Milwaukee-based Firstar Corp. said it fell victim to a check overdraft scheme that would result in a pretax charge of $22 million in the second quarter.
On an after-tax basis, the charge will total $13 million, Firstar said. It is expected to lower the banking company's second-quarter earnings by 20 cents per share. In the first quarter, Firstar earned $53.2 million, or 83 cents per share.
The announcement was made late last Thursday. On Friday, Firstar's stock was up 37.5 cents to $33.375.
Legal Action Commenced
Industry sources said the alleged overdrafts were made by Spring Grove (Minn.) Livestock Exchange and its owners. It is believed the enterprise soon will seek bankruptcy protection from creditors.
Spring Grove Livestock referred all questions about the alleged overdrafts to its attorney, who was not available for comment.
Firstar said it has commenced legal action to recover the overdrawn funds. But the banking company's general counsel, Howard H. Hopwood, said he could not predict either the timing or the amount of recoveries. The $22 million pretax charge equals the full amount of the overdrafts.
$3.8 Million Loan
The livestock exchange additionally has a $3.8 million loan outstanding with Firstar, but Mr. Hopwood said that credit is well collateralized.
A second institution, St. Paul-based Farm Credit Services of Southern Minnesota, has launched legal action to collect funds from Spring Grove Livestock. Sources speculate that the company has the same level of exposure as Firstar.
Farm Credit Services officials were not available for comment.
The $14 billion-asset Firstar is at top-performing banking company, and analysts said they did not view the incident as symptomatic of lax management.
Outlook 'Still Quite Good'
The company posted a hearty 1.62% return on assets in the first quarter, and nonperforming assets made up a slender 0.6% of total assets at March 31.
"I don't think this incident has anything to do with sloppy procedure," said Mike Milunovich, an analyst with Robert W. Baird & Co. "This is a one-time charge, and the overall outlook for Firstar is still quite good."
Mr. Hopwood said Firstar would reexamine its internal controls. "We think we've got policies and procedures in place to guard against this type of risk, but after this [incident], we are looking at them again."