12. Investments in Tax Credit Entities

Federal NMTC

Investment in Bank Owned CDE

During 2013, FNBC CDE received an allocation of Federal NMTC, totaling $50 million, which will generate $19.5 million in tax credits. During 2012 and 2011, FNBC CDE received allocations of $40 million and $28 million, respectively, which are expected to generate $15.6 million and $10.9 million, respectively in tax credits. First NBC has received $118 million in cummulative awards. The Federal NMTC program is administered by the Community Development Financial Institutions Fund of the U.S. Treasury and is aimed at stimulating economic and community development and job creation in low-income communities. The program provides federal tax credits to investors who make qualified equity investments (QEIs) in a CDE. The CDE is required to invest the proceeds of each QEI in projects located in or benefitting low-income communities, which are generally defined as those census tracts with poverty rates greater than 20% and/or median family incomes that are less than or equal to 80% of the area’s median family income.

The credit provided to the investor totals 39% of each QEI in a CDE and is claimed over a seven-year credit allowance period. In each of the first three years, the investor receives a credit equal to 5% of the total QEI amount invested in the project. For each of the remaining four years, the investor receives a credit equal to 6% of the total QEI amount invested in the project. The Company will be eligible to receive up to $46 million in tax credits over the seven-year credit allowance period, based on the period in which the QEI was made, for its QEI of $118 million. Through December 31, 2013, FNBC CDE has invested in allocations of $118 million, of which $32.6 million of the 2013 award and $22.5 million of the 2012 and 2011 awards was invested by the Company and $62.9 million was invested by other investors and leverage lenders, which include the Company. These investments generated total Federal NMTC of approximately $46.0 million, of which $10.4 million has been recognized by the Company through December 31, 2013 and $35.6 million remains available to be earned over six years beginning in 2014, subject to continuing compliance with applicable regulations. The Federal NMTCs claimed by the Company, with respect to each QEI, remain subject to recapture over each QEI’s credit allowance period upon the occurrence of any of the following:

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FNBC CDE does not invest substantially all (generally defined as 85%) of the QEI proceeds in qualified low income community investments;

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FNBC CDE ceases to be a CDE; or

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FNBC CDE redeems its QEI investment prior to the end of the current credit allowance period.

At December 31, 2013 and December 31, 2012, none of the above recapture events had occurred, nor, in the opinion of management, are such events anticipated to occur in the foreseeable future. As of December 31, 2013, FNBC CDE had total assets of $68.7 million, consisting of cash of $27.9 million, loans of $40.7 million and other assets of $0.1 million, with liabilities of $0.1 million and capital of $68.6 million.

Investments through Non-Bank Owned CDEs

The Company is also a limited partner in several tax-advantaged limited partnerships whose purpose is to invest in approved Federal NMTC and state projects that are CDEs and that are not associated with FNBC CDE. During 2013, several of these partnerships that the company was a limited partner in converted to a C corporation. The Company’s ownership in the CDEs did not change based on the conversion. These investments are accounted for using the cost method of accounting and are included in investment in tax credit entities in the accompanying consolidated balance sheets. The limited partnerships and C corporations are considered VIEs. The VIEs have not been consolidated because the Company is not considered the primary beneficiary. All of the Company’s investments in Federal NMTC structures are privately held, and their market values are not readily determinable. At December 31, 2013, the Company had $61.2 million invested in state and federal partnerships and C corporations. These investments generated Federal NMTC of approximately $60.6 million, of which $27.2 million had been recognized by the Company through December 31, 2013 and $33.4 million is expected to be recognized in periods after 2013. Based on the structure of these transactions, the Company expects to recover its investment totaling $61.2 million solely through use of the tax credits that were generated by the investments. As such, these amounts will be amortized on a straight-line basis over the period over which the Company holds its investment (approximately seven years). The Company also made loans unrelated to the generation and use of tax credits related to these real estate projects totaling $81.8 million and $64.1 million at December 31, 2013 and December 31, 2012, respectively. These loans are subject to the Company’s normal underwriting criteria and all loans were performing according to their contractual term at December 31, 2013.

Low-Income Housing Tax Credits

The Company is a limited partner in several tax-advantaged limited partnerships whose purpose is to invest in approved Low-Income Housing Tax Credit projects. These investments are accounted for using the cost method of accounting and are included in investments in tax credit entities in the accompanying consolidated balance sheets. The limited partnerships are considered to be VIEs. The VIEs have not been consolidated because the Company is not considered the primary beneficiary. All of the Company’s investments in low-income housing partnerships are evaluated for impairment at the end of each reporting period. At December 31, 2013 and December 31, 2012, the Company had $40.0 million and $25.3 million, respectively, invested in these partnerships which generated Low-Income Housing Tax Credits of approximately $57.0 million. Of that amount, $9.5 million had been recognized through December 31, 2013 and $47.4 million is expected to be recognized in periods beginning in 2014. Based on the structure of these transactions, the Company expects to recover its remaining investments of $40.0 million at December 31, 2013, solely through use of the tax credits that were generated by the investments. As such, this amount will be amortized on a straight-line basis over the period for which the Company maintains its 99.9% interest in the property (approximately 15 years). The Company also made loans unrelated to the generation and use of tax credits related to these real estate projects totaling $42.0 million at December 31, 2013 and December 31, 2012. These loans are subject to the Company’s normal underwriting criteria and all loans were performing according to their contractual terms at December 31, 2013.

Federal Historic Rehabilitation Tax Credits

The Company is a limited partner in several tax-advantaged limited partnerships whose purpose is to invest in approved Historic Tax Credit projects. These investments are accounted for using the cost method of accounting and are included in investments in tax credit entities in the accompanying consolidated balance sheets. The limited partnerships are considered to be VIEs. The VIEs have not been consolidated because the Company is not considered the primary beneficiary. All of the Company’s investments in limited partnerships are evaluated for impairment at the end of each reporting period. At December 31, 2013 and December 31, 2012, the Company had $16.5 million and $7.1 million, respectively, invested in these partnerships. These investments generated Historic Tax Credits of $25.7 million. Of that amount, $17.8 million had been recognized through December 31, 2013 and $7.5 million is expected to be recognized in 2014. The Company did not make any loans related to these real estate projects. Based on the structure of these transactions, the Company expects to recover its investments totaling $16.5 million at December 31, 2013 solely through use of the tax credits that were generated by the investments. As such, these amounts will be amortized on a straight-line basis over the period during which the Company retains its 99.9% interest in the property (approximately 10 years).