UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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 February 6, 1997,
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 December 31, 1996
(unaudited) and June 30, 1996 1
Consolidated Statements of Income (unaudited) for the three
and six months ended December 31, 1996 and 1995. 2
Consolidated Statements of Cash Flows (unaudited) for the six
months ended December 31, 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 9
Item 6. Exhibits and Reports on Form 8-K 9
Signatures
HARRINGTON FINANCIAL GROUP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(Dollars in Thousands)
(Unaudited)
December 31, June 30,
1996 1996
------------ --------
ASSETS
Cash $ 983 $ 1,036
Interest-bearing deposits 7,819 16,107
------------- ---------
Total cash and cash equivalents 8,802 17,143
Securities held for trading -
at fair value (amortized cost
of $420,228 and $323,936) 425,297 324,221
Securities available for sale - at
fair value (amortized cost of
$1,403 and $2,062) 1,358 2,050
Loans receivable, net 80,592 65,925
Interest receivable, net 2,014 1,807
Premises and equipment, net 3,327 3,105
Federal Home Loan Bank of Indianapolis
stock 2,645 2,645
Income tax receivable 160 ---
Other 3,174 1,300
------- -------
Total assets $527,369 $418,196
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $131,954 $135,143
Securities sold under agreements
to repurchase 328,283 219,067
Federal Home Loan Bank advances 29,300 26,000
Interest payable 1,350 1,970
Note payable 10,729 8,998
Advance payments by borrowers for
taxes & insurance 389 392
Deferred income taxes, net 1,104 663
Accrued income taxes payable --- 115
Deferred compensation payable 104 119
Accrued expenses payable and other
liabilities 336 2,612
------- --------
Total liabilities 503,549 395,079
------- --------
Common stock 407 407
Additional paid-in-capital 15,623 15,623
Unrealized loss on securities
available for sale, net of tax (27) (8)
Retained earnings 7,817 7,095
------- --------
Total stockholders' equity 23,820 23,117
------- --------
Total liabilities and
stockholders' equity $527,369 $418,196
------- --------
------- --------
See notes to unaudited consolidated financial statements.
1
HARRINGTON FINANCIAL GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Income
(Dollars in Thousands Except Share Data)
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
------------------ -----------------
1996 1995 1996 1995
--------- -------- -------- --------
INTEREST INCOME
Securities held for trading $7,719 $4,465 $14,705 $9,142
Securities available for sale 33 47 74 102
Loans receivable 1,448 1,005 2,754 1,934
Dividends on Federal Home Loan
Bank stock 52 51 104 101
Deposits 319 204 578 388
Net interest expense on
interest rate contracts
maintained in the trading
portfolio (112) (5) (182) (114)
----- ----- ------ ------
Interest income 9,459 5,767 18,033 11,553
----- ----- ------ ------
INTEREST EXPENSE
Deposits 1,889 1,809 3,729 3,518
Federal Home Loan Bank
advances 414 409 825 876
Short-term borrowings 4,677 2,101 8,709 4,127
Long-term borrowings 239 237 450 475
----- ----- ------ -----
Interest expense 7,219 4,556 13,713 8,996
----- ----- ------ -----
NET INTEREST INCOME 2,240 1,211 4,320 2,557
PROVISION FOR LOAN LOSSES --- --- --- (1)
----- ----- ----- -----
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,240 1,211 4,320 2,558
----- ----- ----- -----
OTHER INCOME (LOSS)
Loss on sale of securities
held for trading (3,176) (3,335) (5,011) (2,621)
Unrealized gain on securities
held for trading 2,899 3,123 4,784 2,452
Other 58 60 116 114
----- ----- ----- -----
Total other income (loss) (219) (152) (111) (55)
----- ----- ----- -----
OTHER EXPENSE
Salaries and employee benefits 478 416 994 785
Premises and equipment expense 125 107 246 214
FDIC insurance premiums 63 67 137 140
Special SAIF assessment --- --- 830 ---
Marketing 17 35 37 95
Computer services 37 33 75 65
Consulting fees 69 57 139 114
Other 246 159 575 298
----- --- ----- -----
Total other expenses 1,035 874 3,033 1,711
----- --- ----- -----
INCOME BEFORE INCOME TAX
PROVISION 986 185 1,176 792
INCOME TAX PROVISION 385 54 454 249
---- --- ----- ---
NET INCOME $601 $131 $722 $543
----- ----- ----- -----
----- ----- ----- -----
NET INCOME PER SHARE $0.18 $0.07 $0.22 $0.28
----- ----- ----- -----
----- ----- ----- -----
See notes to unaudited consolidated financial statements.
2
HARRINGTON FINANCIAL GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
Six Months Ended
December 31,
---------------------
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $722 $ 543
Adjustments to reconcile net income
to net cash used in operating activities:
Provision (credit) for loan losses --- (1)
Depreciation 111 88
Premium and discount amortization
of securities, net 1,013 1,065
Amortization of premiums and discounts
on loans (8) (89)
Loss on sale of securities held
for trading 5,011 2,621
Unrealized gain on securities held
for trading (4,784) (2,452)
Deferred income tax provision 441 249
(Increase) decrease in interest
receivable (207) 161
Increase (decrease) in interest
payable (620) 248
Decrease in accrued income taxes (275) (1,100)
Purchases of securities held for
trading (447,268) (119,782)
Proceeds from maturities of
securities held for trading 14,647 10,833
Proceeds from sales of securities
held for trading 330,304 124,068
(Increase) decrease in other
assets (1,874) 1,464
Increase (decrease) in accrued
expenses and other liabilities (2,294) 262
------- ------
Net cash provided by (used in)
operating activities (105,081) 18,178
-------- ------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from maturities of
securities available for sale 674 232
Change in loans receivable, net (14,659) (18,844)
Purchases of premises and equipment (333) (561)
------- -------
Net cash used in investing activities (14,318) (19,173)
------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net decrease in deposits (3,189) (498)
Increase in securities sold under
agreements to repurchase 109,216 11,231
Proceeds from stock options exercised --- 165
Proceeds from Federal Home Loan
Bank advances 3,300 10,000
Proceeds from note payable 2,300 800
Principal repayments on Federal
Home Loan Bank advances --- (15,000)
Principal repayments on note payable (569) (479)
------ -------
Net cash provided by financing
activities 111,058 6,219
------- -------
NET INCREASE (DECREASE) IN CASH AND
EQUIVALENTS (8,341) 5,224
CASH AND CASH EQUIVALENTS
Beginning of period 17,143 5,705
------- ------
CASH AND CASH EQUIVALENTS
End of period $ 8,802 $ 10,929
------ -------
------ -------
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid for interest $13,040 $ 8,748
Cash paid for income taxes 100 1,100
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 presentation of results for the interim
periods.
The results of operations for the three and six months ended December 31,
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.
Reclassifications of certain prior period amounts have been made to conform
with the December 31, 1996 presentation.
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 December 31, 1996, the Company's total assets amounted to $527.4
million, as compared to $418.2 million at June 30, 1996. The $109.2 million
or 26.1% increase in total assets during the six months ended December 31,
1996 was primarily the result of an $101.1 million increase in securities
held for trading and a $14.7 million increase in net loans receivable which
was partially offset by an $8.3 million decrease in cash and cash
equivalents. 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. The increase
in the Company's assets from June 30, 1996 to December 31, 1996 was funded
primarily by a $109.2 million or 49.9% increase in securities sold under
agreements to repurchase. The $3.2 million decline in deposits was offset by
a $3.3 million increase in Federal Home Loan Bank advances.
At December 31, 1996, the Company's stockholders' equity amounted to
$23.8 million, as compared to $23.1 million at June 30, 1996. The 3.0%
increase in stockholders' equity was due to the $722,000 of net income
recognized during the six month period. At December 31, 1996, the Bank's
tangible and core capital amounted to $33.4 million or 6.3% of adjusted total
assets, which exceeded the minimum 1.5% and 3.0% requirements by $25.5
million and $17.6 million, respectively. Additionally, as of such date, the
Bank's risk-based capital totalled $33.5 million or 30.2% of total
risk-adjusted assets, which exceeded the minimum 8.0% requirement by $24.6
million.
Results of Operations
General. The Company reported earnings of $601,000 or $0.18 per share
and $722,000 or $0.22 per share during the three and six months ended
December 31, 1996, as compared to $131,000 or $0.07 per share and $543,000 or
$0.28 per share during the prior comparable periods. The $470,000 or 358.8%
increase in earnings during the three months ended December 31, 1996, as
compared to the same period in the prior year, was primarily due to a $1.0
million increase in net interest income which was partially offest by a
$65,000 increase in realized and unrealized net losses on securities held for
trading, a $161,000 increase in operating expenses and a $331,000 increase in
the Company's income tax provision. The $179,000 or 33.0% increase in
earnings during the six months ended December 31, 1996, as compared to the
same period in the prior year, was primarily due to a $1.8 million increase
in net interest income which was partially offest by a $58,000 increase in
realized and unrealized net losses on securities held for trading, a $1.3
million increase in operating expenses (of which $830,000 related to the
special assessment to recapitalize the Savings Association Insurance Fund
(SAIF)) and a $205,000 increase in the Company's income tax provision.
5
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 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, has
recapitalized 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 earnings for the six months
ended December 31, 1996, 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, were reduced to $0.0648 for
every $100 of assessable deposits beginning on January 1, 1997. Given this
expectation, the Bank will save approximately $136,000 per year on SAIF
assessments, net of taxes.
Net Interest Income. Net interest income increased by $1.0 million or
85.0% during the three months ended December 31, 1996, as compared to the
same period in the prior year. This increase was primarily due to a $230.8
million increase in the level of average interest-earning assets. Net
interest income increased by $1.8 million or 68.9% during the six months
ended December 31, 1996 as compared to the same period in the prior year.
The increase was primarily due to a $209.3 million increase in the level of
average interest-earning assets which was partially offset by a 12 basis
point decline in the Company's interest spread (from 1.63% to 1.51%). This
decline was primarily due to the Bank investing the capital raised in the
Company's May 1996 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 (Loss). Total other income (loss) amounted to ($219,000)
and ($111,000) during the three months and six months ended December 31,
1996, as compared to ($152,000) and ($55,000) 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 and six months ended December 31, 1996, the Company
recognized $3.2 million and $5.0 million of realized losses on the sale of
securities held for trading which were partially offest by $2.9 million and
$4.8 million of unrealized gains on securities held for trading (which
includes interest rate contracts used for hedging purposes). During the
three and six months ended December 31, 1995, the Company recognized $3.3
million and $2.6 million of realized losses on the sale of securities held
for trading which were partially offest by $3.1 million and $2.5 million of
unrealized gains on securities held for trading.
6
Other Expense. Total other expense amounted to $1.0 million and $3.0
million during the three and six months ended December 31, 1996, as compared
to $874,000 and $1.7 million during the respective periods in the prior year.
The increase in total other expense during the three and six month periods
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). In addition to
increases in expenses primarily to retail growth, total other expense for the
six months ended December 31, 1996 included the special SAIF assessment of
$830,000 which accounts for 62.8% of the increase in expenses from the
comparative six month period in 1995.
Income Tax Provision. The Company incurred income tax expense of
$385,000 and $454,000 during the three and six months ended December 31,
1996, as compared to $54,000 and $249,000 during the respective periods in
the prior year. The Company's effective tax rate amounted to 39.0% and 38.6%
during the three and six months ended December 31, 1996, as compared to 29.2%
and 31.4% during the respective periods in the prior year.
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 5.09% at December 31, 1996, as
compared to 5.53% and 5.36% at June 30, 1996 and 1995, respectively. At
December 31, 1996, the Bank's average "liquid" assets totalled approximately
$25.6 million, which was $488,000 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
a) An annual meeting of stockholders ("Annual Meeting") was held on
October 23, 1996.
b) Not applicable.
c) Two matters were voted upon at the Annual Meeting. The
stockholders approved matters brought before the Annual Meeting.
The matters voted upon together with the applicable voting results
were as follows:
1) Proposal to elect directors for a three-year term expiring in
1999 - Craig J. Cerny, William F. Quinn and Stanley J. Kon
each received votes for 3,056,929; withheld 35,600; not voted
164,209.
2) Proposal to ratify the appointment by the Board of Directors
of Deloitte & Touche LLP as the Company's independent
auditors for the fiscal year ending June 30, 1997 - votes
for 3,091,079; against 400; abstain 1,050; not voted 164,209.
d) Not applicable.
Item 5. Other Information
None.
8
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 herein by reference.
b) Exhibit 27: Financial Data Schedule
c) No Form 8-K reports were filed during the quarter.
9
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARRINGTON FINANCIAL GROUP, INC.
Date: February 6, 1997 By: /s/ Craig J. Cerny
----------------------------
Craig J. Cerny
President
Date: February 6, 1997 By: /s/ Catherine A. Habschmidt
---------------------------
Catherine A. Habschmidt
Chief Financial Officer and
Treasurer