UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 incorporation or (I.R.S. Employer
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
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Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: As of November 9,
2001, there were issued and outstanding 3,143,670 shares of the Registrant's
Common Stock, par value $.125 per share.
HARRINGTON FINANCIAL GROUP, INC. AND SUBSIDIARY
TABLE OF CONTENTS
PAGE
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements 1
Consolidated Statements of Condition as of September 30, 2001
(unaudited) and June 30, 2001 2
Consolidated Statements of Operations (unaudited) for the three
months ended September 30, 2001 and 2000 3
Consolidated Statements of Cash Flows (unaudited) for the three 4
months ended September 30, 2001 and 2000
Notes to Unaudited Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
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
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
1
HARRINGTON FINANCIAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, JUNE 30,
2001 2001
----------------- ------------------
ASSETS:
Cash $ 1,760 $ 1,895
Interest-bearing deposits 6,295 8,768
----------------- ------------------
Total cash and cash equivalents 8,055 10,663
Securities held for trading - at fair value (amortized cost of
$3,522 and $3,816) 3,160 3,495
Securities available for sale - at fair value (amortized cost of
$44,826 and $50,006) 46,135 51,039
Securities held to maturity - at amortized cost 25 27
Loans receivable, net 325,672 329,222
Interest receivable, net 2,208 2,264
Premises and equipment, net 4,897 5,003
Federal Home Loan Bank of Indianapolis stock 4,879 4,879
Other 2,434 1,448
----------------- ------------------
Total Assets $ 397,465 $ 408,040
================= ==================
LIABILITIES & STOCKHOLDERS' EQUITY:
Deposits $ 303,474 $ 323,324
Securities sold under agreements to repurchase 30,471 35,675
Federal Home Loan Bank advances 24,000 11,000
Interest payable on securities sold under agreements to repurchase 35 51
Other interest payable 1,538 1,669
Note payable 12,995 12,995
Advance payments by borrowers for taxes and insurance 1,074 695
Accrued expenses payable and other liabilities 6,408 3,140
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Total Liabilities 379,995 388,549
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Minority interest 747 765
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Common stock 425 425
Additional paid-in-capital 16,899 16,909
Treasury stock, 262,268 and 270,268 shares at cost (2,510) (2,586)
Retained earnings 4,551 4,467
Accumulated other comprehensive income (loss), net of taxes (2,642) (489)
----------------- ------------------
Total Stockholders' Equity 16,723 18,726
----------------- ------------------
Total Liabilities & Stockholders' Equity $ 397,465 $ 408,040
================= ==================
See notes to unaudited consolidated financial statements.
2
HARRINGTON FINANCIAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
THREE MONTHS ENDED
SEPTEMBER 30
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2001 2000
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INTEREST INCOME:
Securities held for trading $ 200 $ 704
Securities available for sale 746 1,774
Securities held to maturity 1 2
Loans receivable 6,091 5,649
Dividends on Federal Home Loan Bank stock 89 104
Deposits 88 159
Net interest expense on interest rate contracts maintained in the
trading portfolio - (19)
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Total interest income 7,215 8,373
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INTEREST EXPENSE:
Deposits 4,048 4,650
Federal Home Loan Bank advances 82 253
Short-term borrowings 300 878
Long-term borrowings 220 324
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Total interest expense 4,650 6,105
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Net interest income 2,565 2,268
Provision for loan losses 139 185
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Net interest income after provision for loan losses 2,426 2,083
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OTHER INCOME (LOSS):
Gain on sale of securities held for trading 1 776
Unrealized gain (loss) on securities held for trading (41) 750
Unrealized loss on deposit hedges (15) (201)
Gain on branch sale - 1,424
Other 241 239
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Total other income 186 2,988
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OTHER EXPENSE:
Salaries and employee benefits 1,206 1,228
Premises and equipment expense 322 376
FDIC insurance premiums 14 18
Marketing 27 48
Computer services 156 162
Consulting fees 66 67
Other 502 318
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Total other expenses 2,293 2,217
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Income before tax provision & minority interest in
Harrington Wealth Management, Inc. (HWM) 319 2,854
Income tax provision 162 1,114
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Net income before minority interest in HWM 157 1,740
Minority interest in HWM 21 25
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Net income before cumulative effect of accounting change 178 1,765
Cumulative effect of adoption of SFAS 133, less
applicable income tax benefit of $530 - (829)
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Net Income $ 178 $ 936
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BASIC EARNINGS PER SHARE OF COMMON STOCK:
Income before cumulative effect $ 0.06 $ 0.56
Cumulative effect - (0.26)
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Net income $ 0.06 $ 0.30
================ =================
DILUTED EARNINGS PER SHARE OF COMMON STOCK:
Income before cumulative effect $ 0.06 $ 0.56
Cumulative effect - (0.26)
---------------- -----------------
Net income $ 0.06 $ 0.30
================ =================
See notes to unaudited consolidated financial statements.
3
HARRINGTON FINANCIAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED
SEPTEMBER 30
----------------------------------
2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 178 $ 936
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 139 185
Depreciation 149 189
Premium and discount amortization of securities, net 15 (3)
Loss (gain) on sale of securities held for trading (1) (776)
Unrealized loss (gain) on securities held for trading 41 (750)
Effect of minority interest (21) (25)
Proceeds from maturities of securities held for trading 285 1,784
Proceeds from sale of securities held for trading 1 25,967
Net increase in other assets and liabilities 203 201
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Net cash provided by operating activities 989 27,708
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities available for sale - (52,322)
Proceeds from maturities of securities held to maturity 2 2
Proceeds from maturities of securities available for sale 5,174 3,844
Proceeds from sale of securities available for sale - 36,095
Change in loans receivable, net 3,351 (18,632)
Purchases of premises and equipment (43) (12)
Proceeds from sale of fixed assets at sold branches - 255
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Net cash provided by (used in) investing activities 8,484 (30,770)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits (19,850) (832)
Deposits sold as part of branch sale - (43,524)
Increase (decrease) in securities sold under agreements to repurchase (5,204) 3,926
Proceeds from Federal Home Loan Bank advances 27,000 90,000
Principal repayments on Federal Home Loan Bank advances (14,000) (60,000)
Proceeds from issuance of treasury stock 67 56
Dividends paid on common stock (94) (95)
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Net cash used in financing activities (12,081) (10,469)
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Net Increase (Decrease) in Cash and Cash Equivalents (2,608) (13,531)
Beginning of period 10,663 24,321
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End of period $ 8,055 $ 10,790
================ =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 4,415 $ 6,061
Cash paid for income taxes $ 216 $ 5
See notes to unaudited consolidated financial statements.
4
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.
On May 31, 2001, the Company announced that Hasten Bancshares, the
holding company for First National Bank & Trust, ("Hasten") would
acquire all of the outstanding shares of the Company's common stock for
$12.4916 per share at closing. The aggregate purchase price for all
shares is approximately $40 million. The acquisition is expected to
close during the first quarter of calendar year 2002. The Board of
Directors of the Company approved the merger agreement at a special
meeting on May 29, 2001 and the stockholders of the Company approved the
merger agreement at a special meeting of stockholders on August 28,
2001. The sale of the Company to Hastens is dependent on receiving
appropriate regulatory approvals, and the sale of certain portions of
the Company, as defined in the agreement. Pursuant to the agreement, the
Company is required to sell the Kansas operations to Los Padres Bank,
the North Carolina operations to Community First Financial Group, Inc.
and its interest in Harrington Wealth Management ("HWM") to Los Padres
Bank. On November 3, 2001, the Company consummated the sale of its
Kansas operations and its interest in HWM to Los Padres Bank.
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
SEPTEMBER 30,
--------------------------------
2001 2000
--------------- ---------------
BASIC EARNINGS PER SHARE:
Weighted average common shares 3,132,213 3,156,689
========= =========
DILUTED EARNINGS PER SHARE:
Weighted average common shares 3,132,213 3,156,689
Dilutive effect of stock options 67,106 1,991
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Weighted average common and incremental shares 3,199,319 3,158,680
========= =========
5
2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of the
Company have been prepared in accordance with instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. However, such information reflects all adjustments
(consisting solely of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of results for
the interim periods.
The results of operations for the three months ended September 30, 2001
are not necessarily indicative of the results to be expected for the
year ending June 30, 2002. 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, 2001.
In February 1999, the Company formed HWM. HWM is a strategic alliance
between the Bank (51% owner) and Los Padres Bank (49% owner), a
federally chartered savings bank located in California. HWM provides
trust and investment management services for individuals and
institutions. The accompanying unaudited consolidated balance sheets
include 100 percent of the assets and liabilities of HWM and the
ownership of Los Padres Bank is recorded as "Minority interest." The
results of operations for the three months ended September 30, 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. (See Note 1 for a discussion of the sale of the Bank's 51%
interest in HWM to Los Padres Bank.)
Reclassifications of certain amounts in the fiscal year 2001
consolidated financial statements have been made to conform to the
fiscal year 2002 presentation.
3. COMPREHENSIVE INCOME
The following is a summary of the Company's total comprehensive income
(loss) for the interim three month periods ended September 30, 2001 and
2000 under SFAS No. 130:
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------
2001 2000
------------ -----------
(DOLLARS IN THOUSANDS)
Net income $ 178 $ 936
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Other comprehensive income, net of tax:
Unrealized holding gains (losses) on deposit related
hedges and investment securities (2,154) (214)
SFAS 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)
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Other comprehensive income (2,154) 2,231
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Comprehensive income (loss) $ (1,976) $ 3,167
============ ===========
6
4. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
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 the consolidated statement of operations 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 reclassification does not
call into question the Company's intent to hold current or future debt
securities to their maturity.
During the three months ended September 30, 2000, 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.
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 redesignated 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
7
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
the changes in its fair value recognized in current-period earnings.
The Company designates certain derivatives as cash flow hedges. For all
qualifying and highly effective cash flow hedges, the changes in the
fair value of the derivative are recorded in OCI.
5. BRANCH SALE
On September 8, 2000, the Company sold deposits and certain assets of
two branch banking locations. The Company sold $43.5 million of
deposits, $0.3 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.
6. NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No 142. ("SFAS 142"),
"Goodwill and Other Intangible Assets," was issued in July 2001. Under
SFAS 142, goodwill amortization ceases when the new standard is adopted.
The new rules also require an initial goodwill impairment assessment in
the year of adoption and at least annual impairment tests thereafter.
Management has not yet quantified the effect, if any, of this new
standard on the consolidated financial statements.
Statement of Financial Accounting Standards No. 143 ("SFAS 143"),
"Accounting for Asset Retirement Obligations," was issued in June 2001
and is effective for financial statements issued for fiscal years
beginning after June 15, 2002. SFAS 143 addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. Management
has not yet quantified the effect, if any, of this new standard on the
consolidated financial statements.
Statement of Financial Accounting Standards No. 144 ("SFAS 144"),
"Accounting for the Impairment or Disposal of Long-Lived Assets" was
issued in October, 2001 and is effective for financial statements issued
for fiscal years beginning after December 15, 2001, and interim periods
within those fiscal years. SFAS 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets.
Management has not yet quantified the effect, if any, of this new
standard on the consolidated financial statements.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FINANCIAL CONDITION
At September 30, 2001, the Company's total assets amounted to $397.5
million, as compared to $408.0 million at June 30, 2001. The $10.5 million or
2.6% decrease in total assets during the three months ended September 30, 2001
was primarily the result of a $4.9 million decrease in securities available for
sale, a $3.6 million decrease in net loans receivable, a $2.6 million decrease
in cash and cash equivalents, and a $0.3 million decrease in securities held for
trading, which were partially offset with a $1.0 million increase in other
assets. The decreases in securities available for sale and held for trading is a
result of the Company's reduction in the overall size of its investment
portfolio to allow for growth of loans and to reduce earnings volatility from
mark to market accounting. The decrease in net loans receivable was due
primarily to an $8.1 million decrease in mortgage loans due to increased
refinancings, which was partially offset by a $4.7 million increase in consumer
loans.
The Company's total liabilities declined from $388.5 million at June 30,
2001 to $380.0 million at September 30, 2001. The $8.6 million or 2.2% decrease
in total liabilities during the three months ended September 30, 2001, was
primarily the result of a $19.9 million decrease in deposits and a $5.2 million
decrease in securities sold under agreements to repurchase, which was partially
offset by a $13.0 million increase in Federal Home Loan Bank advances during the
period.
Minority interest decreased by $18,000 from June 30, 2001 to $747,000 at
September 30, 2001. The financial statements as of and for the three month
period ended September 30, 2001 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. (See Note 1 for a discussion of the Bank's sale of
the Bank's 51% interest in HWM to Los Padres Bank.)
At September 30, 2001, the Company's stockholders' equity amounted to
$16.7 million, as compared to $18.7 million at June 30, 2001. The 10.7% decrease
in stockholders' equity was primarily due to the $2.2 million unrealized losses
on deposit related hedges and securities available for sale net of income tax
and cash dividends paid of $94,000 which were partially offset by the $178,000
of net income recognized during the three month period and $67,000 due to the
issuance of treasury stock. At September 30, 2001, the Bank's Tier 1 core
capital amounted to $29.7 million or 7.5% of adjusted total assets, which
exceeded the minimum 4.0% requirement by $13.8 million. Additionally, as of such
date, the Bank's risk-based capital totaled $31.9 million or 11.6% of total
risk-adjusted assets, which exceeded the minimum 8.0% requirement by $9.9
million.
RESULTS OF OPERATIONS
GENERAL. The Company reported income of $178,000 or $0.06 per share
during the three months ended September 30, 2001, as compared to income of
$936,000 or $0.30 per share during the prior comparable period. The $758,000
decrease in earnings during the three months ended September 30, 2001, as
compared to the same period in the prior year, was primarily due to a $1.4
million decrease in realized and unrealized net gains on securities held for
trading and deposit related hedges and a $1.4 million gain on the sale of
deposits and certain assets of two branch banking locations recognized in the
prior year. These decreases were partially offset by a $343,000 increase in net
interest income after provision for loan losses, a decrease in the Company's
income tax provision of $952,000 and an $829,000 loss net of tax due to the
adoption of SFAS 133 that was recognized in the prior year.
SELECTED FINANCIAL RATIOS. The following schedule shows selected
financial ratios for the three months ended September 30, 2001 and 2000.
9
AT OR FOR THE
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------
2001 2000
---------- ----------
Return on average assets 0.18% 0.83%
Return on average equity 3.90% 19.83%
Interest rate spread (1) 2.38% 1.96%
Net interest margin (2) 2.60% 2.08%
Operating expenses to average assets 2.28% 1.96%
Efficiency ratio (3) 85.98% 95.48%
Non-performing assets to total assets 0.96% 0.16%
Loan loss reserves to non-performing loans 61.70% 515.36%
(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 $1.2 million or 13.8%
during the three months ended September 30, 2001, as compared to the same period
in the prior year. This decrease was primarily due to a $1.5 million decrease in
interest income from the investment portfolio and an $86,000 decrease in
interest income on deposits and dividends on Federal Home Loan Bank stock, which
were partially offset by a $442,000 increase in interest income from the
Company's loan portfolio. The decrease in interest income from the Company's
investment portfolio was a result of an $87.2 million decrease in the level of
the average investment portfolio which was partially offset by a 28 basis point
increase in the interest yield earned. The Company substantially reduced the
investment portfolio to allow for the growth of loans and to reduce earnings
volatility from mark-to-market accounting. The increase in interest income on
the loan portfolio was a direct result of the $45.3 million increase in the
level of the average loan portfolio which was partially offset by a 96 basis
point decrease in the interest yield earned. The net increase in the average
balance on the Company's loan portfolio is primarily due to the origination of
business loans through its commercial loan division.
INTEREST EXPENSE. Interest expense decreased by $1.5 million during the
three months ended September 30, 2001, as compared to the same period in the
prior year. This decrease was primarily due to a $52.3 million decrease in the
level of average interest-bearing liabilities and a 69 basis point decrease in
the cost of interest-bearing liabilities.
NET INTEREST INCOME. Net interest income increased by $297,000 or 13.1%
during the three months ended September 30, 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 months ended September
30, 2001 was 2.60%, as compared to 2.08% for the three months ended September
30, 2000.
PROVISION FOR LOAN LOSSES. During the three months ended September 30,
2001, the Company increased the general allowance for loan losses by $139,000.
Delinquencies and loan write-offs continue to be minimal, although the Company's
non-performing assets have increased due to slowing economic conditions. At
September 30, 2001, the Company's non-performing assets amounted to $3,796,000
as compared to $2,623,000 as of June 30, 2001 and $678,000 as of September 30,
2000. During the three months ended September 30, 2000, the Company increased
the general allowance for loan losses by $185,000 in response to the continued
loan growth.
10
OTHER INCOME (LOSS). Total other income (loss) amounted to $186,000
during the three months ended September 30, 2001, as compared to $3.0 million
during the respective period in the prior year. Other income (loss) principally
represents the net market value gain or loss (realized or unrealized) on
securities held for trading, offset by the net market value gain or loss
(realized or unrealized) on interest rate contracts used for hedging such
securities. Management's goal is to attempt to offset any change in the fair
value of its securities portfolio with the change in the fair value of the
interest rate risk management contracts and mortgage-backed derivative
securities utilized by the Company to hedge its interest rate exposure. In
addition, management attempts to produce a positive hedged excess return (i.e.
total return, which includes interest income plus realized and unrealized net
gains/losses on investments minus the one month LIBOR funding cost for the
period) on the investment portfolio using option-adjusted pricing analysis.
During the three months ended September 30, 2001, the Company recognized
$1,000 of realized gains on the sale of securities held for trading and $41,000
of unrealized losses on securities and hedges held for trading.
During the three months ended September 30, 2000, the Company recognized
$1.1 million of realized gains on the sale of securities held for trading,
$296,000 of realized losses on futures instruments and $750,000 of unrealized
gains on securities and hedges held for trading. The Company also recognized a
gain of $1.4 million resulting from the sale of deposits and certain assets of
two branch banking locations on September 8, 2000.
OTHER EXPENSE. Total other expense amounted to $2.3 million during the
three months ended September 30, 2001, as compared to $2.2 million during the
respective period in the prior year. The increase in total other expense was
primarily due to professional fees related to the pending merger with Hasten
Bancshares (see Note 1).
INCOME TAX PROVISION (BENEFIT). The Company recorded an income tax
provision of $162,000 during the three months ended September 30, 2001, as
compared to a provision of $1.1 million during the respective period in the
prior year. During the three months ended September 30, 2001, the Company's
effective tax rate amounted to 50.8% as compared to 39.0% during the same period
in fiscal year 2001. The increase in the effective tax rate is due to
non-deductible merger-related expenses recorded during the three months ended
September 30, 2001.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2001, the Bank's average "liquid" assets totaled
approximately $19.2 million. At September 30, 2001, the Company's total approved
originated loan commitments outstanding amounted to $11.8 million, and the
unused lines of credit outstanding totaled $31.1 million. Certificates of
deposit scheduled to mature in one year or less at September 30, 2001 totaled
$132.8 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
11
events or circumstances that arise after the date hereof. Readers should
carefully review the risk factors described in other documents the Company files
from time to time with the SEC.
SEGMENT INFORMATION
The Company's principal business lines include community banking in the
Indiana, Kansas and North Carolina markets, investment activities including
treasury management, HWM (see Notes 1 and 2) and other activities including the
unconsolidated holding company functions. 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.
12
HARRINGTON FINANCIAL GROUP, INC. AND SUBSIDIARY
COMMUNITY BANKING
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001
(DOLLARS IN THOUSANDS)
NORTH
INDIANA KANSAS CAROLINA INVESTMENTS
---------- --------- ---------- ------------
Net interest income (expense) (1) $ 1,533 $ 448 $ 240 $ 546
Provision for loan losses 244 (120) 15 -
---------- --------- ---------- ------------
Net interest income (expense) after provision
for loan losses 1,289 568 225 546
Other operating income 137 26 7 1
Depreciation expense 49 11 14 -
Other operating expense 1,020 307 279 209
---------- --------- ---------- ------------
Core banking income (loss) before taxes 357 276 (61) 338
Realized and unrealized gain (loss) on securities,
net of hedging - - - (55)
Other gains (losses) 4 1 - 10
---------- --------- ---------- ------------
Income (loss) before income taxes 361 277 (61) 293
Applicable income taxes 126 59 (25) 121
---------- --------- ---------- ------------
Net income (loss) before minority interest 235 218 (36) 172
Minority interest, net of taxes - - - -
---------- --------- ---------- ------------
Net income (loss) $ 235 $ 218 $ (36) $ 172
========== ========= ========== ============
Identifiable assets $ 228,740 $ 65,406 $ 38,350 $ 59,561
========== ========= ========== ============
HWM OTHER TOTAL
--------- --------- ----------
Net interest income (expense) (1) $ 17 $ (219) $ 2,565
Provision for loan losses - - 139
--------- --------- ----------
Net interest income (expense) after provision
for loan losses 17 (219) 2,426
Other operating income 69 1 241
Depreciation expense 1 74 149
Other operating expense 137 192 2,144
--------- --------- ----------
Core banking income (loss) before taxes (52) (484) 374
Realized and unrealized gain (loss) on securities,
net of hedging - - (55)
Other gains (losses) (18) 3 -
--------- --------- ----------
Income (loss) before income taxes (70) (481) 319
Applicable income taxes (28) (91) 162
--------- --------- ----------
Net income (loss) before minority interest (42) (390) 157
Minority interest, net of taxes - 21 21
--------- --------- ----------
Net income (loss) $ (42) $ (369) $ 178
========= ========= ==========
Identifiable assets $ 1,616 $ 3,792 $ 397,465
========= ========= ==========
(1) Interest income is presented net of interest expense.
13
HARRINGTON FINANCIAL GROUP, INC. AND SUBSIDIARY
COMMUNITY BANKING
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
(DOLLARS IN THOUSANDS)
NORTH
INDIANA KANSAS CAROLINA INVESTMENTS
------------ ---------- ----------- ------------
Net interest income (expense) (1) $ 1,222 $ 592 $ 228 $ 386
Provision for loan losses 85 74 26 -
------------ ---------- ----------- ------------
Net interest income (expense) after provision
for loan losses 1,137 518 202 386
Other operating income 147 25 4 11
Depreciation expense 74 15 15 1
Other operating expense 1,052 298 238 207
------------ ---------- ----------- ------------
Core banking income (loss) before taxes 158 230 (47) 189
Realized and unrealized gain (loss) on securities,
net of hedging - - - 1,325
Other gains (losses) 5 1 - 10
------------ ---------- ----------- ------------
Income (loss) before income taxes 163 231 (47) 1,524
Applicable income taxes 65 92 (19) 599
------------ ---------- ----------- ------------
Net income (loss) before minority interest 98 139 (28) 925
Minority interest, net of taxes - - - -
------------ ---------- ----------- ------------
Net income (loss) before FAS 133
transition adjustment 98 139 (28) 925
FAS 133 transition adjustment, net of
income tax benefit - - - (829)
------------ ---------- ----------- ------------
Net income (loss) $ 98 $ 139 $ (28) $ 96
============ ========== =========== ============
Identifiable assets $ 133,618 $ 57,977 $ 21,703 $ 122,966
============ ========== =========== ============
HWM OTHER TOTAL
--------- ---------- -----------
Net interest income (expense) (1) $ 13 $ (173) $ 2,268
Provision for loan losses - - 185
--------- ---------- -----------
Net interest income (expense) after provision
for loan losses 13 (173) 2,083
Other operating income 18 34 239
Depreciation expense 1 83 189
Other operating expense 45 188 2,028
--------- ---------- -----------
Core banking income (loss) before taxes (15) (410) 105
Realized and unrealized gain (loss) on securities,
net of hedging - - 1,325
Other gains (losses) (6) 1,414 1,424
--------- ---------- -----------
Income (loss) before income taxes (21) 1,004 2,854
Applicable income taxes (8) 385 1,114
--------- ---------- -----------
Net income (loss) before minority interest (13) 619 1,740
Minority interest, net of taxes - 25 25
--------- ---------- -----------
Net income (loss) before FAS 133
transition adjustment (13) 644 1,765
FAS 133 transition adjustment, net of
income tax benefit - - (829)
--------- ---------- -----------
Net income (loss) $ (13) $ 644 $ 936
========= ========== ===========
Identifiable assets $ 1,727 $ 85,408 $ 423,399
========= ========== ===========
(1) Interest income is presented net of interest expense.
14
HARRINGTON FINANCIAL GROUP, INC. AND SUBSIDIARY
COMMUNITY BANKING
THREE MONTHS ENDED SEPTEMBER 30, 1999 (DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
INDIANA KANSAS INVESTMENTS OTHER
Net interest income (expense) (1) $ 878 $ (31) $ 1,432 $ (296)
Provision for loan losses 45 53 - 19
------------ ---------- ----------- ----------
Net interest income (expense) after provision
for loan losses 833 (84) 1,432 (315)
Other operating income 112 8 1 19
Depreciation expense 133 23 12 25
Other operating expense 1,269 352 213 494
------------ ---------- ----------- ----------
CORE BANKING INCOME (LOSS) BEFORE TAXES (457) (451) 1,208 (815)
Realized and unrealized gain (loss) on securities,
net of hedging - - (2,048) 6
------------ ---------- ----------- ----------
Income (loss) before income taxes (457) (451) (840) (809)
Applicable income taxes (178) (175) (327) (317)
------------ ---------- ----------- ----------
NET INCOME (LOSS) BEFORE MINORITY
INTEREST (279) (276) (513) (492)
Minority interest, net of taxes - - - 29
------------ ---------- ----------- ----------
NET INCOME (LOSS) $ (279) $ (276) $ (513) $ (463)
============ ========== =========== ==========
Identifiable assets $ 220,555 $ 47,180 $ 217,884 $ 12,603
============ ========== =========== ==========
TOTAL
Net interest income (expense) (1) $ 1,983
Provision for loan losses 117
-----------
Net interest income (expense) after provision
for loan losses 1,866
Other operating income 140
Depreciation expense 193
Other operating expense 2,328
-----------
CORE BANKING INCOME (LOSS) BEFORE TAXES (515)
Realized and unrealized gain (loss) on securities,
net of hedging (2,042)
-----------
Income (loss) before income taxes (2,557)
Applicable income taxes (997)
-----------
NET INCOME (LOSS) BEFORE MINORITY
INTEREST (1,560)
Minority interest, net of taxes 29
-----------
NET INCOME (LOSS) $ (1,531)
===========
Identifiable assets $ 498,222
===========
(1) Interest income is presented net of interest expense.
15
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The OTS requires each thrift institution to calculate the estimated
change in the institution's market value of portfolio equity (MVPE) assuming an
instantaneous, parallel shift in the Treasury yield curve of 100 to 300 basis
points either up or down in 100 basis point increments. MVPE is defined as the
net present value (NPV) of an institution's existing assets, liabilities and
off-balance sheet instruments. A post shock MVPE to market value of assets (NPV)
ratio can then be calculated in each interest rate scenario. The OTS permits
institutions to perform this MVPE analysis using their own internal model based
upon reasonable assumptions. The Company has contracted with Smith Breeden
Associates, Inc. for the provision of consulting services regarding, among other
things, the management of its investments and borrowings, the pricing of loans
and deposits, the use of various financial instruments to reduce interest rate
risk, and assistance in performing the required calculation of the sensitivity
of its market value to changes in interest rates. In estimating the market value
of mortgage loans and mortgage-backed securities, the Company utilizes various
prepayment assumptions that vary, in accordance with historical experience,
based upon the term, interest rate and other factors with respect to the
underlying loans.
The following table sets forth at September 30, 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.
16
CHANGE IN INTEREST RATES
(IN BASIS POINTS)(1)
(DOLLARS IN THOUSANDS)
-300 -200 -100 - +100 +200 +300
--------- -------- ------- ------ -------- -------- -------
Market value gain (loss) of assets $ 5,621 $ 6,877 $ 4,815 $ - $ (7,222) $(16,156) $(25,522)
Market value gain (loss) of liabilities (17,202) (11,567) (5,785) - 5,888 11,965 18,256
--------- -------- ------- ------ -------- -------- -------
Market value gain (loss) of net assets
before interest rate contracts (11,581) (4,690) (970) - (1,334) (4,191) (7,266)
Pre-tax market value gain (loss) of
interest rate contracts (27) (17) (8) - 7 11 14
--------- -------- ------- ------ -------- -------- -------
Total change in MVPE(2) (Model) $ (11,608) $ (4,707) $ (978) $ - $ (1,327) $ (4,180) $(7,252)
========= ======== ======= ====== ======== ======== =======
NPV post shock ratio 4.7% 6.4% 7.4% 7.7% 7.5% 6.9% 6.3%
=== === === === === === ===
Change in MVPE as a percent of:
MVPE (2) (Model) (37.7)% (15.3)% (3.2)% - (4.3)% (13.6)% (23.6)%
Total assets of the Bank (3.0)% (1.2)% (0.3)% - (0.3)% (1.1)% (1.9)%
Change in NPV post shock ratio (3.0)% (1.3)% (0.3)% - (0.2)% (0.8)% (1.4)%
(1) Assumes an instantaneous parallel change in interest rates at all
maturities.
(2) Based on the Bank's pre-tax MVPE of $30.8 million at September 30, 2001.
17
PART II
OTHER INFORMATION
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
None.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security-Holders
A special meeting of the stockholders of the Company was held on
August 29, 2001 at which the stockholders voted on a proposal to approve and
adopt the Agreement and Plan of Merger dated as of May 30, 2001, by and among
the Company, Hasten Bancshares ("Hasten"), Al Acquisition Corp. ("Acquisition")
and Douglas T. Breeden, pursuant to which (i) Acquisition will merge with and
into the Company with the Company continuing as the surviving corporation and as
a wholly owned subsidiary of Hasten and (ii) each share of the Company's common
stock outstanding at the time of the merger would be converted into the right to
receive an amount of cash equal to $12.4916. 2,557,728 votes were case in favor
of the merger proposal, 500 votes were cast against again it. No stockholders
abstained from voting on the merger. There were 571,442 non-votes.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
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.
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.
b) 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: November 9, 2001 By: /s/ Craig J. Cerny
--------------------------------------
Craig J. Cerny
President and Chief Executive Officer
Date: November 9, 2001 By: /s/ John E. Fleener
--------------------------------------
John E. Fleener
Chief Financial Officer
19