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

9 Months Ended

Sep. 30, 2021

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 CRA encourages banks to meet the credit needs of their communities, particularly 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 consideration 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 small business investment companies and new market tax credit projects that qualify for CRA consideration, as well as 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 using the proportional amortization method if the investments meet certain criteria. 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 September 30, 2021 and December 31, 2020:



($ in thousands)	September 30, 2021		December 31, 2020
Investments in qualified affordable housing partnerships, net	$	297,367	$	213,555
Accrued expenses and other liabilities — Unfunded commitments	$	148,171	$	77,444

The following table presents additional information related to the Company’s investments in qualified affordable housing partnerships, net, for the three and nine months ended September 30, 2021 and 2020:



($ in thousands)	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Tax credits and other tax benefits recognized	$	7,503	$	11,402	$	28,583	$	34,205
Amortization expense included in income tax expense	$	9,147	$	8,975	$	25,595	$	26,507

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, 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 September 30, 2021 and December 31, 2020:



($ in thousands)	September 30, 2021		December 31, 2020
Investments in tax credit and other investments, net	$	367,428	$	266,525
Accrued expenses and other liabilities — Unfunded commitments	$	194,796	$	105,282

The following table presents additional information related to the Company’s investments in tax credit and other investments, net, for the three and nine months ended September 30, 2021 and 2020:



($ in thousands)	Three Months Ended September 30,		Nine Months Ended September 30,
	2021	2020	2021	2020
Amortization of tax credit and other investments	38,008	17,209	90,657	57,819

The Company held equity securities that are mutual funds with readily determinable fair values of $26.8 million and $31.3 million, as of September 30, 2021 and December 31, 2020, respectively. The Company invested in these mutual funds for CRA purposes. These equity securities were measured at fair value with changes in fair value recorded in net income. The Company recorded unrealized losses of $88 thousand and $515 thousand related to these equity securities for the three and nine months ended September 30, 2021, respectively, and unrealized gains of $55 thousand and $813 thousand, respectively, for the same periods in 2020. 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 $29.3 million and $23.7 million as of September 30, 2021 and December 31, 2020, respectively, which were measured using the measurement alternative at cost less impairment and adjusted for observable price changes. For the three and nine months ended September 30, 2021 and 2020, there were no adjustments made to these securities. 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.

Tax credit and other 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 and impairment recoveries are recorded within Amortization of tax credit and other investments 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-Q for a discussion on the Company’s impairment evaluation and monitoring process of tax credit investments. For the three months ended September 30, 2021 and 2020, the Company recorded no adjustments related to these tax credit and other investments. For the nine months ended September 30, 2021, the Company recorded $1.3 million of impairment recoveries. In comparison, the Company recorded impairment recoveries of $259 thousand and OTTI charges of $733 thousand for the nine months ended September 30, 2020.

Variable Interest Entities

The Company invests in unconsolidated limited partnerships and similar entities that construct, own and operate affordable housing, historic rehabilitation, and wind and solar energy 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’s or managing member’s ability to manage the entity, which is indicative of the general partner’s or managing member’s power over the entity. The Company’s expected 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. A CLO is a VIE that manages a pool of assets consisting primarily of broadly syndicated corporate loans, where multiple tranches of notes are issued to investors. The Company served as the collateral manager of a CLO that closed in 2019 and subsequently sold its portfolio management contract in 2020 but retained the top three investment grade-rated tranches, which had a carrying amount of $291.6 million and $287.5 million as of September 30, 2021 and December 31, 2020, respectively.