Case | HBS Case Collection | February 1997 (Revised April 1997)

Harrington Financial Group

by Robert C. Merton and Alberto Moel

Abstract

In early 1997, Harrington Bank, a small Indiana savings and loan (thrift) wondered what its next move should be. Harrington was acquired in 1988 by the principals of Smith Breeden Associates, a money-management and consulting firm specializing in the application of modern financial technology to the pricing, hedging, and risk management of mortgage securities. The Smith Breeden principals had established an arms-length contract with Harrington, where Smith Breeden advised Harrington on the pricing, hedging, active management, and risk management of Harrington's assets and liabilities. Since the acquisition, the bank had done very well. Assets had grown from $75 million in 1988 to over $520 million at the end of 1996. Its net interest margin had more than tripled, core operating profits had grown by over 400%, and return on equity had been substantially increased. Still, Harrington in 1996 was not an average thrift. 80% of its assets consisted of mortgage-backed securities (vs. 30% for the median thrift), and most of its liabilities were not deposits but other forms of wholesale funding.

Keywords: Banks and Banking; Mergers and Acquisitions; Price; Risk Management; Mortgages; Contracts; Asset Management; Investment; Financial Services Industry;

Citation:

Merton, Robert C., and Alberto Moel. "Harrington Financial Group." Harvard Business School Case 297-088, February 1997. (Revised April 1997.)