A high-profile bankruptcy in California is causing heartburn for a number of banks.
At least five banks — East West Bancorp in Pasadena, Calif.; Hancock Whitney in New Orleans; Meta Financial Group in Sioux Falls, S.D.; United Financial Bancorp in Hartford, Conn.; and Valley National Bancorp in Wayne, N.J. — have issued warnings about potential exposure to DC Solar, a clean energy firm that filed for Chapter 11 bankruptcy protection on Feb. 4.
DC Solar has been accused by an FBI agent of operating an investor scheme, based on claims the company booked lease-related revenue on sales of renewable energy equipment that may not exist.
The $41 billion-asset East West disclosed in its annual filing with the Securities and Exchange Commission that its investments in DC Solar may generate subpar returns, which could hurt its financial results.
The company, which claimed $53.9 million in tax credit benefits between 2014 through 2018, said it now believes it may be required to record an uncertain tax position liability for a significant portion of the tax credit benefits.
East West said it will continue to evaluate its tax positions, though it could record charge-offs if required to recognize an uncertain tax position liability in its 2019 consolidated financial statements.
The $6.2 billion-asset Meta disclosed in a press release Thursday that it is gathering information and is conducting a full inventory of its leased generators. The timing of the review, along with the bank’s ability to recover certain assets, is uncertain.
Meta said that, as of Jan. 31, the net book value of assets leased to DC Solar totaled $13.7 million. Meta previously recognized $7.9 million of investment tax credits tied to those assets in its 2017 and 2018 fiscal years.
“We believe the fundamentals of our company remain sound and this isolated situation does not represent declining credit standards or deterioration within any particular sector,” Brad Hanson, Meta’s president and CEO, said in the release. “Nevertheless, we will continue to evaluate our diligence processes.”
The $7.4 billion-asset United disclosed in its annual report that it holds about $19 million in recorded investments tied to DC Solar. It recognized about $18.3 million in tax credit benefits from 2014 to 2018 tied to the relationship.
United warned that up to $8.2 million of tax benefits could be reversed if it is determined that the basis of the leased assets do not support the tax credit.
United “has not determined whether there is any impact to the investment in these funds or the tax credits generated from the funds as a result of the bankruptcy filing and is currently monitoring the investments for possible impairment, if any,” the filing said.
The $32 billion-asset Valley National Bancorp also disclosed that it claimed about $22.8 million in tax credit benefits between 2013 and 2015, warning that all of those credit could be disallowed if the FBI’s claims are accurate.
The $28.2 billion-asset Hancock disclosed in its annual report that its loss exposure to DC Solar could be up to $11 million, which could result in a charge to its loan-loss allowance.
