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

9 Months Ended

Sep. 30, 2022

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 invests in small business investment companies and new market tax credit projects that qualify for CRA consideration, 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 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 if certain criteria are met. 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.

Investments in Tax Credit and Other Investments, Net

For investments in tax credit and other investments, the Company applies the equity or fair value method of accounting depending on the Company’s ownership percentage. For equity investments without readily determinable fair values, the Company elected the measurement alternative under ASU 2016-01 valuing them at cost less impairment adjusted for observable price changes. 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 3 — 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.

The following table presents investments and unfunded commitments of the Company’s qualified affordable housing partnerships, tax credit, and other investments as of September 30, 2022 and December 31, 2021:



	September 30, 2022				December 31, 2021
($ in thousands)	Assets		Liabilities - Unfunded Commitments (1)		Assets		Liabilities - Unfunded Commitments (1)

Investments in qualified affordable housing partnerships, net	$	400,871	$	254,700	$	289,741	$	146,152
Investments in tax credit and other investments, net	324,383		153,840		338,522		163,464
Total	$	725,254	$	408,540	$	628,263	$	309,616

(1)Included in Accrued expenses and other liabilities on the Consolidated Balance Sheet.

Investments in tax credit and other investments, net presented in the table above include equity securities that are mutual funds with readily determinable fair values of $23.8 million and $26.6 million as of September 30, 2022 and December 31, 2021, respectively. The Company invests in these mutual funds for CRA purposes. These equity securities were measured at fair value with changes in fair value recorded in Other investment income on the Consolidated Statement of Income. Equity securities with readily determinable fair values were included in Investments in qualified affordable housing partnerships, tax credit and other investments, net on the Consolidated Balance Sheet.

The Company also held equity securities without readily determinable fair values totaling $34.6 million and $33.1 million as of September 30, 2022 and December 31, 2021, respectively, which were measured using the measurement alternative of cost less impairment and adjusted for observable price changes. For the three and nine months ended September 30, 2022 and 2021, there were no adjustments made to these securities. Equity securities without readily determinable fair values were included in Investments in qualified affordable housing partnerships, tax credit and other investments, net and Other assets on the Consolidated Balance Sheet.

The following table presents additional information related to the investments in qualified affordable housing partnerships, tax credit and other investments for the three and nine months ended September 30, 2022 and 2021:



($ in thousands)	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Investments in qualified housing partnerships, net
Tax credits and other tax benefits recognized	$	13,180	$	11,361	$	38,764	$	34,083
Amortization expense included in income tax expense	$	10,431	$	9,147	$	30,498	$	25,595
Investments in tax credit and other investments, net
Amortization of tax credit and other investments	$	19,874	$	38,008	$	48,753	$	90,657
Unrealized losses on equity securities with readily determinable values	$	(1,014)	$	(88)	$	(2,958)	$	(515)
Impairment recoveries (1)	$	—	$	—	$	—	$	1,250

(1)For the nine months ended September 30, 2021, impairment recoveries were related to one historic tax credit and two energy tax credits.

Variable Interest Entities

The majority of both the investments in affordable housing partnerships and tax credit and other investments discussed above are variable interest entities (“VIEs”) where the Company is a limited partner in these partnerships, and an unrelated third party is typically the general partner or managing member who has control over the significant activities of these 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 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 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 retained the top three investment grade-rated tranches issued by the CLO, for which the total carrying amount was $281.2 million and $291.7 million as of September 30, 2022 and December 31, 2021, respectively.