Financial Institutions, Inc. (NASDAQ:FISI) Q2 2023 Earnings Call Transcript

Financial Institutions, Inc. (NASDAQ:FISI) Q2 2023 Earnings Call Transcript July 28, 2023

Operator: Good morning, everyone, and welcome to today’s Conference Call titled Financial Institutions Inc. announces Second Quarter Results. My name is Ellen, and I’ll be coordinating the call for today. At the end of today’s presentation, there will be an opportunity to ask the question. [Operator Instructions] I would now like to turn the call over to Kate Croft, Director of Investor Relations to begin. Kate, please go ahead. Whenever you’re ready.

Kate Croft: Thank you for joining us for today’s call. Providing prepared comments will be President and CEO, Marty Birmingham; and CFO, Jack Plants. They will be joined by additional members of the company’s finance and leadership teams during the question-and-answer session. Today’s prepared comments and Q&A will include forward-looking statements. Actual results may differ materially from forward-looking statements due to a variety of risks uncertainties and other factors. We refer you to yesterday’s earnings release and investor presentation as well as historical SEC filings which are available on our Investor Relations website for Safe Harbor description and a detailed discussion of the risk factors related to forward-looking statements.

We’ll also discuss certain non-GAAP financial measures intended to supplement and not substitute for comparable GAAP measures. Reconciliations of these measures to GAAP financial measures were included in the earnings release filed as an exhibit to a Form 8-K. Please note that this call includes information that may only be accurate as of today’s date July 28, 2023. I’ll now turn the call over to President and CEO, Marty Birmingham.

Marty Birmingham: Thank you, Kate. Good morning, everyone, and thank you for joining us today. Our company finished the first half of 2023 in a very solid position. Our second quarter performance was highlighted by incremental loan growth that supported modest net interest income expansion and a continuation of strong and stable credit quality metrics. We also took steps to enhance our wealth management business, merging our two registered investment advisory subsidiaries. Through this merger Courier Capital has additional size and scale to better compete across our footprint for institutional clients, retirement plan sponsors and high net worth individuals and families. Operating under one brand also streamlines our business development efforts, primarily deepening relationships with existing wealth insurance and banking clients.

Second quarter net income available to common shareholders was $14 million or $0.91 per diluted share, up from $11.7 million or $0.76 per share in the first quarter of 2023 and down from $15.3 million or $0.99 per share in the prior year period. And considering the year-over-year decrease in quarterly net income, the company recognized a normalization of loan loss provisioning in the current quarter versus the impact of a large commercial recovery in the second quarter of 2022, in addition to higher quarterly non-interest expenses due to past investments and talent and an increased FDIC insurance assessment. These increased expenses were partially offset by lower taxes in the current quarter, which benefited from investment tax spreads placed in service.

I would note that much of our investment in human capital took place in 2022. We believe that this coupled with a previously announced organizational restructuring completed in December has positioned us well for the future, both from an expense standpoint in the near term and in terms of outperformance in our markets in the long-term. We have attracted high-quality talent to our organization, including experienced individuals joining from larger players who want to be a part of a growth story with a true community bank. On a linked quarter basis, our net income growth was driven by a lower level of provisions, higher non-interest income and lower income tax expense in the current quarter. Jack will provide more color on our income statement and performance relative to the first quarter of 2023 in his remarks.

Deposit gathering remains a top focus. And as of June 30, 2023, total deposits were $5 billion, down $106.4 million or 2.1% from March 31, primarily due to normal seasonal public deposit outflows. Within our sizable public deposit portfolio, which includes local municipalities and school districts, we see a seasonal decrease in the second quarter based on cash flow requirements for the customers. Similarly, first quarter public deposits are typically higher as a result of inflows from tax payments and state funding during the period. While seasonality is the primary driver of the decline in public deposits, we are seeing a normalization of deposit levels in this space post the stimulus injection recognized during the pandemic. Non-public deposits increased from the linked quarter.

We continue to see a disintermediation of lower cost demand and savings deposits into higher cost time deposit accounts. And similar trends for new account acquisition amid the current interest rate environment. Competition for deposits is strong in our markets similar to the rest of the country and we’re focused on defending our deposit base and expanding our reach. We launched a new marketing campaign for money marketed accounts just this week and are beginning to see some of our anticipated Banking as a Service or BaaS deposits come on board. We consider BaaS deposits to be an alternative to high-cost wholesale funding. Reciprocal deposits also grew during the quarter, as this has become an attractive option affording our larger customers the benefit of FDIC insurance on accounts greater than $250,000.

Total loans were $4.4 billion at June, 20, reflecting an increase of $154.5 million or 3.6% from March 31 led by commercial lending. Overall, our commercial portfolio was up 5.7% during the second quarter. We continue to believe that full year loan growth will be concentrated in the first half of the year. As we aim to reserve balance sheet capacity for our best customers with full relationships. Commercial mortgage growth in particular is expected to slow due to a combination of softer demand amid a challenging economic environment and higher pricing. Our pipelines are more modest than in prior periods with our overall commercial pipeline at June 30, 2023 less than half of what it was at year-end 2022 and one-third of the size it was one year ago.

The change is even more notable in the Mid-Atlantic where our pipeline is about 20% of what it was on June 30, 2022. I’d like to discuss our Mid-Atlantic region in a bit more detail given the continued national media coverage of challenges facing major metros in office space in particular. For context, this team sits in a suburb of Baltimore and primarily serves customers headquartered in and around the Baltimore and Greater Washington D.C. area. The majority of loans are for projects and properties throughout Maryland and Virginia and outside of the central business district of D.C. As a result, our committed credit exposure within D.C. itself is very limited at just $25 million and none of our commitments in the Metro D.C. area are for large floor plate buildings.

Office space accounts for just over one-third of our Mid-Atlantic loans and properties within this asset class and region are primarily located in heavy traffic areas near hospitals with a fair amount of medical leasing and high occupancy levels. As many industries and metros grapple with the return to office trends in the workplace, I would note that our commitments relate to much smaller buildings located outside of D.C. where non-federal workers are returning to the office. The health of our commercial portfolio remains strong and we reported just two basis points of net charge-offs to average commercial loans during the second quarter. Our residential loan portfolio grew during both the 3 months and 12 months ended June 30, 2023 despite the higher interest rate environment and tight housing inventory impacting home sales in our market primarily due to our partnerships with new homebuilders.

Additionally, internal process enhancements have led to improved cycle times for both mortgages and home equity loans. Consistent with our other loan categories, we’ve made pricing adjustments to improve margins in this line of business. As expected, consumer and direct loan balances at quarter end were down modestly from both March 31, 2023 and June 30, 2023. This is due in part to our efforts to moderate production in this asset class, while maintaining our focus on credit quality as well as lower number of applications given increased cash deals, leasing activity and aggressive rate offers for manufacturers. The average portfolio FICO score of our indirect portfolio continues to exceed 700 and new production during the quarter came on a weighted average coupon of 9.31%.

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Our credit team is very experienced in this line of business is actively managing the portfolio to secure recoveries where possible. Accordingly, indirect charge-offs were only 12 basis points for the second quarter down from both the linked and year ago quarters. Our disciplined approach to credit risk management continues to support strong asset quality metrics overall. For the second quarter, we reported 23 basis points of non-performing loans to total loans and annualized net charge-offs to average loans of just six basis points. Provision for credit losses on loans was $3.2 million in the second quarter supporting the allowance for credit losses the total loans ratios of 113 basis points and 503% from non-performing loan at June 30. We remain confident in the overall performance and health of our loan portfolio despite the volatile operating requirement.

This concludes my introductory comments and it’s now my pleasure to turn the call over to Jack Plants for additional details on results and updates to guidance for 2023.

Jack Plants: Thank you, Marty. Good morning, everyone. Net interest income of $42.3 million was up $522,000 from the first quarter of 2023 as interest income from loans was partially offset by higher cost of funds in the current rate environment. Our overall cost of funds in the quarter was 203 basis points up 41 basis points from the late first quarter. Different remediation within our non-public deposit portfolio into higher cost time deposits along with additional broker deposits brought on in the second quarter to manage the seasonality of our public deposit portfolio and to help fund loan growth contributed to margin compression in the second quarter. Net interest margin on a fully taxable equivalent basis was 299 basis points for the quarter compared to 309 basis points in the linked quarter.

As Marty mentioned and in line with the guidance we provided in April, we expect that loan growth will be concentrated in the first half of the year. Our commercial pipeline, which includes commitments secured, but not yet funded is down considerably from where it stood at the end of the linked and year ago quarters. Relative to the magnitude of FOMC rate increases that occurred in 2022 and so far in 2023, our total deposit portfolio has experienced a cycle-to-date beta of 31.2%, including the cost of time deposits. Excluding the cost of time deposits the non-maturity deposit portfolio had a beta of 12%. Non-interest income totaled $11.5 million in the second quarter up $542,000 on a linked quarter basis. This growth was driven by a number of components illustrating the diversity of our non-interest revenue streams.

In the second quarter we recorded a net gain of $489,000 on tax credit investments placed in service in the current and prior periods, driven by historic tax credit with a New York state component that was placed in service in the second quarter. While these gains are non-recurring in nature we continue to evaluate opportunities to manage our tax rate, while supporting meaningful projects in our communities that support historic preservation in low-income housing. Investments from limited partnerships increased $218,000 quarter-over-quarter, which was driven by favorable performance of underlying investments. These along with increased swap income offset a lower level of insurance income in the second quarter that was largely seasonal, reflective of contingent revenue that is typically recognized in the first quarter of the year.

Investment advisory income of $2.8 million our largest fee income contributor was 104,000 lower than the previous quarter primarily due to lower transaction-based fees in the most recent period. Non-interest expense was flat on a linked quarter basis. As lower salaries and benefits occupancy and equipment and professional services all of which are typically higher for us in the first quarter of the year were offset by higher other expenses including interest charges related to collateral held for derivative transactions. I would also note that the FDIC insurance expense increased due in part to the final rule that went into effect earlier this year increasing the initial base deposit insurance assessment rate schedules uniformly by two basis points coupled with balance sheet growth driven by commercial mortgage loans.

Income tax expense was $2.4 million in the quarter representing an effective tax rate of 14.4% compared to $2.8 million and an effective tax rate of 18.7% in the first quarter of 2023. We recognized federal and state tax benefits related to tax credit investments placed in service and/or amortized during the second quarter of 2023 of $761,000 compared to $584,000 in the linked quarter. Our accumulated other comprehensive loss stood at $134.5 million at June 30, 2023. We reported a TCE ratio at June 30 of 5.53% in tangible common book value per share of $21.79. Excluding the AOCI impact the TCE ratio and tangible common book value per share would have been 7.53% and $29.66, respectively. We continue to expect these metrics to return to more normalized levels over time, given the high quality and cash flow nature of our investment portfolio.

I would now like to provide an update on our outlook for 2023 in key areas. Given our year-to-date loan growth, an expectation that growth will be concentrated in the first half of the year, we are adjusting our full year 2023 loan growth outlook to low double-digit growth from the previous high single-digit expectation. Our commercial pipeline, which includes commitments secured but not yet funded is down considerably from where it stood at the end of the linked and year ago quarters. We now expect a full year NIM of 300 to 305 basis points. Where the range is narrowed in the bottom is five basis points lower than previous guidance, given the continued funding cost pressure that we’ve experienced. Our forecast assumes a forward rate curve that reflects the latest 25 basis point increase that occurred this week, along with economists predictions for Fed activity to be muted for the remainder of the year.

Given the continued strength of credit quality metrics, we expect full year net charge-offs of between 25 and 30 basis points 10 basis points lower than previous guidance. We now expect the 2023 effective tax rate to fall within a range of 17% to 18%, down approximately 1% from previous guidance reflecting the impact of the amortization of tax credit investments placed in service in the current quarter and recent years, coupled with the impact of revised margin guidance on pre-tax income in the second half of 2023. Recognizing that margin has been pressured through higher funding costs, as observed through year-to-date trends, we expect our annualized ROA to fall in a range of 85 to 95 basis points for 2023. Our expectations for flat noninterest income, excluding nonrecurring and semi-recurring items, mid-single-digit full year expense growth and mid-single-digit growth in nonpublic deposits remain unchanged.

That concludes my prepared remarks and updated guidance. I’ll now turn the call back to, Marty.

Marty Birmingham: Thanks, Jack. Overall, Financial Institutions Incorporated and Five Star Bank are well positioned heading into the second half of 2023. We continue to maintain a healthy capital position, exceeding well-capitalized minimum standards for the bank. We are very focused as we have been on deposit gathering. Our balance sheet is strengthened by the granularity of our community banking franchise. We operate through 49 banking locations, across our upstate New York footprint, which have average deposit balances per branch of approximately $78 million excluding reciprocal and brokered deposits. We have top three market share and more than 70% of the counties where we have a branch presence. And our first or second, in eight of those 14 counties.

Independent of the balance sheet our available committed liquidity remains strong, and stable at approximately $1.1 billion. Our focus in the near term remains the same, protecting our margin, limiting noninterest expense and expanding our customer base across all areas of our diversified financial services company. That concludes our prepared remarks. Operator, please open the call for questions.

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Q&A Session

Operator: Thank you. We go now into our Q&A session. [Operator Instructions] Our first question comes from Damon DelMonte from KBW. Damon, your line is now open. Please go ahead.

Damon DelMonte: Hi, good morning, everybody. Hope everybody is doing well today. So my first question just regarding the outlook for loan growth here in the back half. I mean clearly, a very strong first half. And I was just wondering, like what do you think is driving the smaller pipeline? Is that being more reflected by just slowing demand from borrowers, which imply that maybe economic conditions are kind of slowing, or is it more of you guys just kind of sharpening the pencil a little bit more, and being a little bit more selective, with the types of credits that you’re adding?

Marty Birmingham: I think, it’s a combination of both. The — our borrowers the economy has been dealing with a recession that is not showing up but there’s certainly a lot of uncertainty and volatility and that is impacting confidence levels, in terms of moving forward with projects, both in real estate as well as in our C&I portfolio. But at the same time, we continue to push our spreads up as a result of the markets resetting increases in rate, and the capital and debt markets resetting, which is slowing down demand as well as selectivity on our side of it Damon, we’re trying at this point now to reserve space on our balance sheet for those that have the deepest and broadest relationships with us.

Damon DelMonte: Got it. Okay. That’s good color. Thank you. And then maybe one for Jack, on the margin outlook. Could you just remind us, a little bit about the asset side of the balance sheet and how you’re positioned in the next couple of quarters, as far as repricing goes? And when you look at I guess loans and securities cash flows?

Jack Plants: Yes, Damon, this is Jack. So as you — we’ve instructed in the past, we’re north of 30% about 34% of the balance sheet is positioned as variable rate structure. So, we see the benefit there with increases in Fed funds rates and — as far as cash flow is concerned, we continue to guide on a 12-month basis of approximately $1 billion in cash flow coming off primarily the loan portfolio and then about $130 million coming off of the securities portfolio. And that’s just a function of the continued growth we’ve seen this year, and the cash flow in nature of our total loan portfolio which has a duration of about 4.4 years.

Damon DelMonte: Got it. Okay. So, your guidance for the margin is pretty favorable compared to some others that we’ve heard — I mean on the deposit pricing side, do you feel like it’s starting to rationalize a little bit and the mix shift is slowing?

Jack Plants: We’ve continued to see consumer demand for time deposits. As Marty mentioned, we just rolled out this week a soft launch of a money market campaign that’s going to have some more formal advertising behind it beginning next week. So our expectation is, we’ll see a lift there on the consumer side for non-maturity deposits. And then, we continue to remain focused on that Baas deposit pipeline, which we’ve previously guided to on a full year basis of about $150 million. And we’ve seen a lot of momentum post quarter end really in July and they’re about one-third of a way there as we speak today.

Damon DelMonte: Great. Okay. Thanks for the color. That’s I had. Thank you.

Jack Plants: Thanks, Damon.

Operator: Sorry for the trouble [ph] — We will now take our next question from Alex Twerdahl from Piper Sandler. Alex, your line is now open. Please go ahead.

Alex Twerdahl: Hi. Good morning. Good morning, guys.

Marty Birmingham: Hi, Alex.

Alex Twerdahl: Hi. I wanted to go back to your comment Marty on reserving balance sheet capacity for the best customers and just sort of figure out exactly what you mean by that. Is it is sort of the constraining factor on loan growth a function of liquidity, is it a function of capital, is it a function of concentrations in specific segments? And just get a little bit more color on how you think about the sort of a capacity issue so that we can sort of incorporate that into some of the longer-term balance sheet complexion and growth projections that we have.

Marty Birmingham: So the first half of the year loan growth has been driven by our pipeline cycling in our commercial real estate book and inherently those loans do not come with a lot of deposits. And as a result of that, that’s where we’re also seeing the temper growth on our borrower side and as well actions we’re taking driving our spreads up and encouraging our lenders to pursue and drive full relationships.

Alex Twerdahl: Okay. So it’s really about trying to target more customers that have deposit relationships than specific constraints on the balance sheet today.

Jack Plants: Yes Alex, this is Jack. That’s exactly right. So the focus is to step away from transaction-only type opportunities and those that come with deposits that partially fund the outstanding balance, take a little bit of pressure off of wholesale funding and then look for opportunities to build full relationships with our wealth management and insurance businesses.

Alex Twerdahl: Okay. And then, that’s a reason to my next question, which is the merger of the two investment managers and you kind of alluded to a little bit in your prepared remarks Marty, but I’m just curious if there’s a way to sort of define the opportunity that may be in front of the larger company now just given more capacity I think that you mentioned and just how to think about some of the other potential efficiencies, both on the revenue and expense side that could be associated with the completion of that merger?

Jack Plants: Yes Alex, this is Jack. I’ll take that. So day one of that merger was effectively May 1. So we’re early stages of that merger, but really the opportunity there was to rightsize the business of a function by creating more of a focus on high net worth managed accounts and lesser focus on the retail broker-dealer type relationships that are traditionally offered in the branch network. And from a revenue standpoint you can see that that impacted transaction fee income by about $104,000 during the quarter. However, we did observe a greater reduction in expenses which resulted in a higher EBITDA margin for that business, which is now trending above 25%. So we do have some operational opportunities down the road but we’re in early stages.

Alex Twerdahl: Great. And one question on the Auto. I think you mentioned that new — the new weighted coupon is around 930, which sounds pretty enticing in terms of actually growing that as sort of a mix of the balance sheet just to kind of improve margins. But has the structure of those loans changed to allow for the larger coupon like is the amortization period extended out just to kind keep the sort of the normal payments lower, or just kind of help me understand how customers are reacting to that rate and whether or not it could actually wind up being a better asset class and one that you maybe want to have a little bit more of on the balance sheet?

Marty Birmingham: Consistent kind of with our comments relative to commercial, we’ve been focused on spread in that business as well, and maintaining our approach to credit and the focus on 700 and above credit scores in our Tier 1 bucket. That’s again taking advantage of the market’s resetting and driving wider spreads there. And we agree. It’s an asset class that we’ve been comfortable with that has served us well, is performing very well right now, which gives us some options relative to trying to defend the NIM.

Alex Twerdahl: Great. As I think, if I’m remembering correctly, it’s normally around a 30-month product that just in terms of the sort of the life of the typical loan. Is that extended out as a result of rates moving higher — churn is slow?

Jack Plants: Yes Alex, this is Jack. So over the course of the past, I would say, two to three years, customers have had more of a desire to move into the five or six-year term, which has had a little bit of an impact on duration extension in the portfolio. So we’ve moved from about a three-year duration to about a 3.3 year duration.

Alex Twerdahl: Great. Thanks for taking my questions.

Marty Birmingham: Thanks Alex.

Operator: Thank you. Our next question comes from Nick Cucharale from the Hovde Group. Nick, your line is now open. Please proceed with your question.

Nick Cucharale: Good morning, everyone. How are you today?

Marty Birmingham: Good. Nick, how about yourself?

Nick Cucharale: I’m doing very, very well. Thank you. So First on the tax credit business you mentioned the noise in that number for the quarter as you added new credits and book to gain. What are your expectations for that fee item? And is that included in the flat year-over-year fee guidance?

Jack Plants: Yes, this is Jack. I can take that one. So we do have a pretty active pipeline of low-income housing tax credits and historic tax credits that are in process. And the timeline around when they are placed in service isn’t exact. It’s not an exact science but it does impact our — and inform our forward tax rate guidance.

Nick Cucharale: Okay. And then great credit performance in the consumer indirect book. Was there anything atypical like a large recovery that benefited the charge-off number this quarter? I know you touched on the underwriting standards. But more broadly speaking, are you being more selective in that portfolio as well?

Marty Birmingham: So we did have very strong recoveries in the quarter and used car prices have moved around. I think as a result and our experience of the coupons going up so dramatically, used car prices are in demand. It’s one way consumers are navigating the higher cost of cars and associated loans. And as a result of that, where we have had to work through situations in terms of repossessions and liquidate and collateral, it’s worked out in our favor.

Nick Cucharale: Okay. And then just a follow-up on the lower sequential investment advisory results. Can you help us reconcile the reduction in transaction-based fees with the AUM increases from the strongly positive equity market results in the quarter?

Jack Plants: Sure. So when you think about the allocation of that customer book it’s about 65% equity, 35% fixed income. We viewed historically the wealth management firm as including Carrier Capital legacy HNP and then that retail branch network. And that retail branch network is what drove the higher transaction volume was an LTL-based platform that we’re on. We’ve focused less on that moving forward and more on the high net worth individuals and that was a short-term pain point in the merger, but we’re working through that and focusing more on building deeper relationships with larger account balances.

Nick Cucharale: Got it. And then lastly on the BaaS initiatives, I’m sorry if I missed it. What were the deposit balances at June 30? And are you still expecting $150 million in deposits by year-end?

Jack Plants: Yeah. We are still expecting $150 million by year-end. They were nominal at the end of the second quarter I think they were around $2 million and we’re about one-third of the way through that $150 million target as we stand today.

Nick Cucharale: It’s pretty ratable in terms of how you’re thinking about the results going forward, we should see a big increase in the September quarter. Is that the correct way of thinking about it?

Jack Plants: Yes, I’ll ask Sean Willet to take that one.

Sean Willett: Yeah. So that’s correct. So we saw increased momentum through the month of July and that’s continued to build as we move forward.

Nick Cucharale: Great. Thank you for taking my questions.

Jack Plants: Thanks, Nick.

Operator: Thank you. [Operator Instructions] We will take our next question from Matthew Breese from Stephens Inc. Matthew, your line is now open. Please go ahead.

Matthew Breese: Hey, good morning. I just wanted to touch on the tangible common equity ratio at 5.5%. Understanding much of this is AOCI driven. I guess my question really is — what is the duration of the securities portfolio? And how long will it take to recoup lost AOCI all things equal? And if in fact takes that long are you comfortable waiting that long to recoup it all?

Jack Plants: Yeah. This is Jack. I’ll take that question. So in the last year we’ve seen about $150 million in cash flow with sort of the last 12 months seeing about $150 million in cash flow come out of the securities portfolio. The duration is influenced primarily by shifts in the five-year point on the curve. And I feel that we’re about fully extended in that portfolio. When I measured it as of the end of June, the modified duration was 5.9%. And as to your comment about being comfortable with waiting that long for that to fully recover and we continue to look at opportunities to optimize the balance sheet when it makes sense. So if there’s an opportunity for us to look at that portfolio and recoup some of that principal with an earn-back that’s desirable. We will take advantage of that.

Matthew Breese: Understood. Okay. And then at quarter end, where did your commercial real estate concentration stand at least for the call report, it’s been kind of inching closer to 300, not quite there yet. And then maybe just discuss comfort levels with over time kind of puncturing through and going beyond 300 and any sort of regulatory discussions around that?

Marty Birmingham: So we’re still under the 300. We’re pushing to 90-ish percent and we’re very comfortable with our approach and the business that we’ve built. But obviously, as we take that step it’s meaningful from a regulatory perspective and from our own enterprise risk management framework and we need to do — we want to prepare to do that in thoughtful and deliberate way when it happens.

Matthew Breese: Understood. Okay. Jack, you talked a little bit about BaaS deposits. The goal is still there making headway in July. What are the costs of those deposits so far that’s coming in the door?

Jack Plants: Yeah. We view them as an attractive alternative to the cost of wholesale funding. And I really don’t want to give out the pricing structure as we view that as a competitive advantage but it’s a discount to Fed funds.

Matthew Breese: Okay. The last thing is just on the tax business, trying to figure out its contribution to the overall bottom line. How do you calculate that? And what is your estimate in terms of that tax business its contribution to EPS this quarter?

Jack Plants: The benefit that we received this quarter was about $0.08 per share from an EPS standpoint.

Marty Birmingham: But it is part of a much larger strategic initiative for the company. We really initiated this business activity in 2018, as we recruited talent that had expertise that could help us engage with the opportunity in the marketplace, deliver our bank in this manner to those sponsors that are dealing with historic or affordable housing. As I’m sure you can appreciate, the extension into CRA and community development activities in the markets we’re serving is significant in terms of its impact and that aspect of our commitment to the well-being of the communities we’re serving.

Jack Plants: Yeah. Matt, I think Marty hit the nail on the head there. This is a kind of a line of business for us. We have commercial expertise in-house that engages with these opportunities in our footprint. We underwrite the loans and the tax credits in-house. They’re not purchased. We have deep understanding of them and internal capacity policies around how much exposure we’re taking in that regard.

Matthew Breese: Are they mostly tied to housing? I recall in the past there were tax credit investments around the Northeast Mid-Atlantic that involved kind of the solar credits and I think one of them went sour. Are there ways you can prevent those sorts of unfortunate outcomes with what you’re doing?

Marty Birmingham: Yeah. So as Jack was saying these are opportunities where we are working directly with the sponsors, many times — they are operating in our markets. They are for projects that are well identified renewing if it’s a historic tax credit, renewing an urban building or a block or something of that nature. If it’s affordable housing it still could be renewing neighborhoods either rural suburban or urban but bringing affordable housing to — or supported housing to the market to bear. And it works out very well because housing stock is in those categories is limited and generally older and it gets these projects end up performing as expected.

Jack Plants: Yeah. Matt, we do not have any solar-focused tax credit investments.

Matthew Breese: Great. I’ll leave it there. Thank you for taking my questions.

Marty Birmingham: Thanks, Matt.

Operator: There are no further questions on the line. So I’ll now hand back to Martin Bermingham for any closing comments.

Marty Birmingham: Thank you very much for joining our call today. We look forward to talking to you again and conclude part of our third quarter discussion.

Operator: Thank you. This now concludes today’s conference call everybody. Thank you very much for joining. You may now disconnect your lines. Have a great rest of your day.