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

6 Months Ended

Jun. 30, 2020

Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments, Net and Variable Interest Entities [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. 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, 2020 and December 31, 2019:



($ in thousands)	June 30, 2020		December 31, 2019
Investments in qualified affordable housing partnerships, net	$	201,888	$	207,037
Accrued expenses and other liabilities — Unfunded commitments	$	72,655	$	80,294

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, 2020 and 2019:



($ in thousands)	Three Months Ended June 30,									Six Months Ended June 30,
			2020			2019			2020			2019
Tax credits and other tax benefits recognized	$	11,772		$	11,506		$	22,803		$	23,332
Amortization expense included in income tax expense	$	9,148		$	9,657		$	17,532		$	18,554

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, 2020 and December 31, 2019:



($ in thousands)	June 30, 2020		December 31, 2019
Investments in tax credit and other investments, net	$	251,318	$	254,140
Accrued expenses and other liabilities — Unfunded commitments	$	106,969	$	113,515

Amortization of tax credit and other investments was $24.8 million and $42.1 million, respectively, for the three and six months ended June 30, 2020, as compared with $16.7 million and $41.6 million, respectively, for the same periods in 2019.

Included in Investments in tax credit and other investments, net, on the Consolidated Balance Sheet were equity securities with readily determinable fair values of $31.1 million and $31.7 million, as of June 30, 2020 and December 31, 2019, respectively. These equity securities were CRA investments measured at fair value with changes in fair value recorded in net income. The Company recorded unrealized gains on these equity securities of $720 thousand and $758 thousand during the three and six months ended June 30, 2020, respectively, and unrealized gains of $375 thousand and $767 thousand, respectively, for the same periods in 2019.

The Company held equity securities without readily determinable fair values at carrying value totaling $18.8 million and $19.1 million as of June 30, 2020 and December 31, 2019, respectively, which were measured using the measurement alternative at cost less impairment and adjusted for observable price changes. For the three and six months ended June 30, 2020 and 2019, there were no adjustments to these securities.

The Company recorded an impairment recovery of $109 thousand related to one historic tax credit investment and impairment recoveries of $259 thousand related to two historic tax credit investments for the three and six months ended June 30, 2020, respectively. During the second quarter of 2020, the Company also recorded $733 thousand OTTI charge related to one historic tax credit and one CRA investment. In comparison, the Company recorded an OTTI charge of $2.9 million and $9.9 million, respectively, and no impairment recovery for the three and six months ended June 30, 2019. OTTI charges and impairment recoveries are recorded within Amortization of tax credit and other investments on the Consolidated Statement of Income for the three and six months ended June 30, 2020 and 2019.

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 member’s ability to manage the entity, which is indicative of power over them. The Company’s maximum exposure to loss in connection with these partnerships consist 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 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. A CLO is a VIE that purchases a pool of assets consisting primarily of non-investment grade corporate loans and issues multiple tranches of notes to investors to fund the asset purchases and pay upfront expenses associated with forming the CLO. The Company serves as the collateral manager of a CLO that closed in the fourth quarter of 2019 and retained substantially all of the investment grade rated securities issued by the CLO. In accordance with GAAP, the Company does not consolidate the CLO as it does not hold interests that could potentially be significant to the CLO. The Company’s maximum exposure to loss from the CLO is equal to the carrying amount of the retained securities of $274.0 million and $284.7 million as of June 30, 2020 and December 31, 2019, respectively.