A Michigan community bank restated 1997 earnings last week, saying it was a victim of a check-kiting scheme that could cost it $2.5 million.
Franklin Bank in Southfield said it was setting aside $2.8 million to cover its expected loss and legal fees. The adjustment, which boosted Franklin's loss reserve to $4 million, sliced its 1997 after-tax income nearly in half, to $2 million from $3.9 million.
Officials of the bank declined to identify the customer except to say it was "a Detroit-area business of long and reputable standing."
In an interview, chairman David Simon said Franklin is working with the customer to recover the funds and has filed a claim with its own insurance carrier.
At least two other banks were also caught in the scheme, Mr. Simon said. He wouldn't name them. The police are involved, Mr. Simon said, but he wouldn't say anything further.
Michael M. Moran, an analyst at Roney & Co., a Detroit investment banking firm, said the customer was writing checks to cover checks it had written on other accounts.
"The customer was basically creating cash where there was none," Mr. Moran said. "When the music stopped, Franklin didn't have a chair."
Read P. Dunn, president and chief executive officer at $504 million- asset Franklin, said the bank has more capital now than ever before and can absorb the loss. Nevertheless, he said, it is taking steps to reduce the chance of being caught in such a scheme again.
"We will increase our fraud detection staff and strengthen other measures designed to prevent and identify possible fraudulent activity," he said.
Mr. Moran agreed that Franklin's capital position is strong, adding that the incident would not affect his 1998 earnings forecast of $1.35 a share. Still, he said, the blow is "clearly disconcerting" to the bank and its shareholders, who suddenly saw per-share 1997 earnings drop from $1.12 to 59 cents after the adjustment.
"There could be emotional impact," said Mr. Moran. "We'll see how that plays out over time."