Officials at Harris Savings Bank say they didn't know that when they bought a competitor recently that they were also buying into a relationship that would cost them millions.
The Harrisburg, Pa., savings institution announced Aug. 20 that it had revised downward its second-quarter after-tax earnings by $2.5 million, to $186,000, because of problems related to dealings with a mortgage brokerage.
Harris, with $1.54 billion of assets, had reported in an Aug. 2 filing that bank management had discovered violations of internal control policies in July. In its dealings with a Maryland mortgage brokerage company, "certain unauthorized external activities" also were found. Bank officials declined to identify the Maryland company.
Harris became involved with the brokerage as a result of its April merger with First Federal Savings and Loan Association of Harrisburg.
Patrick Aritz, former chief executive officer of First Federal, resigned as chief operating officer of Harris after the problem surfaced, but it was unclear whether his departure was linked to the earnings revision.
Harris Savings' stock dipped slightly after the Aug. 20 announcement but has edged back up to a little more than $15 a share.
James L. Durrell, Harris' chief financial officer, said First Federal had bought participation interests in mortgages from the Maryland company at least as far back as 1994. Harris Bank assumed the agreement when it completed its purchase of First Federal. Sources quoted in local newspapers said the mortgage company probably used Harris' money to fund existing mortgages rather than the new ones intended.
"The bank decided to do an internal audit when it discovered there were some integrity concerns," said Richard C. Ruben of Hanson & Ruben, Harris' outside counsel.
Mr. Durrell said the pretax loss was $4 million to $5 million. Harris Savings was caught completely off guard by the revelations, he said, and no longer does business with the brokerage. Mr. Durrell added that he lacked firsthand evidence that any other bank had run into problems with the Maryland company.
Harris is evaluating its options for legal recourse and says part of the loss may be covered by insurance.
Frank A. Pinto, chief executive of the Pennsylvania Association of Community Bankers, said Harris is a quality institution.
"They're absolutely rock solid," he said. "They're just a great community bank."
Harris has 31 branches in five counties in Pennsylvania and Maryland.