UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
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)
(765) 962-8531
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: As of May 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
Item 1. Financial Statements
Consolidated Statements of Condition as of March 31, 2001
(unaudited) and June 30, 2000 1
Consolidated Statements of Operations (unaudited) for the three and nine
months ended March 31, 2001 and 2000 2
Consolidated Statements of Cash Flows (unaudited) for the nine
months ended March 31, 2001 and 2000 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 16
Part II. Other Information
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security-Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
HARRINGTON FINANCIAL GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Condition (Unaudited)
(Dollars in Thousands)
March 31 June 30
2001 2000
--------- ---------
Assets:
Cash $ 1,908 $ 2,314
Interest-bearing deposits 5,744 22,007
--------- ---------
Total cash and cash equivalents 7,652 24,321
Securities held for trading - at fair value (amortized cost of
$17,635 and $55,288) 17,450 53,852
Securities available for sale - at fair value (amortized cost of
$84,960 and $64,495) 88,512 64,052
Securities held to maturity - at amortized cost 29 3,857
Loans receivable, net 320,233 270,970
Interest receivable, net 2,835 2,186
Premises and equipment, net 5,106 5,828
Federal Home Loan Bank of Indianapolis stock 4,879 4,878
Other 2,950 5,248
--------- ---------
Total Assets $ 449,646 $ 435,192
========= =========
Liabilities & Stockholders' Equity:
Deposits $ 299,079 $ 361,241
Securities sold under agreements to repurchase 57,096 28,038
Federal Home Loan Bank advances 51,000 7,000
Interest payable on securities sold under agreements to repurchase 81 5
Other interest payable 2,589 2,360
Note payable 12,995 12,995
Advance payments by borrowers for taxes and insurance 1,199 746
Accrued expenses payable and other liabilities 7,156 5,705
--------- ---------
Total Liabilities 431,195 418,090
--------- ---------
Minority interest 783 845
--------- ---------
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 2,949 1,642
Accumulated other comprehensive income (loss), net of taxes (29) (268)
--------- ---------
Total Stockholders' Equity 17,668 16,257
--------- ---------
Total Liabilities & Stockholders' Equity $ 449,646 $ 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 Nine Months Ended
March 31 March 31
-----------------------------------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Interest Income:
Securities held for trading $ 648 $ 1,657 $ 1,808 $ 7,947
Securities available for sale 1,531 73 4,867 109
Securities held to maturity 1 60 4 97
Loans receivable 6,188 5,313 17,958 15,076
Dividends on Federal Home Loan Bank stock 97 97 305 294
Deposits 85 260 384 633
Net interest expense on interest rate contracts
maintained in the trading portfolio (9) (16) (37) (72)
-------- -------- -------- --------
Total interest income 8,541 7,444 25,289 24,084
-------- -------- -------- --------
Interest Expense:
Deposits 4,427 4,753 13,575 13,417
Federal Home Loan Bank advances 405 -- 963 1,106
Short-term borrowings 837 304 2,562 2,318
Long-term borrowings 285 330 929 944
-------- -------- -------- --------
Total interest expense 5,954 5,387 18,029 17,785
-------- -------- -------- --------
Net Interest Income 2,587 2,057 7,260 6,299
Provision for loan losses 336 164 626 478
-------- -------- -------- --------
Net interest income after provision for loan losses 2,251 1,893 6,634 5,821
-------- -------- -------- --------
Other Income (Loss):
Gain (loss) on sale of securities held for trading 1 (3,844) 398 (5,852)
Unrealized gain (loss) on securities held for trading 19 3,232 1,666 3,592
Unrealized gain (loss) on deposit hedges (151) -- (429) --
Gain on branch sale -- -- 1,411 --
Other 212 210 669 546
-------- -------- -------- --------
Total other income (loss) 81 (402) 3,715 (1,714)
-------- -------- -------- --------
Other Expense:
Salaries and employee benefits 1,140 1,282 3,568 3,938
Premises and equipment expense 345 388 1,068 1,169
FDIC insurance premiums 15 19 52 115
Marketing 19 87 93 307
Computer services 169 153 483 455
Consulting fees 67 67 201 210
Other 353 406 1,032 1,232
-------- -------- -------- --------
Total other expenses 2,108 2,402 6,497 7,426
-------- -------- -------- --------
Income (loss) before tax provision & minority interest in
Harrington Wealth Management Company (HWM) 224 (911) 3,852 (3,319)
Income tax provision (benefit) 85 (362) 1,498 (1,302)
-------- -------- -------- --------
Net income (loss) before minority interest in HWM 139 (549) 2,354 (2,017)
Minority interest in HWM 18 23 65 72
-------- -------- -------- --------
Net income (loss) before cumulative effect of accounting change 157 (526) 2,419 (1,945)
Cumulative effect of adoption of SFAS 133, less
applicable income tax benefit of $530 -- -- (829) --
-------- -------- -------- --------
Net Income (loss) $ 157 $ (526) $ 1,590 $ (1,945)
======== ======== ======== ========
Basic Earnings (Loss) Per Share of Common Stock:
Income (loss) before cumulative effect $ 0.05 $ (0.16) $ 0.77 $ (0.61)
Cumulative effect -- -- (0.26) --
-------- -------- -------- --------
Net income (loss) $ 0.05 $ (0.16) $ 0.51 $ (0.61)
======== ======== ======== ========
Diluted Earnings (Loss) Per Share of Common Stock:
Income (loss) before cumulative effect $ 0.05 $ (0.16) $ 0.76 $ (0.61)
Cumulative effect -- -- (0.26) --
-------- -------- -------- --------
Net income (loss) $ 0.05 $ (0.16) $ 0.50 $ (0.61)
======== ======== ======== ========
See notes to unaudited consolidated financial statements
2
HARRINGTON FINANCIAL GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in Thousands)
Nine Months Ended
March 31
----------------------------
2001 2000
--------- ---------
Cash Flows from Operating Activities:
Net income (loss) $ 1,590 $ (1,945)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for loan losses 626 478
Depreciation 532 579
Premium and discount amortization of securities, net (37) 1,170
Loss (gain) on sale of securities held for trading (398) 5,852
Unrealized loss (gain) on securities held for trading (1,666) (3,592)
Loss on disposal of fixed assets 1 8
Effect of minority interest (65) (72)
Purchases of securities held for trading -- (319,293)
Proceeds from maturities of securities held for trading 3,690 10,065
Proceeds from sale of securities held for trading 34,292 429,194
Increase (decrease) in amounts due brokers (4,597) 21,412
Net increase (decrease) in other assets and liabilities 5,158 440
--------- ---------
Net cash provided by operating activities 39,126 144,296
--------- ---------
Cash Flows from Investing Activities:
Purchases of securities held to maturity -- (4,011)
Purchases of securities available for sale (61,280) (59,991)
Proceeds from maturities of securities held to maturity 6 35
Proceeds from maturities of securities available for sale 8,645 167
Proceeds from sale of securities available for sale 36,095 --
Increase in loans receivable, net (49,928) (23,497)
Purchases of premises and equipment (81) (95)
Proceeds from sale of fixed assets at sold branches 255 --
Proceeds from sale of other fixed assets 15 --
--------- ---------
Net cash used in investing activities (66,273) (87,392)
--------- ---------
Cash Flows from Financing Activities:
Net increase (decrease) in deposits (18,638) 34,851
Deposits sold as part of branch sale (43,524) --
Increase (decrease) in securities sold under agreements to repurchase 29,058 (43,535)
Proceeds from Federal Home Loan Bank advances 209,000 3,000
Principal repayments on Federal Home Loan Bank advances (165,000) (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 (283) (288)
--------- ---------
Net cash provided by (used in) financing activities 10,478 (47,972)
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents (16,669) 8,932
Beginning of period 24,321 9,501
--------- ---------
End of period $ 7,652 $ 18,433
========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 18,279 $ 17,962
Cash paid for income taxes $ 88 $ 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 activities.
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 Nine Months Ended
March 31 March 31
---------------------------- ---------------------------
2001 2000 2001 2000
--------- --------- --------- --------
Basic earnings per share:
Weighted average common shares 3,129,670 3,205,382 3,142,062 3,205,382
========= ========= ========= =========
Diluted earnings per share:
Weighted average common shares 3,129,670 3,205,382 3,142,062 3,205,382
Dilutive effect of stock options (1) 10,513 -- 7,042 --
--------- --------- --------- ---------
Weighted average common and incremental shares 3,140,183 3,205,382 3,149,104 3,205,382
========= ========= ========= =========
(1) No dilutive effect of stock options for the three and nine months ended
March 31, 2000 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 nine months ended March 31,
2001 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 nine months ended March 31, 2001 and 2000 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 nine-month periods ended March 31, 2001
and 2000 under SFAS No. 130:
Three Months Ended Nine Months Ended
March 31 March 31
---------------------- ----------------------
2001 2000 2001 2000
------- ------- ------- -------
(Dollars in Thousands) (Dollars in Thousands)
Net income (loss) $ 157 $ (526) $ 1,590 $(1,945)
------- ------- ------- -------
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on deposit related
hedges, investment securities and hedges arising
during period (371) 17 (2,195) 20
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 (37) -- (1,514) --
------- ------- ------- -------
Other comprehensive income (408) 17 240 20
------- ------- ------- -------
Comprehensive income (loss) $ (251) $ (509) $ 1,830 $(1,925)
======= ======= ======= =======
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 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
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 adjustment of $11,000, net of tax, 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.
5
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 be
extinguished. 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 and borrowing 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.
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.
6
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, $0.3
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 March 31, 2001, the Company's total assets amounted to $449.6 million, as
compared to $435.2 million at June 30, 2000. The $14.4 million or 3.3% increase
in total assets during the nine months ended March 31, 2001 was primarily the
result of a $49.3 million increase in net loans receivable and a $24.5 million
increase in securities available for sale, which were partially offset by a
$36.4 million decrease in securities held for trading, a $16.7 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
division.
Minority interest decreased by $62,000 from June 30, 2000 to $783,000 at March
31, 2001. The financial statements as of and for the three- and nine-month
periods ended March 31, 2001 and 2000 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 March 31, 2001, the Company's stockholders' equity amounted to $17.7 million,
as compared to $16.3 million at June 30, 2000. The 8.6% increase in
stockholders' equity was primarily due to net income of $1.6 million recognized
during the nine-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 $283,000,
unrealized net gains of $2.0 million on investment securities available for
sale, unrealized net losses of $4.3 million on deposit hedges, and the
reclassification of OCI to earnings in accordance with FAS 133 of $1.5 million
which is included in the net income of $1.6 million noted above. At March 31,
2001, the Bank's Tier 1 core capital amounted to $28.9 million or 6.5% of
adjusted total assets, which exceeded the minimum 4.0% requirement by $11.0
million. Additionally, as of such date, the Bank's risk-based capital totaled
$30.9 million or 10.4% of total risk-adjusted assets, which exceeded the minimum
8.0% requirement by $7.1 million.
Results of Operations
General. The Company reported income of $157,000 or $0.05 per share and $1.6
million or $0.51 per share during the three and nine months ended March 31,
2001, as compared to losses of $526,000 or $0.16 per share and $1.9 million or
$0.61 per share during the prior comparable periods. The $683,000 increase in
earnings during the three months ended March 31, 2001, as compared to the same
period in the prior year, was primarily due to a $358,000 increase in net
interest income after provision for loan losses, a $481,000 increase in realized
and unrealized net gain on securities held for trading and deposit hedges, and a
$294,000 decrease in operating expense, which were partially offset by a
$447,000 increase in the Company's income tax provision. The $3.5 million
increase in earnings during the nine months ended March 31, 2001, as compared to
the same period in the prior year, was primarily due to a $3.9 million increase
in realized and unrealized net gains on securities held for trading and deposit
hedges, a $1.4 million gain on the sale of deposits and certain assets of two
branch banking locations, a decrease in operating expense of $929,000, and an
$813,000 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 $2.8 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 nine months ended March 31, 2001 and 2000.
8
At or for the At or for the
Three Months Ended Nine Months Ended
March 31 March 31
----------------------- ---------------------
2001 2000 2001 2000
------ ------ ------ ------
Return on average assets 0.14 % (0.50)% 0.48 % (0.55)%
Return on average equity 3.50 % (12.64)% 11.40 % (14.73)%
Interest rate spread (1) 2.15 % 1.92 % 2.07 % 1.75 %
Net interest margin (2) 2.40 % 2.02 % 2.26 % 1.84 %
Operating expenses to average assets 1.91 % 2.27 % 1.96 % 2.10 %
Efficiency ratio (3) 75.33 % 105.00 % 81.92 % 107.73 %
Non-performing assets to total assets 0.40 % 0.11 % 0.40 % 0.11 %
Loan loss reserves to non-performing loans 134.16 % 1806.85 % 134.16 % 1806.85 %
- ------------------
(1) Interest rate spread is the difference between interest income as a
percentage of interest-earning assets and interest expense as a percentage
of interest-bearing liabilities.
(2) Net interest margin is net interest income divided by average
interest-earning assets.
(3) The efficiency ratio is total other expense as a percentage of the net
interest income after provision for loan losses plus other income,
excluding gains and losses on securities held for trading.
Interest Income. Interest income increased by $1.1 million or 14.7% during the
three months ended March 31, 2001, as compared to the same period in the prior
year. This increase was primarily due to an $875,000 increase in interest income
from the Company's loan portfolio and a $390,000 increase in interest income
from the investment portfolio, which were partially offset by a $175,000
decrease in interest income from interest-bearing deposits. The increase in
interest income from the Company's loan portfolio was the result of the $30.9
million increase in the level of the average loan portfolio, which was partially
offset by a 7 basis point decrease in the interest yield earned. The increase in
interest income from the Company's investment portfolio was the result of a $3.2
million increase in the level of the average investment portfolio and a 128
basis point increase in the interest yield earned. The decrease in interest
income from interest-bearing deposits was the result of a $12.4 million decrease
in the level of the average deposits and a 25 basis point decrease in the
interest yield earned.
Interest income increased by $1.2 million or 5.0% during the nine months ended
March 31, 2001 as compared to the same period in the prior year. This increase
was primarily due to a $2.9 million increase in interest income from the
Company's loan portfolio, which was partially offset by a $1.5 million decrease
in interest income from the investment portfolio. The increase in interest
income on the loan portfolio was the direct result of the $26.2 million increase
in the average loan portfolio and the 64 basis point increase in the interest
yield earned. The decrease in the interest income from the investment portfolio
was the result of the $44.5 million decrease in the level of the average
investment portfolio, which was partially offset by the 88 basis point increase
in the interest yield earned. The Company substantially reduced the investment
portfolio to allow for the growth of loans.
Interest Expense. Interest expense increased $567,000 or 10.5% during the three
months ended March 31, 2001, as compared to the same period in the prior year.
This increase was due to the $11.0 million increase in the level of average
interest-bearing liabilities and a 52 basis point increase in the cost of
interest-bearing liabilities.
Interest expense increased $244,000 or 1.4% during the nine months ended March
31, 2001, as compared to the same period in the prior year. This increase was
due to a 49 basis point increase in the cost of interest-bearing liabilities
which was partially offset by a $32.3 million decrease in the level of average
interest-bearing liabilities.
9
Net Interest Income. Net interest income increased by $530,000 or 25.8% during
the three months ended March 31, 2001, as compared to the same period in the
prior year. Net interest income increased by $961,000 or 15.3% during the nine
months ended March 31, 2001, 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 nine months ended March 31, 2001 was
2.40% and 2.26%, as compared to 2.02% and 1.84% for the three and nine months
ended March 31, 2000.
Provision for Loan Losses. During the three and nine months ended March 31,
2001, the Company increased the general allowance for loan losses by $336,000
and $626,000, respectively, in response to the continued commercial loan growth.
Delinquencies and loan write-offs continue to be minimal, although the
non-performing assets did increase during the March 2001 quarter due to slowing
economic conditions. During the three and nine months ended March 31, 2000, the
Company increased the general allowance for loan losses by $164,000 and
$478,000, respectively, in response to loan growth.
Other Income (Loss). Total other income (loss) amounted to $81,000 and $3.7
million during the three and nine months ended March 31, 2001, as compared to
$(402,000) and $(1.7) 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 March 31, 2001, the Company recognized $1,000 of
realized gains on the sale of securities held for trading, $19,000 of unrealized
gains on securities held for trading, and $151,000 of unrealized losses on
deposit hedges. During the nine months ended March 31, 2001, the Company
recognized $722,000 of realized gains on the sale of securities held for
trading, $324,000 of realized losses on futures instruments, $1.7 million of
unrealized gains on securities held for trading, and $429,000 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 March 31, 2000, the Company recognized $4.4
million of realized losses on the sale of securities held for trading, $594,000
of realized gains on futures instruments, and $3.2 million of unrealized gains
on securities and hedges held for trading. During the nine months ended March
31, 2000, the Company recognized $8.7 million of realized losses on the sale of
securities held for trading, $2.9 million of realized gains on futures
instruments and $3.6 million of unrealized gains on securities and hedges held
for trading.
Other Expense. Total other expense amounted to $2.1 million and $6.5 million
during the three and nine months ended March 31, 2001, as compared to $2.4
million and $7.4 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. Furthermore, the
accrual for Employee Stock Ownership Plan (ESOP) and 401(k) contributions was
reduced $93,000 in the March 2001 quarter due to the build-up of the forfeiture
account that can be applied for 401(k) benefits.
10
Income Tax Provision (Benefit). The Company recorded an income tax provision of
$85,000 during the three months ended March 31, 2001, as compared to a benefit
of $362,000 during the respective period in the prior year. For the nine months
ended March 31, 2001, the Company recorded an income tax provision of $1.5
million as compared to a benefit of $1.3 million during the respective period in
the prior year. The Company's effective tax rate amounted to 37.9% and 38.9% for
the three and nine months ended March 31, 2001, as compared to 39.7% and 39.2%
during the same periods in 2000.
Liquidity
At March 31, 2001, the Bank's average "liquid" assets totaled approximately
$39.2 million. At March 31, 2001, the Company's total approved originated loan
commitments outstanding amounted to $2.8 million, and the unused lines of credit
outstanding totaled $29.2 million. Certificates of deposit scheduled to mature
in one year or less at March 31, 2001 totaled $151.6 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 by this funds transfer
methodology. The financial information for each operating segment is reported on
the basis used internally by the Company's management to evaluate performance
and allocate resources.
The measurement of the performance of the operating segments is based on the
management and corporate structure of the Company and is not necessarily
comparable with similar information for any other financial institution. The
information presented is also not necessarily indicative of the segments' asset
size and results of operations if they were independent entities.
11
HARRINGTON FINANCIAL GROUP, INC. AND SUBSIDIARY
COMMUNITY BANKING
THREE MONTHS ENDED MARCH 31, 2001 (Dollars in Thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
North
Indiana Kansas Carolina Investments HWM Other Total
Net interest income (expense) (1) $ 1,327 $ 504 $ 247 $ 820 $ 23 $ (334) $ 2,587
Provision for loan losses 168 (41) 209 -- -- -- 336
--------- --------- --------- --------- --------- --------- ---------
Net interest income (expense) after
provision for loan losses 1,159 545 38 820 23 (334) 2,251
Other operating income 123 23 5 1 60 -- 212
Depreciation expense 53 16 14 -- 3 81 167
Other operating expense 1,035 293 242 208 122 41 1,941
--------- --------- --------- --------- --------- --------- ---------
CORE BANKING INCOME (LOSS) BEFORE TAXES 194 259 (213) 613 (42) (456) 355
Realized and unrealized gain (loss) on
securities, net of hedging -- -- -- (131) -- -- (131)
Other gains (losses) 5 1 -- 10 (18) 2 --
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes 199 260 (213) 492 (60) (454) 224
Applicable income taxes 79 105 (85) 197 (24) (187) 85
--------- --------- --------- --------- --------- --------- ---------
NET INCOME (LOSS) BEFORE MINORITY
INTEREST 120 155 (128) 295 (36) (267) 139
Minority interest, net of taxes -- -- -- -- -- 18 18
--------- --------- --------- --------- --------- --------- ---------
NET INCOME (LOSS) BEFORE FAS 133
TRANSITION ADJUSTMENT 120 155 (128) 295 (36) (249) 157
FAS 133 TRANSITION ADJUSTMENT,
NET OF INCOME TAX BENEFITS -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
NET INCOME (LOSS) $ 120 $ 155 $ (128) $ 295 $ (36) $ (249) $ 157
========= ========= ========= ========= ========= ========= =========
Identifiable assets $ 230,613 $ 63,424 $ 33,174 $ 116,451 $ 1,670 $ 4,314 $ 449,646
========= ========= ========= ========= ========= ========= =========
(1) Interest income is presented net of interest expense
12
HARRINGTON FINANCIAL GROUP, INC. AND SUBSIDIARY
COMMUNITY BANKING
NINE MONTHS ENDED MARCH 31, 2001 (Dollars in Thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
North
Indiana Kansas Carolina Investments HWM Other Total
--------- --------- --------- --------- --------- --------- ---------
Net interest income (expense) (1) $ 4,298 $ 1,770 $ 806 $ 1,237 $ 75 $ (926) $ 7,260
Provision for loan losses 303 70 253 -- -- -- 626
--------- --------- --------- --------- --------- --------- ---------
Net interest income (expense) after
provision for loan losses 3,995 1,700 553 1,237 75 (926) 6,634
Other operating income 411 69 13 15 163 (2) 669
Depreciation expense 187 46 43 2 7 247 532
Other operating expense 3,260 896 725 626 393 65 5,965
--------- --------- --------- --------- --------- --------- ---------
CORE BANKING INCOME (LOSS) BEFORE TAXES 959 827 (202) 624 (162) (1,240) 806
Realized and unrealized gain (loss) on
securities, net of hedging -- -- -- 1,635 -- -- 1,635
Other gains (losses) 10 4 -- 30 (54) 1,421 1,411
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes 969 831 (202) 2,289 (216) 181 3,852
Applicable income taxes 387 333 (81) 901 (84) 42 1,498
--------- --------- --------- --------- --------- --------- ---------
NET INCOME (LOSS) BEFORE MINORITY
INTEREST 582 498 (121) 1,388 (132) 139 2,354
Minority interest, net of taxes -- -- -- -- -- 65 65
--------- --------- --------- --------- --------- --------- ---------
NET INCOME (LOSS) BEFORE FAS 133
TRANSITION ADJUSTMENT 582 498 (121) 1,388 (132) 204 2,419
FAS 133 TRANSITION ADJUSTMENT,
NET OF INCOME TAX BENEFITS -- -- -- (829) -- -- (829)
--------- --------- --------- --------- --------- --------- ---------
NET INCOME (LOSS) $ 582 $ 498 $ (121) $ 559 $ (132) $ 204 $ 1,590
========= ========= ========= ========= ========= ========= =========
Identifiable assets $ 230,613 $ 63,424 $ 33,174 $ 116,451 $ 1,670 $ 4,314 $ 449,646
========= ========= ========= ========= ========= ========= =========
(1) Interest income is presented net of interest expense.
13
HARRINGTON FINANCIAL GROUP, INC. AND SUBSIDIARY
COMMUNITY BANKING
THREE MONTHS ENDED MARCH 31, 2000 (Dollars in Thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
North
Indiana Kansas Carolina Investments HWM Other Total
Net interest income (expense) (1) $ 1,232 $ 607 $ 98 $ 424 $ 24 $ (328) $ 2,057
Provision for loan losses 20 137 7 -- -- -- 164
--------- --------- --------- --------- --------- --------- ---------
Net interest income (expense) after
provision for loan losses 1,212 470 91 424 24 (328) 1,893
Other operating income 161 16 2 2 29 -- 210
Depreciation expense 132 28 19 10 2 2 193
Other operating expense 1,166 324 247 207 131 134 2,209
--------- --------- --------- --------- --------- --------- ---------
CORE BANKING INCOME (LOSS) BEFORE TAXES 75 134 (173) 209 (80) (464) (299)
Realized and unrealized gain (loss) on
securities, net of hedging -- -- -- (619) -- 7 (612)
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes 75 134 (173) (410) (80) (457) (911)
Applicable income taxes 29 52 (68) (159) (33) (183) (362)
--------- --------- --------- --------- --------- --------- ---------
NET INCOME (LOSS) BEFORE MINORITY
INTEREST 46 82 (105) (251) (47) (274) (549)
Minority interest, net of taxes -- -- -- -- 23 -- 23
--------- --------- --------- --------- --------- --------- ---------
NET INCOME (LOSS) $ 46 $ 82 $ (105) $ (251) $ (24) $ (274) $ (526)
========= ========= ========= ========= ========= ========= =========
Identifiable assets $ 224,821 $ 54,540 $ 7,796 $ 146,973 $ 1,755 $ 7,770 $ 443,655
========= ========= ========= ========= ========= ========= =========
(1) Interest income is presented net of interest expense.
14
HARRINGTON FINANCIAL GROUP, INC. AND SUBSIDIARY
COMMUNITY BANKING
NINE MONTHS ENDED MARCH 31, 2000 (Dollars in thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
North
Indiana Kansas Carolina Investments HWM Other Total
------- ------ -------- ----------- --- ----- -----
Net interest income (expense) (1) $ 3,625 $ 1,741 $ 162 $ 1,643 $ 68 $ (940) $ 6,299
Provision for loan losses 123 316 39 -- -- -- 478
--------- --------- --------- --------- --------- --------- ---------
Net interest income (expense) after
provision for loan losses 3,502 1,425 123 1,643 68 (940) 5,821
Other operating income 430 37 1 3 75 -- 546
Depreciation expense 397 82 57 32 6 6 580
Other operating expense 3,724 1,008 759 631 382 342 6,846
--------- --------- --------- --------- --------- --------- ---------
CORE BANKING INCOME (LOSS) BEFORE TAXES (189) 372 (692) 983 (245) (1,288) (1,059)
Realized and unrealized gain (loss) on
securities, net of hedging -- -- -- (2,276) -- 16 (2,260)
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes (189) 372 (692) (1,293) (245) (1,272) (3,319)
Applicable income taxes (75) 144 (270) (499) (97) (505) (1,302)
--------- --------- --------- --------- --------- --------- ---------
NET INCOME (LOSS) BEFORE MINORITY
INTEREST (114) 228 (422) (794) (148) (767) (2,017)
Minority interest, net of taxes -- -- -- -- 72 -- 72
--------- --------- --------- --------- --------- --------- ---------
NET INCOME (LOSS) $ (114) $ 228 $ (422) $ (794) $ (76) $ (767) $ (1,945)
========= ========= ========= ========= ========= ========= =========
Identifiable assets $ 224,821 $ 54,540 $ 7,796 $ 146,973 $ 1,755 $ 7,770 $ 443,655
========= ========= ========= ========= ========= ========= =========
(1) Interest income is presented net of interest expense.
15
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Office of Thrift Supervision ("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 March 31, 2001, 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 $ 20,496 $ 14,724 $ 8,519 -- $(10,619) $(22,227) $(34,190)
Market value gain (loss) of liabilities (6,141) (4,289) (2,268) -- 2,590 5,556 8,937
-------- -------- -------- --- -------- -------- --------
Market value gain (loss) of net
assets before interest rate contracts 14,335 10,435 6,251 -- (8,029) (16,671) (25,253)
Pre-tax market value gain (loss) of
interest rate contracts (17,724) (11,368) (5,468) -- 5,090 9,816 14,216
-------- -------- -------- --- -------- -------- --------
Total change in MVPE(2) (Model) $ (3,369) $ (933) $ 783 -- $ (2,939) $ (6,855) $(11,037)
======== ======== ======== === ======== ======== ========
NPV post shock ratio 5.2% 5.8% 6.2% 6.2% 5.7% 4.9% 4.0%
======== ======== ======== === ======== ======== ========
Change in MVPE as a percent of:
MVPE(2) (Model) (12.2)% (3.4)% 2.8% 0.0% (10.7)% (24.9)% (40.0)%
Total assets of the Bank (0.8)% (0.2)% 0.2% 0.0% (0.7)% (1.6)% (2.5)%
Change in NPV post shock ratio (1.0)% (0.4)% 0.0% 0.0% (0.5)% (1.3)% (2.2)%
(1) Assumes an instantaneous parallel change in interest rates at all
maturities.
(2) Based on the Bank's pre-tax MVPE of $27.6 million at March 31, 2001.
16
HARRINGTON FINANCIAL GROUP, INC. AND SUBSIDIARY
Part II
Item 1. Legal Proceedings
Neither the Company nor the Bank is involved in any
pending legal proceedings other than non-material legal
proceedings occurring in the ordinary course of
business.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security-Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibit 3.1: Amended and Restated Articles of Incorporation
of Harrington Financial Group, Inc. This exhibit is
incorporated herein by reference from the Registration
Statement on Form S-1 (Registration No. 333-1556) filed by
the Company with the SEC on February 20, 1996, as amended.
b) Exhibit 3.2: Amended and Restated Bylaws of Harrington
Financial Group, Inc. This exhibit is incorporated herein by
reference from the Registration Statement on Form S-1
(Registration No. 333-1556) filed by the Company with the
SEC on February 20, 1996, as amended.
c) No Form 8-K reports were filed during the quarter.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARRINGTON FINANCIAL GROUP, INC.
Date: May 7, 2001 By: /s/ Craig J. Cerny
-------------------------------------
Craig J. Cerny
President and Chief Executive Officer
Date: May 7, 2001 By: /s/ John E. Fleener
-------------------------------------
John E. Fleener
Chief Financial Officer
18