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, 1996
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 Promenade
Richmond, Indiana 47374
- -------------------------------------- ----------
(Address of principal executive office) (Zip Code)
(317) 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 7, 1996,
there were issued and outstanding 3,256,738 shares of the Registrant's Common
Stock, par value $.125 per share.
HARRINGTON FINANCIAL GROUP, INC. AND SUBSIDIARY
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1996
(unaudited) and June 30, 1996 1
Consolidated Statements of Income (unaudited) for the three
months ended September 30, 1996 and 1995. 2
Consolidated Statements of Cash Flows (unaudited) for the three
months ended September 30, 1996 and 1995. 3
Notes to Unaudited Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 5
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 8
Item 2. Changes in Securities 8
Item 3. Defaults Upon Senior Securities 8
Item 4. Submission of Matters to a Vote of Security-Holders 8
Item 5. Other Information 8
Item 6. Exhibits and Reports on Form 8-K 8
SIGNATURES
HARRINGTON FINANCIAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
September 30, June 30,
1996 1996
---- ----
ASSETS
Cash $1,003 $1,036
Interest-bearing deposits 10,269 16,107
-------- --------
Total cash and cash equivalents 11,272 17,143
Securities held for trading - at market value
(amortized cost of $441,143 and $323,936) 443,313 324,221
Securities available for sale - at market value
(amortized cost of $1,445 and $2,062) 1,420 2,050
Loans receivable, net 69,287 65,925
Interest receivable, net 2,206 1,807
Premises and equipment, net 3,057 3,105
Federal Home Loan Bank of Indianapolis stock 2,645 2,645
Other 1,376 1,300
-------- --------
Total assets $534,576 $418,196
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $131,248 $135,143
Securities sold under agreements to repurchase 337,681 219,067
Federal Home Loan Bank advances 26,000 26,000
Interest payable 1,810 1,970
Note payable 10,199 8,998
Advance payments by borrowers for taxes & insurance 555 392
Deferred income taxes, net 727 663
Accrued income taxes payable 15 115
Deferred compensation payable 111 119
Accrued expenses payable and other liabilities 3,000 2,612
------- -------
Total liabilities 511,346 395,079
------- -------
Common stock 407 407
Additional paid-in-capital 15,623 15,623
Unrealized loss on securities available for sale (16) (8)
Retained earnings 7,216 7,095
------- -------
Total stockholders' equity 23,230 23,117
------- -------
Total liabilities and stockholders' equity $534,576 $418,196
======== ========
See notes to unaudited consolidated financial statements.
1
HARRINGTON FINANCIAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands)
(Unaudited)
Three Months Ended
September 30,
------------------
1996 1995
---- ----
INTEREST INCOME
Securities held for trading $6,993 $4,677
Securities available for sale 34 55
Loans receivable 1,306 929
Dividends on Federal Home Loan Bank stock 52 50
Deposits 259 184
Net interest expense on interest rate contracts
maintained in the trading portfolio (70) (109)
------ ------
Interest income 8,574 5,786
------ ------
INTEREST EXPENSE
Deposits 1,840 1,709
Federal Home Loan Bank advances 411 467
Short-term borrowings 4,032 2,026
Long-term borrowings 211 238
------ ------
Interest expense 6,494 4,440
------ ------
NET INTEREST INCOME 2,080 1,346
PROVISION FOR LOAN LOSSES -- (1)
------ ------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 2,080 1,347
------ ------
OTHER INCOME
Gain (loss) on sale of securities held for trading (1,835) 714
Unrealized gain (loss) on securities held for trading 1,885 (671)
Other 58 54
------ ------
Total other income 108 97
------ ------
OTHER EXPENSE
Salaries and employee benefits 454 323
Premises and equipment expense 121 107
FDIC insurance premiums 74 73
Special SAIF assessment 830 --
Marketing 20 60
Computer services 38 32
Consulting fees 70 57
Other 391 185
------ ------
Total other expenses 1,998 837
------ ------
INCOME BEFORE INCOME TAX PROVISION 190 607
INCOME TAX PROVISION 69 195
------ ------
NET INCOME $121 $412
====== ======
NET INCOME PER SHARE $0.04 $0.21
====== ======
See notes to unaudited consolidated financial statements.
2
HARRINGTON FINANCIAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Three Months Ended
September 30,
-------------------
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $121 $412
Adjustments to reconcile net income to net cash used
in operating activities:
Provision (credit) for loan losses -- (1)
Depreciation 55 44
Premium and discount amortization of securities, net 420 660
Amortization of premiums and discounts on loans 2 (33)
(Gain) loss on sale of securities held for trading 1,835 (714)
Unrealized (gain) loss on securities held for trading (1,885) 671
Deferred income tax provision 64 (30)
(Increase) decrease in interest receivable (399) 60
Increase (decrease) in interest payable (160) 615
Decrease in accrued income taxes (100) (55)
Purchases of securities held for trading (275,086) (68,494)
Proceeds from maturities of securities held for trading 7,838 5,531
Proceeds from sales of securities held for trading 147,786 59,717
(Increase) decrease in other assets (76) 1,449
Increase in accrued expenses and other liabilities 543 7
--------- -------
Net cash used in operating activities (119,042) (161)
--------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available for sale 622 116
Change in loans receivable, net (3,364) (9,109)
Purchases of premises and equipment (7) (172)
-------- -------
Net cash used in investing activities (2,749) (9,165)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits (3,895) 3,671
Increase in securities sold under agreements to repurchase 118,614 11,560
Proceeds from stock options exercised -- 75
Proceeds from note payable 1,500 800
Principal repayments on note payable (299) (239)
-------- -------
Net cash provided by financing activities 115,920 15,867
-------- -------
Net increase (decrease) in cash and equivalents (5,871) 6,541
Cash and cash equivalents
Beginning of period 17,143 5,705
-------- --------
Cash and cash equivalents
End of period $11,272 $12,246
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest $6,305 $5,067
Cash paid for income taxes 100 250
See notes to unaudited consolidated financial statements.
3
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
two branch locations in Hamilton County, 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 statement of results for the
interim periods.
The results of operations for the three months ended September 30, 1996
are not necessarily indicative of the results to be expected for the year
ending June 30, 1997. 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, 1996.
Note 3 - RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards (FAS) 121,
"ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS OR FOR LONG-LIVED
ASSETS TO BE DISPOSED OF," effective July 1, 1996. The adoption of
FAS 121 had no effect on the financial position or results of operations
of the Company.
The Company adopted FAS 122, "ACCOUNTING FOR MORTGAGE SERVICING RIGHTS,"
effective July 1, 1996. Due to the fact that the Company currently does
not originate loans for sale, the adoption of FAS 122 has not had an
effect on the financial position or results of operations of the Company.
The Company adopted FAS 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION,"
effective July 1, 1996. The Company has elected to continue to account
for stock-based transactions under Accounting Principles Board Opinion
No. 25 "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES" but will disclose in
the notes to the financial statements the pro forma effects of the new
method of accounting under FAS 123.
4
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
At September 30, 1996, the Company's total assets amounted to $534.6
million, as compared to $418.2 million at June 30, 1996. The $116.4 million
or 27.8% increase in total assets during the three months ended September 30,
1996 was primarily the result of a $119.1 million increase in securities held
for trading and a $3.4 million increase in loans receivable, which was
partially offset by a $5.9 million decrease in cash and interest-bearing
deposits. The increase in securities held for trading was a result of
further utilization of the capital raised in the Company's May 1996 initial
public offering (IPO). 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 to individuals
residing in eastern and central Indiana. The increase in the Company's
assets from June 30, 1996 to September 30, 1996 was funded primarily by a
$118.6 million or 54.1% increase in securities sold under agreements to
repurchase.
At September 30, 1996, the Company's stockholder's equity amounted to
$23.2 million, as compared to $23.1 million at June 30, 1996. The .5%
increase in stockholders' equity was due to the $121,000 of net income
recognized during the quarter, which reflects the one-time special federal
insurance premium assessment described below. At September 30, 1996, the
Bank's tangible and core capital amounted to $31.8 million or 6.0% of
adjusted total assets, which exceeded the minimum 1.5% and 3.0% requirements
by $23.8 million and $15.8 million, respectively. Additionally, as of such
date, the Bank's risk-based capital totalled $32.0 million or 32.5% of total
risk-adjusted assets, which exceeded the minimum 8.0% requirement by $24.1
million.
RESULTS OF OPERATIONS
GENERAL. The Company reported earnings of $644,000 or $0.20 per share
during the three months ended September 30, 1996 before the special
assessment to recapitalize the Savings Association Insurance Fund (SAIF).
Net income for the quarter ended September 30, 1995 was $412,000 or $0.21 per
share. The $232,000 or 56.3% increase in earnings, before the effect of the
one-time SAIF assessment, as compared to the same period in the prior year,
was primarily due to a $734,000 increase in net interest income and a $7,000
increase in realized and unrealized net gains on securities held for trading
which was partially offset by a $330,000 increase in operating expenses and a
$182,000 increase in the Company's income tax provision.
The Bank's deposits are insured by the SAIF, which is statutorily
required to be recapitalized to a ratio of 1.25% of insured deposits. The
Bank Insurance Fund (BIF) met its required capitalization levels in 1995 and,
as a result, most BIF insured banks have been paying
5
significantly lower premiums than SAIF insured institutions. The legislation
enacted by the U.S. Congress, which was signed by the President on September
30, 1996, will recapitalize the SAIF by a one-time charge of $0.657 for each
$100 of assessable deposits held at March 31, 1995. Although this resulted
in expense of $830,000 recognized in the Company's September 1996 quarter
earnings, future earnings will be enhanced due to lower insurance premiums.
The Bank's insurance premiums, which have amounted to $0.23 for every $100 of
assessable deposits, are expected to be reduced to $0.064 for every $100 of
assessable deposits beginning January 1, 1997. Given this expectation, the
Bank will save approximately $136,000 per year on SAIF assessments, net of
taxes. After taking into consideration the one-time SAIF assessment, the
Company earned $121,000 or $0.04 per share during the three months ended
September 30, 1996.
NET INTEREST INCOME. Net interest income increased by $734,000 or 54.5%
during the three months ended September 30, 1996, as compared to the same
period in the prior year. This increase was primarily due to a $187.7
million increase in the level of average interest-earning assets. The
increase in net interest income caused by asset growth was partially offset
by a 21 basis point decline in the Company's interest rate spread (from 1.71%
to 1.50%) from the three months ended September 30, 1995 to September 30,
1996. This decline was primarily due to the Bank investing the capital
raised in the Company's IPO in mortgage-backed and related securities, which
earn somewhat lower option-adjusted spreads than the mortgage loans in the
Company's portfolio. These purchases were funded primarily through reverse
repurchase agreements.
OTHER INCOME. Total other income amounted to $108,000 during the three
months ended September 30, 1996, as compared to $97,000 during the comparable
quarter in the prior year. This income principally represents the net
mark-to-market value gain or loss (realized or unrealized) on securities held
for trading, offset by the net mark-to-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 an overall gain with respect to its securities
portfolio through the use of option-adjusted pricing analysis. The Company
utilizes such analysis to select securities with wider spreads for purchase
and to select securities to sell for a gain as spreads tighten (net of the
gain or loss recognized with respect to related interest rate contracts).
During the three months ended September 30, 1996, the Company
recognized $1.9 million of unrealized gains on securities held for trading
(which includes interest rate contracts used for hedging purposes) which was
offset by $1.8 million of realized losses on the sale of securities held for
trading. During the three months ended September 30, 1995, the Company
recognized $714,000 of gains on the sale of securities held for trading,
which was partially offset by $671,000 of unrealized losses on securities
held for trading.
6
OTHER EXPENSE. Total other expense amounted to $2.0 million during the
three months ended September 30, 1996, as compared to $837,000 during the
same quarter in the prior year. The most significant increase in total other
expense during the three month period reflected the special SAIF assessment
of $830,000 which accounts for 71.5% of the increase in expenses from the
comparative quarter in 1995. The increase in total other expense during the
three month period also reflected increases in salaries and other operating
expenses, which were primarily the result of the Company's retail growth
(including the opening of a new branch office in Fishers, Indiana in December
1995). Although total other expense as a percentage of average total assets
amounted to 1.61% during the three months ended September 30, 1996, compared
to 1.06% during the corresponding quarter in the prior year, excluding the
impact of the special SAIF assessment, total other expense as a percentage of
average total assets actually decreased to .94% for the quarter ended
September 30, 1996.
INCOME TAX PROVISION. The Company incurred income tax expense of $69,000
during the three months ended September 30, 1996, as compared to $195,000
during the comparable quarter in the prior year. The Company's effective tax
rate amounted to 36.3% and 32.1% during the three months ended September 30,
1996 and 1995, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Bank is required under applicable federal regulations to maintain
specified levels of "liquid" investments in qualifying types of U.S.
Government and government agency obligations and other similar investments
having maturities of five years or less. Such investments are intended to
provide a source of relatively liquid funds upon which the Bank may rely if
necessary to fund deposit withdrawals and for other short-term funding needs.
The required level of such liquid investments is currently 5% of certain
liabilities as defined by the Office of Thrift Supervision ("OTS").
The regulatory liquidity of the Bank was 5.10% at September 30, 1996, as
compared to 5.53% and 5.36% at June 30, 1996 and 1995, respectively. At
September 30, 1996, the Bank's "liquid" assets totalled approximately $23.1
million, which was $480,000 in excess of the current OTS minimum requirement.
The Company manages its liquidity so as to maintain a minimum regulatory
ratio of 5%. However, as a result of the Company's active portfolio
management, the Bank's regulatory liquidity can be expected to fluctuate from
a minimum of 5% to approximately 6%, based upon investment alternatives
available and market conditions. In addition, the Company also calculates
the amount of cash which could be raised in one, seven or thirty days, either
by selling unpledged assets or by borrowing against them. The ratio of this
amount of liquidity to total deposits generally ranges from over 50% to 90%
or more for one- and thirty-day time frames, respectively. The Company
believes that it has adequate resources to fund ongoing commitments such as
deposit account withdrawals and loan commitments.
7
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 11: Statement of Computation of Per Share Earnings.
The copy of this exhibit, filed as Exhibit 11 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1996, is
incorporated by herein by reference.
b) Exhibit 27: Financial Data Schedule
c) No Form 8-K reports were filed during the quarter.
8
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 7, 1996 By: /s/ Craig J. Cerny
-------------------------------
Craig J. Cerny
President
Date: November 7, 1996 By: /s/ Catherine A. Habschmidt
-------------------------------
Catherine A. Habschmidt
Chief Financial Officer and
Treasurer