits. If you adjust for the acquired balances, they were down about 10% quarter-over-quarter, which was mostly from the brokered deposit bucket. Can you walk through the dynamics that were at play in that segment? Were the declines really from losing the deposits due to competition? And do you think the broker deposits can continue to increase from here?

So, we use broker deposits interchangeably with borrowings to some degree. We are conscious of our loan-to-deposit ratio, but we look at the cost of funds. Last year, broker deposits were much more attractive relative to borrowings. They're 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's bank term funding program. To the larger question, the small loss of deposits in the quarter was primarily in March. We did very well in January and February. March highlighted the yield opportunity. It's surprising how slowly a lot of deposits have recognized the change in yield opportunity in the market. Our customers are loyal and like banking with us and are willing to accept a lower yield than the absolute highest yield in the marketplace. Over time, a certain number of customers each month make the decision to move money. Even though our promotional products are competitive, they are not always the absolute highest in the market. Pricing deposits is an art today. You can raise deposit costs and not materially increase the number of new customers attracted, or you can reprice existing customers at higher levels. For example, we briefly offered a 4.75% rate last month and found it did not materially raise new money; it primarily repriced existing money, so we dropped it back to 4.25%. Because we have such a low level of uninsured deposits, I believe our run-off experience is going to slow, as smaller deposit balances have less motivation to seek the highest yield. A lot of this money sticks around because depositors don't have very large balances and value service. That's the franchise value, and that's what we've experienced.

Woody, one other comment on the broker deposits: we utilize traditional broker deposits via the open market and dealers. We do not have relationships that are classified as broker deposits coming in and out via other arrangements. So, if broker deposits declined, it's because of the market choices at the time.

Got it. And then maybe on those acquired deposits at quarter-end, about $322 million, have you seen those balances stabilize so far in April?

We believe they have stabilized, though April has seasonal outflows for taxes, so it's a little hard right now to read through tax payment reductions and other flows. We'll know better next month.

Got it. And then last for me: can you talk through the rationale of lowering the dividend to $0.10 versus suspending it altogether? And maybe some overall thoughts on your capital position.

Sure. First, we believe we still have a solid capital position. Our CET1 is over 8% today and we have substantially more capital at the bank level. We feel comfortable we have sufficient capital today. We lowered the dividend because we are concerned that the level of profitability this year may not be sufficient to continue paying our regular quarterly dividend. We did this in an abundance of caution. Part of our responsibility is to be conservative in distributions relative to capital needs and the bank's risk profile. Given the uncertainty about future interest rates and deposit flows, the Board determined it was appropriate at this time to reduce the dividend to a level they felt very comfortable with. We did not eliminate the dividend because we believe the company will remain profitable; rather, the predictability of profit levels is uncertain.

Got it. All right. That’s all from me. Thanks for taking my questions.

Thanks, Woody.

We now have Dr. Christian Koch. You may proceed with your question.

Hi, good afternoon gentlemen. My biggest concern after listening is that Mark, you've cited several times that you're hoping and waiting for interest rates to level out or go down. That's not a business strategy. 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. I'm struggling with your hope of rates going down versus how you manage the business. Could you talk a little bit about your positioning for that scenario?

Sure. We're essentially positioned for that today. Everything we do now is focused on managing the balance sheet, maintaining liquidity, having competitive deposit products, and trying to manage pressure on funding. My comments about a lower interest rate environment relate to the structure of our balance sheet. We are somewhat liability-sensitive and several of our lines of business, including mortgage lending, historically performed better in falling-rate markets. Saying we'd like rates to decline is an observation on our business structure, not our only strategy. We are actively managing the business.

I would add that we have taken steps to prepare for higher rates: we've put over $1.3 billion of fixed-rate financing in place between our FHLB advances and the bank term funding program to lock in rates. A significant portion of our borrowings are fixed, so if rates go up, we will not have the same adverse impact from those borrowings.

Excellent. And then one follow-up: with the investments portfolio average duration around 4 to 4.5 years, in theory you could have net interest margin and earnings per share decline while book equity goes up as securities roll back into the balance sheet. Is that a fair assessment?

That could occur. It depends on deposit costs, rates, loan volume, expenses, and many other variables. But yes, that dynamic is possible.

And a clarification: you mentioned depositor anxiety. Is that the popular term you're using for deposit outflows due to market events?

Yes. When several banks lost deposits in March, I would call that depositor anxiety. We did not experience much of that, but it was a marketplace issue at the end of the quarter.

We now have a follow-up from Matthew Clark of Piper Sandler. You may proceed, Matthew.

Thanks for the follow-up. Just back on capital. What do you and the Board view as your most constraining capital ratio? Tier 1 is in the mid-8s; total risk-based at the HoldCo is around 11.15. With additional margin erosion and lower earnings, and fortunately you cut the dividend — what do you view as the most constraining capital ratio or at least the Board's view?

Well, today I think that's Tier 1. That's the ratio that we believe is the most sensitive.

We are also sensitive on the risk-based side because of our large multifamily portfolio, which is largely 50% risk-weighted. Compared to other banks, Tier 1 is a bit more sensitive for us than the risk-based measures. We watch all of the measures and have internal risk appetite levels for each.

Okay. Thank you.

We have had no further questions registered. I'd like to hand it back to the management team for any final remarks.

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

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