An $810 million alleged Ponzi scheme run through a California solar power company has ensnared Hancock Whitney Corp., resulting in a multimillion-dollar hit to the bank's first-quarter profits.
DC Solar, a maker of mobile solar power generators based in Benicia, California, filed for bankruptcy protection in February after federal investigators raided the company's offices, according to bankruptcy documents and company filings.
Among the creditors, documents show, is Hancock Whitney, which has headquarters in both Gulfport, Mississippi, and New Orleans.
The alleged fraud also hit several other banks and insurance companies across the U.S., including insurance giant Progressive Corp., which said it could lose tens of millions of dollars due to its investment.
For Hancock Whitney, the alleged fraud prompted an increase in the bank's provision for loan losses and lowered its first-quarter earnings by $10.1 million, or 9 cents a share, according to the company's quarterly report released late Tuesday. That pushed the bank's earnings down to 91 cents a share, below analysts' average estimates.
The bank's shares slumped following the earnings report, falling 1.9 percent to $43.55 a share on Wednesday.
A spokesman for the bank did not respond to requests for comment.
According to company filings and media reports, at least four other U.S. banks have reported potential losses related to investments or loans with DC Solar, a company founded in 2009 that built and leased mobile solar power stations.
According to its website, DC Solar manufactured solar generators that could be deployed at construction sites, at outdoor festivals and in response to disasters to provide lighting or other power needs.
But bankruptcy documents, as well as an affidavit by an FBI special agent that was part of a forfeiture filing against the company's owners, allege that the company's investors were paid with other investors' money, and not from earnings or tax credits generated through the sale or lease of its products.
Hancock Whitney didn't specifically disclose how it came to be embroiled in the alleged scheme. On page 130 of its 138-page annual financial filing last month, it said that bank officials learned of the alleged fraud in February, the same month that DC Solar filed for bankruptcy protection.
"The company became aware of an affidavit from a Federal Bureau of Investigation special agent that alleged this borrower was operating a potentially fraudulent Ponzi-type scheme," the filing said.
It added that solar generators and lease revenues "claimed to have been received by the borrower may not have existed."
Chris Marinac, a banking analyst at FIG Partners in Atlanta who follows Hancock Whitney, noted that the potential loss to the bank from a single investment is larger than normal, but is still a small part of its overall portfolio.
"It’s part of lending and it’s part of credit. Banks are in the business of taking risks. Some days are peanuts and some days are shells, and this is unfortunately a shell here,” Marinac said. “It’s not that unusual over the course of every couple of years for a bank to get hit by this.”
Hancock Whitney has roughly $20 billion in loans outstanding.
Over the past several years, under Chief Executive John Hairston, the bank has been working to reduce its exposure in the energy sector, including companies that drill for oil and gas as well as the boat owners and other support services that have taken a hit amid slumping activity in the Gulf of Mexico.
On Tuesday, Hancock Whitney said it had $1.1 billion in loans to the energy industry, or about 5 percent of the total.
The DC Solar investment was part of a loan portfolio known as shared national credit, according to Marinac.
While banks like Hancock Whitney are mostly in the business of taking deposits and lending money to local or regional businesses, many elect to take on some riskier loans in the hopes of higher returns and better profits, Marinac said, though he noted that the shared national credit portfolio at Hancock Whitney was about 10 percent of its total loan portfolio.
Since peaking in January 2018 above $56 a share, the company's stock is down about 22 percent.