Harrington West Financial (HWFG) 10-Q Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

OR

o 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: 000-50066

HARRINGTON WEST FINANCIAL GROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation or organization) 48-1175170
(I.R.S. Employer Identification No.)

610 Alamo Pintado Road
Solvang, California
(Address of principal executive offices)

93463
(Zip Code)

(805) 688-6644
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

     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.þ Yeso No

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero Accelerated filero Non-accelerated filerþ

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).o Yesþ No

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

5,460,393 shares of Common Stock, par value $0.01 per share, outstanding as of November 1, 2006.

HARRINGTON WEST FINANCIAL GROUP, INC.

TABLE OF CONTENTS

	Page
Part I — Financial Information
Item 1.Condensed Consolidated Financial Statements (Unaudited)		2
Condensed Consolidated Statements of Financial Condition as of September 30, 2006 and December 31, 2005		2
Condensed Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months Ended September 30, 2006 and 2005		3
Condensed Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the Nine Months Ended September 30, 2006 and Year Ended December 31, 2005		4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006 and 2005		5
Notes to Condensed Consolidated Financial Statements		6
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations		12
Item 3.Quantitative and Qualitative Disclosures about Market Risk		26
Item 4.Controls and Procedures		27
Part II — Other Information
Item 1.Legal Proceedings		28
Item 1A.Risk Factors		28
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds		28
Item 3.Defaults upon Senior Securities		28
Item 4.Submission of Matters to a Vote of Security Holders		28
Item 5.Other Information		28
Item 6.Exhibits		28
Signatures		29
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

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PART 1—FINANCIAL INFORMATION

Item 1:Condensed Consolidated Financial Statements
HARRINGTON WEST FINANCIAL GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)

(Dollars in thousands, except share data)

	September 30, 2006			December 31, 2005
ASSETS
Cash and cash equivalents	$	16,181		$	19,312
Trading account assets		850			975
Securities available-for-sale		320,590			387,352
Securities held to maturity		72			80
Loans receivable, (net of allowance for loan losses of $5,845 and $5,661 at September 30, 2006 and December 31, 2005, respectively)		743,299			672,890
Accrued interest receivable		4,901			4,463
Real estate owned		11,071			—
Premises and equipment, net		14,400			10,276
Prepaid expenses and other assets		4,041			3,783
Investment in FHLB stock, at cost		14,409			16,364
Income tax receivable		936			251
Bank owned life insurance (BOLI)		18,251			17,621
Deferred tax asset		706			137
Goodwill		5,496			5,496
Core deposit intangible, net		998			1,187
TOTAL ASSETS	$	1,146,201		$	1,140,187
LIABILITIES & STOCKHOLDERS’ EQUITY
Deposits:
Interest bearing	$	654,342		$	619,213
Non-interest bearing		54,117			49,932
Total Deposits		708,459			669,145
FHLB advances		279,000			319,000
Securities sold under repurchase agreements		59,888			59,013
Subordinated debt		25,774			25,774
Due to broker		486			2,474
Accrued interest payable and other liabilities		4,461			5,207
Income tax payable		525			—
Deferred income taxes		1,753			—
TOTAL LIABILITIES		1,080,346			1,080,613
STOCKHOLDERS’ EQUITY
Preferred stock, $.01 par value: 1,200,000 shares authorized: none issued and outstanding
Common stock, $.01 par value; 10,800,000 shares authorized: 5,449,593 shares issued and outstanding as of September 30, 2006 and 5,384,843 shares issued and outstanding December 31, 2005		54			54
Additional paid-in capital		32,952			32,059
Retained earnings		33,693			29,458
Accumulated other comprehensive loss		(844	)		(1,997	)
Total Stockholders’ Equity		65,855			59,574
TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY	$	1,146,201		$	1,140,187

The accompanying notes are an integral part of these condensed financial statements.

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HARRINGTON WEST FINANCIAL GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)

(Dollars in thousands, except share data)

	Three months ended						Nine months ended
	September 30,						September 30,
	2006			2005			2006			2005
INTEREST INCOME
Interest on loans	$	14,317		$	11,122		$	40,256		$	31,628
Interest and dividends on securities		4,661			4,725			14,590			13,690
Total interest income		18,978			15,847			54,846			45,318
INTEREST EXPENSE
Interest on deposits		6,866			4,230			18,232			10,815
Interest on FHLB advances and other borrowings		4,409			4,055			13,410			11,897
Total interest expense		11,275			8,285			31,642			22,712
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES		7,703			7,562			23,204			22,606
PROVISION FOR LOAN LOSSES		200			0			490			350
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		7,503			7,562			22,714			22,256
OTHER INCOME (LOSS)
Net gain (loss) on sale of available-for-sale securities		0			275			(613	)		783
Income from trading assets		150			(186	)		983			89
Other (loss)		(26	)		(7	)		(28	)		(13	)
Banking fee and other income		931			1,159			3,038			2,991
Total other income		1,055			1,241			3,380			3,850
OTHER EXPENSES
Salaries & employee benefits		3,104			2,844			9,166			8,270
Premises & equipment		960			969			2,772			2,867
Insurance premiums		104			127			324			378
Marketing		122			129			336			301
Computer services		213			203			610			573
Consulting fees		199			281			759			994
Office expenses & supplies		231			201			684			642
Other		610			625			1,836			1,702
Total other expenses		5,543			5,379			16,487			15,727
INCOME BEFORE INCOME TAXES		3,015			3,424			9,607			10,379
INCOME TAXES		913			1,326			3,332			4,095
NET INCOME	$	2,102		$	2,098		$	6,275		$	6,284
TOTAL COMPREHENSIVE INCOME	$	1,718		$	2,786		$	7,428		$	6,691
BASIC EARNINGS PER SHARE	$	0.39		$	0.39		$	1.15		$	1.18
DILUTED EARNINGS PER SHARE	$	0.38		$	0.37		$	1.13		$	1.12
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING		5,448,820			5,364,077			5,435,238			5,338,935
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING		5,585,527			5,649,134			5,563,214			5,626,599

The accompanying notes are an integral part of these condensed financial statements.

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HARRINGTON WEST FINANCIAL GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (Unaudited)

(Dollars in thousands, except share data)

													Accumulated
					Additional								Other			Total
	Common Stock				Paid-in		Retained			Comprehensive			Comprehensive			Stockholders’
	Stock		Amt		Capital		Earnings			Income			Loss			Equity
Balance, January 1, 2005		5,278,934	$	53	$	31,225	$	23,637					($	2,255	)	$	52,660
Comprehensive income:
Net income								8,336		$	8,336						8,336
Other comprehensive income, net of tax
Unrealized (losses) on securities											(2,270	)		(2,270	)		(2,270	)
Effective portion in change in fair value of cash flow hedges											2,528			2,528			2,528
Total comprehensive income										$	8,594
Stock options, exercised, including tax benefit of $250		105,909		1		834											835
Dividends on common stock								(2,515	)								(2,515	)
Balance, December 31, 2005		5,384,843		54		32,059		29,458						(1,997	)		59,574
Comprehensive income:
Net income								6,275		$	6,275						6,275
Other comprehensive income, net of tax
Unrealized gains on securities											839			839			839
Effective portion in change in fair value of cash flow hedges											314			314			314
Total comprehensive income										$	7,428
Stock options exercised, including tax benefit of $197		64,750				558											558
Stock options expensed						335											335
Dividends on common stock								(2,040	)								(2,040	)
Balance, September 30, 2006		5,449,593	$	54	$	32,952	$	33,693					($	844	)	$	65,855

The accompanying notes are an integral part of these condensed financial statements.

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HARRINGTON WEST FINANCIAL GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollars in thousands)

	Nine months ended			Nine months ended
	September 30,			September 30,
	2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	6,275		$	6,284
Adjustments to reconcile net income to net cash provided by operating activities:
Accretion of deferred loan fees and costs		(390	)		446
Depreciation and amortization		1,070			1,064
Amortization of premiums and discounts on loans receivable and securities		1,609			1,976
Provision for loan losses		490			350
Loss (gain) on sale of investment securities		613			(783	)
Activity in securities held for trading		125			501
FHLB stock dividend		(602	)		(485	)
(Increase) in accrued interest receivable		(438	)		(649	)
Decrease in income taxes receivable		37			464
Stock Options expensed		335			—
Tax benefit on exercise of stock options		(197	)		—
Provision for deferred income taxes		1,392			(781	)
(Increase) in prepaid expenses and other assets		(2,148	)		(1,513	)
(Decrease) in accounts payable, accrued expenses, and other liabilities		(2,442	)		(1,007	)
Net cash provided by operating activities		5,729			5,867
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) in loans receivable		(71,590	)		(53,739	)
Proceeds from sales of securities available for sale		44,327			48,881
Principal paydowns on securities available for sale		67,497			59,917
Principal paydowns on securities held to maturity		9			10
Purchases of securities available for sale		(45,333	)		(63,728	)
Purchase of premises and equipment		(5,034	)		(1,379	)
Purchase bank owned life insurance		—			(17,000	)
Acquisition, net of cash acquired		—			(1,954	)
Sale (purchase) of FHLB Stock		2,557			(717	)
Net cash used in investing activities		(7,567	)		(29,709	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits		39,314			73,569
(Decrease) increase in securities sold under agreements to repurchase		875			(20,523	)
(Decrease) in FHLB advances		(40,000	)		(23,000	)
Proceeds from exercise of stock options		558			715
Dividends paid on common stock		(2,040	)		(1,843	)
Net cash (used in) provided by financing activities		(1,293	)		28,918
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(3,131	)		5,076
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		19,312			13,238
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	16,181		$	18,314
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION —
Cash paid during the period for:
Interest	$	32,053		$	21,146
Income Taxes	$	2,904		$	2,562

The accompanying notes are an integral part of these condensed financial statements.

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HARRINGTON WEST FINANCIAL GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Business of the Company— Harrington West Financial Group, Inc. (the “Company”) is a diversified, community-based financial institution holding company, incorporated on August 29, 1995 to acquire and hold all of the outstanding common stock of Los Padres Bank, FSB (the “Bank”), a federally chartered savings bank. We provide a broad menu of financial services to individuals and small to medium sized businesses and operate sixteen banking offices in three markets as follows: Eleven Los Padres banking offices on the California Central Coast, two Los Padres banking offices in Scottsdale, Arizona, and three banking offices are located in the Kansas City metropolitan area, which are operated as a division under the Harrington Bank brand name. The Company also owns Harrington Wealth Management Company, a trust and investment management company with $160.9 million in assets under management or custody, which offers services to individuals and small institutional clients through a customized asset allocation approach by investing predominantly in low fee, indexed mutual funds and exchange traded funds.

     Basis of Presentation— The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and general practices within the banking industry. The following is a summary of significant principles used in the preparation of the accompanying financial statements. In preparing the financial statements, management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities, including the allowance for loan losses, valuation of investment securities and derivatives, the disclosure of contingent assets and liabilities and the disclosure of income and expenses for the periods presented in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates.

     The unaudited condensed consolidated interim financial statements of the Company and subsidiaries presented herein should be read in conjunction with the consolidated financial statements of the Company for the year ended December 31, 2005, included in the Company’s Annual Report on Form 10-K.

     Allowance for Loan Losses— Allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries).

     The allowance is maintained at a level believed by management to be sufficient to absorb estimated probable credit losses. Management’s determination of the adequacy of the allowance is based on periodic evaluations of the credit portfolio and other relevant factors. This evaluation is inherently subjective, as it requires material estimates, including, among others, the amounts and timing of expected future cash flows on impaired loans, estimated losses on commercial loans, consumer loans and mortgages, and general amounts for historical loss experience, economic conditions, uncertainties in estimating losses and inherent risks in the various credit portfolios, all of which may be susceptible to significant change.

     In determining the adequacy of the allowance for loan losses, the Company makes specific allocations to impaired loans in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 114,Accounting by Creditors for Impairment of a Loan. Loans are identified as impaired when it is deemed probable that the borrower will be unable to meet the scheduled principal and interest payments under the terms of the loan agreement. Impairment is based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, a creditor may

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measure impairment based on a loan’s observable market price or the fair value of the collateral if the loan is collateral dependent.

     Allocations to non-homogenous loan pools are developed by loan type and risk factor and are based on historical loss trends and management’s judgment concerning those trends and other relevant factors. These factors may include, among others, trends in criticized assets, regional and national economic conditions, changes in lending policies and procedures, trends in local real estate values and changes in volumes and terms of the loan portfolio.

     Homogenous (consumer and residential mortgage) loan allocations are made at a total portfolio level based on historical loss experience adjusted for portfolio activity and economic conditions.

     Management believes the level of the allowance as of September 30, 2006, is adequate to absorb future losses inherent in the loan portfolio.

     Stock-Based Compensation —Effective January 1, 2006 , the Company accounted for stock-based compensation arrangements in accordance with the provision of Financial Accounting Standard Board Statement (SFAS) 123(R), “Share-based Payment.” Under SFAS 123(R), compensation cost is calculated on the date of grant using the fair value of the option as determined using the Black Scholes method. The compensation cost is then amortized straight-line over the vesting period. The Black Scholes valuation calculation requires the Company to estimate key assumptions such as expected option term, expected volatility of the Company’s stock, the risk-free interest rate, annual dividend yield and forfeiture rates to determine the stock options fair value. The estimate of these key assumptions is based on historical information and judgment regarding market factors and trends. The Company elected to adopt the modified prospective application method as provided by SFAS 123(R), and, accordingly, the Company recorded compensation costs as the requisite service rendered for the unvested portion of previously issued awards that remain outstanding at the initial date of adoption and any awards issued, modified, repurchased, or cancelled after the effective date of SFAS 123(R). The Company assumes a forfeiture rate of 3% annually.

     Prior to January 1, 2006, the Company accounted for share-based compensation to employees in accordance with Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. The Company also followed the disclosure requirements of SFAS 123, “Accounting for Stock-Based Compensation”. No stock-based compensation was recognized on employee stock options in the Consolidated Income Statement before January 1, 2006. Accordingly, financial statement amounts for the prior periods presented in this Form 10Q have not been restated to reflect the fair value method of expensing share-based compensation. Had the Company adopted SFAS 123(R) in prior periods, the impact on the net income and earnings per share would have been approximately similar to the pro forma net income and earnings per share as disclosed in the tables on page 9 of this document.

     As a result of adopting SFAS 123(R), total stock-based compensation resulted in a decrease to income before income taxes for the quarter ended September 30, 2006, of $113 thousand. For the nine-months ending September 30, 2006, total stock-based compensation resulted in a decrease to income before income taxes of $335 thousand. The pre-tax future compensation expense throughout the four year vesting period through December 31, 2010, is estimated to be $1.4 million.

As of September 30, 2006, we have the following share-based compensation plan:

2005 Equity Based Compensation Plan —In May 2005, Company stockholders approved the 2005 Equity Based Compensation Plan (the Plan). The principal purpose of the 2005 Plan is to promote the success of the Company by attracting, motivating, and retaining key employees, including officers, and

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directors of the Company, through the grant of stock-based compensation awards and incentives for high levels of individual performance and improved financial performance of the Company. The availability of stock options and other equity awards combined with the ability to condition vesting of those awards on performance based criteria can provide the Company flexibility not found in the previous 1996 Stock Option Plan. This flexibility will help the Company craft compensation practices that better align management’s interest with those of the stockholders.

     The material aspects of the 2005 Plan are as follows:

• the 2005 Plan authorizes the granting of:

Incentive Stock Options;
Non-Qualified Stock Options;
Stock Appreciation Rights (“SARs”);
Restricted Stock Awards;
Restricted Stock Units; and
Performance Share Cash Only Awards

• vesting restrictions on awards may be time based and/or performance based;

• participation in the 2005 Plan is limited to officers at the level of Vice President or above and other employees who provide substantial services to the Company as well as the Company’s directors;

• the 2005 Plan provides for a maximum of a “floating” ten percent (10%) of the Company’s issued and outstanding shares of common stock that may be delivered for awards subject to adjustment as set forth therein; and

• the maximum number of Incentive Stock Options (ISO) that may be issued under the Plan is the lesser of 1,000,000 or the maximum number of shares allocated to the Plan;

• the right to acquire stock may not remain outstanding more than 10 years after the grant date, and any ISO Award granted to any eligible employee owning more than 10% of the Company’s stock must be granted at 110% of the fair market value of the stock. Awards do not vest or become exercisable until six months after the date of grant.

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The following table summarized the pro forma effect of stock-based compensation as if the fair value method of accounting for stock compensation had been applied.

	Stock Based Compensation
	Three Months		Nine Months
	September 30, 2005		September 30, 2005
Pro Forma Results
Net Income:
As reported	$	2,098	$	6,284
Total stock-based employee expense under the fair value based awards, net of related tax effects		59		175
Pro forma net income (APB 25)	$	2,039	$	6,109
Earnings per share — basic:
As reported	$	0.39	$	1.18
Pro forma	$	0.38	$	1.14
Earnings per share — diluted:
As reported	$	0.37	$	1.12
Pro forma	$	0.36	$	1.09

The fair value of each option granted is estimated on the date of grant, although during the September 2006 quarter no options were granted, using the Black-Scholes option-pricing model. For purposes of this computation, the significant assumptions used for the nine-month periods ending September 30, 2006, and September 30, 2005, computed on a weighted average basis, were:

	2006			2005
Risk free interest rate:		4.98	%		4.31	%
Expected option term (years):		6.93			9.00
Expected stock price volatility:		52.79	%		41.12	%
Contractual lives		10			10
Dividend yield		3.11	%		2.49	%
Weighted average fair value of options granted	$	7.08		$	8.16

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The following table summarizes the Company’s stock option plan activity and changes during the nine months ended September 30, 2006.

	September 30,
	2006
				Weighted-
				Average		Aggregate
				Exercise		Intrinsic
($ in Thousands Except Per Share Information)	Shares			Price		Value
Incentive stock options:
Outstanding beginning of year		620,440		$	9.60
Granted		102,500		$	16.80
Expired unexercised		(1,000	)	$	16.88
Options exercised		(64,750	)	$	5.57
Outstanding, end of the period		657,190		$	11.11	$	3,662
��
Exercisable, end of the period		426,026		$	8.35	$	3,452

Recent Accounting Pronouncements

     In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements,which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value in the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for that fiscal year, including financial statements for an interim period within that fiscal year. We do not expect the adoption of this statement to have a material impact on the Company’s financial condition, results of operations or cash flows.

     In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin(“SAB”) No. 108,Considering the Effects of Prior Year Misstatements when Quantifying Current Year Misstatements.SAB No. 108 requires analysis of misstatements using both an income statement (rollover ) approach and a balance sheet (iron Curtain) approach in assessing materiality and provides for a one-time cumulative effect transition adjustment. SAB No. 108 is effective for fiscal years ending on or after November 15, 2006. We are currently assessing the potential impact that the adoption of SAB No. 108 will have on our financial statements.

     In June 2006, the FASB issued FIN No. 48,Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109,which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109,Accounting for Income Taxes.The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 requires recognition of tax benefits that satisfy a greater than 50% probability threshold. FIN No. 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. We are currently assessing the potential impact that the adoption of FIN No. 48 will have on our financial statements.

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     Under EITF 06-4 : Accounting for deferred compensation and postretirement benefit aspects of endorsement split dollar life insurance arrangements, the EITF reached a consensus that requires the recognition of a liability related to the postretirement benefits covered by an endorsement split-dollar life insurance arrangement. The consensus highlights that the employer who is the policy holder has a liability for the benefit it is providing to the employee. The employer has agreed to maintain the insurance policy in force for the employee’s benefit during his retirement, then the liability recognized during the employee’s active service period should be based on the future cost of insurance to be incurred during the employee’s retirement. Also, if the employer has agreed to provide the employee with a death benefit, then the liability for the future death benefit should be recognized under SFAS 106. As of September 20, 2006, this FASB board ratified the above. It is applicable for fiscal years beginning after December 15, 2006. We do not expect the adoption of this statement to have a material impact on the Company’s financial condition, results of operations or cash flows.

     Under EITF 06-5: Accounting for Purchases of Life Insurance — Determining the Amount That Could be Realized in Accordance with FASB Technical Bulletin No. 85-4, “Accounting for Purchases of Life Insurance”, the Task Force reached a consensus that a policyholder should consider any additional amounts included in the contractual terms of the policy in determining the amount that could be realized under the insurance contract. The task forces agreed that contractual limitations should be considered when determining the realizable amounts. Those amounts that are recoverable by the policyholder at the discretion of the insurance company should be excluded from the amount that could be realized. The task force also agreed that fixed amounts that are recoverable by the policyholder in future periods in excess of one year from the surrender of the policy should be recognized at their present value. The task force also reached a consensus that a policyholder should determine the amount that could be realized under the life insurance contract assuming the surrender of an individual -life by individual life policy. The Task force also noted that any amount that is ultimately realized by the policyholder upon the assumed surrender of the final policy shall be included in the amount that could be realized under the insurance contract. The issue should be effective for fiscal years beginning after December 15, 2006, but early adoption is permitted. This was ratified at the Task Force, September 20 meeting. We do not expect the adoption of this statement to have a material impact on the Company’s financial condition, results of operations or cash flows.

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2. EARNINGS PER SHARE

The following tables represent the calculation of earnings per share (“EPS”) for the periods presented.

	Three months ended							Nine months ended
	September 30, 2006							September 30, 2006
	Income		Shares		Per-Share			Income		Shares		Per-Share
(net income amounts in thousands)	(Numerator)		(Denominator)		Amount			(Numerator)		(Denominator)		Amount
Basic EPS	$	2,102		5,448,820	$	0.39		$	6,275		5,435,238	$	1.15
Effect of dilutive stock options				136,707		(0.01	)				127,976		(0.02	)
Diluted EPS	$	2,102		5,585,527	$	0.38		$	6,275		5,563,214	$	1.13

	Three months ended							Nine months ended
	September 30, 2005							September 30, 2005
	Income		Shares		Per-Share			Income		Shares		Per-Share
	(Numerator)		(Denominator)		Amount			(Numerator)		(Denominator)		Amount
Basic EPS	$	2,098		5,364,077	$	0.39		$	6,284		5,338,935	$	1.18
Effect of dilutive stock options				285,057		(0.02	)				287,664		(0.06	)
Diluted EPS	$	2,098		5,649,134	$	0.37		$	6,284		5,626,599	$	1.12

Item 2:Management’s Discussion and Analysis of Financial Condition and Results of Operations

Corporate Profile

     Harrington West Financial Group, Inc. (NASDAQ: HWFG) is a diversified, community-based, financial institution holding company. Our primary business is delivering an array of financial products and services to commercial and retail consumers through our sixteen full-service banking offices in multiple markets. We also operate Harrington Wealth Management Company, our wholly owned subsidiary, which provides trust and investment management services to individuals and small institutional clients through customized investment allocations and a high service approach. The culture of our company emphasizes building long-term customer relationships through exemplary personalized service. Our corporate headquarters are in Solvang, California with executive offices in Scottsdale, Arizona.

Mission and Philosophy

     Our mission is to increase shareholder value through the development of highly profitable, community-based banking operations that offer a broad range of high value loan alternatives, deposit products, and investment and trust services for commercial and retail customers in the markets of the California central coast and the metropolitan areas of Kansas City and Phoenix/Scottsdale.

Multiple Market Strategy

     Although our markets are geographically dispersed, we can compete effectively in each region due to our considerable market knowledge of each area, our placement of local management with

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extensive banking experience in the respective market, our strong community ties that enhance relationship development, the favorable demographic and economic characteristics specific to each market, and our broad product menu.

     We believe this multiple market banking strategy benefits our shareholders by providing the Company with the ability to:

1.	Diversify its loan portfolio and thus economic and credit risk
2.	Capitalize on the most favorable growth markets
3.	Deploy elements of our diverse product mix that are best suited for each market
4.	Price products strategically among the markets to maximize profitability.

     While employing this strategy, we have expanded our banking facilities from four to sixteen offices since 1996. We operate eleven full-service offices on the central coast of California from Thousand Oaks to Atascadero, three banking offices in Johnson County, Kansas, the fastest growing area of the Kansas City metro, and two offices in Scottsdale, Arizona. HWFG opened its third Harrington Bank office in its Kansas City market in August 2006, which is the sixteenth office throughout its markets. The new office is located in Western Johnson County, in the city of Olathe, Kansas. The office is also conveniently located near the Lenexa business district, the Johnson County Community College, and residential development. HWFG’s third banking office in the Phoenix metro in the city of Surprise is in the development stages and expected to open in the fall of 2007. The Company has purchased a parcel for a banking office in the growing Deer Valley Airpark in north central Phoenix and has a one acre parcel under contract in Gilbert, AZ in the southeast Phoenix metro.

     We are considering additional expansion opportunities in each region and plan to open two to three offices every eighteen months. We evaluate opportunities for acquiring entities, which offer financial services, but remain value-oriented. We expect acquisitions will be accretive to earnings per share within a twelve-month period.

Product Line Diversification

     Over the last seven years, we have broadened our product lines to diversify revenue sources and to become a full service community banking company. In 1999, we added Harrington Wealth Management Company, a federally registered trust and investment management company, to provide our customers a consultative and customized investment process for their trust and investment funds. In 2000, we added a full line of commercial banking and deposit products for small-to-medium-sized businesses and developed our consumer lending lines to include home equity lines of credit. In 2001, we added Internet banking and bill pay services to augment our in-branch services. In 2003, we further expanded mortgage banking and security brokerage activities in all of our markets. In 2004, we implemented the Overdraft Privilege Program and started to offer brokerage and insurance products through an alliance with UVEST Financial Services, Inc.

Modern Financial and Investment Management Skills

     We have considerable expertise in investment and asset liability management. Our Chief Executive Officer spent thirteen years, of his 20 years, in this field consulting on risk management practices with banking institutions and advising on mortgage and related assets managed on a short duration basis. We utilize excess capital in a short duration and high credit quality investment portfolio comprised largely of mortgage and related securities. Our goal is to produce a pre-tax return on these investments of 1.00% to 1.25% over the related funding cost. We believe our ability to price loans and

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investments on an option-adjusted spread basis and manage the interest rate risk of longer term, fixed rate loans allows us to compete effectively against other institutions, that do not offer these products.

Control Banking Risks

     We seek to control banking risks. Our disciplined credit evaluation and underwriting environment emphasizes the assessment of collateral support, cash flows, guarantor support, and stress testing. We manage operational risk through stringent policies, procedures, and controls and manage interest rate risk through our modern financial and hedging skills and the application of risk management tools.

Concentrate on Selected Performance Measures

     We evaluate our performance based upon the primary measures of return on average equity, which we seek to maintain in the low to mid-teens, earnings per share growth, and franchise value creation through the growth of deposits, loans, and wealth management assets.

Profitability Drivers

     We expect these factors will drive more consistent and growing profitability in the future:

1.	Steady development and growth of loans, deposits, and investment management and trust accounts in all of our markets.
2.	Changing the loan mix to higher risk-adjusted spread earning categories such as business lending, commercial real estate lending, small tract construction and construction-to-permanent loan lending, and selected consumer lending activities such as home equity lines of credit.
3.	Growing our non-interest bearing consumer and commercial deposits and continuing to change the overall deposit mix toward core deposit accounts.
4.	Diversifying and increasing our banking fee income through existing and new sources such as our overdraft protection program and other deposit fees, loan fee income from mortgage banking and prepayment penalties, Harrington Wealth Management trust and investment fees, and other retail banking fees.
5.	Achieving a high level of performance on our investment portfolio by earning a pre-tax total return interest income plus net gains and losses on securities and related total return swaps over one month LIBOR of approximately 1.00% to 1.25% per annum.
6.	Controlling interest rate risk of the institution to a lower level and seeking high credit quality of the loan and investment portfolios.

Together, we believe these factors will contribute to consistent and growing profitability. The effect of these factors on our financial results is discussed further in the following sections:

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Results of Operations

     The Company reported net income of $2.1 million for the three months ended September 30, 2006, as compared to $2.1 million for the three months ended September 30, 2005. The Company reported net income of $6.3 million for the nine months ended September 30, 2006, as compared to $6.3 million for the nine months ended September 30, 2005. On a diluted earnings per share basis, the Company earned $.38 per share for the three months ended September 30, 2006 and $.37 for the three months ended September 30, 2005. On a diluted earnings per share basis, the Company earned $1.13 per share for the nine months ended September 30, 2006, compared to $1.12 per share for the nine months ended September 30, 2005. Return on average equity was 12.8% and 13.3% in the September quarters and year-to-date periods compared to 14.9 % and 15.4 % in the same periods in 2005, respectively.

     The net interest margin expanded for the third consecutive quarter to 2.88%, increasing 3 bps from the June quarter 2006. Over the last year, HWFG has reduced its available for sale and held to maturity portfolio by $70.5 million from sales and principal reductions in the tight spread environment and replaced these investments with strong loan growth of $92.1 million. The mix change from HWFG’s loan growth and the reduction of the investment portfolio is increasing HWFG’s net interest margin, offset somewhat by the lag in the re-pricing of some floating rate loans (lagging PRIME and cost of funds) and the pressure on deposit cost from competition increasing deposit rates more than general market rates. As a result of the net interest margin expansion and loan growth offsetting the reduction in the investment portfolio, net interest income was $7.7 million in the September 2006 quarter versus $7.6 million in the September 2005 quarter, growing 1.9%. For the first nine months of 2006, net interest income was $23.2 million compared to $22.6 million in the comparable period in 2005, growing 2.6%, in line with the growth in average interest earning assets.

     The following tables set forth, for the periods presented, information regarding (i) the total dollar amount of interest income from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rate; (iii) net interest income before provision for loan losses; (iv) interest rate spread; and (v) net interest margin. Information is based on average daily balances during the periods presented.

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	Three months ended							Three months ended
	September 30, 2006							September 30, 2005
(In thousands)	Balance		Income		Rate (6)			Balance		Income		Rate (6)
Interest earning assets:
Loans receivable (1)	$	730,840	$	14,317		7.82	%	$	641,446	$	11,122		6.94	%
FHLB stock		14,806		205		5.49	%		16,502		180		4.36	%
Securities and trading account assets (2)		329,143		4,384		5.33	%		399,818		4,500		4.50	%
Cash and cash equivalents (3)		10,469		72		2.73	%		9,802		45		1.84	%
Total interest earning assets		1,085,258		18,978		6.98	%		1,067,568		15,847		5.94	%
Non-interest-earning assets		50,544							45,714
Total assets	$	1,135,802						$	1,113,282
Interest bearing liabilities:
Deposits:
NOW and money market accounts	$	89,650	$	506		2.24	%	$	123,596	$	543		1.76	%
Passbook accounts and certificates of deposit		567,142		6,360		4.45	%		491,668		3,687		3.00	%
Total deposits		656,792		6,866		4.15	%		615,264		4,230		2.75	%
FHLB advances (4)		274,185		3,425		4.96	%		301,848		3,197		4.24	%
Reverse repurchase agreements		59,439		447		2.94	%		60,023		451		3.01	%
Other borrowings (5)		25,774		537		8.15	%		25,774		407		6.32	%
Total interest-bearing liabilities		1,016,190		11,275		4.38	%		1,002,909		8,285		3.30	%
Non-interest-bearing deposits		47,852							47,523
Non-interest-bearing liabilities		6,658							6,848
Total liabilities		1,070,700							1,057,280
Stockholders’ equity		65,102							56,002
Total liabilities and stockholders’ equity	$	1,135,802						$	1,113,282
Net interest-earning assets (liabilities)	$	69,068						$	64,659
Net interest income/interest rate spread			$	7,703		2.60	%			$	7,562		2.64	%
Net interest margin						2.88	%						2.83	%
Ratio of average interest-earning assets to average interest-bearing liabilities						106.80	%						106.45	%

1)	Balance includes non-accrual loans. Income includes fees earned on loans originated and accretion of deferred loan fees.
2)	Consists of securities classified as available for sale, held to maturity and trading account assets. adjustments to fair value, which are included in other assets.
3)	Consists of cash and due from banks and Federal funds sold.
4)	Interest on FHLB advances is net of hedging costs. Hedging costs include interest income and expense and ineffectiveness adjustments for cash flow hedges. The Company uses pay-fixed, receive floating LIBOR swaps to hedge the short term repricing characteristics of the floating FHLB advances.
5)	Consists of other debt and a note payable under a revolving line of credit.
6)	Annualized.

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	Nine Months Ended							Nine Months Ended
	September 30, 2006							September 30, 2005
(In thousands)	Balance		Income		Rate (6)			Balance		Income		Rate (6)
Interest earning assets:
Loans receivable (1)	$	704,447	$	40,256		7.62	%	$	628,943	$	31,628		6.71	%
FHLB stock		15,678		607		5.18	%		16,215		516		4.24	%
Securities and trading account assets (2)		358,064		13,790		5.14	%		411,519		13,058		4.23	%
Cash and cash equivalents (3)		11,107		193		2.32	%		9,363		116		1.65	%
Total interest earning assets		1,089,296		54,846		6.72	%		1,066,040		45,318		5.67	%
Non-interest-earning assets		48,773							37,338
Total assets	$	1,138,069						$	1,103,378
Interest bearing liabilities:
Deposits:
NOW and money market accounts	$	100,103	$	1,603		2.14	%	$	119,729	$	1,383		1.54	%
Passbook accounts and certificates of deposit		543,431		16,629		4.09	%		464,844		9,432		2.71	%
Total deposits		643,534		18,232		3.79	%		584,573		10,815		2.47	%
FHLB advances (4)		292,817		10,587		4.83	%		315,945		9,290		3.92	%
Reverse repurchase agreements		59,220		1,325		2.95	%		73,382		1,491		2.71	%
Other borrowings (5)		25,774		1,498		7.66	%		25,774		1,116		5.77	%
Total interest-bearing liabilities		1,021,345		31,642		4.12	%		999,674		22,712		3.03	%
Non-interest-bearing deposits		47,575							40,559
Non-interest-bearing liabilities		5,938							8,761
Total liabilities		1,074,858							1,048,994
Stockholders’ equity		63,211							54,384
Total liabilities and stockholders’ equity	$	1,138,069						$	1,103,378
Net interest-earning assets (liabilities)	$	67,951						$	66,366
Net interest income/interest rate spread			$	23,204		2.60	%			$	22,606		2.64	%
Net interest margin						2.86	%						2.83	%
Ratio of average interest-earning assets to average interest-bearing liabilities						106.65	%						106.64	%

1)	Balance includes non-accrual loans. Income includes fees earned on loans originated and accretion of deferred loan fees.
2)	Consists of securities classified as available for sale, held to maturity and trading account assets. Excludes SFAS 115 adjustments to fair value, which are included in other assets.
3)	Consists of cash and due from banks and Federal funds sold.
4)	Interest on FHLB advances is net of hedging costs. Hedging costs include interest income and expense and ineffectiveness adjustments for cash flow hedges. The Company uses pay-fixed, receive floating LIBOR swaps to hedge the short term repricing characteristics of the floating FHLB advances.
5)	Consists of other debt and a note payable under a revolving line of credit.
6)	Annualized.

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     The Company reported interest income of $19.0 million for the three months ended September 30, 2006, compared to $15.8 million for the three months ended September 30, 2005, an increase of $3.1 million or 19.8%. The Company reported interest income of $54.8 million for the nine months ended September 30, 2006, compared to $45.3 million for the nine months ended September 30, 2005, an increase of $9.5 million or 21.0%. The primary reason for the increase during the periods was the increase in the volume of net loans receivable and a higher yield on securities and loans due to higher interest rates.

     The Company reported total interest expense of $11.3 million for the three months ended September 30, 2006, compared to $8.3 million for the three months ended September 30, 2005, an increase of $3.0 million or 36.1%. For the nine months ended September 30, 2006, the Company reported total interest expense of $31.6 million, compared to $22.7 million for the nine months ended September 30, 2005, an increase of $8.9 million or 39.3%. The increase in interest expense during the period was attributable to an increase in the volume of interest-bearing liabilities and an increase in the average rate on interest-bearing liabilities as a result of the upward repricing of interest bearing-liabilities due to rising market interest rates and competition for deposits.

     The Company recorded a provision for loan losses of $200 thousand during the three months ended September 30, 2006, compared to $0.0 for the three months ended September 30, 2005, an increase of $200 thousand. The provision for loan losses was $490 thousand during the nine months ended September 30, 2006, compared to $350 thousand for the nine months ended September 30, 2005, an increase of $140 thousand. The provision reflects the reserves required based upon, among other things, the Company’s analysis of the composition, credit quality and growth of its commercial real estate and commercial and industrial loan portfolios.

     At September 30, 2006, the Company had $1.1 million of real estate owned. The property was acquired from the workout of a business credit in the Kansas City market, and the related business loans were charged off in the second quarter against the allowance for loan losses. HWFG completed the sale of its real estate owned on October 24, 2006, for the net book value of $1.1 million. The Company had no non-performing assets as of December 31, 2005, and $101 thousand of non-performing assets as of September 30, 2006.

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     The following table sets forth the activity in our allowance for loan losses for the periods indicated.

	For the Quarter Ended						For the Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
	(Dollars in thousands)						(Dollars in thousands)
Balance at beginning of period	$	5,614		$	5,576		$	5,661		$	5,228
Charge-offs:
Real Estate Loans
Single-family Residential
Multi-family Residential
Commercial
Commercial & Industrial		(13	)					(369	)
Consumer and Other Loans								(1	)		(2	)
Total Charge-offs		(13	)		0			(370	)		(2	)
Recoveries:		44			0			64			0
Net Recoveries (Charge-offs)		31						(306	)
Provision (credit) for Losses on Loans		200			0			490			350
Balance at end of period	$	5,845		$	5,576		$	5,845		$	5,576
Allowance for Loan Losses as a percent of total loans outstanding		0.78	%		0.85	%		0.78	%		0.85	%
Ratio of Net Charge-offs to Average Loans outstanding		0.00	%		0.00	%		0.04	%		0.00	%

     The Company attempts to manage its investment securities and the related borrowings and hedges thereof on a duration-matched basis and thus profit from its selection of undervalued investments. As such, net gains and losses on these investments are primarily the result of the changes in interest rate spreads between the securities and the hedged borrowings and the related effect on net market values. Investment portfolio net gains were $150 thousand in the quarter and emanated totally from the tightening of spreads on HWFG’s remaining total rate of return swap portfolio held in its trading portfolio. These swaps profit from a tightening of general spreads to comparable LIBOR rates and were entered into partially as a hedge against narrowing security and loan spreads on commercial real estate and residential loans. With the extreme tightening of credit spreads over the last 2 years, HWFG has reduced the notional amount of these swaps from over $160.0 million to $10.0 million at September 30, 2006. Management believes that spreads have tightened to an extent that the risk/return tradeoff is not favorable for holding many of these positions.

     Management measures the performance of the investment portfolio as the spread between its total return (interest income plus net gains and losses on securities and hedges) and one month LIBOR with a goal of achieving a spread of 1.25% and 1.50%. Management expects to manage the size of the

- 19 -

investment portfolio opportunistically as equity capital levels warrant and based on the growth of core banking assets and liabilities.

     Banking fee and other income was $931 thousand in the September 2006 quarter as compared to $1,159 thousand and $1,194 thousand in the September 2005 and June 2006 quarters, respectively. After adjusting for a one-time recovery of $295 thousand in the June 2006 quarter, banking fee and other income sources continued to grow in the September 2006 quarter, increasing $32 thousand over the prior quarter. The $295 thousand was the result of a recovery of back rents and leasehold improvements from a tenant in the Metcalf, KS banking office. However, banking fee income was lower by $228 thousand in the third quarter of 2006 over the comparable quarter in 2005 due to lower prepayment penalty fees. Prepayment penalty fees declined $207 thousand from the September 2005 to the September 2006 quarter due to higher market rates and fewer loan prepayments.

     BOLI Income decreased in the September 2006 quarter by $48 thousand over the September 2005 quarter, however, it continues to have a positive impact upon other income by increasing $119 thousand during the September 2006 year to date period over the same nine month period in 2005.

     The following chart shows the comparison of banking fee and other income sources for the September 2006 quarter and year-to-date period over the same periods in 2005:

Banking Fee & Other Income
(Dollars in thousands)

	September		September		%			September		September		%
Banking Fee Type	2006 Quarter		2005 Quarter		Change			2006 YTD		2005 YTD		Change
Mortgage Brokerage Fee, Prepayment Penalties & Other Loan Fees	$	176	$	409		-57.0	%	$	551	$	1,040		-47.0	%
Deposit, Other Retail Banking Fees & Other Fee Income	$	356	$	334		6.6	%	$	1,302	$	967		34.6	%
Harrington Wealth Management Fees	$	214	$	183		16.9	%	$	618	$	536		15.3	%
BOLI Income, net	$	185	$	233		-20.6	%	$	567	$	448		26.6	%
Total Banking Fee & Other Income	$	931	$	1,159		-19.7	%	$	3,038	$	2,991		1.6	%

     HWFG seeks to control its operating expenses relative to its anticipated growth in banking offices and its infrastructure required to produce its loan and deposit growth. Operating expenses were $5.5 million in the September 2006 quarter compared to $5.6 million and $5.4 million in the June 2006 and September 2005 quarters, respectively. The September 2006 quarter’s expenses have increased largely from the expansion of new banking offices in HWFG’s markets and the increase in general corporate and health care benefits. Year-to-date operating expenses were $16.5 million compared to $15.7 million in the same period in 2005, increasing 4.8%.

     Net income in the September 2006 quarter was positively affected by a favorable tax audit ruling from the California Franchise Tax Board, confirming the apportionment of income to states in which HWFG operates, thus adding $255 thousand to net income in the quarter that had been reserved pending the outcome of the audit. HWFG expects its combined tax rate to normalize to approximately 37.5% in future quarters.

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Financial Condition

     The Company’s total assets increased $6.0 million, to $1.1 billion at September 30, 2006 as compared to December 31, 2005. The Company’s primary focus with respect to its lending operations has historically been the direct origination of single-family and multi-family residential, commercial real estate, business, and consumer loans. As part of its strategic plan to diversify its loan portfolio, the Company, starting in 2000, has been increasing its emphasis on loans secured by commercial real estate, industrial loans and consumer loans.

     The Company recognizes that certain types of loans are inherently riskier than others. For instance, the commercial real estate loans that the Company makes are riskier than home mortgages because they are generally larger, often rely on income from small-business tenants, and historically have produced higher default rates on an industry wide basis. Likewise commercial loans are riskier than consumer and mortgage loans because they are generally larger and depend upon the success of often complex businesses. Furthermore construction loans and land acquisition and development loans present higher credit risk than do other real estate loans due to their speculative nature. Unsecured loans are also inherently riskier than collateralized loans. However, these loans also provide a higher risk adjusted margin and diversification benefits to the loan portfolio.

     Non-single-family loans as a group increased to $636.6 million at September 30, 2006, compared to $565.6 million at December 31, 2005, an increase of $71.0 million while single-family residential loan balances decreased to $115.1 million at September 30, 2006, compared to $115.9 million at December 31, 2005, a decrease of $800 thousand.

     The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated.

HWFG Net Loan Growth and Mix
(Dollars in millions)

	September 30, 2006						December 31, 2005						September 30, 2005
				% of						% of						% of
Loan Type	Total			Total			Total			Total			Total			Total
Commercial Real Estate	$	260.5			34.7	%	$	253.2			37.2	%	$	260.7			39.6	%
Multi-family Real Estate		78.7			10.5	%		80.9			11.9	%		76.0			11.5	%
Construction (1)		106.9			14.2	%		70.9			10.4	%		55.5			8.4	%
Single-family Real Estate		115.1			15.3	%		115.9			17.0	%		109.0			16.5	%
Commercial and Industrial Loans		112.1			14.9	%		96.5			14.2	%		94.3			14.3	%
Land Acquisition and Development		50.5			6.7	%		36.1			5.3	%		34.5			5.2	%
Consumer Loans		25.7			3.4	%		26.7			3.9	%		28.1			4.3	%
Other Loans (2)		2.2			0.3	%		1.3			0.1	%		1.3			0.2	%
Total Gross Loans	$	751.7			100.0	%	$	681.5			100.0	%	$	659.4			100.0	%
Allowance, Deferred Fees & Discounts/ Premiums		(8.4	)					(8.6	)					(8.2	)
Net Loans Receivable	$	743.3					$	672.9					$	651.2

(1)	Includes loans secured by residential, land and commercial properties. At September 30, 2006, we had $56.0 million of construction loans secured by single-family residential properties, $24.0 million secured by commercial properties, $22.2 million for land development and $4.7 million secured by multi-family residential properties.
(2)	Includes loans collateralized by deposits and consumer line of credit loans.

     Securities classified as available for sale decreased to $320.6 million at September 30, 2006, as compared to $387.4 million at December 31, 2005, a decrease of $66.8 million from net sales and

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principal reductions or 17.2%. The Company manages the securities portfolio in order to enhance net interest income and net market value, as opportunities dictate, and deploys excess capital in investment assets until such time as the Company can reinvest into loans or other community banking assets that generate higher risk-adjusted returns.

     The amortized cost and market values of available for sale securities are as follows:

	Amortized		Fair
	Cost		Value
September 30, 2006
Mortgage-backed securities — pass throughs	$	101,285	$	99,638
Collateralized mortgage obligations		65,870		65,421
Commercial mortgage-backed securities		35,595		35,284
Asset-backed securities (underlying securities mortgages)		116,576		117,081
Asset-backed securities		3,149		3,165
	$	322,475	$	320,589

	Amortized		Fair
	Cost		Value
December 31, 2005
Mortgage-backed securities — pass throughs	$	125,153	$	122,840
Collateralized mortgage obligations		80,470		79,531
Commercial mortgage-backed securities		40,647		40,179
Asset-backed securities (underlying securities mortgages)		141,086		141,564
Asset-backed securities		3,335		3,238
	$	390,691	$	387,352

     The fair values of securities can change due to underlying credit quality of the issuer or collateral, prepayment speed changes, and changes in interest rates. All of the available for sale securities held by the Company are carried at their fair value. At the present time the Company is not aware of any credit quality issues.

     Premises and Equipment increased to $14.4 million at September 30, 2006, compared to $10.3 million as of December 31, 2005, an increase of 40.1%. The increase was attributed to the purchase of a parcel for a new banking center in the Deer Valley Airpark in north central Phoenix.

     Deposit balances decreased slightly by $2.7 million in the September 2006 quarter, however, increased by $39.3 million year-to-date from the popularity of HWFG’s Diamond account, which is a hybrid CD providing the customer limited liquidity and re-pricing options over its ten month term. HWFG continued to pursue non-costing deposits through its incentive program for lenders and its Ultimate Checking promotion. In the September 2006 quarter, average non-interest bearing deposits were up 3.3% to $47.9 million, while the ending balance of these deposits was up 12.9% to $54.1 million. Overall deposits declined by $2.7 million to $708.5 million in the September 2006 quarter, due primarily to management’s decision not to match certificate of deposit promotions of other financial institutions above its borrowing cost.

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     Advances from the Federal Home Loan Bank (“FHLB”) of San Francisco decreased to $279.0 million at September 30, 2006, compared to $319.0 million at December 31, 2005, a $40.0 million or 12.5% decrease due to the increase in deposit and earnings over the same period. For additional information concerning limitations on FHLB advances, see “Liquidity and Capital Resources.” The decrease in FHLB borrowings is due primarily to deposit growth and the reduction of the investment portfolio during the current quarter.

     Stockholders’ equity increased to $65.9 million at September 30, 2006, as compared to $59.6 million at December 31, 2005, an increase of $6.3 million or 10.5%. The $6.3 million increase in stockholders’ equity was positively influenced by $6.3 million of net income recognized and $558 thousand of additional paid in capital from options exercised and $335 thousand from options expensed. Other comprehensive income increased by $1.2 million due to unrealized gains on securities held as available for sale of $839 thousand plus $314 thousand in gains on interest rate hedge contracts. The Company also paid $2.0 million in dividends during the nine month period.

Liquidity and Capital Resources

     Liquidity.The liquidity of Los Padres Bank was 15.3% at September 30, 2006. Los Padres Bank is a consolidated subsidiary of the Company and is monitored closely for regulatory purposes at the Bank level by calculating the ratio of cash, cash equivalents (not committed, pledged or required to liquidate specific liabilities), investments and qualifying mortgage-backed securities to the sum of total deposits plus borrowings payable within one year. At September 30, 2006, Los Padres Bank’s “liquid” assets totaled approximately $98.0 million.

     In general, Los Padres Bank’s liquidity is represented by cash and cash equivalents and is a product of its operating, investing and financing activities. The Bank’s primary sources of internal liquidity consist of deposits, prepayments and maturities of outstanding loans and mortgage-backed and related securities, maturities of short-term investments, sales of mortgage-backed and related securities and funds provided from operations. The Bank’s external sources of liquidity consist of borrowings, primarily advances from the FHLB of San Francisco, securities sold under agreements to repurchase and a revolving line of credit loan facility, which it maintains with two banks. At September 30, 2006, the Bank had $279.0 million in FHLB advances and had $122.2 million of additional borrowing capacity with the FHLB of San Francisco based on a 35% of total Bank asset limitation. Borrowing capacity from the FHLB is further limited to $27.0 million based on excess collateral pledged at the FHLB as of September 30, 2006.

     The Company has a revolving line of credit with a maximum borrowing capacity of $15.0 million with a maturity of September 30, 2007. We may utilize this line of credit as growth opportunities develop and to provide working capital. At September 30, 2006, and December 31, 2005, the Company was not indebted under its revolving line of credit.

     A substantial source of the Company’s cash flow from which it services its debt and capital trust securities, pays its obligations, and pays dividends to its shareholders is the receipt of dividends from Los Padres Bank. The availability of dividends from Los Padres Bank is limited by various statutes and regulations. In order to make such dividend payments, Los Padres Bank is required to provide 30 days advance notice to the Office of Thrift Supervision (“OTS”), during which time the OTS may object to such dividend payment. It is possible, depending upon the financial condition of Los Padres Bank and other factors, the OTS could object to the payment of dividends by Los Padres Bank on the basis that the payment of such dividends is an unsafe or unsound practice. In the event Los Padres Bank is unable to pay dividends to us, we may not be able to service our debt, pay our obligations, or pay dividends on our common stock.

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     Capital Resources.Federally insured savings institutions such as Los Padres Bank are required to maintain minimum levels of regulatory capital. Under applicable regulations, an institution is well capitalized if it has a total risk-based capital ratio of at least 10.0%, a Tier 1 risk-based capital ratio of at least 6.0% and a leverage ratio of at least 5.0%, with no written agreement, order, capital directive, prompt corrective action directive or other individual requirement by the OTS to maintain a specific capital measure. An institution is adequately capitalized if it has a total risk-based capital ratio of at least 8.0% and a Tier 1 risk-based capital ratio of at least 4.0% and a leverage ratio of at least 4.0% (or 3.0% if it has a composite rating of “1”). The regulation also establishes three categories for institutions with lower ratios: undercapitalized, significantly undercapitalized and critically undercapitalized. At September 30, 2006, Los Padres Bank met the capital requirements of a “well capitalized” institution under applicable OTS regulations. At September 30, 2006, the Bank’s Tier 1 (Core) Capital Ratio was 7.34%, Total Risk-Based Capital Ratio was 10.82%, Tier 1 Risk-Based Capital Ratio was 10.12% and Leverage Ratio was 7.34%.

     On May 3, 2005, the Company announced a share repurchase program of up to 200,000 shares over the next year as market conditions warrant. These shares will be purchased in the open market or privately negotiated transactions. No shares were repurchased by the Company in the September 2006 quarter.

Asset and Liability Management

     The Company evaluates the change in its market value of portfolio equity (“MVPE”) to changes in interest rates and seeks to manage these changes to relatively low levels through various risk management techniques. MVPE is defined as the net present value of the cash flows from an institution’s existing assets, liabilities and off-balance sheet instruments. The MVPE is estimated by valuing the Company’s assets, liabilities and off-balance sheet instruments under various interest rate scenarios. The extent to which assets gain or lose value in relation to the gains or losses of liabilities determines the appreciation or depreciation in equity on a market value basis. MVPE analysis is intended to evaluate the impact of immediate and sustained interest rate shifts of the current yield curve upon the market value of the current balance sheet. In general, financial institutions are negatively affected by an increase in interest rates to the extent that interest-bearing liabilities mature or reprice more rapidly than interest-earning assets. This factor causes the income and MVPE of these institutions to increase as rates fall and decrease as interest rates rise.

     The Company’s management believes that its asset and liability management strategy, as discussed below, provides it with a competitive advantage over other financial institutions. The Company believes that its ability to hedge its interest rate exposure through the use of various interest rate contracts provides it with the flexibility to acquire loans structured to meet its customer’s preferences and investments that provide attractive net risk-adjusted spreads, regardless of whether the customer’s loan or our investment is fixed-rate or adjustable-rate or short-term or long-term. Similarly, the Company can choose a cost-effective source of funds and subsequently engage in an interest rate swap or other hedging transaction so that the interest rate sensitivities of its interest-earning assets and interest-bearing liabilities are more closely matched.

     The Company’s asset and liability management strategy is formulated and monitored by the board of directors of Los Padres Bank. The Board’s written policies and procedures are implemented by the Asset and Liability Committee of Los Padres Bank (“ALCO”), which is comprised of Los Padres Bank’s chief executive officer, president/chief financial officer, chief lending officer, president of the Kansas region/chief commercial lending officer, principal accounting officer, and four non-employee directors of Los Padres Bank. The ALCO meets at least eight times a year to review the sensitivity of Los Padres Bank’s assets and liabilities to interest rate changes, investment opportunities, the performance of the investment portfolios, and prior purchase and sale activity of securities. The ALCO also provides guidance to management on reducing interest rate risk and on investment strategy and retail pricing and

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funding decisions with respect to Los Padres Bank’s overall asset and liability composition. The ALCO reviews Los Padres Bank’s liquidity, cash flow needs, interest rate sensitivity of investments, deposits and borrowings, core deposit activity, current market conditions and interest rates on both a local and national level in connection with fulfilling its responsibilities.

     The ALCO regularly reviews interest rate risk with respect to the impact of alternative interest rate scenarios on net interest income and on Los Padres Bank’s MVPE. The Asset and Liability Committee also reviews analyses concerning the impact of changing market volatility, prepayment forecast error, and changes in option-adjusted spreads and non-parallel yield curve shifts.

     In the absence of hedging activities, the Company’s MVPE would decline as a result of a general increase in market rates of interest. This decline would be due to the market values of the Company’s assets being more sensitive to interest rate fluctuations than are the market values of its liabilities due to its investment in and origination of generally longer-term assets which are funded with shorter-term liabilities. Consequently, the elasticity (i.e.,the change in the market value of an asset or liability as a result of a change in interest rates) of the Company’s assets is greater than the elasticity of its liabilities.

     Accordingly, the primary goal of the Company’s asset and liability management policy is to effectively increase the elasticity of its liabilities and/or effectively contract the elasticity of its assets so that the respective elasticities are matched as closely as possible. This elasticity adjustment can be accomplished internally, by restructuring the balance sheet, or externally by adjusting the elasticities of assets and/or liabilities through the use of interest rate contracts. The Company’s strategy is to hedge, either internally through the use of longer-term certificates of deposit or less sensitive transaction deposits and FHLB advances, or externally through the use of various interest rate contracts.

     External hedging generally involves the use of interest rate swaps, caps, floors, options and futures. The notional amount of interest rate contracts represents the underlying amount on which periodic cash flows are calculated and exchanged between counterparties. However, this notional amount does not necessarily represent the principal amount of securities that would effectively be hedged by that interest rate contract.

     In selecting the type and amount of interest rate contract to utilize, the Company compares the elasticity of a particular contract to that of the securities to be hedged. An interest rate contract with the appropriate offsetting elasticity could have a notional amount much greater than the face amount of the securities being hedged.

     The Company adopted SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities,on January 1, 2001. SFAS No. 133 as amended requires that an entity recognize all interest rate contracts as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. If certain conditions are met, an interest rate contract may be specifically designated as a fair value hedge, a cash flow hedge, or a hedge of foreign currency exposure. The accounting for changes in the fair value of an interest rate contract (that is, gains and losses) depends on the intended use of the interest rate contract and the resulting designation. To qualify for hedge accounting, the Company must show that, at the inception of the interest rate contracts, and on an ongoing basis, the changes in the fair value of the interest rate contracts are expected to be highly effective in offsetting related changes in the cash flows of the hedged liabilities. The Company has entered into various interest rate swaps for the purpose of hedging certain of its short-term liabilities. These interest rate swaps qualify for hedge accounting. Accordingly, the effective portion of the accumulated change in the fair value of the cash flow hedges is recorded in a separate component of stockholders’ equity, net of tax, while the ineffective portion is recognized in earnings immediately.

     The Company has also entered into various total return swaps in an effort to enhance income, where cash flows are based on the level and changes in the yield spread on investment grade commercial

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mortgage indexes and asset backed referenced securities relative to similar duration LIBOR swap rates. These swaps do not qualify for hedge accounting treatment and are included in the trading account assets and are reported at fair value with realized and unrealized gains and losses on these instruments recognized in income (loss) from trading account assets.

Critical Accounting Policies

     Critical accounting policies are discussed within our Form 10-K dated December 31, 2005. There are no changes to these policies as of September 30, 2006.

Cautionary Statement Regarding Forward-Looking Statements.

     Certain statements contained in this Form 10-Q, including, without limitation, statements containing the words “believes”, “anticipates”, “intends”, “expects”, and words of similar import, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions in those areas in which we operate, demographic changes, competition, fluctuations in interest rates, changes in business strategy or development plans, changes in governmental regulation, credit quality, the availability of capital to fund the expansion of our business, economic, political and global changes arising from the war on terrorism, the conflict with Iraq and its aftermath, and other factors referenced in our 2005 Annual Report as filed on form 10-K, including in “Item 1A. Risk Factors.”

     Because these forward-looking statements are subject to risks and uncertainties, our actual results may differ materially from those expressed or implied by these statements. You are cautioned not to place undue reliance on our forward-looking statements, which speak only as of the date of this Form 10-Q. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. The future results and stockholder values of our common stock may differ materially from those expressed in these forward-looking statements. Many of the factors that will determine these results and values are beyond our ability to control or predict.

     We do not undertake any obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events.

Item 3:Quantitative and Qualitative Disclosures about Market Risk

     The OTS requires each thrift institution to calculate the estimated change in the institution’s 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. The OTS permits institutions to perform this MVPE analysis using their own internal model based upon reasonable assumptions.

     In estimating the market value of mortgage loans and mortgage-backed securities, the Company utilizes various prepayment assumptions, which vary, in accordance with historical experience, based upon the term, interest rate, prepayment penalties, if applicable, and other factors with respect to the underlying loans. At September 30, 2006, these prepayment assumptions varied from 1.4% to 48.7% for fixed-rate mortgages and mortgage-backed securities and varied from 2.0% to 68.0% for adjustable-rate mortgages and mortgage-backed securities.

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     The following table sets forth at September 30, 2006, the estimated sensitivity of the Bank’s MVPE to parallel yield curve shifts using the Company’s internal market value calculation. The table demonstrates the sensitivity of the Company’s assets and liabilities both before and after the inclusion of its interest rate contracts.

	Change In Interest Rates (In Basis Points)
	-300			-200			-100			Base	+100			+200			+300
Market value gain (loss) in assets	$	27,392		$	21,066		$	12,336			$	(15,204	)	$	(32,172	)	$	(49,997	)
Market value gain (loss) of liabilities		(21,402	)		(14,773	)		(7,513	)			7,538			15,104			22,764
Market value gain (loss) of net assets before interest rate contracts		5,990			6,293			4,823				(7,666	)		(17,068	)		(27,233	)
Market value gain (loss) of interest rate contracts		(11,041	)		(7,160	)		(3,488	)			3,298			6,424			9,407
Total change in MVPE (2)	$	(5,051	)	$	(867	)	$	1,335			$	(4,368	)	$	(10,644	)	$	(17,826	)
Change in MVPE as a percent of:
MV of total assets of Bank		-5.36	%		-0.92	%		1.42	%			-4.64	%		-11.31	%		-18.93	%
Total assets of the Bank (3)		-0.63	%		-0.23	%		0.03	%			-0.28	%		-0.72	%		-1.26	%

(1)	Assumes an instantaneous parallel change in interest rates at all maturities.
(2)	Based on the Company’s pre-tax tangible MVPE of $94.1 million at September 30, 2006.
(3)	Pre-tax tangible MVPE as a percentage of tangible assets.

     The table set forth above 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 to the extent the affected instruments are marked to market, and over the life of the instruments as an impact on recorded yields.

Item 4:Controls and Procedures

     As of the end of the period covered by this report the Company carried out an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”). The evaluation was based on confirmations provided by a number of senior officers. Based upon that evaluation, the Company’s Chief Executive Officer and the Company’s Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings. For the quarter ended September 30, 2006, there have been no significant changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

     Disclosure controls and procedures are Company controls designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed

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to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing these controls and procedures, management recognizes that they can only provide reasonable assurance of achieving the desired control objectives. Management also evaluated the cost-benefit relationship of possible controls and procedures.

PART II —OTHER INFORMATION

Item 1:Legal Proceedings

The Company is involved in various legal proceedings occurring in the ordinary course of business, which, in the aggregate, are believed by management to be immaterial to the financial condition and results of operations of the Company.

Item 1A.Risk Factors

There were no material changes in the third quarter of 2006 to the risk factors discussed in the Company’s 10-K for the year ended December 31, 2005

Item 2:Unregistered Sales of Equity Securities and Use of Proceeds

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

Not applicable.

Item 6:Exhibits

EXHIBIT NO.	DESCRIPTION
31.1	Section 302 Certification by Chief Executive Officer filed herewith.
31.2	Section 302 Certification by Chief Financial Officer filed herewith.
32	Section 906 Certification by Chief Executive Officer and Chief Financial Officer furnished herewith.

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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 WEST FINANCIAL GROUP, INC.
Date: November 10, 2006	By:	/S/ CRAIG J. CERNY
	Craig J. Cerny, Chief Executive Officer
	(Principal Executive Officer)
	By:	/S/ WILLIAM W. PHILLIPS
	William W. Phillips,
	President, Chief Operating Officer and Chief Financial Officer (Principal Financial and Accounting Officer)

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