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, 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 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)
(Registrant's telephone number, including area code) (765) 962-8531
--------------
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 7,
2001, there were issued and outstanding 3,129,670 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 ----
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Item 1. Financial Statements
Consolidated Statements of Condition as of December 31, 2000
(unaudited) and June 30, 2000 1
Consolidated Statements of Operations (unaudited) for the three and six
months ended December 31, 2000 and 1999 2
Consolidated Statements of Cash Flows (unaudited) for the six
months ended December 31, 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 17
Part II. Other Information
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Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security-Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures
HARRINGTON FINANCIAL GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Condition (Unaudited)
(Dollars in Thousands)
December 31, June 30,
2000 2000
----------------- ------------------
Assets:
Cash $ 1,913 $ 2,314
Interest-bearing deposits 9,856 22,007
----------------- ------------------
Total cash and cash equivalents 11,769 24,321
Securities held for trading - at fair value (amortized cost of
$18,618 and $55,288) 18,403 53,852
Securities available for sale - at fair value (amortized cost of
$87,369 and $64,495) 89,505 64,052
Securities held to maturity - at amortized cost 31 3,857
Loans receivable, net 304,751 270,970
Interest receivable, net 2,944 2,186
Premises and equipment, net 5,239 5,828
Federal Home Loan Bank of Indianapolis stock 4,878 4,878
Other 3,118 5,248
----------------- ------------------
Total Assets $ 440,638 $ 435,192
================= ==================
Liabilities & Stockholders' Equity:
Deposits $ 320,240 $ 361,241
Securities sold under agreements to repurchase 61,491 28,038
Federal Home Loan Bank advances 15,000 7,000
Interest payable on securities sold under agreements to repurchase 196 5
Other interest payable 2,353 2,360
Note payable 12,995 12,995
Advance payments by borrowers for taxes and insurance 627 746
Accrued expenses payable and other liabilities 8,921 5,705
----------------- ------------------
Total Liabilities 421,823 418,090
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Minority interest 800 845
----------------- ------------------
Common stock 425 425
Additional paid-in-capital 16,909 16,946
Treasury stock, 270,268 and 249,306 shares at cost (2,586) (2,488)
Retained earnings 2,886 1,642
Accumulated other comprehensive income (loss), net of taxes 381 (268)
----------------- ------------------
Total Stockholders' Equity 18,015 16,257
----------------- ------------------
Total Liabilities & Stockholders' Equity $ 440,638 $ 435,192
================= ==================
See notes to unaudited consolidated financial statements.
1
HARRINGTON FINANCIAL GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Operations (Unaudited)
(Dollars in Thousands Except Share Data)
Three Months Ended Six Months Ended
December 31 December 31
----------------------------- --------------------------------
2000 1999 2000 1999
-------------- -------------- -------------- ----------------
Interest Income:
Securities held for trading $ 456 $ 3,033 $ 1,160 $ 6,290
Securities available for sale 1,562 25 3,336 36
Securities held to maturity 1 32 3 37
Loans receivable 6,121 5,023 11,770 9,763
Dividends on Federal Home Loan Bank stock 104 99 208 197
Deposits 140 201 299 373
Net interest expense on interest rate contracts
maintained in the trading portfolio (9) 40 (28) (56)
-------------- -------------- -------------- --------------
Total interest income 8,375 8,453 16,748 16,640
-------------- -------------- -------------- --------------
Interest Expense:
Deposits 4,498 4,466 9,148 8,664
Federal Home Loan Bank advances 305 352 558 1,106
Short-term borrowings 847 1,053 1,725 2,014
Long-term borrowings 320 323 644 614
-------------- -------------- -------------- --------------
Total interest expense 5,970 6,194 12,075 12,398
-------------- -------------- -------------- --------------
Net Interest Income 2,405 2,259 4,673 4,242
Provision for loan losses 105 197 290 314
-------------- -------------- -------------- --------------
Net interest income after provision for loan losses 2,300 2,062 4,383 3,928
-------------- -------------- -------------- --------------
Other Income (Loss):
Gain (loss) on sale of securities held for trading (379) (958) 397 (2,008)
Unrealized gain (loss) on securities held for trading 897 1,352 1,647 360
Unrealized gain (loss) on deposit hedges (77) - (278) -
Gain on branch sale (13) - 1,411 -
Other 218 196 457 336
-------------- -------------- -------------- --------------
Total other income (loss) 646 590 3,634 (1,312)
-------------- -------------- -------------- --------------
Other Expense:
Salaries and employee benefits 1,200 1,301 2,428 2,656
Premises and equipment expense 347 388 723 781
FDIC insurance premiums 19 49 37 96
Marketing 26 118 74 220
Computer services 152 160 314 302
Consulting fees 67 70 134 143
Other 361 417 679 826
-------------- -------------- -------------- --------------
Total other expenses 2,172 2,503 4,389 5,024
-------------- -------------- -------------- --------------
Income (loss) before tax provision & minority interest in
Harrington Wealth Management Company (HWM) 774 149 3,628 (2,408)
Income tax provision (benefit) 299 57 1,413 (940)
-------------- -------------- -------------- --------------
Net income (loss) before minority interest in HWM 475 92 2,215 (1,468)
Minority interest in HWM 22 20 47 49
-------------- -------------- -------------- --------------
Net income (loss) before cumulative effect of accounting change 497 112 2,262 (1,419)
Cumulative effect of adoption of SFAS 133, less
applicable income tax benefit of $530 - - (829) -
-------------- -------------- -------------- --------------
Net Income (loss) $ 497 $ 112 $ 1,433 $ (1,419)
============== ============== ============== ==============
Basic Earnings (Loss) Per Share of Common Stock:
Income (loss) before cumulative effect $ 0.16 $ 0.03 $ 0.72 $ (0.44)
Cumulative effect - - (0.26) -
-------------- -------------- -------------- --------------
Net income (loss) $ 0.16 $ 0.03 $ 0.46 $ (0.44)
============== ============== ============== ==============
Diluted Earnings (Loss) Per Share of Common Stock:
Income (loss) before cumulative effect $ 0.16 $ 0.03 $ 0.72 $ (0.44)
Cumulative effect - - (0.26) -
-------------- ---------------- -------------- --------------
Net income (loss) $ 0.16 $ 0.03 $ 0.46 $ (0.44)
============== ================ ============== ==============
See notes to unaudited consolidated financial statements.
2
HARRINGTON FINANCIAL GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in Thousands)
Six Months Ended
December 31
---------------------------------
2000 1999
---------------- ----------------
Cash Flows from Operating Activities:
Net income (loss) $ 1,433 $ (1,419)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for loan losses 290 314
Depreciation 365 384
Premium and discount amortization of securities, net (19) 1,068
Loss (gain) on sale of securities held for trading (397) 2,008
Unrealized loss (gain) on securities held for trading (1,647) (360)
Effect of minority interest (47) (49)
Purchases of securities held for trading - (290,894)
Proceeds for maturities of securities held for trading 2,725 8,340
Proceeds from sale of securities held for trading 34,291 346,467
Net increase (decrease) in other assets and liabilities 3,166 (560)
---------------- ----------------
Net cash provided by (used in) operating activities 40,160 65,299
---------------- ----------------
Cash Flows from Investing Activities:
Purchases of securities held to maturity - (1,662)
Purchases of securities available for sale (61,280) (980)
Proceeds from maturities of securities held to maturity 4 11
Proceeds from maturities of securities available for sale 6,200 127
Proceeds from sale of securities available for sale 36,095 -
Change in loans receivable, net (34,083) (17,080)
Minority interest - -
Purchases of premises and equipment (31) (90)
Proceeds from sale of fixed assets at sold branches 255 -
---------------- ----------------
Net cash provided by (used in) investing activities (52,840) (19,674)
---------------- ----------------
Cash Flows from Financing Activities:
Net increase (decrease) in deposits 2,523 28,833
Deposits sold as part of branch sale (43,524) -
Increase (decrease) in securities sold under agreements to repurchase 33,453 (31,378)
Proceeds from Federal Home Loan Bank advances 149,000 3,000
Principal repayments on Federal Home Loan Bank advances (141,000) (43,000)
Proceeds from note payable - 1,000
Purchase of treasury stock (191) -
Proceeds from issuance of treasury stock 56 -
Dividends paid on common stock (189) (192)
---------------- ----------------
Net cash provided by (used in) financing activities 128 (41,737)
---------------- ----------------
Net Increase (Decrease) in Cash and Cash Equivalents (12,552) 3,888
Beginning of period 24,321 9,501
---------------- ----------------
End of period $ 11,769 $ 13,389
================ ================
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 12,505 $ 12,132
Cash paid for income taxes $ 5 $ 6
See notes to unaudited consolidated financial statements.
3
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:
Three Months Ended Six Months Ended
December 31 December 31
------------------------ ------------------------
2000 1999 2000 1999
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Basic earnings per share:
Weighted average common shares 3,139,559 3,205,382 3,148,124 3,205,382
========= ========= ========= =========
Diluted earnings per share:
Weighted average common shares 3,139,559 3,205,382 3,148,124 3,205,382
Dilutive effect of stock options (1) 87 -- 1,086 --
--------- --------- --------- ---------
Weighted average common and incremental shares 3,139,646 3,205,382 3,149,210 3,205,382
========= ========= ========= =========
(1) No dilutive effect of stock options for the three and six months ended
December 31, 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 and six months ended December 31,
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
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
and six months ended December 31, 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- and six-month periods ended December 31,
2000 and 1999 under SFAS No. 130:
Three Months Ended Six Months Ended
December 31 December 31
--------------------- -----------------------
2000 1999 2000 1999
------- ------- ------ -----
(Dollars in Thousands) (Dollars in Thousands)
Net income (loss) $ 497 $ 112 $ 1,433 $(1,419)
------- ------- ------- -------
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on deposit related
hedges, investment securities and hedges arising
during period (1,583) (1) (1,824) 3
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 (1,583) (1) 648 3
------- ------- ------- -------
Comprehensive income (loss) $(1,086) $ 111 $ 2,081 $(1,416)
======= ======= ======= =======
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
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.
Statement of Financial Accounting Standards No. 140 ("SFAS 140"),
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," was issued September 2000 and provides
accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. SFAS 140 is effective
for transfers and servicing of financial assets and extinguishments of
liabilities after March 31, 2001. Also, it is effective for recognition
and reclassification of collateral and for disclosures relating to
securitization transactions and collateral for fiscal years ending after
December 15, 2000. Management has not yet quantified the effect, if any,
of this new standard on the consolidated financial statements.
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.
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.
6
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
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition
At December 31, 2000, the Company's total assets amounted to $440.6 million, as
compared to $435.2 million at June 30, 2000. The $5.4 million or 1.2% increase
in total assets during the six months ended December 31, 2000 was primarily the
result of a $33.8 million increase in net loans receivable and a $25.5 million
increase in securities available for sale, which were partially offset with a
$35.4 million decrease in securities held for trading, a $12.6 million decrease
in cash and cash equivalents, and a $3.8 million decrease in securities held to
maturity. 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. The increase in net loans receivable primarily reflected the
Company's increase in the origination of business loans through its commercial
and consumer divisions.
Minority interest decreased by $45,000 from June 30, 2000 to $800,000 at
December 31, 2000. The financial statements as of and for the three- and
six-month periods ended December 31, 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 December 31, 2000, the Company's stockholders' equity amounted to $18.0
million, as compared to $16.3 million at June 30, 2000. The 10.4% increase in
stockholders' equity was primarily due to net income of $1.4 million recognized
during the six-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 (see Note
4). These increases were partially offset by cash dividends paid of $189,000,
unrealized net gains of $1.2 million on investment securities available for sale
and unrealized net losses of $3.0 million on deposit hedges. At December 31,
2000, the Bank's Tier 1 core capital amounted to $29.1 million or 6.7% of
adjusted total assets, which exceeded the minimum 4.0% requirement by $11.6
million. Additionally, as of such date, the Bank's risk-based capital totaled
$30.8 million or 10.9% of total risk-adjusted assets, which exceeded the minimum
8.0% requirement by $8.2 million.
Results of Operations
General. The Company reported income of $497,000 or $0.16 per share and $1.4
million or $0.46 per share during the three and six months ended December 31,
2000, as compared to income of $112,000 or $0.03 per share and losses of $1.4
million or $0.44 per share during the prior comparable periods. The $385,000
increase in earnings during the three months ended December 31, 2000, as
compared to the same period in the prior year, was primarily due to a $238,000
increase in net interest income after provision for loan losses and a $331,000
decrease in operating expense, which were partially offset by a $242,000
increase in the Company's income tax provision. The $2.9 million increase in
earnings during the six months ended December 31, 2000, as compared to the same
period in the prior year, was primarily due to a $3.7 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 decrease in operating expense of $635,000, and a $455,000 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 $2.4 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 (see Note 4).
Selected Financial Ratios. The following schedule shows selected financial
ratios for the three and six months ended December 31, 2000 and 1999.
8
At or for the At or for the
Three Months Ended Six Months Ended
December 31 December 31
------------------------------ -----------------------------
2000 1999 2000 1999
-------------- -------------- -------------- --------------
Return on average assets 0.46 % 0.09 % 0.65 % (0.58)%
Return on average equity 10.49 % 2.58 % 15.14 % (16.18)%
Interest rate spread (1) 2.09 % 1.76 % 2.03 % 1.67 %
Net interest margin (2) 2.30 % 1.89 % 2.18 % 1.76 %
Operating expenses to average assets 2.02 % 2.05 % 1.99 % 2.05 %
Efficiency ratio (3) 82.73 % 110.85 % 85.51 % 117.83 %
Non-performing assets to total assets 0.18 % 0.15 % 0.18 % 0.15 %
Loan loss reserves to non-performing loans 381.67 % 515.33 % 381.67 % 515.33 %
(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 decreased by $78,000 or 0.9% during the three
months ended December 31, 2000, as compared to the same period in the prior
year. This decrease was primarily due to a $1.1 million decrease in interest
income from the investment portfolio and a $61,000 decrease in interest income
from interest-bearing deposits, which were partially offset by a $1.1 million
increase in interest income from the Company's loan portfolio. The decrease in
interest income from the Company's investment portfolio was the result of a
$76.2 million decrease in the level of the average investment portfolio, which
was partially offset by a 109 basis point increase in the interest yield earned.
The Company substantially reduced the investment portfolio to allow for the
growth of loans. The increase in interest income on the loan portfolio was a
direct result of the $27.0 million increase in the level of the average loan
portfolio in addition to an 86 basis point increase in the interest yield
earned. The decrease in interest income from interest-bearing deposits was the
result of a $6.6 million decrease in the level of the average deposits, which
was partially offset by an 85 basis point increase in the interest yield earned.
Interest income increased by $108,000 or 0.6% during the six months ended
December 31, 2000 as compared to the same period in the prior year. This
increase was primarily due to a $2.0 million increase in interest income from
the Company's loan portfolio, which was partially offset by a $1.8 million
decrease in interest income from the investment portfolio. The increase in
interest income on the loan portfolio was the direct result of the $24.0 million
increase in the average loan portfolio and the 75 basis point increase in the
interest yield earned. The decrease in the interest income from the investment
portfolio was the result of the $68.1 million decrease in the level of the
average investment portfolio, which was partially offset by the 67 basis point
increase in the interest yield earned.
Interest Expense. Interest expense decreased $224,000 or 3.6% during the three
months ended December 31, 2000, as compared to the same period in the prior
year. This decrease was due to the $62.6 million decrease in the level of
average interest-bearing liabilities, which was partially offset by a 65 basis
point increase in the cost of interest-bearing liabilities.
Interest expense decreased $323,000 or 2.6% during the six months ended December
31, 2000, as compared to the same period in the prior year. This decrease was
due to the $53.8 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 liabilities.
9
Net Interest Income. Net interest income increased by $146,000 or 6.5% during
the three months ended December 31, 2000, as compared to the same period in the
prior year. Net interest income increased by $431,000 or 10.2% during the six
months ended December 31, 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 and six months ended December 31, 2000
was 2.30% and 2.18%, as compared to 1.89% and 1.76% for the three and six months
ended December 31, 1999.
Provision for Loan Losses. During the three and six months ended December 31,
2000, the Company increased the general allowance for loan losses by $105,000
and $290,000, respectively, 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 and six months ended December 31, 1999,
the Company increased the general allowance for loan losses by $197,000 and
$314,000, respectively, in response to loan growth.
Other Income (Loss). Total other income (loss) amounted to $646,000 and $3.6
million during the three and six months ended December 31, 2000, as compared to
$590,000 and $(1.3) million during the respective periods 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 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 December 31, 2000, the Company recognized $351,000
of realized losses on the sale of securities held for trading, $28,000 of
realized losses on futures instruments, $897,000 of unrealized gains on
securities held for trading, and $77,000 of unrealized losses on deposit hedges.
During the six months ended December 31, 2000, the Company recognized $721,000
of realized gains on the sale of securities held for trading, $324,000 of
realized losses on futures instruments, $1.6 million of unrealized gains on
securities held for trading, and $278,000 of unrealized losses on deposit
hedges. 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 December 31, 1999, the Company recognized $3.5
million of realized losses on the sale of securities held for trading, $2.5
million of realized gains on futures instruments, and $1.4 million of unrealized
gains on securities and hedges held for trading. During the six months ended
December 31, 1999, the Company recognized $4.3 million of realized losses on the
sale of securities held for trading, $2.3 million of realized gains on futures
instruments and $360,000 of unrealized gains on securities and hedges held for
trading.
Other Expense. Total other expense amounted to $2.2 million and $4.4 million
during the three and six months ended December 31, 2000, as compared to $2.5
million and $5.0 million during the respective periods 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.
10
Income Tax Provision (Benefit). The Company recorded an income tax provision of
$299,000 during the three months ended December 31, 2000, as compared to $57,000
during the respective period in the prior year. For the six months ended
December 31, 2000, the Company recorded an income tax provision of $1.4 million
as compared to a benefit of $940,000 during the respective period in the prior
year. The Company's effective tax rate amounted to 38.6% and 38.9% for the three
and six months ended December 31, 2000, as compared to 38.3% and 39.0% during
the same periods in 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. Recent legislation has eliminated this
requirement.
The total eligible regulatory liquidity of the Bank was 13.2% at December 31,
2000, as compared to 24.4% and 16.7% at June 30, 2000 and 1999, respectively. At
December 31, 2000, the Bank's average "liquid" assets totaled approximately
$52.7 million, which was $36.8 million in excess of the current OTS minimum
requirement.
At December 31, 2000, the Company's total approved originated loan commitments
outstanding amounted to $5.0 million, and the unused lines of credit outstanding
totaled $26.6 million. Certificates of deposit scheduled to mature in one year
or less at December 31, 2000 totaled $166.7 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 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 mainly the
unconsolidated holding company functions. 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
11
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.
12
HARRINGTON FINANCIAL GROUP, INC. AND SUBSIDIARY
COMMUNITY BANKING
THREE MONTHS ENDED DECEMBER 31, 2000 (Dollars in Thousands)
- --------------------------------------------------------------------------------
North
Indiana Kansas Carolina Investments HWM Other Total
------- ------ -------- ----------- --- ----- -----
Net interest income (expense) (1) $ 1,749 $ 674 $ 331 $ 31 $ 39 $ (419) $ 2,405
Provision for loan losses 50 37 18 -- -- -- 105
--------- --------- --------- --------- --------- --------- ---------
Net interest income (expense) after provision
for loan losses 1,699 637 313 31 39 (419) 2,300
Other operating income 141 21 4 3 85 (36) 218
Depreciation expense 60 15 14 1 3 83 176
Other operating expense 1,173 305 245 211 226 (164) 1,996
--------- --------- --------- --------- --------- --------- ---------
CORE BANKING INCOME (LOSS) BEFORE TAXES 607 338 58 (178) (105) (374) 346
Realized and unrealized gain (loss) on securities,
net of hedging -- -- -- 441 -- -- 441
Other gains (losses) -- 2 -- 10 (30) 5 (13)
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes 607 340 58 273 (135) (369) 774
Applicable income taxes 243 136 23 105 (52) (156) 299
--------- --------- --------- --------- --------- --------- ---------
NET INCOME (LOSS) BEFORE MINORITY
INTEREST 364 204 35 168 (83) (213) 475
Minority interest, net of taxes -- -- -- -- -- 22 22
--------- --------- --------- --------- --------- --------- ---------
NET INCOME (LOSS) BEFORE FAS 133
TRANSITION ADJUSTMENT 364 204 35 168 (83) (191) 497
FAS 133 TRANSITION ADJUSTMENT,
NET OF INCOME TAX BENEFITS -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
NET INCOME (LOSS) $ 364 $ 204 $ 35 $ 168 $ (83) $ (191) $ 497
========= ========= ========= ========= ========= ========= =========
Identifiable assets $ 228,427 $ 59,749 $ 26,669 $ 119,817 $ 1,708 $ 4,268 $ 440,638
========= ========= ========= ========= ========= ========= =========
(1) Interest income is presented net of interest expense.
13
HARRINGTON FINANCIAL GROUP, INC. AND SUBSIDIARY
COMMUNITY BANKING
SIX MONTHS ENDED DECEMBER 31, 2000 (Dollars in Thousands)
- --------------------------------------------------------------------------------
North
Indiana Kansas Carolina Investments HWM Other Total
------- ------ -------- ----------- --- ----- -----
Net interest income (expense) (1) $ 2,971 $ 1,266 $ 559 $ 417 $ 52 $ (592) $ 4,673
Provision for loan losses 135 111 44 -- -- -- 290
--------- --------- --------- --------- --------- --------- ---------
Net interest income (expense) after provision
for loan losses 2,836 1,155 515 417 52 (592) 4,383
Other operating income 288 46 8 14 103 (2) 457
Depreciation expense 134 30 29 2 4 166 365
Other operating expense 2,225 603 483 418 271 24 4,024
--------- --------- --------- --------- --------- --------- ---------
CORE BANKING INCOME (LOSS) BEFORE TAXES 765 568 11 11 (120) (784) 451
Realized and unrealized gain (loss) on securities,
net of hedging -- -- -- 1,766 -- -- 1,766
Other gains (losses) 5 3 -- 20 (36) 1,419 1,411
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes 770 571 11 1,797 (156) 635 3,628
Applicable income taxes 308 228 4 704 (60) 229 1,413
--------- --------- --------- --------- --------- --------- ---------
NET INCOME (LOSS) BEFORE MINORITY
INTEREST 462 343 7 1,093 (96) 406 2,215
Minority interest, net of taxes -- -- -- -- -- 47 47
--------- --------- --------- --------- --------- --------- ---------
NET INCOME (LOSS) BEFORE FAS 133
TRANSITION ADJUSTMENT 462 343 7 1,093 (96) 453 2,262
FAS 133 TRANSITION ADJUSTMENT,
NET OF INCOME TAX BENEFITS -- -- -- (829) -- -- (829)
--------- --------- --------- --------- --------- --------- ---------
NET INCOME (LOSS) $ 462 $ 343 $ 7 $ 264 $ (96) $ 453 $ 1,433
========= ========= ========= ========= ========= ========= =========
Identifiable assets $ 228,427 $ 59,749 $ 26,669 $ 119,817 $ 1,708 $ 4,268 $ 440,638
========= ========= ========= ========= ========= ========= =========
(1) Interest income is presented net of interest expense.
14
HARRINGTON FINANCIAL GROUP, INC. AND SUBSIDIARY
COMMUNITY BANKING
THREE MONTHS ENDED DECEMBER 31, 1999 (Dollars in Thousands)
- --------------------------------------------------------------------------------
North
Indiana Kansas Carolina Investments Other Total
------- ------ -------- ----------- ----- -----
Net interest income (expense) (1) $ 1,310 $ 630 $ 52 $ 564 $ (297) $ 2,259
Provision for loan losses 58 126 13 -- -- 197
--------- --------- --------- --------- --------- ---------
Net interest income (expense) after provision
for loan losses 1,252 504 39 564 (297) 2,062
Other operating income 155 13 -- 2 26 196
Depreciation expense 135 23 20 13 3 194
Other operating expense 1,283 343 273 208 202 2,309
--------- --------- --------- --------- --------- ---------
CORE BANKING INCOME (LOSS) BEFORE TAXES (11) 151 (254) 345 (476) (245)
Realized and unrealized gain (loss) on securities,
net of hedging -- -- -- 391 3 394
--------- --------- --------- --------- --------- ---------
Income (loss) before income taxes (11) 151 (254) 736 (473) 149
Applicable income taxes (5) 59 (98) 287 (186) 57
--------- --------- --------- --------- --------- ---------
NET INCOME (LOSS) BEFORE MINORITY
INTEREST (6) 92 (156) 449 (287) 92
Minority interest, net of taxes -- -- -- -- 20 20
--------- --------- --------- --------- --------- ---------
NET INCOME (LOSS) $ (6) $ 92 $ (156) $ 449 $ (267) $ 112
========= ========= ========= ========= ========= =========
Identifiable assets $ 208,765 $ 53,220 $ 5,107 $ 136,212 $ 24,527 $ 427,831
========= ========= ========= ========= ========= =========
(1) Interest income is presented net of interest expense.
15
HARRINGTON FINANCIAL GROUP, INC. AND SUBSIDIARY
COMMUNITY BANKING
SIX MONTHS ENDED DECEMBER 31, 1999 (Dollars in thousands)
- --------------------------------------------------------------------------------
North
Indiana Kansas Carolina Investments Other Total
------- ------ -------- ----------- ----- -----
Net interest income (expense) (1) $ 2,460 $ 1,130 $ 53 $ 1,166 $ (567) $ 4,242
Provision for loan losses 103 179 32 -- -- 314
--------- --------- --------- --------- --------- ---------
Net interest income (expense) after provision
for loan losses 2,357 951 21 1,166 (567) 3,928
Other operating income 267 21 (1) 3 46 336
Depreciation expense 268 46 40 25 7 386
Other operating expense 2,555 691 511 421 460 4,638
--------- --------- --------- --------- --------- ---------
CORE BANKING INCOME (LOSS) BEFORE TAXES (199) 235 (531) 723 (988) (760)
Realized and unrealized gain (loss) on securities,
net of hedging -- -- -- (1,657) 9 (1,648)
--------- --------- --------- --------- --------- ---------
Income (loss) before income taxes (199) 235 (531) (934) (979) (2,408)
Applicable income taxes (78) 92 (206) (363) (385) (940)
--------- --------- --------- --------- --------- ---------
NET INCOME (LOSS) BEFORE MINORITY
INTEREST (121) 143 (325) (571) (594) (1,468)
Minority interest, net of taxes -- -- -- -- 49 49
--------- --------- --------- --------- --------- ---------
NET INCOME (LOSS) $ (121) $ 143 $ (325) $ (571) $ (545) $ (1,419)
========= ========= ========= ========= ========= =========
Identifiable assets $ 208,765 $ 53,220 $ 5,107 $ 136,212 $ 24,527 $ 427,831
========= ========= ========= ========= ========= =========
(1) Interest income is presented net of interest expense.
16
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 December 31, 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)
-300 -200 -100 - +100 +200 +300
-------- -------- --------- ------ -------- -------- --------
Market value gain (loss) of assets $ 21,089 $ 15,163 $ 8,611 -- $(10,291) $(21,684) $(33,762)
Market value gain (loss) of liabilities (6,465) (4,506) (2,383) -- 2,715 5,897 9,522
-------- -------- -------- --- -------- -------- --------
Market value gain (loss) of net
assets before interest rate contracts 14,624 10,657 6,228 -- (7,576) (15,787) (24,240)
Pre-tax market value gain (loss) of
interest rate contracts (17,708) (11,343) (5,460) -- 5,080 9,859 14,301
-------- -------- -------- --- -------- -------- --------
Total change in MVPE(2) (Model) $ (3,084) $ (686) $ 768 -- $ (2,496) $ (5,928) $ (9,939)
======== ======== ======== === ======== ======== ========
NPV post shock ratio 5.2% 5.8% 6.2% 6.1% 5.7% 5.0% 4.2%
======== ======== ======== === ======== ======== ========
Change in MVPE as a percent of:
MVPE(2) (Model) (11.5)% (2.6)% 2.9% 0.0% (9.3)% (22.1)% (37.1)%
Total assets of the Bank (0.7)% (0.2)% 0.2% 0.0% (0.6)% (1.4)% (2.3)%
Change in NPV post shock ratio (0.9)% (0.3)% 0.1% 0.0% (0.4)% (1.1)% (1.9)%
(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 December 31, 2000.
17
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 19, 2000.
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 one director for a three-year term
expiring in 2003 - Dr. Douglas T. Breeden received votes for
1,636,644; opposed 12,000; withheld 0; not voted 1,511,276.
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, 2001 - votes
for 1,648,644; opposed 0; abstain 0; not voted 1,511,276.
d) 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) No Form 8-K reports were filed during the quarter.
18
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 7, 2001 By: /s/ Craig J. Cerny
-------------------------------------
Craig J. Cerny
President and Chief Executive Officer
Date: February 7, 2001 By: /s/ John E. Fleener
-------------------------------------
John E. Fleener
Chief Financial Officer