A federal bankruptcy judge has approved a settlement that could allow First NBC Bank Holding Co. to take advantage of nearly $1 billion in accumulated tax credits if it successfully emerges from bankruptcy.
Those credits could, theoretically, be used to offset federal tax liabilities on future earnings and potentially to provide financial relief for the company's creditors and possibly its shareholders. But that path is far from assured, and any plan for taking advantage of the tax credits is still in its infancy.
Attorneys involved in the case offered varying assessments of the plan at a court hearing last week. None indicated that it was close to becoming a reality. U.S. Bankruptcy Court Judge Elizabeth Magner, who is handling the case, formally signed off on it Tuesday.
Since filing for bankruptcy in May, First NBC Bank Holding, the parent company of the failed New Orleans bank First NBC, has worked to preserve a stable of tax credits that it had accumulated.
After Hurricane Katrina destroyed much of the city in 2005, First NBC was a major player in many ambitious construction projects that were financed with federal and state tax credits.
The bank’s tax-credit business worked on two levels: First, it would loan money to developers for projects that relied on the tax credits. Then, it would invest in projects that used the credits, including New Market Tax Credits and those for low-income housing or historic rehabilitation.
In turn, the company recorded the credits on its balance sheet as expected cash flow from future tax benefits, essentially profit, and they ultimately accounted for much of its claimed earnings in recent years. But to apply the credits against its taxes, the company needed to earn a profit on which to pay taxes.
Since that wasn’t happening, the credits began to pile up. As that figure grew on the company's balance sheet, banking experts noticed something was amiss.
This year, the holding company hired PricewaterhouseCoopers to assess the status of its potential tax assets. According to the firm's work, the company had accumulated nearly $340 million in tax assets through Dec. 31, 2016.
When it failed in April in a nearly $1 billion collapse, First NBC Bank earned the distinction of being the costliest collapse of an American bank since the height of the 2008-10 financial crisis.
The Federal Deposit Insurance Corp., a U.S. banking regulator that protects bank customers in the event of failure, was named the bank's receiver before selling off much of its assets. That agency is expected to use about $75 million of the tax assets to obtain a refund on federal taxes that First NBC Bank had paid in recent years when it was profitable, federal court records show.
Additionally, federal estimates suggest that First NBC's operating losses for 2017 are expected to exceed $700 million, a staggering figure that can ultimately be carried forward for accounting purposes to offset future tax liabilities.
First, the company would have to emerge from bankruptcy and likely move to acquire profitable businesses in order to use the tax benefits.
When it filed for Chapter 11 bankruptcy protection in May, the company's petition listed fewer than 50 creditors owed an estimated $65 million total. At the time, the company claimed assets worth just $6 million.
Under the terms of the settlement, First NBC Bank Holding Co. can pursue the nearly $1 billion in combined tax assets without facing a legal challenge by the FDIC.
In exchange, the FDIC is seeking nearly $3.5 million that the bank transferred to its parent company over two months beginning in November 2016, at a time when it was prohibited from doing so under the terms of a consent order that was reached with regulators.
During a Dec. 15 hearing in federal court in New Orleans, First NBC Bank Holding Co.'s attorney, William Steffes of Baton Rouge, described the company's bevy of tax assets as "a potential means of recovery in the future for creditors and possibly all the way down to shareholders."
But not everyone was convinced the plan was a sure thing.
Jeffrey Sternklar, a Boston attorney representing a committee of the company's unsecured creditors, expressed concern that money was being wasted on "expensive professionals" to pursue a strategy that faced "substantial challenges to getting it done."
Sternklar described it as "a somewhat very speculative effort to overcome the substantial regulatory and financial hurdles."
In addition to the FDIC and the FBI, the Securities and Exchange Commission is also investigating the bank's meltdown. A federal grand jury also has been probing the bank's failure.