Banc of California in Santa Ana will take a nearly $10 million hit in the first quarter after setting aside funds to cover a case of potential borrower fraud.

The $10.3 billion-asset company disclosed in a regulatory filing late Thursday that it will record a $13.7 million loan-loss provision to account for a line of credit it now says was fraudulently obtained. After adjusting for taxes, Banc of California said, the move could lower its earnings per share by 19 cents.

The provision is equal to the total amount funds Banc of California reserved last year.

Banc of California said the the borrower appeared to have satisfied a precondition to receive the credit line by fully collateralizing it with funds on deposit at another financial institution. Banc of California said it was informed on March 9 that the borrower misrepresented the existence of the pledged account, which had been closed.

The company said it launched an internal investigation and referred the matter to law enforcement, adding that it believes the alleged fraud “to be an isolated incident involving a single borrower.”

Rather than relying on money at another bank, many financial institutions require borrowers to deposit funds used for collateral before agreeing to provide large lines of credit, said Tom Shaw, a certified fraud examiner and consultant who recently retired after a 26-year career in banking.

“You can never be certain otherwise,” Shaw said.

For the first time since 1996 the number of suspicious activity reports filed by depository institutions that identified possible mortgage loan fraud experienced a year-over-year decline. Credit: ThinkStock
A potential case of borrower fraud could cost Banc of California $10 million this quarter.

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