Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments, Net and Variable Interest Entities

6 Months Ended

Jun. 30, 2019

Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments, Net [Abstract]

Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments, Net and Variable Interest Entities

The Community Reinvestment Act (“CRA”) encourages banks to meet the credit needs of their communities for housing and other purposes, particularly in low-and moderate- income neighborhoods. The Company invests in certain affordable housing projects in the form of ownership interests in limited partnerships or limited liability companies that qualify for CRA and tax credits. These entities are formed to develop and operate apartment complexes designed as high-quality affordable housing for lower income tenants throughout the U.S. To fully utilize the available tax credits, each of these entities must meet the regulatory affordable housing requirements for a minimum 15-year compliance period to fully utilize the tax credits. In addition to affordable housing projects, the Company also invests in New Market Tax Credit projects that qualify for CRA credits, as well as eligible projects that qualify for renewable energy and historic tax credits. Investments in renewable energy tax credits help promote the development of renewable energy sources, and the investments in historic tax credits promote the rehabilitation of historic buildings and economic revitalization of the surrounding areas.

Investments in Qualified Affordable Housing Partnerships, Net

The Company records its investments in qualified affordable housing partnerships, net, using the proportional amortization method. Under the proportional amortization method, the Company amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received, and recognizes the amortization in Income tax expense on the Consolidated Statement of Income.

The following table presents the Company’s investments in qualified affordable housing partnerships, net, and related unfunded commitments as of June 30, 2019 and December 31, 2018:




($ in thousands)	June 30, 2019		December 31, 2018
Investments in qualified affordable housing partnerships, net	$	198,466	$	184,873
Accrued expenses and other liabilities — Unfunded commitments	$	83,785	$	80,764

The following table presents additional information related to the Company’s investments in qualified affordable housing partnerships, net, for the three and six months ended June 30, 2019 and 2018:




($ in thousands)	Three Months Ended June 30,				Six Months Ended June 30,
($ in thousands)	2019		2018		2019		2018
Tax credits and other tax benefits recognized	$	11,506	$	8,940	$	23,332	$	18,095
Amortization expense included in income tax expense	$	9,657	$	6,700	$	18,554	$	13,773

Investments in Tax Credit and Other Investments, Net

Depending on the ownership percentage and the influence the Company has on the investments in tax credit and other investments, net, the Company applies the equity or cost method of accounting, or the measurement alternative as elected under ASU 2016-01 for equity investments without readily determinable fair value.

The following table presents the Company’s investments in tax credit and other investments, net, and related unfunded commitments as of June 30, 2019 and December 31, 2018:




($ in thousands)	June 30, 2019		December 31, 2018
Investments in tax credit and other investments, net	$	210,387	$	231,635
Accrued expenses and other liabilities — Unfunded commitments	$	73,369	$	80,228

Amortization of tax credit and other investments was $16.7 million and $41.6 million, respectively, for the three and six months ended June 30, 2019, as compared to $20.5 million and $37.9 million, respectively, for the same periods in 2018.

Included in Investments in tax credit and other investments, net, on the Consolidated Balance Sheet were equity securities with readily determinable fair values of $31.4 million and $31.2 million, as of June 30, 2019 and December 31, 2018, respectively. These equity securities are CRA investments and were measured at fair value with changes in fair value recorded in net income. The Company recorded unrealized gains on these equity securities of $375 thousand and $767 thousand during the three and six months ended June 30, 2019, respectively, and unrealized losses of $159 thousand and $613 thousand, respectively, for the same periods in 2018.

The Company invested in four solar energy tax credit funds in the years 2014, 2015, 2017 and 2018 as a limited member. These tax credit funds engaged in the acquisition and leasing of mobile solar generators through DC Solar entities. The Company’s investments in the DC Solar tax credit funds qualified for federal energy tax credit under Section 48 of the Internal Revenue Code of 1986, as amended. The Company also received a “should” level legal opinion from an external law firm supporting the legal structure of the investments for tax credit purposes. These investments were recorded in Investments in tax credit and other investments, net on the Consolidated Balance Sheet and were accounted for under the equity method of accounting. For reasons that were not known or knowable to the Company, DC Solar had its assets frozen in December 2018. DC Solar filed for bankruptcy protection in February 2019. In February 2019, an affidavit from a Federal Bureau of Investigation special agent stated that DC Solar was operating a fraudulent “Ponzi-like scheme” and that the majority of the mobile solar generators sold to investors and managed by DC Solar, as well as the majority of the related lease revenues claimed to have been received by DC Solar may not have existed.

Tax credit investments are evaluated for possible OTTI on an annual basis or when events or changes in circumstances suggest that the carrying amount of the tax credit investments may not be realizable. Refer to Note 4 — Fair Value Measurement and Fair Value of Financial Instruments to the Consolidated Financial Statements in this Form 10-Q for a discussion on the Company’s impairment evaluation and monitoring process of tax credit investments. Investments in tax credit and other investments, net related to DC Solar tax credit investments was $7.0 million out of the $231.6 million as December 31, 2018. During the first quarter of 2019, the Company fully wrote off its tax credit investments related to DC Solar and recorded a $7.0 million OTTI charge within Amortization of tax credit and other investments on the Consolidated Statement of Income. The Company concluded that there would be no material future cash flows related to these investments, in part because of the fact that DC Solar has ceased operations and its bankruptcy case had been converted from Chapter 11 to Chapter 7 on March 22, 2019. There are no balances recorded in Accrued expenses and other liabilities — Unfunded commitments related to DC Solar as of June 30, 2019 and December 31, 2018. Refer to Note 14 — Income Taxes to the Consolidated Financial Statements in this Form 10-Q for a further discussion related to the impacts on the Company’s income tax expense related to the DC solar tax credit investments.

During the second quarter of 2019, the Company recorded an additional OTTI charge of $2.9 million related to a historic tax credit and a CRA investment within Amortization of tax credit and other investments on the Consolidated Statement of Income. Total OTTI charge was $2.9 million and $9.9 million for the three and six months ended June 30, 2019, respectively. There was no OTTI charge recorded for the three and six months ended June 30, 2018.

Variable Interest Entities

The Company invests in unconsolidated limited partnerships and similar entities that construct, own and operate affordable housing, historic rehabilitation projects, wind and solar projects, of which the majority of such investments are variable interest entities (“VIEs”). As a limited partner in these partnerships, these investments are designed to generate a return primarily through the realization of federal tax credits and tax benefits. An unrelated third party is typically the general partner or managing member who has control over the significant activities of such investments. While the Company’s interest in some of the investments may exceed 50% of the outstanding equity interests, the Company does not consolidate these structures due to the general partner or managing partner’s ability to manage the entity, which is indicative of power in them. The Company’s maximum exposure to loss in connection with these partnerships consists of the unamortized investment balance and any tax credits claimed that may become subject to recapture.

Special purpose entities formed in connection with securitization transactions are generally considered VIEs. The Company is the servicer of the multifamily residential loans it has securitized in the first quarter of 2016. The Company does not consolidate the multifamily securitization entity because it does not have power and does not have a variable interest that could potentially be significant to the VIE.