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Solar investment tax credits are now more accessible

By Josh Miller

For more than a decade, large financial institutions like U.S. Bank and Wells Fargo, joined by Fortune 500 giants like Apple and Google, have been the dominant players in solar investment tax credits (ITC). Driven by federal incentives, these companies have provided funding for the largest solar projects in the country, collecting healthy returns while raising their corporate profiles as environmental, social, governance (ESG) leaders.

The benefits of solar ITCs are hard to ignore. Tax credit investors funding renewable energy projects can significantly offset their federal tax liability and recognize a meaningful annual GAAP earnings benefit. From 2005–2020, renewable energy tax credits have fueled the explosive growth of solar and wind power production nearly 18-fold.

The recently passed Inflation Reduction Act is a transformational bill with provisions that will entice large numbers of mid-size businesses and community banks to deploy capital into renewable energy projects across the U.S. It extends solar ITCs for at least ten more years (until greenhouse gas emissions are reduced by 70%) and retroactively increases the ITC from 26% to 30%, effective January 1, 2022. This extension and expansion of ITCs, along with other meaningful incentives included in the bill, will result in a significant increase in renewable energy projects being developed and constructed over the next decade.

Community banks are the logical source of financing for solar ITCs and traditional loans in response to this expected flood of mid-size renewable projects. Solar ITCs have a notably better return profile than other types of tax credit investments commonly made by banks. Solar ITCs and the accelerated depreciation associated with a solar power project are fully recognized once it is built and begins producing power. This is quite different from other tax credit investments, such as new markets tax credits (NMTC), low-income housing tax credits (LIHTC) and historic rehabilitation tax credits (HTC), where credits are recognized over the holding period of the investment (5, 7, 10, or 15 years).

Like other tax equity investments, solar tax equity investments require complex deal structures, specialized project diligence and underwriting, and active ongoing monitoring. Specialty investment management firms like KeyState provide support to community banks hoping to make solar tax credit (i.e., “solar tax equity”) investments by syndicating the investments across small groups of community banks. Without support, community banks may struggle to consistently identify suitable solar project investment opportunities built by qualified solar development partners.

Beyond the compelling return profile and stable and predictable cash flows offered by conservative, investment-grade solar projects, achieving energy independence, and reducing carbon emissions are critical goals in and of themselves. Solar tax credit investments can be a key component to a bank’s broader ESG strategy. The bank can monitor and report the amount of clean energy generation being produced by the projects it has financed and include this information in an annual renewable energy finance impact report or a broader annual sustainability report.

Miller is CEO of KeyState Renewables, LLC., a KeyState Company.

The KeyState Companies is a WBA Associate Member

This year, the Wisconsin Bankers Association will offer the 2022 Bank Directors Summit in two locations: Stevens Point on May 18 and Madison on May 19. The event draws beginning and experienced inside and outside directors, bank CEOs, bank executive officers, and bank general counsel. This year’s Summit will take a look at the nuts and bolts that are essential to the role of bank directors, while preparing leaders for the kinds of unique opportunities and challenges that could potentially lie ahead of them in 2022.

One of the key topics addressed at the Summit will be directors’ responsibilities in the investment portfolio. Speaking on the topic will be Ricky Brillard, senior vice president in the Investment Strategies Group at Vining Sparks Associates. Brillard is a Certified Public Accountant who works with financial institutions on balance sheet strategies, the optimization of investment portfolio returns, and the evaluation of asset/liability exposure, while incorporating the entity’s liquidity needs, risk controls, and capital constraints.

A presentation titled ‘2022 — A Year of What Ifs’ will be given by Marc Gall, vice president and asset/liability strategist at BOK Financial. As bankers have come to expect uncertainty over the last two years, Gall will walk Summit attendees through various scenarios to help prepare for the coming months and into the future. Gall is a returning speaker to the WBA Directors Summit, and his areas of expertise include asset/liability modeling, interpreting output and communicating strategies to key management and boards of directors, understanding and complying with regulatory requirements, and fixed income portfolio management/trade execution.

Other sessions to look forward to include ‘Unlock and Inspire a Team That Spans Four Generations’ by Flynt Gallagher of Newcleus Compensation Advisors as well as ‘A Director’s Role in Today’s Changing Banking Environment.’ To learn more and to register for the Stevens Point or Madison event, please visit www.wisbank.com/directors.

By Jim Reber, president and CEO of ICBA Securities 

Community bankers are nothing if not predictable, and I mean that as a compliment. They are bright, enterprising, have a nose for the risk/reward dynamic and a sense of duty and loyalty to their customers and staff. They’re also deathly afraid of rising interest rates.

The last is understandable, speaking as one who has A. worked for a bank when overnight rates were double-digit, B. personally borrowed money for a home at 12%, and C. worked in financial services during the near-death of the thrift industry. We know how low rates can go. What we don’t know is how high they can go, nor for how long.

But what’s a bit curious about this widespread fear is that by a number of measures, community banks in 2022 stand to profit from higher interest rates. This comes from banking regulators, interest rate risk modelers, and even bankers themselves. I suppose the notion of a bond portfolio losing four, five or six percent of its value drives some of this thought process. So, as we haven’t had to endure a rate hike scenario since 2018, we’ll use the rest of this column to remind ourselves which bonds stand a good chance of performing well if higher rates do indeed prevail in the near future.

Old School

Certainly, the bonds that fit the most traditional definition of a floater are those which have very short reset periods, are indexed to money market equivalents, and have large or no caps, both periodic and lifetime. The model for such a security is a Small Business Administration (SBA) 7(a) pool. These securities float based on the prime rate, which is 100% correlated to fed funds. Most SBAs reset monthly or quarterly and have no caps—so wherever prime goes, so goes your yield.

The rub on SBAs, at least from a risk standpoint, is that many of them come with large premium prices of 108, 109 or even higher. This exposes the investor to unwelcome prepayments. Still, the many benefits (have we mentioned 0% risk weighting?) make them attractive to short investors. It’s not uncommon for them to yield around prime minus 2.75%, which will beat fed funds by about 25 basis points (0.25%). They are true money market alternatives.

Mortgage Floaters

These days there are few true mortgage-backed securities (MBS) floaters. The ones that do exist usually have an extended period of time with a fixed rate, before they convert to adjustable. This “extended period” can be three, five, seven years or more so they’re really not floaters, yet. However, the fact that one day they will adjust can help their market value stay relatively stable.

Something new about these is that the Secured Overnight Financing Rate (SOFR) index is becoming more visible. SOFR is the U.S. alternative to London Interbank Offered Rate (LIBOR), and it has generally tracked fed funds, so far. And, since these will have prices closer to par, the investor doesn’t have to take a gigantic bite of prepay risk. Starting yields are wholly dependent on the fixed rate period and other variables, but they deserve a look.

Clip Coupons

Even if you don’t own a floater, an easy-to-execute trade that will help limit your price volatility is “up-in-coupon” securities. It doesn’t matter if they’re MBS, agencies, or munis: The bigger the stated interest rate, the greater the cash flow and the lower the duration.

The best example of this strategy is a tax-free municipal bond that has a big stated interest rate, or “coupon.” It’s common to see a newly hatched security with a 4% rate, that comes to market at an original issue price of 120 or more. This is a quality to be embraced. For one thing, the fact that the yield is tax-free makes the security less volatile that a taxable bond. If (and when, it appears) interest rates rise, the large interest payments will further help keep the value of the bond from falling off the table.

Do-it-Yourself

There’s another way to inject floating rate securities into your bond portfolio, and that’s to build them yourself. It’s a simple task to buy and own a collection of long-durated municipal bonds—that’s how they typically come to market. A recent innovation is the ability to execute an interest rate swap to instantly, or at some designated point in the future, turn the munis into floaters.

Interest rate product providers are equipped to price out transactions whereby a community bank can convert a bond, a collection of bonds, or a subsector of your balance sheet into short-duration assets that will see their yields improve every time the Fed has a “policy adjustment.” Maybe the best news is that these transactions can now be executed in sizes that fit your community bank’s needs.

How many rate hikes might we see this year? That’s the subject of myriad conversations around the board room, water cooler, and ALCOs. I’m pleased to report investments that are built for rising rates can take on a variety of appearances, and are fully accessible to your community bank.

Events

Fundamentals for understanding the how a bank’s investment portfolio is managed. Objectives and composition of investment portfolios, and common bank investments are covered, focusing on their risk and return profiles. Various investment strategies are described and the development of bank investment policies is discussed.

Audience: This course is designed for individuals involved in managing the bank’s investment portfolio.

The required textbook for this course is Bank Management, 8th Edition.

IMPORTANT:  Be sure to order the required book for this course if you do not have it.  We recommend that you FIRST select and add your course session to the shopping cart, then select your preferred format of book from the “Recommended Training” options that appear alongside the shopping cart.

*Please note this book is used for all four Bank Management courses: Managing Funding, Liquidity, Capital, Managing Interest Rate Risk, Analyzing Bank Performance, and Managing the Bank’s Investment Portfolio.*

Price: $660

Fundamentals for understanding the how a bank’s investment portfolio is managed. Objectives and composition of investment portfolios, and common bank investments are covered, focusing on their risk and return profiles. Various investment strategies are described and the development of bank investment policies is discussed.

Audience: This course is designed for individuals involved in managing the bank’s investment portfolio.

The required textbook for this course is Bank Management, 8th Edition.

IMPORTANT:  Be sure to order the required book for this course if you do not have it.  We recommend that you FIRST select and add your course session to the shopping cart, then select your preferred format of book from the “Recommended Training” options that appear alongside the shopping cart.

*Please note this book is used for all four Bank Management courses: Managing Funding, Liquidity, Capital, Managing Interest Rate Risk, Analyzing Bank Performance, and Managing the Bank’s Investment Portfolio.*

Price: $660

A summary of the bank funding types, liquidity issues and management of capital. Learn what funding is used by banks; how liquidity needs may be addressed by storing liquidity on the balance sheet or by securing additional funding; and bank capital’s purpose, regulatory requirements and the effect on profitability.

Audience: This course is designed for individuals involved in managing the bank’s investment portfolio.

The required textbook for this course is Bank Management, 8th Edition.

IMPORTANT:  Be sure to order the required book for this course if you do not have it.  We recommend that you FIRST select and add your course session to the shopping cart, then select your preferred format of book from the “Recommended Training” options that appear alongside the shopping cart.

*Please note this book is used for all four Bank Management courses: Managing Funding, Liquidity, and Capital, Managing Interest Rate Risk, Analyzing Bank Performance, and Managing the Bank’s Investment Portfolio.*

Price: $660

An exploration of interest rate risk measurement techniques such as GAP, earnings sensitivity analysis, Duration GAP and economic value of equity sensitivity analysis. Risk management policy implementation and how to change overall interest rate sensitivity through balance sheet adjustments or derivative contracts are discussed.

Audience: Managing Interest Rate Risk is a rigorous course designed for individuals involved in asset liability management or line managers making pricing, investment, or funding decisions that impact interest rate risk.

The required textbook for this course is Bank Management, 8th Edition.

IMPORTANT:  Be sure to order the required book for this course if you do not have it.  We recommend that you FIRST select and add your course session to the shopping cart, then select your preferred format of book from the “Recommended Training” options that appear alongside the shopping cart.

*Please note this book is used for all four Bank Management courses: Managing Interest Rate Risk, Analyzing Bank Performance, Managing Funding, Liquidity, and Capital, and Managing the Bank’s Investment Portfolio.*

Price: $660

An exploration of interest rate risk measurement techniques such as GAP, earnings sensitivity analysis, Duration GAP and economic value of equity sensitivity analysis. Risk management policy implementation and how to change overall interest rate sensitivity through balance sheet adjustments or derivative contracts are discussed.

Audience: Managing Interest Rate Risk is a rigorous course designed for individuals involved in asset liability management or line managers making pricing, investment, or funding decisions that impact interest rate risk.

The required textbook for this course is Bank Management, 8th Edition.

IMPORTANT:  Be sure to order the required book for this course if you do not have it.  We recommend that you FIRST select and add your course session to the shopping cart, then select your preferred format of book from the “Recommended Training” options that appear alongside the shopping cart.

*Please note this book is used for all four Bank Management courses: Managing Interest Rate Risk, Analyzing Bank Performance, Managing Funding, Liquidity, and Capital, and Managing the Bank’s Investment Portfolio.*

Price: $660