FirstSun joins list of banks hit by borrower fraud
- Key insight: Though FirstSun Capital characterized a $22 million fraud-related loss as “isolated,” another lender said fraud is becoming an increasingly serious problem.
- Forward look: FirstSun said its second-quarter charge-offs could reach $43 million, compared with less than $11 million for the three months ending March 31.
- Expert quote: “We treat everything we receive as if it might be phony.” – Gelt Financial Founder Jack Miller
Denver-based FirstSun Capital Bancorp expects to report a spike in second-quarter charge-offs after taking losses on two commercial loans, one of them fraud-related.
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The $8.6 billion-asset FirstSun, parent to Sunflower Bank, said late Thursday that a materials distributor misrepresented accounts receivable, collateral and financial-performance data, triggering a $22 million charge-off.
A separate $12.9 million charge-off was prompted by a second borrower’s deteriorating financial condition. The disclosures came in a report FirstSun filed with the Securities and Exchange Commission.
FirstSun, which had already been experiencing
FirstSun merged with another bank, First Foundation, in April. It did not disclose Thursday whether the problem loans originated at First Foundation or at the pre-merger FirstSun.
FirstSun is only the latest bank to be rocked in recent months by borrower-fraud allegations.
In October, both the $98.9 billion-asset Western Alliance Bancorp in Phoenix and the $88 billion-asset Zions Bancorp in Salt Lake City reported losing tens of millions of dollars due to fraud tied to the same borrower.
In September, the $297 billion-asset Fifth Third Bancorp in Cincinnati
In its SEC filing, FirstSun stated that it referred the details of its fraud case to law-enforcement authorities. Following an internal review, the company concluded the incident was an “isolated occurrence” and “not indicative of broader exposure to fraud-related losses.”
A FirstSun spokesperson did not respond to a reporter’s request for comment by deadline on Friday afternoon.
Piper Sander analyst Matthew Clark expects FirstSun to receive additional scrutiny around asset quality, “given this event and the heavier amount of net charge-offs in recent quarters,” he wrote Friday in a research note. Company shares were trading down more than 7% at $35.08 Friday afternoon.
Jack Miller, a longtime private commercial real estate lender in Boca Raton, Florida, said fraud and fraudulent documents have become an increasingly serious problem in recent years for lenders of all types.
“We’re like a mini-FBI now,” Miller told American Banker on Friday. “We have to treat every loan like there may be fraud and question everything, which we do.”
Miller attributed much of the financial industry’s fraud woes to tough economic conditions as well as improved technology that has made it easier for borrowers to manufacture convincing-looking but still-spurious documents.
“We treat everything we receive as if it might be phony,” Miller said.
In addition to scrutinizing documents, Miller said Gelt Financial, the small, family-owned firm he founded in 1987, now insists on interviewing all borrowers in one-on-one sessions without loan brokers being part of the conversation, something it didn’t do in the past.
While Miller didn’t detail specific instances of fraud involving his company, he did say that he worries the tougher protections he has put in place may have cost it some legitimate deals.
“We’ve gotten so tough about this that we’ve probably passed on good deals, because we’re nervous,” Miller said.
