First Internet Bancorp Q1 FY2023 Earnings Call

Good day, everyone, and welcome to the First Internet Bancorp Earnings Conference Call for the first quarter of 2023. My name is Jayson, and I'll be the moderator for today's call. Please note that today's event is being recorded. I would now like to turn the conference over to Larry Clark, from Financial Profiles. Please go ahead, Mr. Clark.

Thank you, Jayson. Good day, everyone, and thank you for joining us to discuss First Internet Bancorp's financial results for the first quarter of 2023. The company issued its earnings press release yesterday afternoon, and it's available on the company's website. In addition, the company has included a slide presentation that you can refer to during the call. You can also access these slides on the website. Joining us today from the management team are Chairman and CEO, David Becker; and Executive Vice President and CFO, Ken Lovik. David will provide an overview, and Ken will then discuss the financial results. Then we'll open the call to your questions. Before we begin, I'd like to remind you that this call contains forward-looking statements with respect to the future performance and financial condition of First Internet Bancorp that involve risks and uncertainties. Various factors could cause actual results to differ materially from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company's SEC filings, which are available on the company's website. The company disclaims any obligation to update any forward-looking statements made during the call. Additionally, management may refer to non-GAAP measures, which are intended to supplement, but not substitute, the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today as well as a reconciliation of the GAAP to non-GAAP measures. At this time, I'd like to turn the call over to David.

Thank you, Larry. Good afternoon, everyone, and thanks for joining us today as we discuss our first quarter 2023 results. Before we walk through the financial and operating results for the quarter, I would like to start with some comments regarding the sustainability and resilience of our business in light of the stunning external events during March and the challenges faced by the banking system. You'll find these points on Slide 3 in the earnings presentation. First, continued outflow to deposits in the banking sector during the quarter have brought deposit retention and liquidity to the forefront. First Internet Bank increased deposits by $181 million, or 5.3%, from year-end. Earlier in the quarter, we took advantage of consumer demand for CDs and brought in over $200 million in new CD volume, allowing us to build liquidity at pricing below forecasted increases in the fed funds rate. The demand for CDs remained fairly strong later in the quarter as well, and we also had the opportunity to increase certain larger deposit relationships. This calculated growth allowed us to easily absorb a decline in money market balances, some of which was due to outflows to money center banks in the U.S. Treasury market. While we experienced a modest decline in deposits from mid-March to quarter-end, balances have rebounded and are up $135 million thus far in the month of April. As of March 31, nearly 75% of our deposits were covered under FDIC insurance. The percentage increases to over 80% when you exclude public fund deposits that are either insured or collateralized and other deposits under contractual agreements. Despite the volatility in the banking industry during March, our balance sheet liquidity remains strong, in that we did not need to access any additional borrowings from either the Federal Home Loan Bank or any of the new emergency facilities established by the Federal Reserve in response to the events during March. Another hot topic at the moment is office commercial real estate exposure. Within our commercial portfolio, office exposure is limited to suburban and medical offices. There is no central business district exposure. Overall, it represents less than 1% of our total loan portfolio. Our capital levels remain strong, with tangible common equity to tangible assets at 7.47% and a common equity tier 1 capital ratio of 10.35% at quarter-end. Our securities portfolio has not been immune from the impact of higher interest rates. However, regulatory capital ratios remain well above minimum requirements even after adjusting for unrealized losses in the securities portfolio. We did not go all-in on buying securities back in 2020 and 2021 with excess liquidity when rates were at an all-time low. As a result, total unrealized security losses only represent 13.3% of our tangible shareholder equity at quarter-end. Furthermore, tangible book value per share was relatively stable at $39.43. This brings me to our financial and operating results, which are highlighted on Slide 4 of the presentation. For the first quarter of 2023, we reported a net loss of $1.3 million and diluted loss per share of $0.14. The loss for the quarter can be largely attributed to two events. First, we had a partial charge-off of a $9.8 million commercial and industrial loan based on events we learned of after the end of the quarter. The partial charge-off was $4.7 million, which amounts to a per-share impact of $0.41. I will come back to this loan and to credit quality generally in just a moment. Our results for the quarter also include $3.1 million of mortgage operations and exit costs and about $100,000 of mortgage banking revenue. In January, we announced our plan to exit this line of business. We have completed substantially all originations that were in the pipeline, and costs associated with winding down the line of business were generally in line with our guidance and had a per-share impact of $0.26. Adjusted for these two discrete items, net income was $4.8 million and earnings per share were $0.53, which was in line with analyst expectations. In terms of our core operation, the performance for the quarter reflects the execution of our strategy we discussed last quarter. First, we focused on controlling what we can control. And so we looked to expenses. Excluding mortgage costs, operating expenses across the organization declined 3.3% from fourth quarter '22. We have also focused on positioning the loan portfolio to generate increased revenue in future periods, with variable-rate lending in construction, investor commercial real estate, and SBA, as well as higher-yielding fixed-rate lending in franchise finance and consumer lending. During the quarter, the weighted average yield on new funded originations was 7.76%, which was up 161 basis points over the fourth quarter of 2022. As the composition of the loan portfolio continues to migrate towards a more favorable mix of variable-rate and new production at higher rates, we continue to believe that we will be well-positioned to achieve higher earnings and profitability in future quarters once the Federal Reserve hits its terminal fed funds rate. Commercial loan balances were up $89 million, or 3.3%, compared to the prior quarter, as cash flows from longer-term fixed-rate products were redeployed to support growth in franchise finance, small business lending and construction and investor commercial real estate. Consumer loan balances increased $23.1 million, or 3.1%, compared to the prior quarter, as trailers, RV and other consumer loan production remained solid despite the higher interest rate environment. With regard to asset quality, I would like to provide some more color around the C&I loan that we partially charged off. This particular account has a participation through the program we have been a part of for about 9 years that allows smaller banks access to the leveraged loan market. Historically, these loans have performed exceptionally well for us, with only about 20 basis points of cumulative losses over the 9-year period up to this point. This loan began to demonstrate some weaknesses and was moved to nonaccrual status late in the first quarter. Our credit team is highly engaged with the program manager on resolution strategies as the borrower and the lender are evaluating. Subsequent to quarter-end, we were made aware of developments related to these resolution efforts that made it clear, in our opinion, the loan was impaired, which resulted in the partial charge-off. Through this program, we had only $11.8 million of other loans in addition to this credit outstanding at quarter-end, $2 million of which has been paid off in full in April. The remaining credits are performing well, and we see no signs of potential problems on the horizon. Despite the developments on this particular loan, our overall levels of nonperforming loans to total loans of 32 basis points and nonperforming assets to total assets of 24 basis points are still relatively low compared to the rest of the banking industry. Furthermore, delinquencies 30 days or more past due declined during the quarter by 13 basis points, while net charge-offs, excluding the effect of the partial C&I charge-off, remained low, at 3 basis points of average loan balances. To wrap up the credit discussion, I want to emphasize that we believe the participation credit discussed earlier is an isolated incident within our portfolio. With less than $15 million now outstanding, loans from this program represent a very small portion of our portfolio and have historically performed extremely well. Speaking to our credit standards generally, our disciplined underwriting standards have remained consistent over time regardless of market conditions. We remain confident in the high quality of our loan portfolio as evidenced by the continued low levels of delinquency and net charge-offs. Turning back to the operating highlights, our SBA team had an outstanding quarter, posting its highest level of quarterly gain on sale revenue to date, which was up over 40% compared to the prior quarter on increases in both sold loan volume and net gain on sale premiums. Our SBA pipeline has continued to build, which is a testament to the high-performing team we have put together, and it leaves us confident that we will achieve the growth targets we have set for them. And lastly, I want to provide an update on our banking-as-a-service and partnership initiatives. Programs that were in pilot are now live and gaining momentum. We have a dozen programs either live or preparing to go live with our platform partner, Increase. From a total deposit standpoint, we now have over $80 million of banking-as-a-service deposits. Program fees contributed $125,000 to noninterest income during the quarter and will grow as more programs go live on the platform. Additionally, our partnership with the platform Treasury Prime continues to move forward. Similar to our partnership with Increase, we are looking at new opportunities regularly as we get ready to go live with Treasury Prime. To wrap up my prepared comments, I want to reiterate that we are focused on controlling what we can control to build an earnings stream that is resilient to changes in the economic and interest rate environments. We have a strong balance sheet and are well capitalized, allowing us to withstand the challenges of an uncertain economy. Like you, members of the board and the bank's senior leadership team are shareholders. We are committed to improvement in our financial performance in order to create shareholder value. With that, I'd like to turn the call over to Ken for more details of our financial results for the quarter.

Thanks, David. Now turning to Slide 5. David covered the highlights for the quarter from a lending perspective, so I will just add some additional color. In line with our focus on higher-yielding asset classes, we were pleased to see that our first quarter funded portfolio loan originations continued to increase from the fourth quarter. Because of the fixed-rate nature of some of our larger portfolios, there is a lagging impact of the higher origination yields on the overall loan portfolio. However, these originations should have a positive impact on the loan yields in future periods. Our SBA, construction and franchise finance channels continue to have healthy pipelines. Our intent is to fund the majority of this production using cash flows from other loan portfolios as we continue to rebalance the composition of our total loan book. Moving on to deposits, on Slide 6 through 8, for the quarter our deposit balances were up $181 million, or 5.3%, from the end of the fourth quarter. As David mentioned, early in the first quarter we took advantage of strong consumer and small business demand and pulled forward deposit growth, primarily with CDs, which increased $296 million from the prior quarter, locking in rates ahead of the expected March Fed rate hike. Additionally, brokered deposits increased $69 million from the end of 2022 as we proactively expanded existing contractual deposit relationships with certain customers and issued long-term fixed-rate callable brokered CDs. Non-maturity deposits, excluding banking-as-a-service deposits, decreased by $227 million compared to the linked quarter, with money market accounts, noninterest-bearing and interest-bearing demand deposits declining $165 million, $35 million, and $23 million, respectively. We estimate that about half of the decline in money market balances was the result of outflows of uninsured deposits in mid-March, while the other portion of the decline was considered to be business as usual from our commercial and small business customers to fund ongoing operations. The decline in noninterest-bearing deposits was due primarily to drawdowns from commercial real estate development and construction clients contributing equity to projects we're financing, while the decline in interest-bearing demand was due to normal activity associated with the municipal deposit relationship. We more than doubled our banking-as-a-service deposits, which increased from $40 million at the end of 2022 to $82.4 million at the end of the first quarter. As a result of all the deposit and interest rate activity during the first quarter, the cost of our interest-bearing deposits increased by 79 basis points from the fourth quarter. Looking at Slide 7. At quarter-end, we estimate that our uninsured deposit balances were $950 million, or 26% of total deposits, down from 33% at the beginning of the year. This decrease was driven primarily by the decline in money market balances, conversions to reciprocal deposits and the drawdowns on construction-related noninterest-bearing balances. Included in the uninsured balance total are Indiana-based municipal deposits which are insured by the Indiana Board for Depositories and neither require collateral nor are reported as preferred deposits on the bank's call report, as well as certain larger-balance collateralized public funds and accounts under contractual agreements that only allow withdrawal under certain conditions. After adjusting for these types of deposits, our adjusted uninsured balance drops to $695 million, or 19% of total deposits, comparing favorably to the rest of the industry. Moving to Slide 8. At quarter-end, we had total liquidity of $932 million, including cash and unused borrowing capacity. With the deposit growth since quarter-end, we have increased cash balances by an additional $100 million. Currently, our cash and unused borrowing capacity represent 109% of total uninsured deposits and 149% of adjusted uninsured deposits. So we continue to feel comfortable that we have the ability to meet any future customer liquidity needs if they arise. As David noted earlier, total deposit balances declined modestly from mid-March through quarter-end and have since rebounded up $135 million through April 20. Turning to Slides 9 and 10, net interest income for the quarter was $19.6 million and $21 million on a fully taxable equivalent basis, down 9.7% and 9.1%, respectively, from the fourth quarter. Our yield on average interest-earning assets increased to 4.69%, from 4.4% in the linked quarter, due primarily to a 24-basis point increase in the average loan yield, a 36-basis point increase in the yield earned on securities and a 94-basis point increase in the yield earned on other earning assets. The higher yields on interest-earning assets, combined with growth in average loan balances, produced strong top line growth in interest income, increasing 13.9% compared to the linked quarter. Deposit costs, however, increased at a faster pace, resulting in the decline in net interest income. We recorded a net interest margin of 1.76% in the first quarter, a decrease of 33 basis points from the fourth quarter. Fully taxable equivalent net interest margin was also down 33 basis points, to 1.89% for the quarter. This was down from the range we provided on last quarter's call for a couple of reasons; the primary one being the impact of pulling forward deposit growth and building liquidity with CDs. Additionally, average commercial loan balances, specifically construction and C&I loans, came in a bit lower than our forecast, which impacted top line loan income. The net interest margin roll-forward on Slide 10 highlights the drivers of change in fully tax equivalent net interest margin during the quarter. Looking ahead, with higher-priced new loan originations and variable-rate assets repricing higher, we believe that we will deliver another increase in total interest income for the second quarter. Currently, we expect the yield on the portfolio to be up around another 15 to 20 basis points for the second quarter. We also expect deposit costs to increase given forward rate expectations based on the Fed's continued language regarding rates and inflation as well as the effect on deposit pricing following the events of March. The pace of increase will depend heavily on price competition as deposits continue to leave the banking system. Given the expectations for higher short-term interest rates in the near term, we anticipate that net interest margin and net interest income will contract further in the second quarter, although not at nearly the same pace as the past two quarters, and are expected to increase thereafter. Turning to noninterest income, on Slide 11, noninterest income for the quarter was $5.4 million, down $400,000 from the fourth quarter. Gain on sale of loans totaled $4.1 million for the quarter, up 42% over the fourth quarter, and consisted entirely of gains on sales of U.S. Small Business Administration 7(a) guaranteed loans. Our SBA team continues to perform well, as sold loan volume increased 16.4% and net premiums were up over 150 basis points as well. Other income totaled $400,000 for the first quarter, down $1.2 million compared to the linked quarter due to distributions received on our fund investments in the fourth quarter. Mortgage banking revenue totaled less than $100,000 for the first quarter, as we began to wind down our consumer mortgage business in late January. Moving to Slide 12, excluding $3.1 million of mortgage operation and exit costs, noninterest expense totaled $17.9 million for the first quarter, declining $600,000, or 3.3%, compared to the linked quarter. Excluding the mortgage operations and exit costs, salaries and employee benefits expense decreased by $800,000 compared to the linked quarter due to lower incentive compensation and bonus accruals.

Now let's turn to asset quality on Slide 13. David covered the major components of asset quality for the quarter in his comments. I will just add some color around the provision and the allowance for credit losses. The provision for loan losses in the quarter was $7.2 million, up from $2.1 million in the fourth quarter of 2022. The increase in the provision was largely driven by the partial charge-off of the C&I participation loan as well as growth in the loan portfolio and changes in certain economic forecasts that impacted quantitative factors related to the allowance for credit losses in certain portfolios. The allowance for credit losses as a percentage of total loans was 1.02% as of March 31, compared to 91 basis points as of December 31. The increase in the allowance for credit losses reflects the Day 1 CECL adjustment of $3 million, which was in line with the estimate we provided last quarter. The increase also reflects the portfolio growth and the impact of economic forecasts mentioned earlier. With respect to capital, as shown on Slide 14, our overall capital levels at both the company and the bank remain strong. Our tangible common equity ratio declined 47 basis points to 7.47% due to the combination of share repurchase activity, the Day 1 CECL adjustment and the reported net loss for the quarter, partially offset by the decrease in the accumulated other comprehensive loss, as securities valuations improved since year-end. During the quarter, we repurchased 161,691 shares of our common stock at an average price of $24.50 per share as part of our authorized stock repurchase program. In total, we have repurchased $36.2 million of stock under our authorized programs to date. As a result of share repurchase activity, tangible book value per share remained relatively stable at $39.43 at quarter-end. Before I wrap up my comments, I would like to provide some additional commentary on components of forward earnings. As we discussed on the expense side, excluding the impact of mortgage, total noninterest expense was down 3.3% compared to the prior quarter. Along the lines of controlling what we can control, we do have levers we can pull to control expense growth and expect full-year 2023 total noninterest expense to be in the range of $72 million to $74 million, which is a little lower than the previous guidance. Related to noninterest income, our solid performance in the first quarter sets us up to outperform the guidance provided on last quarter's call. For the full year 2023, we now expect total noninterest income to be in the range of $19 million to $21 million, which is up from our prior guidance. Our revised outlook reflects increased SBA origination and loan sale volume and modestly higher net gain on sale premiums. We expect the next several quarters may continue to provide a level of uncertainty from an earnings perspective due to where deposit costs may trend and determining the right level of liquidity to maintain on the balance sheet. However, we also continue to remain very optimistic about 2024 and beyond. When the Fed begins to bring rates back down, whether in line with the forward curve expectations or the Fed dot plot, deposit costs should come down significantly, with a meaningful and positive impact on net income and EPS. One final area I would like to address is our commitment to preserving and growing tangible book value per share. While the impact of operating in a challenging interest rate and deposit environment may be new to many bank management teams, we have operated successfully with our business model for decades. And along with that, we have a demonstrated track record of building tangible book value per share. Regardless of what interest rate or economic scenario actually comes to fruition, the stability in our business model gives us the confidence that we will continue to build tangible book value per share over the long term. With that, I will turn it back to the operator so we can take your questions.

Our first question is from Nathan Race, with Piper Sandler.

A question just on the margin guidance. I appreciate all the details in terms of kind of the trajectory for 2Q. And it sounds like you guys think you can kind of keep the margin stable in the back half of the year. So I guess I'm just curious, what kind of rate environment does that contemplate? Does that just assume the Fed hikes in May and then is on hold from there? And I guess, what kind of gives you guys confidence that the deposit pricing pressures may moderate or at least the margin can stabilize with the Fed on hold in 3Q and 4Q?

Nate, at this point, we don't have a specific projection. We model out several different scenarios. We're in line with the Fed raising one more time, perhaps another, but perhaps being done with that. But you've got the forward curve that says rates are going to come down at the back end of the year. I don't know if we're convinced that that's going to happen. So we look at a few different sets of scenarios. I think the wild card, Nate, with deposit pricing and why it's hard to pin down exactly is what's going to happen with deposit flows. So as you've seen with your banks and others who have had to go to different deposit markets than they're used to, the cost, and whether it's fed funds or a spread to fed funds, seems to vary by channel. But I think as we model it out, once the Fed stops, and again assuming that spreads aren't really widening in that, we feel pretty good that the cost of deposits, whether it's the cost itself in percentage terms or the dollar amount, is going to stabilize. And once rates start coming down, whether it's this year or next year, we're going to pick up a lot of leverage on earnings because those deposit costs are going to come down pretty rapidly.

One comment on that, Nate. We started at a higher level than others entering this marketplace. Our rates were higher to begin with. Although we've experienced significant increases in the past couple of quarters, on a percentage basis, some are facing triple-digit increases in their cost of funds. As Ken mentioned, we've been in this for two decades, so we are skilled at adjusting rates when necessary. We've increased our outstanding deposits without resorting to extreme measures in the market. As he noted, we did not borrow from third parties to boost our figures. Our situation remains quite stable. Additionally, we've raised loan rates, funding much of our activity through payments from longer-term, lower-cost loans. The main challenge for us is determining how much liquidity we need to maintain on our balance sheet. We don't need to seek additional deposits at this time, as we have sufficient CDs and similar instruments, and we believe the worst is behind us. However, we need to see how things unfold. If First Republic faces serious issues, it could create more disruption in the system, but that remains to be seen.

Got it. That's helpful. And just turning to credit, you mentioned in the release, David, that your exposure to similar type loans is very limited. So I was wondering if you could just size up kind of what the participation C&I loan portfolio looks like, what credit quality metrics are trending there in terms of criticized, classified trends and so forth and just maybe if you could shed any more light in terms of some of the uniqueness around the specific charge-offs in 1Q.

That loan through Bank Alliance, a partnership we've been a part of for 9 or 10 years. It was a company that during COVID was booming, unlike other companies that readjusted their business model post-COVID. They kept building product and got out over their heads on development of product. The biggest challenge they currently face is excess inventory and consulting fees trying to solve those problems. It's a good company, and we've received favorable assessments from S&P and Moody's. We've had interest in potential sales discussions about the company. So there is still value, but its management team did not keep track of operations post-COVID. The rest of the loan portfolio remains stable, with about $4 million of loans still on the books, and $10 million in a few other loans that have performed as agreed. The rest of our C&I portfolio did not show any degradation during the quarter. Had we not moved this one loan to nonperforming, we would have seen a decrease in nonperforming assets. This bump in our statistics is primarily due to this singular loan. As I've forecasted in preceding quarters, we expect to see occasional challenges but nothing extensive.

Got it. That's very helpful. And it sounds like just the broader participation book where you guys are the non-agent is fairly small.

Yes, the total exposure through the Bank Alliance program amounts to about $15 million, which includes this problem loan. And we may have around $25 million to $30 million in total exposures with other banks, but it remains a small portion of our overall loan portfolio.

Okay. Got it. And then just maybe lastly, with the mortgage right-sizing seemingly largely behind you guys at this point, how should we be thinking about the tax rate going forward? Any other one-time costs in Q2 and beyond?

Nate, are you asking if there's any more one-time costs in Q2 and beyond?

Yes. And just the tax rate going forward. And obviously, you have the tax reversal in the quarter.

Well, the first question, no. With mortgage, we took all of our one-time costs in the first quarter. So there should be no additional costs associated with exiting the mortgage business or other one-time costs on the horizon right now. I'd say in a more normalized environment, the tax rate is probably closer to the 12% to 15% range we had. But with earnings being lower than a year ago, we model internally at 12%. However, with the lower earnings, the effective rate might be somewhere between 9% to 12% due to the benefits from our tax-exempt public finance portfolio. So that's probably the way that I'd look at it.

Our next question is from Brett Rabatin, with Hovde Group.

I wanted just to start strategically and just think about the balance sheet options. Is it not under consideration to maybe shrink down the balance sheet? Are there pieces of the loan book that maybe you could sell and just given the stock price, maybe retrench and buy back more stock? Or just any thoughts on the strategic opportunities that your stock price here might be giving you relative to the balance sheet?

At the current time, Brett, we do intend to continue the stock buyback, particularly at the price it's at today. It's absurd not to. In regard to selling parts of the balance sheet, as pointed out during this call, if you look at individual categories compared to last quarter or even back into the fourth quarter, certain segments have become unmanageable due to lower pricing. Given that we're bringing in funds at around 4% and lending them out at 8%, 9%, or 10% levels through the commercial side, it makes sense for us to continue. This is good quality lending. We're not buying business for the sake of growth. We're focusing on a return on our investments. We've assessed potential sales of segments of the portfolio, but we haven't justified that hit. We're comfortable maintaining our current strategy during this cycle, and historically, we've emerged stronger post-cycles.

Can you confirm if I understood correctly that there was a 15 basis points improvement in asset yields in Q2?

Sorry, Brett, that's more like the loan book, with a 15% to 20% improvement. Some of those results are based on new loan yield generation rather than repricing existing loans.

Okay. That's helpful. And on the CD book, how much do you have maturing in the next two quarters? And it looks like you're paying a little over 5% for the 1-year CD, but it looks like your money market rate is actually 3.56% on consumer. I'd be curious to hear what it is on the commercial side.

It's 3.20% on the commercial side. And regarding the maturing CDs, we have about $360 million of CDs maturing with an average rate in the 2.70% to 3% range.

We also pay a higher rate for balances exceeding certain amounts in the money markets. In terms of what's maturing, about $360 million of CDs are rolling off in the next two quarters.

Okay. And then just last question, on the BaaS platform. How many people have you added in compliance? I'm just curious about that platform and how you've built that out over the past year or so.

In the past year, on the compliance side, we've added about six individuals, more than doubled the team we had. Part of this was setting up, especially after observing some of our peers facing regulatory issues for relying solely on fintech for compliance efforts. We built out both technology and human resources for internal monitoring to ensure BSA, KYC, KYB compliance. Although some fintech partners do check some of those for compliance, we double-check everything. We have good automation tools to handle volume and transactions. We were audited by the FDIC and the DFI last fall, and their feedback was our program is one of the stronger we have seen for BaaS services. We feel confident about our compliance structure and continue to improve and review it, and we're gaining traction as some clients leave other banks due to regulatory issues.

Our next question is from George Sutton, with Craig-Hallum.

David, I wondered if you could just go further on what you were just referring to relative to the fintech update. Just to take this a little higher level, the idea of creating this was to bring in low-cost deposits. Do you feel like this area can achieve that, going forward? And can you give us a little more detail on the scarcity of deposit importance relative to bringing these partners in?

George, as you know, I don't believe there are truly free deposits out there in today's marketplace. When we analyzed our current status and prepared for this call, we realized we actually have more HOA deposits on the books than what was presented to us. While they're not free, they do offer slightly better cost than traditional deposits, so they are more advantageous. Having partnered with BaaS providers, as we continue to develop relationships, we expect to see lower-cost deposits flowing in. The initial costs are competitive, with many deposits coming in at a lower rate than fed funds. We're experiencing significant customer activity, which bolsters our revenue. We foresee additional successful partnerships growing with this approach. The current market indicates the importance of scaling this strategy effectively.

One other thing. Have you put in a reciprocal deposit program? And my assumption is you probably have. I'm just curious about the feedback you've gotten in terms of keeping some of those uninsured deposits.

We have. Our partnership with IntraFi has been ongoing for a couple of years. When Silicon Valley collapsed, we received very few requests for our services. The fact that we offer it has alleviated concerns for many larger depositors. As of now, we have about $60 million to $70 million in our IntraFi program, helping to spread deposits across several institutions while remaining low-cost. The service fees are minimal. We believe this safety net has been valuable, and many of our clients have returned for this option, contributing to our deposit growth in April. It’s a practical tool, though more of a safety net currently than a primary selling point.

Our next question is from Nathan Race with Piper Sandler.

I appreciate you taking the follow-up. And I apologize if I didn't catch it in your prepared comments, Ken, but can you guys just remind me kind of what your outlook is for core deposit growth and loan growth over the next couple of quarters?

I think one of the things we've kind of talked about a couple of times is the remixing concept for the loan book. The overall loan balances for the next two to three quarters really aren't expected to grow tremendously. It's really more about remixing the loan book organically versus growing the overall balance sheet. The caveat is what is the right amount of liquidity to maintain on the balance sheet. Because with unforeseen events going forward, it probably is prudent to maintain more liquidity right now. And as we all know, balance sheet growth isn't driven by loans; it's driven more by deposits. So that's just the one wildcard on that.

One real quick comment on the deposit side. I know one of the issues that has raised concerns among investors over the years, when the loan-to-deposit ratio gets north of 100%, everybody becomes nervous. Positively, we're currently positioned under 1:1. It's around 98% to 99%. We aim to maintain that balance to remain under the 100% loan-to-deposit ratio and to see low single digits in loan growth in future quarters.

Our next question is from Ross Haberman, with RLH.

I just had a quick question. I got on a little late. Could you touch upon any weakness in any of the loan categories which you are beginning to see? Or like a lot of banks, you're not seeing any cracks yet.

At the current time, we're not seeing any cracks, per se. We had the one-off participation loan that we discussed earlier, but the overall delinquency has decreased this quarter compared to last quarter. We do have one REO property, a home in Vermont, worth less than $200,000. It's been in foreclosure for 3.5 years and doesn't relate to the current economy. Overall, the loan portfolio remains solid, with no pending losses. Even the SBA sector is performing very well. The small business community continues to work diligently, so we're not seeing any cracks.

And just one follow-up. Could you refresh us on how big your total loan participation book is as a percentage of the total loans?

We have about $15 million through the Bank Alliance program, which includes this one C&I loan. There’s also around $15 million through other banks’ participations, equating to approximately $30 million total participation loans, which is a small percentage of our overall book.

Our next question is from Brett Rabatin, with Hovde Group.

On the buyback, I missed if you provided remaining authorization. And then I know it likely depends on a lot of factors, but any broad color on how much you think you might buy back the rest of the year and if there are capital ratios that would constrain that, beyond which you wouldn't want to buy back more stock? Just how you're thinking about the buyback.

Currently, Ken, correct me if I'm wrong, but we have just over $19 million left on the $25 million stock buyback program initiated at the start of the year. We're actively buying stock today. Especially at the current price, it’s an opportunity we can't afford to miss. Our intention is to maintain above a 7% capital marker, as defined by tangible common equity, to remain comfortable during buybacks. Below that point, we may reevaluate but we will continue to buy at this price.

Okay. And 7%, David, is that tangible common equity, I assume?

Yes, that's correct.

Our next question is from Howard Henick, with Scurlydog Capital.

I have a quick question. I've seen other banks in the past have issues with Bank Alliance loans. I never really understood their loan origination process through the consortium. Are you still originating loans through Bank Alliance? Or has that program been shut down?

I can't tell you the last one we originated. It's been several months. The experience with this loan has made us cautious. We have been with the program for 9 years, and our cumulative losses across are only about 20 basis points. We certainly don’t participate in every loan offered to us. We have not originated any new loans in the last six or seven months. After this experience, we’re deliberately cautious, as there are enough existing opportunities without having to engage with third parties. I won't say we'll never participate again, but it would need to be a standout opportunity.

There are no more questions. So I'll pass the call back over to David Becker.

Thank you all for joining us on today's call. We will continue to use all tools at our disposal to maintain a strong balance sheet and liquidity positions while working towards more resilient earnings going forward. We are committed to driving improved profitability and enhanced shareholder value. Thank you for your time, and have a good afternoon.

That concludes the conference call. Thank you for your participation. You may now disconnect your lines.