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

12 Months Ended

Dec. 31, 2020

Investments in Qualified Affordable Housing Partnerships, 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, particularly including low- and moderate-income individuals and 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 December 31, 2020 and 2019:



($ in thousands)	December 31,
	2020		2019
Investments in qualified affordable housing partnerships, net	$	213,555	$	207,037
Accrued expenses and other liabilities — Unfunded commitments	$	77,444	$	80,294

The following table presents additional information related to the Company’s investments in qualified affordable housing partnerships, net, for the years ended December 31, 2020, 2019 and 2018:



($ in thousands)	Year Ended December 31,
	2020		2019		2018
Tax credits and other tax benefits recognized	$	45,971	$	46,034	$	39,262
Amortization expense included in income tax expense	$	37,132	$	36,561	$	28,046

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 December 31, 2020 and 2019:



($ in thousands)	December 31,
	2020		2019
Investments in tax credit and other investments, net	$	266,525	$	254,140
Accrued expenses and other liabilities — Unfunded commitments	$	105,282	$	113,515

Amortization of tax credit and other investments was $70.1 million, $98.4 million, and $96.2 million for the years ended December 31, 2020, 2019 and 2018, respectively.

The Company held equity securities with readily determinable fair values of $31.3 million and $31.7 million, as of December 31, 2020 and 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 $732 thousand for the year ended December 31, 2020, and unrealized gains of $789 thousand for the year ended December 31, 2019. Equity securities with readily determinable fair value were included in Investments in tax credit and other investments, net on the Consolidated Balance Sheet.

The Company held equity securities without readily determinable fair values totaling $23.7 million and $19.1 million as of December 31, 2020 and 2019, respectively, which were measured using the measurement alternative at cost less impairment and adjusted for observable price changes. The increase during 2020 was primarily due to a $5.0 million purchase of one new security in the fourth quarter of 2020. For the year ended December 31, 2020, the Company recorded $360 thousand in OTTI charges related to these securities. No adjustments were made to these securities for the year ended December 31, 2019. Equity securities without readily determinable fair values were included in Investments in tax credit and other investments, net and Other Assets on the Consolidated Balance Sheet.

As of December 31, 2020, the Company’s unfunded commitments related to investments in qualified affordable housing partnerships, tax credit and other investments are estimated to be funded as follows:



($ in thousands)	Amount
2021	$	125,142
2022	37,175
2023	14,499
2024	2,034
2025	462
Thereafter	3,414
Total	$	182,726

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. OTTI charges are recorded within Amortization of tax credit and other investments, net on the Consolidated Statement of Income. Refer to Note 2 — Fair Value Measurement and Fair Value of Financial Instruments to the Consolidated Financial Statements in this Form 10-K for a discussion on the Company’s impairment evaluation and monitoring process of tax credit investments. There were $4.8 million OTTI charges, offset by OTTI recoveries of $1.5 million recorded on the Company’s investments in tax credits and other investments, net, during the year ended December 31, 2020. Comparatively, there were $14.6 million in OTTI charges, offset by OTTI recoveries of $1.6 million recorded during the year ended December 31, 2019. The higher OTTI charges recorded during the year ended December 31, 2019 were primarily due to $5.4 million in net OTTI charges related to the Company’s investment in DC Solar and affiliates (“DC Solar”) discussed below.

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. 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. DC Solar had its assets frozen in December 2018 and filed for bankruptcy protection in February 2019. In February 2019, an affidavit from a Federal Bureau of Investigation (“FBI”) 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 had been received by DC Solar might not have existed.

During 2019, the Company recorded $7.0 million OTTI charge on its remaining tax credit investment related to DC Solar, and subsequently recovered $1.6 million. During 2020, the Company further recorded $10.7 million in recoveries, of which $1.1 million was recorded as an impairment recovery. There were no balances in Accrued expenses and other liabilities — Unfunded commitments related to DC Solar as of both December 31, 2020 and 2019. Refer to Note 11 — Income Taxes to the Consolidated Financial Statements in this Form 10-K for a further discussion related to the impacts on the Company’s income tax expense related to the DC solar tax credit investments.

Variable Interest Entities

The Company invests in unconsolidated limited partnerships and similar entities that construct, own and operate affordable housing, historic rehabilitation, wind and solar projects, of which the majority of such investments are 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. 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 served as the collateral manager of a CLO that closed in 2019 and subsequently reassigned its portfolio manager responsibilities in 2020. The Company had retained the top 3 investment grade-rated tranches issued by the CLO, which the carrying amounts were $287.5 million and $284.7 million as of December 31, 2020 and 2019, respectively.