A Connecticut bank that in mid-July cited accounting errors in delaying its earnings report now says a former employee had fudged records of its investment portfolio for more than three years.

Hometown Bancorp. of Darien said the ex-employee "manipulated accounting records and circumvented controls," inflating earnings but taking no money.

The $227 million-asset company, which owns Bank of Darien, didn't identify the ex-employee.

Senior vice president and chief financial officer Robert A. Foote Jr. resigned Aug. 4, a month after Hometown reported that accounting errors had been discovered in financial reports for the first quarter of 1995 and yearend 1994.

Last week's announcement by the board of directors followed an investigation by bank officials, independent accountants and investigators, and legal counsel.

In an interview Monday, Kevin E. Gage, president and chief executive, said he didn't know why the unnamed former employee had manipulated the records. But Mr. Gage stressed that no theft was involved.

The probe, which revealed additional problems in 1992 and 1993 results, was begun after the ex-employee admitted errors in accounting for investment income, Mr. Gage said.

"Our investigation revealed no embezzlement," Mr. Gage said. "It's really just accounting irregularities and errors ... and that's what our statement reflects."

Most of the problems were related to the bank's investment securities, including the accounting for premiums on securities and deferred loan fees. The investments themselves weren't affected.

Mr. Gage said the problems didn't affect customer accounts or asset quality. And the bank still exceeds regulatory capital requirements, with a Tier 1 leverage capital ratio of 6.95% at June 30, he said.

"It's a black eye," he said. "It's an embarrassment. But black eyes heal. We'll just continue on and grow from this."

He said the company was is still reviewing its internal control system to understand how the manipulation occurred and prevent a recurrence.

As a result of the investigation, Hometown restated its earnings for 1992 through the first quarter of this year to reflect lower income.

Last week it reported second-quarter net income of $476,000, up from a restated $290,000 for a year earlier. Six-month earnings total $846,000, up from a restated $677,000 in the 1994 half.

In the first quarter, Hometown says, it earned $370,000, down from the previously reported $518,000. Full-year 1994 earnings were reduced to $1.1 million from $1.9 million; the 1994 restatement also included a charge of $256,000 for a reduction in the market value of some real estate.

The bank restated its 1993 net as $1.2 million, against $1.3 million originally reported, and its 1992 net as $605,000 instead of $852,000.

"It's rare to see this happen, particularly with such consecutive years of restatement," said John Carusone, president of the Bank Analysis Center in Hartford, Conn.

Hometown officials said they expect to report a "material" third-quarter charge for investigative expenses and the filing of amended financial reports during the next two quarters.

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