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 March 31, 1998
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
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(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 May 8, 1998,
there were issued and outstanding 3,292,711 shares of the Registrant's Common
Stock, par value $.125 per share.
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HARRINGTON FINANCIAL GROUP, INC. AND SUBSIDIARY
TABLE OF CONTENTS
Page
----
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1998
(unaudited) and June 30, 1997 1
Consolidated Statements of Income (unaudited) for the three
and nine months ended March 31, 1998 and 1997. 2
Consolidated Statements of Cash Flows (unaudited) for the nine
months ended March 31, 1998 and 1997. 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 12
Signatures
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<TABLE>
<CAPTION>
HARRINGTON FINANCIAL GROUP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(Dollars in Thousands)
(Unaudited)
March 31, June 30,
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Cash ....................................................... $ 1,411 $ 1,207
Interest-bearing deposits .................................. 6,559 8,309
--------- ---------
Total cash and cash equivalents .......................... 7,970 9,516
Securities held for trading - at fair value
(amortized cost of $393,243 and $314,953) ................ 394,082 317,355
Securities available for sale - at fair value
(amortized cost of $966 and $1,183) ...................... 940 1,125
Due from brokers ........................................... -- 11,308
Loans receivable, net ...................................... 135,120 93,958
Interest receivable, net ................................... 2,019 2,080
Premises and equipment, net ................................ 5,488 4,424
Federal Home Loan Bank of Indianapolis stock ............... 4,852 4,852
Other ...................................................... 2,663 2,179
========= =========
Total assets ............................................. $ 553,134 $ 446,797
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits ................................................... $ 167,207 $ 136,175
Securities sold under agreements to repurchase ............. 318,285 245,571
Federal Home Loan Bank advances ............................ 26,000 26,000
Interest payable on securities sold under agreements to
repurchase ............................................... 244 300
Other interest payable ..................................... 1,594 787
Note payable ............................................... 12,995 9,995
Advance payments by borrowers for taxes & insurance ........ 1,041 585
Deferred income taxes, net ................................. 607 1,249
Deferred compensation payable .............................. 68 89
Accrued expenses payable and other liabilities ............. 622 1,052
--------- ---------
Total liabilities ........................................ 528,663 421,803
--------- ---------
Common stock ............................................... 425 407
Additional paid-in-capital ................................. 16,962 15,623
Treasury stock, 89,227 shares at cost ...................... (1,071) --
Retained earnings .......................................... 8,171 8,999
Unrealized loss on securities available for sale, net of tax (16) (35)
--------- ---------
Total stockholders' equity ............................... 24,471 24,994
--------- ---------
Total liabilities and stockholders' equity ............. $ 553,134 $ 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 Nine Months Ended
March 31, March 31,
----------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
INTEREST INCOME
Securities held for trading ................... $ 6,585 6,733 $ 19,121 $ 21,438
Securities available for sale ................. 22 30 70 104
Loans receivable .............................. 2,256 1,591 6,007 4,345
Dividends on Federal Home Loan Bank stock ..... 96 51 295 155
Deposits ...................................... 115 316 696 894
Net interest expense on interest rate contracts
maintained in the trading portfolio ......... (514) (335) (1,043) (517)
-------- -------- -------- --------
Interest income ............................... 8,560 8,386 25,146 26,419
-------- -------- -------- --------
INTEREST EXPENSE
Deposits ...................................... 1,988 1,779 5,883 5,508
Federal Home Loan Bank advances ............... 460 401 1,349 1,226
Short-term borrowings ......................... 4,742 4,009 13,256 12,718
Long-term borrowings .......................... 256 231 693 681
-------- -------- -------- --------
Interest expense .............................. 7,446 6,420 21,181 20,133
-------- -------- -------- --------
NET INTEREST INCOME .............................. 1,114 1,966 3,965 6,286
PROVISION FOR LOAN LOSSES ........................ -- 93 -- 93
-------- -------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES ..................... 1,114 1,873 3,965 6,193
-------- -------- -------- --------
OTHER INCOME (LOSS)
Gain on sale of securities held for trading ... 2,201 6,006 931 995
Unrealized loss on securities held for trading (2,059) (5,408) (1,563) (624)
Other ......................................... 64 59 210 175
-------- -------- -------- --------
Total other income (loss) ..................... 206 657 (422) 546
-------- -------- -------- --------
</TABLE>
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<TABLE>
<CAPTION>
HARRINGTON FINANCIAL GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Income
(Dollars in Thousands Except Share Data)
(Unaudited)
(continued)
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
OTHER EXPENSE
Salaries and employee benefits ................ 893 577 2,294 1,571
Premises and equipment expense ................ 229 141 544 387
FDIC insurance premiums ....................... 22 22 65 159
Special SAIF assessment ....................... -- -- -- 830
Marketing ..................................... 65 17 122 54
Computer services ............................. 63 44 161 119
Consulting fees ............................... 73 72 214 211
Other ......................................... 367 288 1,053 863
-------- -------- -------- --------
Total other expenses .......................... 1,712 1,161 4,453 4,194
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAX
PROVISION ..................................... (392) 1,369 (910) 2,545
INCOME TAX PROVISION (BENEFIT) ................... (151) 534 (378) 988
-------- -------- -------- --------
NET INCOME (LOSS) ................................ $ (241) $ 835 $ (532) $ 1,557
======== ======== ======== ========
BASIC EARNINGS (LOSS) PER SHARE .................. $ (0.07) $ 0.26 $ (0.16) $ 0.48
======== ======== ======== ========
DILUTED EARNINGS (LOSS) PER SHARE ................ $ (0.07) $ 0.25 $ (0.16) $ 0.47
======== ======== ======== ========
</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)
Nine Months Ended
March 31,
--------------------------
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .............................................. $ (532) $ 1,557
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Provision for loan losses ................................... -- 93
Depreciation ................................................ 232 175
Tax benefit from exercise of non-qualified stock options .... 283 --
Premium and discount amortization of securities, net ........ 986 1,568
Amortization of premiums and discounts on loans ............. 108 9
Gain on sale of securities held for trading ................. (931) (995)
Unrealized loss on securities held for trading .............. 1,563 624
Deferred income tax provision ............................... (642) (476)
Decrease (increase) in interest receivable .................. 61 (184)
Increase (decrease) in interest payable ..................... 751 (265)
Increase in accrued income taxes ............................ -- 1,115
Purchases of securities held for trading ................... (609,182) (715,396)
Increase in amounts due to brokers .......................... -- 5,863
Decrease (increase) in amounts due from brokers ............. 11,308 (20,766)
Proceeds from maturities of securities held for trading ..... 21,103 20,277
Proceeds from sales of securities held for trading .......... 509,735 633,892
Decrease (increase) in other assets ......................... (484) 363
Increase (decrease) in accrued expenses and other liabilities 4 (1,941)
--------- ---------
Net cash used in operating activities ..................... (65,637) (74,487)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available for sale ... 204 835
Change in loans receivable, net ............................. (41,270) (19,998)
Purchases of premises and equipment ......................... (1,296) (531)
--------- ---------
Net cash used in investing activities ..................... (42,362) (19,694)
--------- ---------
</TABLE>
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<TABLE>
<CAPTION>
HARRINGTON FINANCIAL GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
(continued)
Nine Months Ended
March 31,
--------------------------
1998 1997
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<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits ......................... 31,032 (4,191)
Increase in securities sold under agreements to repurchase .. 72,714 93,798
Proceeds from stock options exercised ....................... 1,074 --
Proceeds from Federal Home Loan Bank advances ............... 55,000 3,300
Proceeds from note payable .................................. 3,000 2,300
Principal repayments on Federal Home Loan Bank advances ..... (55,000) (3,300)
Principal repayments on note payable ........................ -- (569)
Purchase of treasury stock .................................. (1,071) --
Dividends paid on common stock .............................. (296) --
--------- ---------
Net cash provided by financing activities ................. 106,453 91,338
--------- ---------
NET DECREASE IN CASH AND EQUIVALENTS ........................... (1,546) (2,843)
CASH AND CASH EQUIVALENTS
Beginning of period ......................................... 9,516 17,143
--------- ---------
CASH AND CASH EQUIVALENTS
End of period ............................................... $ 7,970 $ 14,300
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest ...................................... $ 21,829 $ 19,804
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 six full-service branch offices located in Carmel, Fishers,
Noblesville and Indianapolis, Indiana.
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 nine months ended March 31,
1998 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. The adoption of this statement as of January 1, 1998 did not
have a material effect 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
following is a reconciliation of the weighted average common shares for
the basic and diluted earnings per share computations:
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<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------- ------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic earnings per share:
Weighted average common shares . 3,339,538 3,256,738 3,282,758 3,256,738
========= ========= ========= =========
Diluted earnings per share:
Weighted average common shares . 3,339,538 3,256,738 3,282,758 3,256,738
Dilutive effect of stock options 6,527 39,416 38,114 39,111
--------- --------- --------- ---------
Weighted average common and
incremental shares (1) ....... 3,346,065 3,296,154 3,320,872 3,295,849
========= ========= ========= =========
</TABLE>
(1) The calculations for diluted earnings per share for the three and
nine months ended March 31, 1998 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 March 31, 1998, the Company's total assets amounted to $553.1
million, as compared to $446.8 million at June 30, 1997. The $106.3 million or
23.8% increase in total assets during the nine months ended March 31, 1998 was
primarily the result of a $76.7 million increase in securities held for trading
and a $41.2 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 March 31, 1998 was funded
primarily by a $72.7 million or 29.6% increase in securities sold under
agreements to repurchase and a $31.0 million or 22.8% increase in deposits.
At March 31, 1998, the Company's stockholders' equity amounted to $24.5
million, as compared to $25.0 million at June 30, 1997. The 2.1% decrease in
stockholders' equity was primarily due to the $532,000 of net loss recognized
during the nine month period, the quarterly $0.03 per share payments of cash
dividends totaling $296,000 and the repurchase of stock for $1.1 million which
was partially offset by $1.4 million from the exercise of a portion of the
Company's eligible stock options including the related tax benefit. At March 31,
1998, the Bank's Tier 1 core capital amounted to $33.9 million or 6.2% of
adjusted total assets, which exceeded the minimum 4.0% requirement by $11.8
million. Additionally, as of such date, the Bank's risk-based capital totaled
$34.1 million or 23.8% of total risk-adjusted assets, which exceeded the minimum
8.0% requirement by $22.6 million.
Results of Operations
General. The Company reported losses of $241,000 or $0.07 per share and
$532,000 or $0.16 per share during the three and nine months ended March 31,
1998, as compared to earnings of $835,000 or $0.26 per share and $1.6 million or
$0.48 per share during the prior comparable periods. The $1.1 million decrease
in earnings during the three months ended March 31, 1998, as compared to the
same period in the prior year, was primarily due to a $852,000 decrease in net
interest income, a $456,000 increase in realized and unrealized net losses on
securities held for trading and a $551,000 increase in operating expenses which
were partially offset by a $685,000 decrease in the Company's income tax
provision. The $2.1 million decrease in earnings during the nine months ended
March 31, 1998, as compared to the same period in the prior year, was primarily
due to a $2.3 million decrease in net interest income, a $1.0 million increase
in realized and unrealized net losses on securities held for trading and a
$259,000 increase in operating expenses (operating expenses increased $1.1
million excluding the $830,000 special Savings Association Insurance Fund (SAIF)
assessment) which were partially offset by a $1.4 million decrease in the
Company's income tax provision.
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<PAGE>
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 nine months
ended March 31, 1997. 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 nine months ended March 31, 1998 and 1997.
<TABLE>
<CAPTION>
At or for the Three At or for the Nine
Months Ended Months Ended
March 31, March 31,
-------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Return on average assets -0.17% 0.66% -0.13% 0.40%
Return on average assets, excluding special -0.17 0.66 -0.13 0.54
SAIF assessment
Return on average equity -3.88 13.64 -2.86 8.74
Return on average equity, excluding special
SAIF assessment -3.88 13.64 -2.86 11.68
Interest rate spread (1) 0.69 1.41 0.88 1.47
Net interest margin (2) 0.82 1.60 1.04 1.66
Operating expenses to average assets 1.23 0.92 1.12 1.08
Operating expenses to average assets,
excluding special SAIF assessment 1.23 0.92 1.12 0.87
Efficiency ratio (3) 145.33 60.09 106.66 65.84
Efficiency ratio, excluding special SAIF
assessment (3) 145.33 60.09 106.66 52.81
Non-performing assets to total assets 0.16 0.23 0.16 0.23
Loan loss reserves to non-performing loans 70.53 63.20 70.53 63.20
</TABLE>
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(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 in 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.
<PAGE>
Interest Income. Interest income increased by $174,000 or 2.1% during
the three months ended March 31, 1998, as compared to the same period in the
prior year. This increase was primarily due to a $665,000 increase in interest
income from the loan portfolio which was partially offset by a $156,000 decrease
in interest income from the Company's investment portfolio, a $179,000 increase
in net interest expense on interest rate contracts maintained in the trading
portfolio and a $201,000 decrease in interest income from deposits. The increase
in interest income on the loan portfolio was a direct result of the $38.8
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. The decrease in
interest income from the Company's investment portfolio was a result of the 76
basis point decline in the interest yield earned which was partially offset by
the
-7-
<PAGE>
$26.2 million increase in the level of the average investment portfolio. The
decline in the basis points on 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. Maturities and new interest rate contract agreements were
primarily the cause of the increase in net interest expense on interest rate
contracts maintained in the trading portfolio. The decrease in interest income
from deposits was a result of the change in regulatory liquidity requirements
which allowed an average of $15.9 million in funds to be invested in higher
yielding investment opportunities.
Interest income decreased by $1.3 million or 4.8% during the nine months
ended March 31, 1998, as compared to the same period in the prior year. This
decrease was primarily due to a $2.4 million decrease in interest income on the
Company's investment portfolio and a $526,000 increase in the net interest
expense on interest rate contracts maintained in the trading portfolio which was
partially offset by a $1.7 million increase in interest income from the loan
portfolio. The 63 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 $20.6 million. Maturities and new
interest rate contract agreements were primarily the cause of the increase in
net interest expense on interest rate contracts maintained in the trading
portfolio. The increase in interest income on the loan portfolio was a direct
result of the $32.2 million increase in the level of the average loan portfolio
which was partially offset by a 27 basis point decline in the interest yield
earned.
Interest Expense. Interest expense increased by $1.0 million during the
three months ended March 31, 1998, as compared to the same period in the prior
year. This increase was primarily due to a $56.0 million increase in the level
of average interest-bearing liabilities and a 20 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 $1.0 million during the nine months ended
March 31, 1998, as compared to the same period in the prior year. This increase
was primarily due to a $10.3 million increase in the level of average
interest-bearing liabilities and 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.
<PAGE>
Net Interest Income. Net interest income decreased by $852,000 or 43.3%
during the three months ended March 31, 1998, as compared to the same period in
the prior year. Net interest income decreased by $2.3 million or 36.9% during
the nine months ended March 31, 1998, as compared to the same period in the
prior year.
Provision for Loan Losses. No additional provision for loan losses was
made during the three and nine months ended March 31, 1998. Delinquencies and
loan write-offs continue to be low and the non-performing assets remain stable.
During the three and nine months ended March 31, 1997, the Company increased the
general allowance for loan losses by $93,000 in response to the substantial loan
growth.
-8-
<PAGE>
Other Income (Loss). Total other income (loss) amounted to $206,000 and
($422,000) during the three months and nine months ended March 31, 1998, as
compared to $657,000 and $546,000 during the respective periods in the prior
year. This income (loss) principally 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 months ended March 31, 1998, the Company recognized $2.2
million of realized gains on the sale of securities held for trading which were
partially offset by $2.1 million of unrealized losses on securities held for
trading (which includes interest rate contracts used for hedging purposes).
During the nine months ended March 31, 1998, the Company recognized $1.6 million
of unrealized losses on the sale of securities held for trading which were
partially offset by $931,000 of realized gains on the sale of securities held
for trading.
During the three and nine months ended March 31, 1997, the Company
recognized $6.0 million and $995,000 of realized gains on the sale of securities
held for trading which were partially offset by $5.4 million and $624,000 of
unrealized losses on securities and hedge contracts held for trading.
Other Expense. Total other expense amounted to $1.7 million and $4.5
million during the three and nine months ended March 31, 1998, as compared to
$1.2 million and $3.4 million during the respective periods in the prior year
before the one-time SAIF assessment. Total other expense amounted to $4.2
million during the nine months ended March 31, 1997 after the SAIF assessment of
$830,000. The increase in total other expense during the three and nine 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 four new branch offices in the
Indianapolis, Indiana area). The Company anticipates further increases in
expenses as a new commercial loan division is developed and two additional
branch locations are planned to be added.
Income Tax Provision. The Company received an income tax benefit of
$151,000 during the three months ended March 31, 1998, as compared to income tax
expense of $534,000 during the respective period in the prior year. During the
three months ended March 31, 1998, the Company's effective benefit rate amounted
to 38.5% as compared to an effective tax rate of 39.0% during same period in
fiscal year 1997.
The Company received an income tax benefit of $378,000 during the nine
months ended March 31, 1998, as compared to income tax expense of $988,000
during the respective period in the prior year. During the nine months ended
March 31, 1998, the Company's effective benefit rate amounted to 41.5% as
compared to an effective tax rate of 38.8% during same period in fiscal year
1997. The change in the effective tax/benefit rate was a result of higher levels
of permanent differences which resulted in lower taxable income.
-9-
<PAGE>
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 14.21% at March
31, 1998, as compared to 5.25% and 5.53% at June 30, 1997 and 1996,
respectively. At March 31, 1998, the Bank's average "liquid" assets totaled
approximately $72.3 million, which was $51.9 million in excess of the current
OTS minimum requirement.
At March 31, 1998, the Company's total approved originated loan
commitments outstanding amounted to $4.1 million, and the unused lines of credit
outstanding totaled $2.4 million. At the same date, commitments outstanding to
purchase investment securities and loans were $18.9 million and $10.2 million,
respectively. Certificates of deposit scheduled to mature in one year or less at
March 31, 1998 totaled $102.4 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 March 31, 1998, 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
Not applicable.
Item 5. Other Information
None.
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.
-12-
<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: May 8, 1998 By:/s/ Craig J. Cerny
------------------
Craig J. Cerny
President
Date: May 8, 1998 By:/s/ Catherine A. Habschmidt
---------------------------
Catherine A. Habschmidt
Chief Financial Officer and Treasurer
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<PERIOD-END> MAR-31-1998
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