UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission File Number 0-27940
HARRINGTON FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Indiana 48-1050267
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
722 East Main
Richmond, Indiana 47374
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(Address of principal executive office) (Zip Code)
(765) 962-8531
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: As of February 6,
1998, there were issued and outstanding 3,380,378 shares of the Registrant's
Common Stock, par value $.125 per share.
<PAGE>
HARRINGTON FINANCIAL GROUP, INC. AND SUBSIDIARY
TABLE OF CONTENTS
Page
----
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1997
(unaudited) and June 30, 1997 1
Consolidated Statements of Income (unaudited) for the three
and six months ended December 31, 1997 and 1996. 2
Consolidated Statements of Cash Flows (unaudited) for the six
months ended December 31, 1997 and 1996. 3
Notes to Unaudited Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk 11
Part II. Other Information
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security-Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 13
Signatures
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<TABLE>
<CAPTION>
HARRINGTON FINANCIAL GROUP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(Dollars in Thousands)
(Unaudited)
December 31, June 30,
1997 1997
--------- ---------
<S> <C> <C>
ASSETS
Cash ....................................................... $ 1,252 $ 1,207
Interest-bearing deposits .................................. 7,857 8,309
--------- ---------
Total cash and cash equivalents .......................... 9,109 9,516
Securities held for trading - at fair value
(amortized cost of $407,893 and $314,953) ................ 410,791 317,355
Securities available for sale - at fair value
(amortized cost of $1,023 and $1,183) .................... 997 1,125
Due from brokers ........................................... -- 11,308
Loans receivable, net ...................................... 110,168 93,958
Interest receivable, net ................................... 2,156 2,080
Premises and equipment, net ................................ 5,076 4,424
Federal Home Loan Bank of Indianapolis stock ............... 4,852 4,852
Other ...................................................... 1,528 2,179
--------- ---------
Total assets ............................................. $ 544,677 $ 446,797
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits ................................................... $ 137,528 $ 136,175
Securities sold under agreements to repurchase ............. 302,396 245,571
Federal Home Loan Bank advances ............................ 64,000 26,000
Interest payable on securities sold under agreements to
repurchase ............................................... 327 300
Other interest payable ..................................... 876 787
Note payable ............................................... 11,995 9,995
Advance payments by borrowers for taxes & insurance ........ 517 585
Deferred income taxes, net ................................. 1,031 1,249
Deferred compensation payable .............................. 75 89
Accrued expenses payable and other liabilities ............. 1,579 1,052
--------- ---------
Total liabilities ........................................ 520,324 421,803
--------- ---------
</TABLE>
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<TABLE>
<CAPTION>
HARRINGTON FINANCIAL GROUP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(Dollars in Thousands)
(Unaudited)
December 31, June 30,
1997 1997
--------- ---------
<S> <C> <C>
Common stock ............................................... 408 407
Additional paid-in-capital ................................. 15,687 15,623
Treasury stock, 19,560 shares at cost ...................... (239) --
Unrealized loss on securities available for sale, net of tax (16) (35)
Retained earnings .......................................... 8,513 8,999
--------- ---------
Total stockholders' equity ............................... 24,353 24,994
--------- ---------
Total liabilities and stockholders' equity ............. $ 544,677 $ 446,797
========= =========
</TABLE>
See notes to unaudited consolidated financial statements.
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<TABLE>
<CAPTION>
HARRINGTON FINANCIAL GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Income
(Dollars in Thousands Except Share Data)
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
------------------------ -----------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
INTEREST INCOME
Securities held for trading ................... $ 6,459 $ 7,719 $ 12,536 $ 14,705
Securities available for sale ................. 23 33 48 74
Loans receivable .............................. 1,927 1,448 3,751 2,754
Dividends on Federal Home Loan Bank stock ..... 98 52 199 104
Deposits ...................................... 272 319 581 578
Net interest expense on interest rate contracts
maintained in the trading portfolio ......... (330) (112) (529) (182)
-------- -------- -------- --------
Interest income ............................... 8,449 9,459 16,586 18,033
-------- -------- -------- --------
INTEREST EXPENSE
Deposits ...................................... 1,987 1,889 3,895 3,729
Federal Home Loan Bank advances ............... 467 414 889 825
Short-term borrowings ......................... 4,510 4,677 8,514 8,709
Long-term borrowings .......................... 219 239 437 450
-------- -------- -------- --------
Interest expense .............................. 7,183 7,219 13,735 13,713
-------- -------- -------- --------
NET INTEREST INCOME ............................. 1,266 2,240 2,851 4,320
PROVISION FOR LOAN LOSSES ....................... -- -- -- --
-------- -------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES ..................... 1,266 2,240 2,851 4,320
-------- -------- -------- --------
OTHER INCOME (LOSS)
Loss on sale of securities held for trading ... (1,072) (3,176) (1,270) (5,011)
Unrealized gain on securities held for trading 173 2,899 496 4,784
Other ......................................... 78 58 146 116
-------- -------- -------- --------
Total other income (loss) ..................... (821) (219) (628) (111)
-------- -------- -------- --------
</TABLE>
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<TABLE>
<CAPTION>
HARRINGTON FINANCIAL GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Income
(Dollars in Thousands Except Share Data)
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
------------------------ -----------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
OTHER EXPENSE
Salaries and employee benefits ................ 752 478 1,401 994
Premises and equipment expense ................ 163 125 315 246
FDIC insurance premiums ....................... 22 63 43 137
Special SAIF assessment ....................... -- -- -- 830
Marketing ..................................... 33 17 57 37
Computer services ............................. 51 37 98 75
Consulting fees ............................... 71 69 141 139
Other ......................................... 392 246 686 575
-------- -------- -------- --------
Total other expenses .......................... 1,484 1,035 2,741 3,033
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAX
PROVISION ..................................... (1,039) 986 (518) 1,176
INCOME TAX PROVISION (BENEFIT) .................. (430) 385 (226) 454
-------- -------- -------- --------
NET INCOME (LOSS) ............................... $ (609) $ 601 $ (292) $ 722
======== ======== ======== ========
BASIC EARNINGS (LOSS) PER SHARE ................. $ (0.19) $ 0.18 $ (0.09) $ 0.22
======== ======== ======== ========
DILUTED EARNINGS (LOSS) PER SHARE ............... $ (0.19) $ 0.18 $ (0.09) $ 0.22
======== ======== ======== ========
</TABLE>
See notes to unaudited consolidated financial statements.
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<TABLE>
<CAPTION>
HARRINGTON FINANCIAL GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
Six Months Ended
December 31,
------------------------
1997 1996
-------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................. $ (292) $ 722
Adjustments to reconcile net income to net cash used
in operating activities:
Depreciation ................................................ 138 111
Premium and discount amortization of securities, net ........ 521 1,013
Amortization of premiums and discounts on loans ............. 62 (8)
Loss on sale of securities held for trading ................. 1,270 5,011
Unrealized gain on securities held for trading .............. (496) (4,784)
Deferred income tax provision ............................... (218) 441
Increase in interest receivable ............................. (76) (207)
Increase (decrease) in interest payable ..................... 116 (620)
Decrease in accrued income taxes ............................ -- (275)
Purchases of securities held for trading .................... (442,570) (447,268)
Decrease in amounts due from brokers ........................ 11,308 --
Proceeds from maturities of securities held for trading ..... 12,967 14,647
Proceeds from sales of securities held for trading .......... 334,872 330,304
(Increase) decrease in other assets ......................... 651 (1,874)
Increase (decrease) in accrued expenses and other liabilities 445 (2,294)
-------- ---------
Net cash used in operating activities ..................... (81,302) (105,081)
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available for sale ... 147 674
Change in loans receivable, net ............................. (16,272) (14,659)
Purchases of premises and equipment ......................... (790) (333)
-------- ---------
Net cash used in investing activities ..................... (16,915) (14,318)
-------- ---------
</TABLE>
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<TABLE>
<CAPTION>
HARRINGTON FINANCIAL GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
Six Months Ended
December 31,
------------------------
1997 1996
-------- ---------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits ......................... 1,353 (3,189)
Increase in securities sold under agreements to repurchase .. 56,825 109,216
Proceeds from stock options exercised ....................... 66 --
Proceeds from Federal Home Loan Bank advances ............... 55,000 3,300
Proceeds from note payable .................................. 2,000 2,300
Principal repayments on Federal Home Loan Bank advances ..... (17,000) --
Principal repayments on note payable ........................ -- (569)
Purchase of treasury stock .................................. (239) --
Dividends paid on common stock .............................. (195) --
-------- ---------
Net cash provided by financing activities ................. 97,810 111,058
-------- ---------
NET DECREASE IN CASH AND EQUIVALENTS .......................... (407) (8,341)
CASH AND CASH EQUIVALENTS
Beginning of period ......................................... 9,516 17,143
-------- ---------
CASH AND CASH EQUIVALENTS
End of period ............................................... $ 9,109 $ 8,802
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest ...................................... $ 13,786 $ 13,040
Cash paid for income taxes .................................. 321 100
</TABLE>
See notes to unaudited consolidated financial statements.
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<PAGE>
HARRINGTON FINANCIAL GROUP, INC. AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
Note 1 - Business of the Company
Harrington Financial Group, Inc. (the "Company") is a savings and loan
holding company incorporated in 1988 to acquire and hold all of the
outstanding common stock of Harrington Bank, FSB (the "Bank"), a
federally chartered savings bank with principal offices in Richmond,
Indiana and four full-service branch offices located in Carmel, Fishers,
Noblesville and Indianapolis, Indiana. Two additional Indianapolis area
branch locations are expected to open in the next quarter.
Note 2 - Basis of Presentation
The accompanying unaudited consolidated financial statements of the
Company have been prepared in accordance with instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. However, such information reflects all adjustments
(consisting solely of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of results for
the interim periods.
The results of operations for the three and six months ended December
31, 1997 are not necessarily indicative of the results to be expected
for the year ending June 30, 1998. The unaudited consolidated financial
statements and notes thereto should be read in conjunction with the
audited financial statements and notes thereto for the year ended June
30, 1997.
Note 3 - Recent Accounting Pronouncements
Statement of Financial Accounting Standards (SFAS) No. 125, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, was issued in June 1996 and provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. SFAS No. 125 was amended by SFAS No.
127, Deferral of the Effective Date of Certain Provisions of SFAS No.
125. SFAS No. 127 defers certain provisions of SFAS No. 125 relating to
repurchase agreements, dollar- roll, securities lending, and similar
transactions and is effective for transactions occurring after December
31, 1997. Management has not quantified the effect, if any, of this new
standard on the consolidated financial statements.
The Company adopted SFAS No. 128, "Earnings per Share," effective
December 31, 1997. This statement established new accounting standards
for the calculation of basic earnings per share as well as diluted
earnings per share. The adoption of this statement did not have a
material effect on the Company's calculation of earnings per share. The
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<PAGE>
following is a reconciliation of the weighted average common shares for
the basic and diluted earnings per share computations:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
-------------------------- -------------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic earnings per share:
Weighted average common shares 3,253,231 3,256,738 3,254,985 3,256,738
========= ========= ========= =========
Diluted earnings per share:
Weighted average common shares 3,253,231 3,256,738 3,254,985 3,256,738
Dilutive effect of stock options 63,749 39,596 62,227 39,031
Weighted average common and --------- --------- --------- ---------
incremental shares (1) 3,316,980 3,296,334 3,317,212 3,295,769
========= ========= ========= =========
</TABLE>
(1) The calculations for diluted earnings per share for the three
and six months ended December 31, 1997 were based upon the
weighted average common shares as the effects of the stock
options were anti-dilutive due to the net losses for the
respective periods.
In June 1997, SFAS No. 130, Comprehensive Income, was issued and becomes
effective for fiscal years beginning after December 15, 1997 and
requires reclassification of earlier financial statements for
comparative purposes. SFAS No. 130 requires that changes in the amounts
of certain items, including gains and losses on certain securities, be
shown in the financial statements. SFAS No. 130 does not require a
specific format for the financial statement in which comprehensive
income is reported, but does require that an amount representing total
comprehensive income is reported in that statement. Management has not
yet determined the effect, if any, of SFAS No. 130 on the consolidated
financial statements.
Also in June 1997, SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, was issued. This Statement will
change the way public companies report information about segments of
their business in their annual financial statements and requires them to
report selected segment information in their quarterly reports issued to
shareholders. It also requires entity-wide disclosures about the
products and services an entity provides, the material countries in
which it holds assets and reports revenues, and its major customers.
SFAS No. 131 is effective for fiscal years beginning after December 15,
1997. Management has not yet determined the effect, if any, of SFAS No.
131 on the consolidated financial statements.
The Financial Accounting Standards Board issued Exposure Draft,
Accounting for Derivative and Similar Financial Instruments and for
Hedging Activities, in June 1996. Management has not yet quantified the
effect, if any, of this Exposure Draft on the consolidated financial
statements.
- 5 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition
At December 31, 1997, the Company's total assets amounted to $544.7
million, as compared to $446.8 million at June 30, 1997. The $97.9 million or
21.9% increase in total assets during the six months ended December 31, 1997 was
primarily the result of a $93.4 million increase in securities held for trading
and a $16.2 million increase in net loans receivable which was partially offset
by an $11.3 million decrease in receivables from brokers. The increase in
securities held for trading was a result of further utilization of the Company's
capital. The increase in loans receivable reflected the Company's continuing
efforts to increase its retail banking operations, particularly the origination
(both directly and through correspondent mortgage banking companies) of
single-family residential loans. The decrease in receivables from brokers was
due to a decrease in the amount of unsettled sales of investment securities. The
increase in the Company's assets from June 30, 1997 to December 31, 1997 was
funded primarily by a $56.8 million or 23.1% increase in securities sold under
agreements to repurchase and a $38.0 million or 146.2% increase in Federal Home
Loan Bank advances.
At December 31, 1997, the Company's stockholders' equity amounted to
$24.4 million, as compared to $25.0 million at June 30, 1997. The 2.6% decrease
in stockholders' equity was primarily due to the $292,000 of net loss recognized
during the six month period, the quarterly $0.03 per share payments of cash
dividends totaling $195,000 and the repurchase of stock for $239,000 which was
partially offset by $66,000 received from the exercise of a portion of the
Company's eligible stock options . At December 31, 1997, the Bank's tangible and
core capital amounted to $33.0 million or 6.1% of adjusted total assets, which
exceeded the minimum 1.5% and 3.0% requirements by $24.9 million and $16.7
million, respectively. Additionally, as of such date, the Bank's risk-based
capital totalled $33.3 million or 26.8% of total risk-adjusted assets, which
exceeded the minimum 8.0% requirement by $23.3 million.
Results of Operations
General. The Company reported losses of $609,000 or $0.19 per share and
$292,000 or $0.09 per share during the three and six months ended December 31,
1997, as compared to earnings of $601,000 or $0.18 per share and $722,000 or
$0.22 per share during the prior comparable periods. The $1.2 million decrease
in earnings during the three months ended December 31, 1997, as compared to the
same period in the prior year, was primarily due to a $1.0 million decrease in
net interest income, a $622,000 increase in realized and unrealized net losses
on securities held for trading and a $449,000 increase in operating expenses
which were partially offset by an $815,000 decrease in the Company's income tax
provision. The $1.0 million decrease in earnings during the six months ended
December 31, 1997, as compared to the same period in the prior year, was
primarily due to a $1.4 million decrease in net interest income and a $547,000
increase in realized and unrealized net losses on securities held for trading
which were partially offset by a $292,000 decrease in operating expenses
(operating
- 6 -
<PAGE>
expenses increased $538,000 excluding the $830,000 special Savings Association
Insurance Fund (SAIF) assessment) and a $680,000 decrease in the Company's
income tax provision.
The Bank's deposits are insured by the SAIF, which was statutorily
required to be recapitalized to a ratio of 1.25% of insured deposits. The
legislation enacted by the U.S. Congress, which was signed by the President on
September 30, 1996, recapitalized the SAIF by a one-time charge of $0.657 for
each $100 of assessable deposits held at March 31, 1995. This resulted in
expense of $830,000 recognized in the Company's earnings for the six months
ended December 31, 1996. The Bank's insurance premiums, which had amounted to
$0.23 for every $100 of assessable deposits, were reduced to $0.065 for every
$100 of assessable deposits beginning on January 1, 1997.
Selected Financial Ratios. The following schedule shows selected
financial ratios for the three and six months ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
At or for the Three At or for the Six
Months Ended Months Ended
December 31 December 31,
---------------------- ---------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Return on average assets -0.46% 0.44% -0.11% 0.28%
Return on average assets, excluding special -0.46 0.44 -0.11 0.48
SAIF assessment
Return on average equity -9.86 10.32 -2.35 6.18
Return on average equity, excluding special
SAIF assessment -9.86 10.32 -2.35 10.65
Interest rate spread (1) 0.81 1.52 0.97 1.50
Net interest margin (2) 0.98 1.67 1.15 1.69
Operating expenses to average assets 1.12 0.75 1.07 1.16
Operating expenses to average assets,
excluding special SAIF assessment 1.12 0.75 1.07 0.84
Efficiency ratio (3) 110.42 45.04 91.46 68.35
Efficiency ratio, excluding special SAIF
assessment (3) 110.42 45.04 91.46 49.64
Non-performing assets to total assets 0.18 0.23 0.18 0.23
Loan loss reserves to non-performing loans 69.97 38.22 69.97 38.22
</TABLE>
(1) Interest rate spread is the difference between interest income as a
percentage of interest-earning assets and interest expense as a percentage
of interest-bearing liabilities.
(2) Net interest margin is net interest income divided by average
interest-earning assets.
(3) The efficiency ratio is total other expense as a percentage of the net
interest income after provision for loan losses plus other income,
excluding gains and losses on securities held for trading.
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<PAGE>
Interest Income. Interest income decreased by $1.0 million or 10.7%
during the three months ended December 31, 1997, as compared to the same period
in the prior year. This decrease was primarily due to a $1.3 million decrease in
interest income on the Company's investment portfolio which was partially offset
by a $479,000 increase in interest income from the loan portfolio. The 71 basis
point decline in interest income from the investment portfolio was largely a
result of the Company's shifting of assets to low initial rate GNMA one-year
adjustable rate mortgage securities and the shifting of the portfolio's fixed
rate mortgage investments to lower coupons with lower accounting yields but
higher option adjusted spreads; in addition, the level of the average investment
portfolio decreased by $45.6 million. The increase in interest income on the
loan portfolio is a direct result of the $28.7 million increase in the level of
the average loan portfolio which was partially offset by a 32 basis point
decline in the interest yield earned.
Interest income decreased by $1.5 million or 8.0% during the six months
ended December 31, 1997, as compared to the same period in the prior year. This
decrease was primarily due to a $2.2 million decrease in interest income on the
Company's investment portfolio which was partially offset by a $997,000 increase
in interest income from the loan portfolio. The 54 basis point decline in
interest income from the investment portfolio was largely a result of the
Company's shifting of assets to low initial rate GNMA one-year adjustable rate
mortgage securities and the shifting of the portfolio's fixed rate mortgage
investments to lower coupons with lower accounting yields but higher option
adjusted spreads; in addition, the level of the average investment portfolio
decreased by $44.0 million. The increase in interest income on the loan
portfolio is a direct result of the $28.8 million increase in the level of the
average loan portfolio which was partially offset by a 26 basis point decline in
the interest yield earned.
Interest Expense. Interest expense decreased by $36,000 during the three
months ended December 31, 1997, as compared to the same period in the prior
year. This decline is due to the $20.1 million decrease in the level of average
interest-bearing liabilities which was partially offset by a 19 basis point
increase in the cost of interest-bearing liabilities resulting mainly from an
increase in the funding costs for securities sold under agreements to
repurchase.
Interest expense increased by $22,000 during the six months ended
December 31, 1997, as compared to the same period in the prior year. This
increase is due to a 16 basis point increase in the cost of interest-bearing
liabilities, resulting mainly from an increase in the funding costs for
securities sold under agreements to repurchase, which was partially offset by a
$12.6 million decrease in the level of average interest-bearing liabilities.
Net Interest Income. Net interest income decreased by $974,000 or 43.5%
during the three months ended December 31, 1997, as compared to the same period
in the prior year. Net interest income decreased by $1.5 million or 34.0% during
the six months ended December 31, 1997, as compared to the same period in the
prior year.
Other Income (Loss). Total other income (loss) amounted to ($821,000)
and ($628,000) during the three months and six months ended December 31, 1997,
as compared to ($219,000) and ($111,000) during the respective periods in the
prior year. This income (loss) principally
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<PAGE>
represents the net market value gain or loss (realized or unrealized) on
securities held for trading, offset by the net market value gain or loss
(realized or unrealized) on interest rate contracts used for hedging such
securities. Management's goal is to attempt to offset any change in the market
value of its securities portfolio with the change in the market value of the
interest rate risk management contracts and mortgage-backed derivative
securities utilized by the Company to hedge its interest rate exposure. In
addition, management attempts to produce a positive hedged excess return (i.e.
total return, which includes interest income plus realized and unrealized net
gains/losses on investments minus the one month LIBOR funding cost for the
period) on the investment portfolio using option-adjusted pricing analysis.
During the three and six months ended December 31, 1997, the Company
recognized $1.1 million and $1.3 million of realized losses on the sale of
securities held for trading which were partially offset by $173,000 and $496,000
of unrealized gains on securities held for trading (which includes interest rate
contracts used for hedging purposes). During these periods, prepayment rate
uncertainty caused investors to require wider spreads to Treasury for mortgage
investments, so that mortgage price increases lagged those of comparable
duration Treasuries. For example, in the quarter ended December 31, 1997, fixed
rate and adjustable rate mortgage spreads widened approximately ten basis
points, resulting in negative hedged spreads to the one-month London Interbank
Offered Rate (LIBOR) on these investments. The impact of this spread widening on
the Company's four-year duration investment portfolio can be illustrated as
follows. A 10 basis point spread widening causes a decline in price of
approximately 40 cents per $100 of investments. On an average investment
portfolio of $389 million, this price decline translates into an approximately
$1.6 million loss. The Company's actual net loss on its investment portfolio
during the three months ended December 31, 1997 was $899,000, which is lower due
to the better performance of Cost of Funds Indexed adjustable rate mortgage
investments and the use of LIBOR-based interest rate contracts used for hedging
purposes.
During the three and six months ended December 31, 1996, the Company
recognized $3.2 million and $5.0 million of realized losses on the sale of
securities held for trading which were partially offset by $2.9 million and $4.8
million of unrealized gains on securities and hedge contracts held for trading.
Other Expense. Total other expense amounted to $1.5 million and $2.7
million during the three and six months ended December 31, 1997, as compared to
$1.0 million and $2.2 million during the respective periods in the prior year
before the one-time SAIF assessment. Total other expense amounted to $3.0
million during the six months ended December 31, 1996 after the SAIF assessment
of $830,000. The increase in total other expense during the three and six month
periods, excluding the special SAIF assessment, was due to increases in salaries
and other operating expenses, which were primarily the result of the Company's
retail growth (including the opening of new branch offices in Noblesville,
Indiana in June 1997 and Indianapolis, Indiana in December 1997).
Income Tax Provision. The Company received an income tax benefit of
$430,000 during the three months ended December 31, 1997, as compared to income
tax expense of $385,000 during the respective period in the prior year. During
the three months ended
- 9 -
<PAGE>
December 31, 1997, the Company's effective benefit rate amounted to 41.4% as
compared to an effective tax rate of 39.0% during same period in 1996. The
change in the effective tax/benefit rate was a result of higher levels of
permanent differences which resulted in lower taxable income.
The Company received an income tax benefit of $226,000 during the six
months ended December 31, 1997, as compared to income tax expense of $454,000
during the respective period in the prior year. During the six months ended
December 31, 1997, the Company's effective benefit rate amounted to 43.6% as
compared to an effective tax rate of 38.6% during same period in 1996. The
change in the effective tax/benefit rate was a result of higher levels of
permanent differences which resulted in lower taxable income.
Liquidity and Capital Resources
The Bank is required under applicable federal regulations to maintain
specified levels of "liquid" investments as defined by the Office of Thrift
Supervision ("OTS"). As of November 24, 1997, the required level of such liquid
investments was changed from 5% to 4% of certain liabilities as defined by the
OTS. In addition to the change in the percentage of required level of liquid
assets, the OTS also modified its definition of investments that are considered
liquid. As a result of this change, the level of assets eligible for regulatory
liquidity calculations increased considerably.
The total eligible regulatory liquidity of the Bank was 17.70% at
December 31, 1997, as compared to 5.25% and 5.53% at June 30, 1997 and 1996,
respectively. At December 31, 1997, the Bank's average "liquid" assets totalled
approximately $86.4 million, which was $66.9 million in excess of the current
OTS minimum requirement.
At December 31, 1997, the Company's total approved originated loan
commitments outstanding amounted to $2.3 million, and the unused lines of credit
outstanding totalled $1.9 million. At the same date, commitments outstanding to
purchase investment securities and loans were $12.0 million and $9.0 million,
respectively. Certificates of deposit scheduled to mature in one year or less at
December 31, 1997 totalled $66.6 million. The Company believes that it has
adequate resources to fund ongoing commitments such as investment security and
loan purchases as well as deposit account withdrawals and loan commitments.
- 10 -
<PAGE>
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995
In addition to historical information, forward-looking statements are
contained herein that are subject to risks and uncertainties that could cause
actual results to differ materially from those reflected in the forward-looking
statements. Factors that could cause future results to vary from current
expectations, include, but are not limited to, the impact of economic conditions
(both generally and more specifically in the markets in which the Company
operates), the impact of competition for the Company's customers from other
providers of financial services, the impact of government legislation and
regulation (which changes from time to time and over which the Company has no
control), and other risks detailed in this Form 10-Q and in the Company's other
Securities and Exchange Commission (SEC) filings. Readers are cautioned not to
place undue reliance on these forward-looking statements, which reflect
management's analysis only as of the date hereof. The Company undertakes no
obligation to publicly revise these forward-looking statements, to reflect
events or circumstances that arise after the date hereof. Readers should
carefully review the risk factors described in other documents the Company files
from time to time with the SEC.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The OTS requires each thrift institution to calculate the estimated
change in the institution's market value of portfolio equity (MVPE) assuming an
instantaneous, parallel shift in the Treasury yield curve of 100 to 400 basis
points either up or down in 100 basis point increments. MVPE is defined as the
net present value of an institution's existing assets, liabilities and
off-balance sheet instruments. The OTS permits institutions to perform this MVPE
analysis using their own internal model based upon reasonable assumptions. The
Company has contracted with Smith Breeden Associates, Inc. for the provision of
consulting services regarding, among other things, the management of its
investments and borrowings, the pricing of loans and deposits, the use of
various financial instruments to reduce interest rate risk and assistance in
performing the required calculation of the sensitivity of its market value to
changes in interest rates. In estimating the market value of mortgage loans and
mortgage-backed securities, the Company utilizes various prepayment assumptions
which vary, in accordance with historical experience, based upon the term,
interest rate and other factors with respect to the underlying loans.
Using the internal market value calculations, the Company has determined
that, as of December 31, 1997, there has been no material change in prepayment
assumptions or the estimated sensitivity of the Bank's MVPE to parallel yield
curve shifts in comparison to the disclosures set forth in the Company's 1997
annual report to stockholders.
- 11 -
<PAGE>
HARRINGTON FINANCIAL GROUP, INC. AND SUBSIDIARY
Part II
Item 1. Legal Proceedings
Neither the Company nor the Bank is involved in any pending legal
proceedings other than non-material legal proceedings occurring
in the ordinary course of business.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security-Holders
a) An annual meeting of stockholders ("Annual Meeting") was
held on October 23, 1997.
b) Not applicable.
c) Two matters were voted upon at the Annual Meeting. The
stockholders approved matters brought before the Annual
Meeting. The matters voted upon together with the
applicable voting results were as follows:
1) Proposal to elect directors for a three-year term
expiring in 2000 - Douglas T. Breeden, Stephen A.
Eason, Daniel C. Dektar and Marianthe S. Mewkill
each received votes for 2,691,521; withheld 1,500;
not voted 563,717.
2) Proposal to ratify the appointment by the Board of
Directors of Deloitte & Touche LLP as the
Company's independent auditors for the fiscal year
ending June 30, 1998 - votes for 2,690,521;
against 1,500; abstain 1,000; not voted 563,717.
d) Not applicable.
Item 5. Other Information
None.
- 12 -
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
a) Exhibit 3.1: Amended and Restated Articles of
Incorporation of Harrington Financial Group, Inc. This
exhibit is incorporated herein by reference from the
Registration Statement on Form S-1 (Registration No.
333-1556) filed by the Company with the SEC on February
20, 1996, as amended.
b) Exhibit 3.2: Amended and Restated Bylaws of Harrington
Financial Group, Inc. This exhibit is incorporated herein
by reference from the Registration Statement on Form S-1
(Registration No. 333-1556) filed by the Company with the
SEC on February 20, 1996, as amended.
c) Exhibit 27: Financial Data Schedule
d) No Form 8-K reports were filed during the quarter.
- 13 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARRINGTON FINANCIAL GROUP, INC.
Date: February 6, 1998 By: /s/ Craig J. Cerny
------------------
Craig J. Cerny
President
Date: February 6, 1998 By: /s/ Catherine A. Habschmidt
---------------------------
Catherine A. Habschmidt
Chief Financial Officer and
Treasurer
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<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 1,252
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