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VARIABLE INTEREST ENTITIES | 9 Months Ended
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Sep. 30, 2022
Organization, Consolidation and Presentation of Financial Statements [Abstract] |
VARIABLE INTEREST ENTITIES | VARIABLE INTEREST ENTITIES We hold ownership interests in alternative energy partnerships and qualified affordable housing partnerships and have a variable interest in a multifamily securitization trust. We evaluate our interests in these entities to determine whether they meet the definition of a variable interest entity ("VIE") and whether we are required to consolidate these entities. A VIE is consolidated by its primary beneficiary, which is the party that has both (i) the power to direct the activities that most significantly impact the economic performance of the VIE and (ii) a variable interest that could potentially be significant to the VIE. To determine whether or not a variable interest we hold could potentially be significant to the VIE, we consider both qualitative and quantitative factors regarding the nature, size, and form of our involvement with the VIE. We have determined that our interests in these entities meet the definition of variable interests; however none of the VIE's meet the criteria for consolidation. Unconsolidated VIEs Multifamily Securitization During the third quarter of 2019, we transferred $573.5 million of multifamily loans, through a two-step process, to a third-party depositor which placed the multifamily loans into a third-party trust (a VIE) that issued structured pass-through certificates to investors. The transfer of these loans was accounted for as a sale for financial reporting purposes, in accordance with ASC 860. We determined that we are not the primary beneficiary of this VIE as we do not have the power to direct the activities that will have the most significant economic impact on the entity, therefore we do not consolidate the securitization trust. Our continuing involvement in this securitization is limited to customary obligations associated with the securitization of loans, including the obligation to cure, repurchase, or substitute loans in the event of a material breach in representations. Additionally, we have the obligation to guarantee credit losses up to 12% of the aggregate unpaid principal balances at cut-off date of the securitization. This obligation is supported by a $68.8 million letter of credit between the Freddie Mac and the FHLB. The maximum loss exposure that would be absorbed by us in the event that all of the assets in the securitization trust are deemed worthless is $68.8 million, which represents the aforementioned obligation to guarantee credit losses up to 12%. We believe that the loss exposure on the multifamily securitization is reduced by both loan-to-value ratios of the underlying collateral balances and the overcollateralization that exists within the securitization trust. At September 30, 2022, we have a $2.0 million repurchase reserve related to this VIE. Alternative Energy Partnerships We invested in certain alternative energy partnerships (limited liability companies) formed to provide sustainable energy projects that are designed to generate a return primarily through the realization of federal tax credits (energy tax credits). These entities were formed to invest in newly established residential and commercial solar leases and power purchase agreements. As a result of our investments, we have the right to certain investment tax credits and tax depreciation benefits (recognized on the flow through income statement method in accordance with ASC 740), and to a lesser extent, cash flows generated from the installed solar systems leased to individual consumers for a fixed period of time. While our interest in the alternative energy partnerships meets the definition of a VIE in accordance with ASC 810, we have determined that we are not the primary beneficiary because we do not have the power to direct the activities that most significantly impact the economic performance of the entities including operational and credit risk management activities. As we are not the primary beneficiary, we did not consolidate the entities. We use the Hypothetical Liquidation at Book Value ("HLBV") method to account for our investments in energy tax projects as an equity investment under ASC 970-323-25-17. Under the HLBV method, an equity method investor determines its share of an investee's net earnings by comparing its claim on the investee's book value at the beginning and end of the period, assuming the investee were to liquidate all assets at their U.S. GAAP amounts and distribute the resulting cash to creditors and investors under their respective priorities. The difference between the calculated liquidation distribution amounts at the beginning and the end of the reporting period, after adjusting for capital contributions and distributions, is our share of the earnings or losses from the equity investment for the period. To account for the tax credits earned on investments in alternative energy partnerships, we use the flow-through income statement method. Under this method, the tax credits are recognized as a reduction to income tax expense and the initial book-tax differences in the basis of the investments are recognized as additional tax expense in the year they are earned. Investments in alternative energy partnerships totaled $22.4 million and $25.9 million at September 30, 2022 and December 31, 2021. The following table presents information regarding activity in our alternative energy partnerships for the periods indicated:
|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
($ in thousands) |  | 2022 |  | 2021 |  | 2022 |  | 2021
Cash distribution from investment |  | $ | 626 |  |  | $ | 657 |  |  | $ | 1,782 |  |  | $ | 1,765 |
(Loss) gain on investments in alternative energy partnerships |  | (504) |  |  | 1,785 |  |  | (1,705) |  |  | (1,016) |
Tax (benefit) expense recognized from HLBV application |  | (146) |  |  | 491 |  |  | (493) |  |  | (280) |
There were no fundings of alternative energy partnership or related income tax credits recognized for the three and nine months ended September 30, 2022 and 2021. The following table represents the carrying value of the associated unconsolidated assets and liabilities and the associated maximum loss exposure for alternative energy partnerships as of the dates indicated:
($ in thousands) |  | September 30, 2022 |  | December 31, 2021
Cash |  | $ | 4,082 |  |  | $ | 4,227 |
Equipment, net of depreciation |  | 239,727 |  |  | 246,421 |
Other assets |  | 9,841 |  |  | 9,098 |
Total unconsolidated assets |  | $ | 253,650 |  |  | $ | 259,746 |
Total unconsolidated liabilities |  | $ | 9,020 |  |  | $ | 12,129 |
Maximum loss exposure |  | $ | 22,401 |  |  | $ | 25,888 |
The maximum loss exposure that would be absorbed by us in the event that all of the assets in alternative energy partnerships are deemed worthless is $22.4 million, which is our recorded investment amount at September 30, 2022. We believe that the loss exposure on our investments is reduced considering our return on our investment is provided not only by the cash flows of the underlying client leases and power purchase agreements, but also through the significant tax benefits, including the federal tax credit carryover that resulted from the investments. In addition, our exposure is further limited as the arrangements include a transition manager to support any transition of the solar company sponsor, whose role includes that of the servicer and operation and maintenance provider, in the event the sponsor would be required to be removed from its responsibilities (e.g., bankruptcy, breach of contract, etc.). Capital Trusts - Trust Preferred Securities In connection with our merger with PMB, we acquired investments in two grantor trusts. These grantor trusts were originally formed to sell and issue trust preferred securities to institutional investors (Refer to Note 7 - Long-term Debt). We are not the primary beneficiary, and consequently, these grantor trusts are not consolidated in the consolidated financial statements. At September 30, 2022 and December 31, 2021, our investment in these grantor trusts, which is included in other assets in the consolidated statements of financial condition, totaled $527 thousand. Qualified Affordable Housing Partnerships - Low Income Housing Tax Credits We invest in limited partnerships that operate qualified affordable housing projects that qualify for low income housing tax credits (“LIHTC”). The returns on these investments are generated primarily through allocated Federal tax credits and other tax benefits. In addition, LIHTC investments contribute to our compliance with the Community Reinvestment Act. These limited partnerships are considered to be VIEs, because either (i) they do not have sufficient equity investment at risk or (ii) the limited partners with equity at risk do not have substantive kick-out rights through voting rights or substantive participating rights over the general partner. As a limited partner, we are not the primary beneficiary because the general partner has the ability to direct the activities of the VIEs that most significantly impact their economic performance. As a result, we do not consolidate these partnerships. The following table presents information regarding balances in LIHTC investments for the periods indicated:
($ in thousands) |  | September 30, 2022 |  | December 31, 2021
Ending balance(1) |  | $ | 46,944 |  |  | $ | 38,982 |
Aggregate funding commitment |  | 72,967 |  |  | 61,278 |
Total amount funded |  | 54,166 |  |  | 51,014 |
Unfunded commitment |  | 18,801 |  |  | 10,264 |
Maximum loss exposure |  | 46,944 |  |  | 38,982 |
(1)Included in other assets in the accompanying Consolidated Statements of Financial Condition. The following table presents information regarding activity in our LIHTC investments for the periods indicated:
|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
($ in thousands) |  | 2022 |  | 2021 |  | 2022 |  | 2021
Fundings |  | $ | 1,128 |  |  | $ | 3,563 |  |  | $ | 3,152 |  |  | $ | 5,727 |
Proportional amortization recognized |  | 1,350 |  |  | 1,051 |  |  | 3,727 |  |  | 3,114 |
Income tax credits recognized |  | 1,298 |  |  | 1,155 |  |  | 3,834 |  |  | 3,466 |

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- Definition The entire disclosure for a variable interest entity (VIE), including but not limited to, judgments and assumptions in determining whether to consolidate and in identifying the primary beneficiary, gain (loss) recognized on the initial consolidation of the VIE, terms of arrangements, amounts and classification of the VIE's assets and liabilities, and the entity's maximum exposure to loss. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 810 -URI https://asc.fasb.org/topic&trid=2197479 + Details
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