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 September 30, 2000
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.
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(Exact name of registrant as specified in its charter)
Indiana 48-1050267
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
722 East Main
Richmond, Indiana 47374
----------------------------------------- -------------
(Address of principal executive office) (Zip Code)
(765) 962-8531
---------------
(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 November 10,
2000, there were issued and outstanding 3,129,670 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 Statements of Condition as of September 30, 2000
(unaudited) and June 30, 2000 1
Consolidated Statements of Operations (unaudited) for the three
months ended September 30, 2000 and 1999 2
Consolidated Statements of Cash Flows (unaudited) for the three
months ended September 30, 2000 and 1999 3
Notes to Unaudited Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Part II. Other Information
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security-Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures
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HARRINGTON FINANCIAL GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Condition (Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
September 30, June 30,
2000 2000
----------------- ------------------
<S> <C> <C>
Assets:
Cash $ 1,822 $ 2,314
Interest-bearing deposits 8,968 22,007
----------------- ------------------
Total cash and cash equivalents 10,790 24,321
Securities held for trading - at fair value (amortized cost of
$28,281 and $55,288) 27,595 53,852
Securities available for sale - at fair value (amortized cost of
$80,734 and $64,495) 80,882 64,052
Securities held to maturity - at amortized cost 33 3,857
Loans receivable, net 289,390 270,970
Interest receivable, net 2,716 2,186
Premises and equipment, net 5,396 5,828
Federal Home Loan Bank of Indianapolis stock 4,878 4,878
Other 1,719 5,248
----------------- ------------------
Total Assets $ 423,399 $ 435,192
================= ==================
Liabilities & Stockholders' Equity:
Deposits $ 316,885 $ 361,241
Securities sold under agreements to repurchase 31,964 28,038
Federal Home Loan Bank advances 37,000 7,000
Interest payable on securities sold under agreements to repurchase 117 5
Other interest payable 2,497 2,360
Note payable 12,995 12,995
Advance payments by borrowers for taxes and insurance 1,150 746
Accrued expenses payable and other liabilities 586 5,705
----------------- ------------------
Total Liabilities 403,194 418,090
----------------- ------------------
Minority interest 820 845
----------------- ------------------
Common stock 425 425
Additional paid-in-capital 16,909 16,946
Treasury stock, 240,018 and 249,306 shares at cost (2,395) (2,488)
Retained earnings 2,483 1,642
Accumulated other comprehensive income (loss), net of taxes 1,963 (268)
----------------- ------------------
Total Stockholders' Equity 19,385 16,257
----------------- ------------------
Total Liabilities & Stockholders' Equity $ 423,399 $ 435,192
================= ==================
</TABLE>
See notes to unaudited consolidated financial statements.
1
<PAGE>
HARRINGTON FINANCIAL GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Operations (Unaudited)
(Dollars in Thousands Except Share Data)
<TABLE>
<CAPTION>
Three Months Ended
September 30
-----------------------------------
2000 1999
----------------- -----------------
<S> <C> <C>
Interest Income:
Securities held for trading $ 704 $ 3,257
Securities available for sale 1,774 11
Securities held to maturity 2 5
Loans receivable 5,649 4,740
Dividends on Federal Home Loan Bank stock 104 98
Deposits 159 172
Net interest expense on interest rate contracts maintained in the
trading portfolio (19) (96)
----------------- -----------------
Total interest income 8,373 8,187
----------------- -----------------
Interest Expense:
Deposits 4,650 4,198
Federal Home Loan Bank advances 253 754
Short-term borrowings 878 961
Long-term borrowings 324 291
----------------- -----------------
Total interest expense 6,105 6,204
----------------- -----------------
Net Interest Income 2,268 1,983
Provision for loan losses 185 117
----------------- -----------------
Net interest income after provision for loan losses 2,083 1,866
----------------- -----------------
Other Income (Loss):
Gain (loss) on sale of securities held for trading 776 (1,050)
Unrealized gain (loss) on securities held for trading 750 (992)
Unrealized gain (loss) on deposit hedges (201) -
Gain on branch sale 1,424 -
Other 239 140
----------------- -----------------
Total other income (loss) 2,988 (1,902)
----------------- -----------------
Other Expense:
Salaries and employee benefits 1,228 1,355
Premises and equipment expense 376 393
FDIC insurance premiums 18 47
Marketing 48 102
Computer services 162 142
Consulting fees 67 73
Other 318 409
----------------- -----------------
Total other expenses 2,217 2,521
----------------- -----------------
Income (loss) before tax provision & minority interest in
Harrington Wealth Management Company (HWM) 2,854 (2,557)
Income tax provision (benefit) 1,114 (997)
----------------- -----------------
Net income (loss) before minority interest in HWM 1,740 (1,560)
Minority interest in HWM 25 29
----------------- -----------------
Net income (loss) before cumulative effect of accounting change 1,765 (1,531)
Cumulative effect of adoption of SFAS 133, less
applicable income tax benefit of $530. (829) -
----------------- -----------------
Net Income (loss) $ 936 $ (1,531)
================= =================
Basic Earnings (Loss) Per Share of Common Stock:
Income (loss) before cumulative effect $ 0.56 $ (0.48)
Cumulative effect (0.26) -
----------------- -----------------
Net income (loss) $ 0.30 $ (0.48)
================= =================
Diluted Earnings (Loss) Per Share of Common Stock:
Income (loss) before cumulative effect $ 0.56 $ (0.48)
Cumulative effect (0.26) -
----------------- -----------------
Net income (loss) $ 0.30 $ (0.48)
================= =================
</TABLE>
See notes to unaudited consolidated financial statements.
2
<PAGE>
HARRINGTON FINANCIAL GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months Ended
September 30
------------------------------------
2000 1999
----------------- ------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 936 $ (1,531)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Provision for loan losses 185 117
Depreciation 189 192
Premium and discount amortization of securities, net (3) 687
Loss (gain) on sale of securities held for trading (776) 1,050
Unrealized loss (gain) on securities held for trading (750) 992
Effect of minority interest (25) -
Purchases of securities held for trading - (179,682)
Proceeds for maturities of securities held for trading 1,784 5,730
Proceeds from sale of securities held for trading 25,967 159,455
Proceeds from sale of fixed assets at sold branches 255 -
Net increase (decrease) in other assets and liabilities 201 230
----------------- ------------------
Net cash provided by (used in) operating activities 27,963 (12,760)
----------------- ------------------
Cash Flows from Investing Activities:
Purchases of securities held to maturity - (1,662)
Purchases of securities available for sale (52,322) (980)
Proceeds from maturities of securities held to maturity 2 -
Proceeds from maturities of securities available for sale 3,844 (5)
Proceeds from sale of securities available for sale 36,095 -
Change in loans receivable, net (18,632) (6,240)
Minority interest - 29
Purchases of premises and equipment (12) (62)
----------------- ------------------
Net cash provided by (used in) investing activities (31,025) (8,920)
----------------- ------------------
Cash Flows from Financing Activities:
Net increase (decrease) in deposits (44,356) 9,587
Increase (decrease) in securities sold under agreements to repurchase 3,926 17,547
Proceeds from Federal Home Loan Bank advances 90,000 -
Principal repayments on Federal Home Loan Bank advances (60,000) -
Proceeds from note payable - 500
Proceeds from issuance of treasury stock 56 -
Dividends paid on common stock (95) (96)
----------------- ------------------
Net cash provided by (used in) financing activities (10,469) 27,538
----------------- ------------------
Net Increase (Decrease) in Cash and Cash Equivalents (13,531) 5,858
Beginning of period 24,321 9,501
----------------- ------------------
End of period $ 10,790 $ 15,359
================= ==================
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 6,061 $ 6,372
Cash paid for income taxes $ 5 $ 4
</TABLE>
See notes to unaudited consolidated financial statements.
3
<PAGE>
HARRINGTON FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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1. BUSINESS OF THE COMPANY
Harrington Financial Group, Inc. (the "Company") is an
Indiana-chartered, registered thrift 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 seven full-service
banking offices, five of which were opened since December 1997. The
Company is a community-focused financial institution with three
distinct banking units in Indiana, Kansas, and North Carolina. The
Company's business includes the gathering of deposits, the origination
of mortgage related and consumer loans, and the operation of a
commercial loan division for business customers. It also owns a 51%
interest in Harrington Wealth Management Company ("HWM"), which
provides trust, investment management, and custody services for
individuals and institutions (see Note 2). The Company manages a
hedged mortgage investment portfolio to utilize excess capital until
it can be deployed in community banking assets.
Earnings per Share
The following is a reconciliation of the weighted average common
shares for the basic and diluted earnings per share computations in
accordance with Statement of Accounting Standards (SFAS) No. 128:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------------------
2000 1999
---------- ----------
<S> <C> <C>
Basic earnings per share:
Weighted average common shares 3,156,689 3,205,382
========== ==========
Diluted earnings per share:
Weighted average common shares 3,156,689 3,205,382
Dilutive effect of stock options (1) 1,991 -
---------- ----------
Weighted average common and incremental shares 3,158,680 3,205,382
========== ==========
</TABLE>
(1) No dilutive effect of stock options for the three months ended September
30, 1999 was used in the calculation as the effect of the stock options
was anti-dilutive.
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 months ended September 30,
2000 are not necessarily indicative of the results to be expected for
the year ending June 30, 2001. 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, 2000.
4
<PAGE>
In February 1999, the Company formed HWM. HWM is a strategic alliance
between the Bank (51% owner) and Los Padres Bank (49% owner), a
federally chartered savings bank located in California. HWM provides
trust and investment management services for individuals and
institutions. The accompanying unaudited consolidated balance sheets
include 100 percent of the assets and liabilities of HWM and the
ownership of Los Padres Bank is recorded as "Minority interest." The
results of operations for the three months ended September 30, 2000
and 1999 include 100 percent of the revenues and expenses of HWM, and
the ownership of Los Padres Bank is recorded as "Minority interest"
net of taxes.
Reclassifications of certain amounts in the fiscal year 2000
consolidated financial statements have been made to conform to the
fiscal year 2001 presentation.
3. COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, Comprehensive Income, effective July
1, 1998. It 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 be reported in that statement. All prior year financial
statements have been reclassified for comparative purposes.
The following is a summary of the Company's total comprehensive income
(loss) for the interim three-month periods ended September 30, 2000
and 1999 under SFAS No. 130:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------------
2000 1999
-------------- -------------
(Dollars in Thousands)
<S> <C> <C>
Net income (loss) $ 936 $ (1,531)
-------------- -------------
Other comprehensive income, net of tax:
Unrealized holding gains (losses) arising during period (241) 4
FAS 133 transition adjustment net of income tax 3,837 -
Add: reclassification adjustment for losses
realized in net income 112 -
Less: reclassification to earnings from OCI in
accordance with SFAS 133 (1,477) -
-------------- -------------
Other comprehensive income 2,231 4
-------------- -------------
Comprehensive income (loss) $ 3,167 $ (1,527)
============== =============
</TABLE>
4. RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards No.
133 "Accounting for Derivative Instruments and Hedging Activities"
(SFAS 133), on July 1, 2000. In accordance with the transition
provisions of SFAS 133, the Company recorded a cumulative-effect type
adjustment of $829,000 loss in earnings to recognize the difference
(attributable to the hedged risks) between the carrying values and the
fair values of related hedged assets and liabilities. Additionally,
the Company recorded a cumulative-effect type adjustment of $3.8
million, net of tax, in accumulated other comprehensive income (OCI)
to recognize the fair value of all derivatives that are designated as
cash-flow hedges.
The Company, upon its adoption of SFAS 133, reclassified $3.8 million
of held-to-maturity debt securities to the available-for-sale
classification. Such reclassifications were made so that those debt
securities would be eligible to be designated as hedged items in the
future as either fair-value or cash-flow hedges. This reclassification
resulted in a cumulative-effect type adjustment of $11,000, net of
tax,
5
<PAGE>
loss in OCI. Under the provisions of SFAS 133, such a reclassification
does not call into question the Company's intent to hold current or
future debt securities to their maturity.
The Company, using proceeds from the sale of $40.0 million of GNMA
adjustable rate mortgage securities, extinguished $40.5 million of
securities sold under agreements to repurchase and $11.8 million of
certificates of deposit. As a result of the extinguishment of
short-term liabilities, the hedged transactions were deemed by
management to no longer be probable of occurring. In accordance with
SFAS 133, the Company reclassified $1.5 million from OCI to earnings.
Accounting for Derivatives and Hedging Activities
The Company utilizes derivative financial instruments as part of an
overall interest rate risk management strategy.
The Company is exposed to interest rate risk relating to the variable
cash flows of certain deposit liabilities attributable to changes in
market interest rates. As part of its overall strategy to manage the
level of exposure to the risk of interest rates adversely affecting
net interest income the Company uses interest rate swap agreements
that have offsetting characteristics from the hedged deposit
liabilities. These derivatives are designated and qualify as cash flow
hedges.
On the date the Company enters into a derivative contract, management
designates the derivative as a hedge of the identified cash flow
exposure or as a "no hedging" derivative. If a derivative does not
qualify in a hedging relationship, the derivative is recorded at fair
value and changes in its fair value are reported currently in
earnings.
The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk-management objective
and strategy for undertaking various hedge transactions. In this
documentation, the Company specifically identifies the asset,
liability, firm commitment, or forecasted transaction that has been
designated as a hedged item and states how the hedging instrument is
expected to hedge the risks related to the hedged item. The Company
formally measures effectiveness of its hedging relationships both at
the hedge inception and on an ongoing basis in accordance with its
risk management policy.
The Company will discontinue hedge accounting prospectively if it is
determined that the derivative is no longer effective in offsetting
changes in the fair value or cash flows of a hedged item; when the
derivative expires or is sold, terminated, or exercised; when the
derivative is dedesignated as a hedge instrument, because it is
probable that the forecasted transaction will not occur; or management
determines that designation of the derivative as a hedge instrument is
no longer appropriate.
6
<PAGE>
When hedge accounting is discontinued because it is probable that a
forecasted transaction will not occur, the derivative will continue to
be carried on the balance sheet at its fair value, and gains and
losses that were accumulated in OCI will be recognized immediately in
earnings. When the hedged forecasted transaction is no longer
probable, but is reasonably possible, the accumulated gain or loss
remains in OCI and will be recognized when the transaction affects
earnings; however, prospective hedge accounting for this transaction
is terminated. In all other situations in which hedge accounting is
discontinued, the derivative will be carried at its fair value on the
balance sheet, with changes in its fair value recognized in
current-period earnings.
The Company designates certain derivatives as cash flow hedges. For
all qualifying and highly effective cash flow hedges, the changes in
the fair value of the derivative are recorded in OCI.
5. BRANCH SALE
On September 8, 2000, the Company sold deposits and certain assets of
two branch banking locations. The Company sold $43.5 million of
deposits, $0.4 million of office properties and equipment and paid
approximately $41.7 million. The sale resulted in a pre-tax gain of
approximately $1.4 million.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition
At September 30, 2000, the Company's total assets amounted to $423.4 million, as
compared to $435.2 million at June 30, 2000. The $11.8 million or 2.7% decrease
in total assets during the three months ended September 30, 2000 was primarily
the result of a $26.3 million decrease in securities held for trading and a
$13.5 million decrease in cash and cash equivalents which were partially offset
with a $16.8 million increase in securities available for sale and an $18.4
million increase in net loans receivable. The decrease in securities held for
trading is a result of the Company's reduction in the overall size of its
investment portfolio to allow for growth of loans and to reduce earnings
volatility from mark to market accounting. This decrease was partially offset by
the increase in the securities available for sale. The increase in net loans
receivable primarily reflected the Company's increase in the origination of
business loans through its commercial division. The Company sold deposits of two
branch banking locations totaling $43.5 million on September 8, 2000. This
decrease was partially offset by a $30.0 million increase in Federal Home Loan
Bank advances.
Minority interest decreased by $25,000 from June 30, 2000 to $820,000 at
September 30, 2000. The financial statements as of and for the three month
periods ended September 30, 2000 and 1999 include all of the assets,
liabilities, and results of operations for HWM. The minority interest represents
the portion of the assets, liabilities, and results of operations attributable
to the ownership interest of Los Padres Bank.
At September 30, 2000, the Company's stockholders' equity amounted to $19.4
million, as compared to $16.3 million at June 30, 2000. The 19.0% increase in
stockholders' equity was primarily due to net income of $936,000 recognized
during the three-month period and the cumulative-effect type adjustment of $3.8
million, net of tax, in accumulated other comprehensive income to recognize the
fair value of all derivatives that are designated as cash flow hedges. These
increases were partially offset by cash dividends paid of $95,000. At September
30, 2000, the Bank's Tier 1 core capital amounted to $29.7 million or 7.1% of
adjusted total assets, which exceeded the minimum 4.0% requirement by $12.9
million. Additionally, as of such date, the Bank's risk-based capital totaled
$31.3 million or 11.8% of total risk-adjusted assets, which exceeded the minimum
8.0% requirement by $10.0 million.
Results of Operations
General. The Company reported income of $936,000 or $0.30 per share during the
three months ended September 30, 2000, as compared to losses of $1.5 million or
$(0.48) per share during the prior comparable period. The $2.4 million increase
in earnings during the three months ended September 30, 2000, as compared to the
same period in the prior year, was primarily due to a $3.6 million increase in
realized and unrealized net gains on securities held for trading, a $1.4 million
gain on the sale of deposits and certain assets of two branch banking locations,
a $304,000 decrease in operating expenses, and a $217,000 increase in net
interest income after provision for loan losses. These increases were partially
offset by an increase in the Company's income tax provision of $2.1 million and
an $829,000 loss, net of tax, to recognize the difference (attributable to the
hedged risks) between the carrying values and the fair values of related hedged
assets and liabilities.
Selected Financial Ratios. The following schedule shows selected financial
ratios for the three months ended September 30, 2000 and 1999.
8
<PAGE>
At or for the
Three Months Ended
September 30,
------------------------
2000 1999
------------ -----------
Return on average assets 0.83% (1.24)%
Return on average equity 19.83% (34.67)%
Interest rate spread (1) 1.96% 1.51%
Net interest margin (2) 2.08% 1.63%
Operating expenses to average assets 1.96% 2.04%
Efficiency ratio (3) 95.48% 125.66%
Non-performing assets to total assets 0.16% 0.16%
Loan loss reserves to non-performing loans 515.01% 328.73%
(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.
Interest Income. Interest income increased by $186,000 or 2.3% during the three
months ended September 30, 2000, as compared to the same period in the prior
year. This increase was primarily due to a $909,000 increase in interest income
from the Company's loan portfolio, which was partially offset by a $716,000
decrease in interest income from the investment portfolio. The decrease in
interest income from the Company's investment portfolio was a result of a $60.1
million decrease in the level of the average investment portfolio which was
partially offset by a 103 basis point increase in the interest yield earned. The
Company substantially reduced the investment portfolio to allow for the growth
of loans and to reduce earnings volatility from mark-to-market accounting. The
increase in interest income on the loan portfolio was a direct result of the
$21.0 million increase in the level of the average loan portfolio in addition to
an 82 basis point increase in the interest yield earned. The net increase in the
average balance and interest yield earned on the Company's loan portfolio is
primarily due to the origination of commercial loans.
Interest Expense. Interest expense decreased by $99,000 during the three months
ended September 30, 2000, as compared to the same period in the prior year. This
decrease was primarily due to a $44.9 million decrease in the level of average
interest-bearing liabilities which was partially offset by a 50 basis point
increase in the cost of interest-bearing deposits.
Net Interest Income. Net interest income increased by $285,000 or 14.4% during
the three months ended September 30, 2000, as compared to the same period in the
prior year. The net interest margin, defined as net interest income divided by
average interest-earning assets, for the three months ended September 30, 2000
was 2.08%, as compared to 1.63% for the three months ended September 30, 1999.
Provision for Loan Losses. During the three months ended September 30, 2000, the
Company increased the general allowance for loan losses by $185,000 in response
to the continued commercial loan growth. Delinquencies and loan write-offs
continue to be minimal, and the non-performing assets remain stable. During the
three months ended September 30, 1999, the Company increased the general
allowance for loan losses by $117,000 in response to loan growth.
Other Income (Loss). Total other income (loss) amounted to $3.0 million during
the three months ended September 30, 2000, as compared to $(1.9) million during
the respective period in the prior year. Other 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 fair
value of its securities portfolio with the change in the fair value of the
interest rate risk management contracts and mortgage-backed derivative
securities utilized by the Company to hedge its interest rate exposure. In
9
<PAGE>
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 September 30, 2000, the Company recognized $1.1
million of realized gains on the sale of securities held for trading, $296,000
of realized losses on futures instruments and $750,000 of unrealized gains on
securities and hedges held for trading. The Company also recognized a gain of
$1.4 million resulting from the sale of deposits and certain assets of two
branch banking locations on September 8, 2000.
During the three months ended September 30, 1999, the Company recognized
$814,000 of realized losses on the sale of securities held for trading, $236,000
of realized losses on futures instruments, and $992,000 of unrealized losses on
securities and hedges held for trading.
Other Expense. Total other expense amounted to $2.2 million during the three
months ended September 30, 2000, as compared to $2.5 million during the
respective period in the prior year. The decrease in total other expense was due
to decreases in salaries, premises and equipment expense, marketing expense, and
other operating expenses, which were primarily the result of the Company's
efforts to streamline the senior management organization and increase operating
efficiency in the March 2000 quarter. As a result of this realignment, the Chief
Operating Officer position, two mortgage loan operations positions, and a
marketing staff position were eliminated. These changes, along with the sale of
the two southern Indiana branches, contributed to the decrease in operating
expenses.
Income Tax Provision (Benefit). The Company recorded an income tax provision of
$1.1 million during the three months ended September 30, 2000, as compared to a
benefit of $1.0 million during the respective period in the prior year. The
Company's effective tax rate amounted to 39.0% for the three months ended
September 30, 2000 and 1999.
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 20.0% at September 30,
2000, as compared to 24.4% at June 30, 2000. At September 30, 2000, the Bank's
average "liquid" assets totaled approximately $79.4 million, which was $63.5
million in excess of the current OTS minimum requirement.
At September 30, 2000, the Company's total approved originated loan commitments
outstanding amounted to $12.0 million, and the unused lines of credit
outstanding totaled $22.6 million. Certificates of deposit scheduled to mature
in one year or less at September 30, 2000 totaled $148.0 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.
"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
10
<PAGE>
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.
Segment Information
The Company's principal business lines include community banking in the Indiana,
Kansas and North Carolina markets, investment activities including treasury
management, HWM (see Notes 1 and 2) and other activities including the
unconsolidated holding company functions. For the three months ended September
30, 1999, the other category also includes start-up costs for the North Carolina
bank, which opened in July of 1999. The community banking segment provides a
full range of deposit products as well as mortgage, consumer and commercial
loans in its designated markets. The investment segment is comprised of the
Company's held for trading, available for sale and held to maturity securities,
as well as the treasury management function. A standard investment return is
allocated to each of the Community Banking segments based on whether the segment
is a funds provider (excess deposits relative to loans) or user (excess loans
relative to deposits). If the segment generates excess funds, then it is
assigned an investment return on those excess funds of one month LIBOR. If the
banking segment is a funds user, those funds are provided from the Investments
segment at one month LIBOR. The overall profitability of the Investment and
Community Banking segments is therefore affected by this funds transfer
methodology. The financial information for each operating segment is reported on
the basis used internally by the Company's management to evaluate performance
and allocate resources.
The measurement of the performance of the operating segments is based on the
management and corporate structure of the Company and is not necessarily
comparable with similar information for any other financial institution. The
information presented is also not necessarily indicative of the segments' asset
size and results of operations if they were independent entities.
11
<PAGE>
Harrington Financial Group, Inc. and Subsidiary
Community Banking
Three Months Ended September 30, 2000 (Dollars in Thousands)
<TABLE>
<CAPTION>
North
Indiana Kansas Carolina Investments HWM Other Total
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income (expense) (1) $ 1,222 $ 592 $ 228 $ 386 $ 13 $ (173) $ 2,268
Provision for loan losses 85 74 26 -- -- -- 185
--------- --------- --------- --------- --------- --------- ---------
Net interest income (expense) after provision
for loan losses 1,137 518 202 386 13 (173) 2,083
Other operating income 147 25 4 11 18 34 239
Depreciation expense 74 15 15 1 1 83 189
Other operating expense 1,052 298 238 207 45 188 2,028
--------- --------- --------- --------- --------- --------- ---------
Core banking income (loss) before taxes 158 230 (47) 189 (15) (410) 105
Realized and unrealized gain (loss) on securities,
net of hedging -- -- -- 1,325 -- -- 1,325
Other gains (losses) 5 1 -- 10 (6) 1,414 1,424
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes 163 231 (47) 1,524 (21) 1,004 2,854
Applicable income taxes 65 92 (19) 599 (8) 385 1,114
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) before minority interest 98 139 (28) 925 (13) 619 1,740
Minority interest, net of taxes -- -- -- -- -- 25 25
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) before FAS 133
transition adjustment 98 139 (28) 925 (13) 644 1,765
FAS 133 transition adjustment, net of
income tax benefits -- -- -- (829) -- -- (829)
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) $ 98 $ 139 $ (28) $ 96 $ (13) $ 644 $ 936
========= ========= ========= ========= ========= ========= =========
Identifiable assets $ 133,618 $ 57,977 $ 21,703 $ 122,966 $ 1,727 $ 85,408 $ 423,399
========= ========= ========= ========= ========= ========= =========
</TABLE>
(1) Interest income is presented net of interest expense.
12
<PAGE>
Harrington Financial Group, Inc. and Subsidiary
Community Banking
Three Months Ended September 30, 1999 (Dollars in Thousands)
<TABLE>
<CAPTION>
Indiana Kansas Investments Other Total
<S> <C> <C> <C> <C> <C>
Net interest income (expense) (1) $ 878 $ (31) $ 1,432 $ (296) $ 1,983
Provision for loan losses 45 53 -- 19 117
--------- --------- --------- --------- ---------
Net interest income (expense) after provision
for loan losses 833 (84) 1,432 (315) 1,866
Other operating income 112 8 1 19 140
Depreciation expense 133 23 12 25 193
Other operating expense 1,269 352 213 494 2,328
--------- --------- --------- --------- ---------
Core banking income (loss) before taxes (457) (451) 1,208 (815) (515)
Realized and unrealized gain (loss) on securities,
net of hedging -- -- (2,048) 6 (2,042)
--------- --------- --------- --------- ---------
Income (loss) before income taxes (457) (451) (840) (809) (2,557)
Applicable income taxes (178) (175) (327) (317) (997)
--------- --------- --------- --------- ---------
Net income (loss) before minority interest (279) (276) (513) (492) (1,560)
Minority interest, net of taxes -- -- -- 29 29
--------- --------- --------- --------- ---------
Net income (loss) $ (279) $ (276) $ (513) $ (463) $ (1,531)
========= ========= ========= ========= =========
Identifiable assets $ 220,555 $ 47,180 $ 217,884 $ 12,603 $ 498,222
========= ========= ========= ========= =========
</TABLE>
(1) Interest income is presented net of interest expense.
13
<PAGE>
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 300 basis
points either up or down in 100 basis point increments. MVPE is defined as the
net present value (NPV) of an institution's existing assets, liabilities and
off-balance sheet instruments. A post shock MVPE to market value of assets (NPV)
ratio can then be calculated in each interest rate scenario. 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 that vary, in accordance with historical experience,
based upon the term, interest rate and other factors with respect to the
underlying loans.
The following table sets forth at September 30, 2000, the
estimated sensitivity of the Bank's MVPE and NPV ratios to parallel yield curve
shifts using the Company's internal market value calculation. The Company
actively manages the interest rate risk of the balance sheet and investment
portfolio by dynamically rebalancing the hedges on a frequent basis. This
rebalancing is undertaken to further reduce the interest rate risk for large
rate changes. Since the following analysis is based on instantaneous changes in
rates, the benefits of the dynamic rebalancing process on interest rate risk
reduction are, therefore, not reflected in this analysis.
The table set forth below does not purport to show the impact of
interest rate changes on the Company's equity under generally accepted
accounting principles. Market value changes only impact the Company's income
statement or the balance sheet (1) to the extent the affected instruments are
marked to market and (2) over the life of the instruments as an impact on
recorded yields.
Change in Interest Rates
(In Basis Points)(1)
(Dollars in Thousands)
<TABLE>
<CAPTION>
-300 -200 -100 - +100 +200 +300
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Market value gain (loss) of assets $ 18,268 $ 14,188 $ 8,060 -- $ (9,677) $(20,272) $(31,065)
Market value gain (loss) of liabilities (7,988) (5,598) (2,970) -- 3,467 7,465 11,748
-------- -------- -------- --- -------- -------- --------
Market value gain (loss) of net
assets before interest rate contracts 10,280 8,590 5,090 -- (6,210) (12,807) (19,317)
Pre-tax market value gain (loss) of
interest rate contracts (12,287) (7,894) (3,806) -- 3,720 7,306 10,679
-------- -------- -------- --- -------- -------- --------
Total change in MVPE(2) (Model) $ (2,007) $ 696 $ 1,284 -- $ (2,490) $ (5,501) $ (8,638)
======== ======== ======== === ======== ======== ========
NPV post shock ratio 5.7% 6.4% 6.6% 6.5% 6.0% 5.5% 4.8%
======== ======== ======== === ======== ======== ========
Change in MVPE as a percent of:
MVPE (2) (Model) (7.5)% 2.6% 4.8% -- (9.3)% (20.5)% (32.2)%
Total assets of the Bank (0.5)% 0.2% 0.3% -- (0.6)% (1.3)% (2.0)%
Change in NPV post shock ratio (0.8)% (0.1)% 0.1% -- (0.5)% (1.0)% (1.7)%
</TABLE>
(1) Assumes an instantaneous parallel change in interest rates at all
maturities.
(2) Based on the Bank's pre-tax MVPE of $26.8 million at September 30, 2000.
14
<PAGE>
Since a portion of the Company's assets is recorded at market
value, the following table is included to show the estimated impact on the
Company's equity of instantaneous, parallel shifts in the yield curve, using the
methodology described above. The assets and interest rate contracts included in
the table below are only those which are either classified by the Company as
held for trading or available for sale and, therefore, reflected at fair value.
Consequently, the Company's liabilities, which are reflected at cost, are not
included in the table below. All amounts are shown net of taxes, with an
estimated effective tax rate of 39.0%.
Change in Interest Rates
(In Basis Points)
(Dollars in Thousands)
<TABLE>
<CAPTION>
-300 -200 -100 - +100 +200 +300
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
After tax market value gain (loss)
of assets $ 6,170 $ 3,842 $ 1,813 - $(1,868) $(3,924) $(6,107)
After tax market value gain (loss)
of interest rate contracts (4,709) (3,040) (1,473) - 1,390 2,703 3,947
------- ------- ------- - ------- ------- -------
After tax gain (loss) equity (Model) 1,461 802 340 - (478) (1,221) (2,160)
======= ======= ======= = ======= ======= =======
After tax gain (loss) in equity as a
percent of the Company's equity
at September 30, 2000 7.5 % 4.1 % 1.8 % - (2.5)% (6.3)% (11.1)%
</TABLE>
15
<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
None
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.
16
<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: November 13, 2000 By: /s/ Craig J. Cerny
-------------------------------------
Craig J. Cerny
President and Chief Executive Officer
Date: November 13, 2000 By: /s/ John E. Fleener
-------------------------------------
John E. Fleener
Chief Financial Officer
