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 March 31, 2008

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 Yes     o No

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

Large accelerated filer o	Accelerated filer o	Non-accelerated filer o	Smaller reporting company þ
	(Do not check if a smaller reporting company)

     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 Yes     þ No

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 6,131,243 shares of Common Stock, par value $0.01 per share, outstanding as of April 30, 2008.

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 March 31, 2008 and December 31, 2007		2
Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2008 and 2007		3
Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the Three Months Ended March 31, 2008 and Year Ended December 31, 2007		4
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2008 and 2007		5
Notes to Condensed Consolidated Financial Statements		7
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations		11
Item 3.Quantitative and Qualitative Disclosures about Market Risk		25
Item 4T.Controls and Procedures		26
Part II — Other Information
Item 1.Legal Proceedings		27
Item 1A.Risk Factors		27
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds		27
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		28
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 31.3
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 per share data)

	March 31			December 31,
	2008			2007
Assets:
Cash and cash equivalents	$	24,599		$	14,433
Trading account assets		3,719			2,307
Securities, available-for-sale		331,434			351,466
Securities held to maturity (fair value of $56 at March 31, 2008 and $58 at December 31, 2007)		53			56
Loans held for sale		16,654			—
Loans receivable, net of allowance for loan losses of $6,945 at March 31, 2008 and $6,446 at December 31, 2007		782,421			782,626
Accrued interest receivable		4,373			5,168
Premises, equipment and other long-term assets		17,540			16,917
Due from broker		83			1
Prepaid expenses and other assets		4,582			2,848
Investment in FHLB stock, at cost		12,643			12,474
Income taxes receivable		2,782			—
Cash surrender value of life insurance		20,716			20,524
Deferred tax asset		16,333			8,384
Goodwill		5,496			5,496
Other intangible assets		640			702
Total assets	$	1,244,068		$	1,223,402
Liabilities:
Deposits:
Interest-bearing deposits	$	831,033		$	786,263
Non-interest-bearing demand deposits		49,000			50,070
Total Deposits		880,033			836,333
FHLB advances		232,000			247,000
Securities sold under repurchase agreements		50,374			49,981
Subordinated debt		25,774			25,774
Accrued interest payable and other liabilities		13,115			8,769
Income taxes payable		122			503
Total liabilities		1,201,418			1,168,360
Commitments and contingencies
Shareholders’ 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; 6,131,243 shares issued and outstanding as of March 31, 2008 and 5,554,003 shares issued and outstanding December 31, 2007		61			56
Additional paid-in capital		39,003			34,424
Retained earnings		31,415			35,368
Accumulated other comprehensive income/(loss)		(27,829	)		(14,806	)
Total shareholders’ equity		42,650			55,042
Total liabilities and shareholders’ equity	$	1,244,068		$	1,223,402

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

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HARRINGTON WEST FINANCIAL GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME/LOSS   (Unaudited)
(Dollars in thousands, except per share data)

	March 31
	2008			2007
Interest income:
Loans	$	14,200		$	14,992
Securities		5,365			4,326
Total interest income		19,565			19,318
Interest expense:
Deposits		8,482			7,577
Interest on FHLB advances, repos & other debt		3,368			4,062
Total interest expense		11,850			11,639
Net interest income		7,715			7,679
Provision for loan losses		500			100
Net interest income after provision for loan losses		7,215			7,579
Non-interest income:
Gain on sale of available for sale securities		1,402			—
Income (loss) from trading assets		(8,670	)		4
Other-than-temporary loss		(70	)		—
Other income		1			—
Increase in cash surrender value of life insurance		193			201
Banking fee and other income		840			871
Total non-interest income		(6,304	)		1,076
Non-interest expense:
Salaries and employee benefits		3,536			3,273
Premises and equipment		993			949
Insurance premiums		212			85
Marketing		96			113
Computer services		256			220
Professional fees		135			264
Office expenses and supplies		209			213
Other		673			577
Total non-interest expense		6,110			5,694
Income (loss) before income taxes		(5,199	)		2,961
Provision for income tax expense (benefit)		(1,953	)		1,106
Net income (loss)	$	(3,246	)	$	1,855
Basic earnings/(loss) per share	$	(0.58	)	$	0.34
Diluted earnings/(loss) per share	$	(0.58	)	$	0.33
Basic weighted-average shares outstanding		5,590,236			5,516,239
Diluted weighted-average shares outstanding		5,590,236			5,632,054

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

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HARRINGTON WEST FINANCIAL GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME (LOSS) (Unaudited)
(Dollars in thousands, except share and per share data)

													Accumulated
					Additional								Other			Total
	Common Stock				Paid-In		Retained			Comprehensive			Comprehensive			Stockholders’
	Shares		Amount		Capital		Earnings			Income/(Loss)			Income (Loss)			Equity
BALANCE, JANUARY 1, 2007		5,460,393	$	55	$	33,332	$	34,964					$	(653	)	$	67,698
Comprehensive Income
Net Income								4,168			4,168						4,168
Other comprehensive loss, net of tax
Unrealized losses on securities											(10,757	)		(10,757	)		(10,757	)
Effective portion of change in fair value of cash flow hedges											(3,396	)		(3,396	)		(3,396	)
Total comprehensive loss										$	(9,985	)
Stock options exercised including tax benefit of $125		93,610		1		719											720
Stock compensation expense						373											373
Dividends on Common Stk at $.675/Shr								(3,764	)								(3,764	)
BALANCE, DECEMBER 31, 2007		5,554,003		56		34,424		35,368						(14,806	)		55,042
Comprehensive Income/(loss)
Net Income/(loss)								(3,246	)	$	(3,246	)					(3,246	)
Other comprehensive loss, net of tax
Unrealized losses on securities											(9,772	)		(9,772	)		(9,772	)
Effective portion of change in fair value of cash flow hedges											(3,251	)		(3,251	)		(3,251	)
Total comprehensive loss										$	(16,269	)
Stock options exercised including tax benefit of $25		27,240		—		233											233
Shares issued in private offering at $7.75		550,000		5		4,257											4,262
Stock compensation expense						89											89
Dividends on Common Stk at $.125/Shr								(707	)								(707	)
BALANCE, MARCH 31, 2008		6,131,243	$	61	$	39,003	$	31,415					$	(27,829	)	$	42,650

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

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HARRINGTON WEST FINANCIAL GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollars in thousands)

	Three Months Ended
	March 31
	2008			2007
Cash flows from operating activities:
Net income (loss)	$	(3,246	)	$	1,855
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Accretion of deferred loan fees and costs		(173	)		(207	)
Depreciation and amortization		358			386
Amortization of premiums and discounts on loans receivable and securities		(242	)		459
Deferred income taxes		(7,949	)		(57	)
Provision for loan losses		500			100
Activity in trading account assets		(1,902	)		5
Gain (loss) on sale of trading securities		490			(3	)
Gain on sale of available-for-sale securities		(1,402	)		—
Loss on other-than-temporary impairment		70			—
FHLB stock dividend		(169	)		(214	)
Earnings on bank owned life insurance		(193	)		(201	)
Decrease in accrued interest receivable		795			261
Increase (decrease) in income tax receivable, net of payable		(3,163	)		359
Decrease in prepaid expenses and other assets		6,120			1,067
Stock compensation expense		89			120
(Decrease) increase in accounts payable, accrued expenses, and other liabilities		1,104			(1,340	)
Net cash (used in) provided by operating activities		(8,913	)		2,590
Cash flows from investing activities:
Net (increase) decrease in loans receivable		(16,767	)		2,802
Proceeds from sales of securities available for sale		55,446			—
Purchases of securities available for sale		(65,284	)		(13,198	)
Principal paydowns on securities available for sale		15,802			32,935
Principal paydowns on securities held to maturity		3			3
Net purchase of premises and equipment		(919	)		(71	)
Redemption of FHLB Stock		—			108
Net cash (used in) provided by investing activities		(11,719	)		22,579
Cash flows from financing activities:
Net increase in deposits		43,700			354
(Decrease) increase in securities sold under agreements to repurchase		393			(1,190	)
Decrease in FHLB advances		(15,000	)		(30,000	)
Proceeds from exercise of stock options, including tax benefits		233			661
Proceeds from shares issued in private offering		2,179			—
Dividends paid on common stock		(707	)		(696	)
Net cash (used in) provided by financing activities		30,798			(30,871	)
Net (decrease) increase in cash and cash equivalents		10,166			(5,702	)
Cash and cash equivalents at beginning of period		14,433			21,178
Cash and cash equivalents at end of period	$	24,599		$	15,476

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

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HARRINGTON WEST FINANCIAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollars in thousands)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION —
Cash paid during the period for:
Interest	$	11,409		$	11,839
Income Taxes	$	1,190		$	800
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES —
Due from broker	$	(83	)	$	(1	)
Transfer of loans to loans held for sale	$	16,654		$	—

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

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HARRINGTON WEST FINANCIAL GROUP, INC.
NOTES TO 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 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 $187.4 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 for interim financial information and general practices within the banking industry. In the opinion of the Company’s management, all adjustments consisting of normal recurring accruals necessary for a fair presentation of the financial condition and results of operation for the interim periods included herein have been made.

     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, 2007, 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). Charge-offs are recorded when management believes the uncollectability of the loan balance is confirmed.

     The allowance is maintained at a level believed by management to be sufficient to absorb estimated probable incurred 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.

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     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 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.

     Adoption of new accounting standards— In September 2006, the FASB issued Statement No. 157,Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The standard is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued Staff Position (FSP) 157-2,Effective Date of FASB Statement No. 157. This FSP delays the effective date of FAS 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The impact of adoption was not material.

     In February 2007, the FASB issued Statement No. 159,The Fair Value Option for Financial Assets and Financial Liabilities. The standard provides companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The new standard is effective for the Company on January 1, 2008. The Company did not elect the fair value option for any financial assets or financial liabilities as of January 1, 2008.

2. FAIR VALUE

     Statement 157 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

     Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

     Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

     Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing and asset or liability.

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     The fair values of trading securities and securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used to in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). All of our securities are quoted using observable market information for similar assets which requires HWFG to report and use Level 2 pricing.

     Our derivative instruments consist of interest rate swaps, total return swaps and credit default swaps, as such, significant fair value inputs can generally be verified by counterparties and do not typically involve significant management judgments (Level 2 inputs).

     Assets and liabilities measured at fair value on a recurring basis are summarized below:

Fair Value Measurements at March 31, 2008 Using

				Quoted Prices in					Significant
				Active Markets for		Significant Other			Unobservable
				Identical Assets		Observable Inputs			Inputs
	Total			(Level 1)		(Level 2)			(Level 3)
Assets:
Trading securities	$	3,719		$	—	$	3,719		$	—
Available for sale securities		331,434			—		331,434			—
Interest rate swaps		(10,313	)		—		(10,313	)		—

     Assets and liabilities measured at fair value on a non-recurring basis are summarized below:

Fair Value Measurements at March 31, 2008 Using

			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
			Identical Assets		Observable Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Impaired loans	$	13,784	$	—	$	13,784	$	—

     Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $14.6 million, with a valuation allowance of $764 thousand, resulting in an additional provision for loan losses of $500 thousand for the period.

3. EARNINGS PER SHARE

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

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	Three months ended March 31, 2008
(net income/(loss) amounts	Income/(Loss)			Shares		Per-Share
in thousands)	(Numerator)			(Denominator)		Amount
Basic EPS	$	(3,246	)		5,590,236	$	(0.58	)
Effect of dilutive stock options					—		—
Diluted EPS	$	(3,246	)		5,590,236	$	(0.58	)

	Three months ended March 31, 2007
	Income/(Loss)		Shares		Per-Share
	(Numerator)		(Denominator)		Amount
Basic EPS	$	1,855		5,516,239	$	0.34
Effect of dilutive stock options				115,815		(0.01	)
Diluted EPS	$	1,855		5,632,054	$	0.33

     Anti-dilutive options totaling 519,175 and 92,500 for the quarters and year-to-date ended March 31, 2008 and 2007, respectively, are excluded from the calculation of earnings per share.

4. OTHER-THAN-TEMPORARY IMPAIRMENT

     As further discussed in Management’s Discussion and Analysis, management determined that an available-for-sale security with an amortized cost of $73 thousand was deemed other than temporarily impaired. As such, this security was written down by $70 thousand to fair value through earnings in the March 2008 quarter.

5. TOTAL RATE OF RETURN SWAPS

     HWFG posted a $3.2 million loss for the first quarter of 2008. This loss was due to $4.5 million in after-tax realized and unrealized losses on its $80 million notional amount of AAA-rated Commercial Mortgage Backed Securities (CMBS) total rate of return (TROR) swap position net of gains and losses on other CMBS and CMBS hedges.

6. LOANS HELD FOR SALE

     On April 30, 2008, management entered into an agreement with Federal Home Loan Mortgage Corp to sell 94 loans or $16.7 million of lower spread earning fixed rate single family mortgage loans. Subsequent to the agreement two loans paid off leaving 92 loans at $16.0 million. The transaction is expected to settle May 15, 2008 with an approximate $250 thousand net pre-tax gain. Mortgage servicing will be retained on the sale of these loans.

     Mortgage loans originated that were not originally intended for sale in the secondary market are accounted for at the lower of cost or fair value in accordance with FAS65,Accounting for Certain Mortgage Banking Activities.

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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 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 provides the following benefits to our stockholders:

1.	Diversification of the loan portfolio and economic and credit risk.
2.	Options to capitalize on the most favorable growth markets.
3.	The capability to deploy the Company’s diversified product mix and emphasize those products that are best suited for the market.
4.	The ability to price products strategically among the markets in an attempt to maximize profitability.

     Based upon HWFG’s financial performance and economic conditions, we expect the opening of two to three banking offices every 18 months through new branching. We evaluate financial institution acquisition opportunities but are value oriented. Acquisitions are expected to be accretive to earnings per share within a 12-month period.

     Since 1997, we have grown from 4 banking offices to 16 banking offices We have 11 full service banking offices on the Central Coast of California from Thousand Oaks to Atascadero along Highway 101, 3 banking offices in Johnson County, Kansas, in the fastest growing area of the Kansas City metro, and 2 offices in Scottsdale, Arizona. We will open our third banking office in the Phoenix metro area in May 2008 in Surprise, Arizona.

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Product Line Diversification

     We have broadened our product lines over the last 6 years to diversify our 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 expanded our consumer lending lines to provide Home Equity Lines of Credit. In 2001, we added internet banking and bill pay services to augment our in-branch services and consultation. In 2002, we further expanded our mortgage banking and brokerage activities in all of our markets. In 2004, we added the Overdraft Privilege Program and Uvest. Uvest expanded Harrington Wealth Management’s services to include brokerage and insurance products. During this past year, with emphasis on core deposit development, HWFG introduced the successful Power-Up account and Remote Deposit Capture.

Modern Financial and Investment Management Skills

     We have expertise in investment and asset liability management. Our Chief Executive Officer spent thirteen 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. Our Chief Investment Officer, hired in February 2007, brought over twenty years experience in the investment and risk management fields.

     We invest 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% over the related funding cost. We believe our ability to price loans and 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 are trying to maintain in the low to mid-teens, earnings per share growth, and additional franchise value creation through the growth of deposits, loans and wealth management assets. We may forego some short term profits to invest in operating expenses for branch development in an effort to earn future profits.

Profitability Drivers

     The factors that we expect to drive our profitability in the future are as follows:

1. Growing our low and non-costing consumer and commercial deposits and continuing to change the mix of deposits to fewer time based certificates of deposit. This strategy is expected to lower our deposit cost and increase our net interest margin over time. We have emphasized the development of low cost business accounts and our full-service, free checking and money market accounts for consumers.

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2.	Changing the mix of our loans 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 line of credit loans.
3.	Diversifying and growing our banking fee income through existing and new fee income sources such as our overdraft protection program and other deposit fees, loan fee income from mortgage banking, prepayment penalty fees and other loan fees, Harrington Wealth Management trust and investment fees, and other retail banking fees.
4.	Achieving a high level of performance on our investment portfolio by earning a pre-tax total return consisting of interest income plus net gains and losses on securities and related total return swaps over one month LIBOR of approximately 1.00% per annum. With our skills in investment and risk management, we utilize excess equity capital by investing in a high credit quality, mortgage and related securities portfolio managed to a short duration of three to six months.
5.	Controlling the interest rate risk of the institution and seeking high credit quality of the loan and investment portfolios. The Bank seeks to hedge the marked-to-market value of equity and net interest income to changes in interest rates by matching the effective duration of our assets to our liabilities using risk management tools and practices. The company maintains rigorous loan underwriting standards and credit risk management and review process.

     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:

Results of Operations

     The Company reported a net loss of $3.2 million for the three months ended March 31, 2008, as compared to net income of $1.9 million for the three months ended March 31, 2007. On a diluted earnings per share basis, the Company reported $.58 loss per share for the quarter ended March 31, 2008 compared to earnings per share of $.33 cents for the quarter ended March 31, 2007. The loss for the March 2008 quarter was exclusively due to a $4.5 million after-tax loss on CMBS TROR swaps, as spreads widened to unprecedented levels in the credit crisis of the last three quarters (See Financial Condition section on page 17 for more details). Excluding the net mark-to-market losses and gain on sale of securities, as well as using HWFG’s effective tax rate of 37.5%, core banking income after-tax was $1.3 million or 24 cents per diluted share in the March 2008 quarter compared to $1.9 million or $.33 per diluted share in the March 2007 quarter. The decline in after-tax core banking income in the March 2008 over March 2007 quarter is primarily due to a higher provision for loan losses and higher operating expenses (start-up of the Surprise, Arizona banking center and higher insurance costs) in the March 2008 quarter over the March 2007 quarter. HWFG expects to return to profitability in the June 2008 quarter.

     HWFG’s net interest income was $7.7 million in the March 2008 quarter versus $7.7 million in the March 2007 quarter but down from the $8.5 million in the December 2007 quarter. Net interest margin was 2.60% in the March 2008 quarter compared to 2.80% in the March 2007 quarter and 2.94% in the December 2007 quarter. The decline in net interest income and net interest margin from the December 2007 quarter was due to two factors: (1) the Federal Funds, Prime, and one month LIBOR rates fell by approximately 2.00 % in the March 2008 quarter on which over $500 million of loans and securities reprice, while approximately $600 million of HWFG’s Certificate of Deposit (CD) liabilities reprice over the first 9 months of 2008. This lag in repricing causes a minor mismatch in the timing of the repricing of its Prime and LIBOR-based loans and CD liabilities with a corresponding short-term decline in the net interest margin. (2) Approximately $8.6 million of additional loans became non-accrual or non-performing in the March 2008 quarter over the December 2007 quarter, with $152 thousand of accrued interest reversed in the March quarter, resulting in a 6 basis point decline in net interest margin in the quarter. HWFG expects recovery in its net interest income in the second

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half of 2008, assuming that the Fed Funds rate stabilizes between 1.75% and 2.00% and total non-accruing loans do not substantially increase from the March 31, 2008 levels.

     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.

	Three months ended							Three months ended
	March 31, 2008							March 31, 2007
(In thousands)	Balance		Income		Rate (6)			Balance		Income		Rate (6)
Interest earning assets:
Loans receivable (1)	$	789,079	$	14,200		7.21	%	$	760,259	$	14,992		7.92	%
FHLB stock		12,476		165		5.32	%		14,648		218		6.04	%
Securities and trading account assets (2)		367,620		5,126		5.58	%		302,918		4,031		5.32	%
Cash and cash equivalents (3)		17,761		74		1.68	%		12,088		77		2.58	%
Total interest earning assets		1,186,936		19,565		6.60	%		1,089,913		19,318		7.11	%
Non-interest-earning assets		40,001							52,122
Total assets	$	1,226,937						$	1,142,035
Interest bearing liabilities:
Deposits:
NOW and money market accounts	$	125,947	$	828		2.64	%	$	103,997	$	685		2.67	%
Passbook accounts and certificates of deposit		685,819		7,654		4.49	%		578,703		6,892		4.83	%
Total deposits		811,766		8,482		4.20	%		682,700		7,577		4.50	%
FHLB advances (4)		234,857		2,547		4.36	%		244,044		3,059		5.08	%
Reverse repurchase agreements		50,336		388		3.05	%		64,656		489		3.03	%
Other borrowings (5)		25,774		433		6.65	%		25,774		514		7.98	%
Total interest-bearing liabilities		1,122,733		11,850		4.23	%		1,017,174		11,639		4.62	%
Non-interest-bearing deposits		45,449							49,405
Non-interest-bearing liabilities		12,353							6,576
Total liabilities		1,180,535							1,073,155
Stockholders’ equity		46,402							68,880
Total liabilities and stockholders’ equity	$	1,226,937						$	1,142,035
Net interest-earning assets (liabilities)	$	64,203						$	72,739
Net interest income/interest rate spread			$	7,715		2.37	%			$	7,679		2.49	%
Net interest margin						2.60	%						2.80	%
Ratio of average interest-earning assets to average interest-bearing liabilities						105.72	%						107.15	%

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 non-interest earning 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 subordinated debt.
6)	Annualized.

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     The Company reported interest income of $19.6 million for the three months ended March 31, 2008, compared to $19.3 million for the three months ended March 31, 2007, an increase of $247 thousand or 1.3%. The increase during the periods was due primarily to the increase in volume of our investment portfolio, offset by a declining yield on the loan portfolio.

     The Company reported total interest expense of $11.9 million for the three months ended March 31, 2008, compared to $11.6 million for the three months ended March 31, 2007, an increase of $211 thousand or 1.8%. The increase in interest expense during the period was attributable to an increase in the volume of interest-bearing deposits during the period ending March 31, 2008, offset by a reduced cost of funds on FHLB advances and deposits.

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

	March 31
	2008			2007
	(Dollars in Thousands)
Balance at beginning of period	$	6,446		$	5,914
Charge-offs:
Real estate loans
Consumer and other loans		(1	)		(1	)
Total charge-offs		(1	)		(1	)
Net charge-offs		(1	)		(1	)
Provision for losses on loans		500			100
Balance at end of period	$	6,945		$	6,013
Allowance for loan losses as a percent of total loans outstanding at the end of the period		0.86	%		0.79	%
Ratio of net charge-offs to average loans outstanding during the period		0.00	%		0.00	%

     The provision reflects the reserves management believes are required based upon, among other things, the Company’s analysis of the composition, credit quality and shift to growth of its single-family real estate and construction loans and decrease in commercial and industrial and other segments of the loan portfolios. Our allowance for loan losses has four components: (i) an allocated allowance for specifically identified problem loans, (ii) a formula allowance for non-homogenous loans, (iii) a formula allowance for large groups of smaller balance homogenous loans and (iv) an unallocated allowance. Each of these components is determined based upon estimates that can and do change when the actual events occur. The formula allowance uses a model based on historical losses as an indicator of future losses and as a result could differ from the losses incurred in the future; however, since this history is updated with the most recent loss information, the differences that might otherwise occur may be mitigated. The specific allowance uses various techniques to arrive at an estimate of loss. Historical loss information, discounted cash flows, fair market value of collateral and secondary market information are all used to estimate those losses.

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     Banking fee and other income was $1.0 million in the March 2008 quarter compared with $1.1 million in the March 2007 quarter, down 3.6%. Harrington Wealth Management fee income and deposit fee income drove the growth in banking fees over the comparable March 2008 and December 2007 quarters. However, prepayment penalty fee income decreased due to lower levels of prepayments, and the net change in the cash surrender value of life insurance was reduced, as the underlying crediting rate declined with lower interest rates and total returns on investments.

	Banking Fee & Other Income
	(Dollars in thousands)
	March		December					March		March
	2008		2007		%			2008		2007		%
	Quarter		Quarter		Change			Quarter		Quarter		Change
Banking Fee Type
Mortgage Brokerage Fee, Prepayment Penalties & Other Loan Fees	$	147	$	204		-27.9	%	$	147	$	239		-38.5	%
Deposit, Other Retail Banking Fees & Other Fee Income		440		425		3.5	%		440		395		11.4	%
Harrington Wealth Management Fees		253		241		5.0	%		253		237		6.8	%
Cash Surrender Value of Life Insurance, net		193		257		-24.9	%		193		201		-4.0	%
Total Banking Fee & Other Income	$	1,033	$	1,127		-8.3	%	$	1,033	$	1,072		-3.6	%

     Operating expenses were $6.1 million in the March 2008 quarter compared with $5.7 million in the March 2007 and December 2007 quarters. The growth in expenses in the comparable quarter and sequential quarters of about $400 thousand, or 7%, can generally be attributed to the following:

(1)	an increase in FDIC deposit insurance (as HWFG’s FDIC insurance credit was fully exhausted) and other insurances of $130 thousand in the March 2008 quarter;
(2)	the start up expenses for the new banking center in Surprise, Arizona and related employees of approximately $30 thousand;
(3)	higher payroll taxes of $30 thousand and salary increases of $100 thousand incurred at the start of a new year;
(4)	lower deferral of loan origination expenses of approximately $60 thousand;
(5)	and an increase in other expenses of $50 thousand.

     HWFG is addressing several measures to contain operating costs and gain efficiencies.

Financial Condition

     HWFG continues to be affected by the dislocations in the credit markets, the weak real estate market, and the overall slowdown in the economy. Although its investment portfolio is of high credit quality, spreads on these largely mortgage investments have widened greatly due to the severe illiquidity and credit crisis in the markets, and as a result, the fair values have declined. HWFG performs independent analysis of the credit quality of the investment portfolio and its ability to earn all cash flows, and based on this analysis and the current state of the housing market, it expects to earn all the related principal and interest from these investments. However, a further weakening of the housing market and general economy could affect this expected outcome adversely. Also, although HWFG has not experienced concentrated credit quality issues in its loan portfolio due to its diversification by market and loan type and underwriting standards, the weak real estate markets and economy have affected some borrowers and related credits, with deterioration of credit quality in some already classified credits.

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Securities and Investment Activities

     The Company manages the securities portfolio in an effort to enhance net interest income and market value, as opportunities arise, and deploys excess capital in investments until such time as the company can reinvest into loans or other community banking assets that generate higher risk-adjusted returns.

     In the March 2008 quarter, investment returns were negatively affected, as AAA-rated CMBS spreads (Lehman AAA 8.5+ year index) widened markedly to the duration matched LIBOR benchmark by 157 bps, from 104 bps at December 31, 2007 to 261 bps at March 31, 2008. Over the five year period leading up to the credit crisis which began in the second half of 2007, this AAA-rated CMBS index spread averaged 33 bps, and ranged from a low of 22 bps to a high of 60 bps. $70 million of HWFG’s AAA-rated CMBS TROR swap positions expired by March 31, 2008 and were not renewed. The remaining $10 million notional amount expired at April 30, 2008 and was cross hedged until expiration. These positions were established to capitalize on a diversified portfolio of CMBS as spreads widened in the third quarter of 2007. As a result of the widening, HWFG incurred mark-to-market losses on these CMBS TROR positions of $4.5 million after tax in the March 2008 quarter. In the period from 2003 to 2006, HWFG had earned $3.7 million after-tax on such positions. In early April 2008, HWFG purchased about $50 million of AAA-rated CMBS in its available for sale (AFS) portfolio to earn the wide risk-adjusted spreads still available on these securities. Unrealized gains and losses on these securities will be reflected in equity (other comprehensive income).

     The fair value of securities classified as available for sale decreased to $331.4 million at March 31, 2008 as compared to $351.5 million at December 31, 2007, a decrease of $20.1 million, or 5.7%, due to net sales, amortization, and market value declines. As of the quarter ended March 31, 2008, the Company’s available for sale portfolio had an unrealized market value loss of $21.5 million, which is reflected as a reduction in stockholders’ equity on an after-tax basis. As of March 31, 2008, based on the current state of the housing market HWFG expects to earn all principal and interest on its investment securities; however, a more severe deterioration of the housing market could result in a material portion of the amount of the unrealized loss on investment securities at March 31, 2008 to be recognized in the income statement. If all cash flows are earned on the investments, the unrealized loss of $21.5 million on the AFS portfolio would be near zero with a substantial increase in shareholders’ equity and book value per share.

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

	Amortized
March 31, 2008	Cost		Fair Value
Mortgage-backed securities — pass throughs	$	59,025	$	58,990
Collateralized mortgage obligations		98,592		90,707
Commercial mortgage-backed securities		19,543		19,729
Asset-backed securities (underlying securities mortgages)		186,926		160,807
Asset-backed securities		1,814		1,201
	$	365,900	$	331,434

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	Amortized
	Cost		Fair Value
December 31, 2007
Mortgage-backed securities — pass throughs	$	69,570	$	69,101
Collateralized mortgage obligations		114,101		111,805
Asset-backed securities (underlying securities mortgages)		184,724		168,822
Asset-backed securities		1,900		1,738
	$	370,295	$	351,466

     Over the past three quarters, the rating agencies have revised downward their original ratings on thousands of mortgage securities which were issued during the 2005-2007 time period. As of March 31, 2008, the Company held $4.3 million in fair value of investments that were originally rated “Investment Grade” that have been downgraded to “Below Investment Grade” rated. As of March 31, 2008, the composition of the Company’s available for sale portfolios by credit rating was as follows:

	Amortized
	Cost		Fair Value
March 31, 2008
Agency	$	59,025	$	58,990
AAA		141,067		135,807
AA		118,424		101,099
A		34,613		26,229
BBB		5,832		4,990
Below investment grade		6,939		4,319
	$	365,900	$	331,434

	Amortized
	Cost		Fair Value
December 31, 2007
Agency	$	69,570	$	69,101
AAA		139,890		138,744
AA		115,084		106,090
A		41,621		34,691
BBB		170		170
Below investment grade		3,960		2,670
	$	370,295	$	351,466

     HWFG is not a program originator of sub-prime loans but does invest in investment grade sub-prime securities, largely rated AAA or AA by one or more rating agency, in a portion of its investment portfolio when the Company’s analysis indicates the spreads and return potential of these securities are high relative to the underlying risk. HWFG does not rely solely on the rating agencies’ analysis and ratings of sub-prime securities. Management performs its own independent analysis of the expected cash flows for more extreme delinquency, default, and estimates of losses incurred in the foreclosure and sale process to determine whether credit enhancement is sufficient for the spread to be earned relative to the risk of default. HWFG also reviews the nature of the issuers and their underwriting performance as well as the capabilities and performance of the servicers of the underlying loans and securities. HWFG has not invested in collateralized debt obligations (CDO’s) and does not anticipate doing so. As of March 31, 2008, the composition of the Company’s available for sale portfolio by type of security was as follows:

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	Amortized
	Cost		Fair Value
March 31, 2008
Agency	$	59,025	$	58,990
Prime		88,670		83,620
Commercial mortgage-backed securities		19,543		19,729
Alt-A		8,575		7,286
Subprime		185,984		158,837
Other		4,103		2,972
	$	365,900	$	331,434

	Amortized
	Cost		Fair Value
December 31, 2007
Agency	$	69,570	$	69,101
Prime		104,195		103,202
Alt-A		9,217		8,475
Subprime		183,065		166,715
Other		4,248		3,973
	$	370,295	$	351,466

     HWFG monitors its investments on an on-going basis and, at least quarterly, performs analysis on certain of its investments in order to ascertain whether any decline in market value is other than temporary. In the quarter ended March 31, 2008, the results of this analysis indicated that the additional decline in market value of one Net Interest Margin (NIM) security was other than temporary and, as a result, the affected security was written down by $70 thousand to its market value at that time. The affected security had previously been deemed impaired in the third quarter of 2007 and written down to its fair value as of that time. The portfolio of NIM securities of $2.4 million book value has been written down to $300 thousand over the last three quarters. These NIM securities were lower rated and more credit leveraged than HWFG’s other securities, as they are dependent on the excess interest spread and prepayment penalties of the securitizations rather than the principal of the underlying loans.

Loans

     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.

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     Asset quality deteriorated somewhat in the March 2008 quarter, as a few already criticized loans deteriorated in payment performance and became non-performing or non-accrual. At March 31, 2008, $12.0 million of loans were either non-accrual (over 60 days by Bank policy) or non-performing (over 90 days delinquent) as compared to $3.4 million at December 31, 2007. A $750 thousand land development loan on property near Ventura, California, was sold as real estate owned (REO) in January 2008 at no loss, as HWFG recovered all interest, fees, and expenses. The $12.0 million in non-accrual and non-performing loans at March 31, 2008 are the following:

(1) A total of $3.2 million in income producing, residential mortgage loans to one borrower in the Kansas City metro area

(2) A $6.2 million fully-entitled 47 unit residential lot development in California.

(3) A $1.8 million participation loan on a private residential lot development and golf course in California.

(4) $238 thousand in small commercial related credits.

(5) $605 thousand in 2 related single family mortgage loans.

     Given the growth in loans and HWFG’s credit risk analysis, $500 thousand was added to the allowance for loan losses in the March 2008 quarter. The allowance for loan losses was $6.9 million at March 31, 2008 or .86% of net loan balances.

     Net loans grew in the March 2008 quarter over both the December 2007 quarter and a year ago and in line with HWFG’s targeted levels. Net loans (including loans held for sale) were $799.1 million at March 31, 2008, compared to $782.6 million at December 31, 2007 (up 2.1%) and $754.3 million at March 31, 2007 (up 5.9%).

     As of March 31, 2008, HWFG transferred $16.7 million of its total loans, to Loans Held for Sale. Subsequently, the Company entered into an agreement with the Federal Home Loan Mortgage Company (FHLMC — Freddie Mac) on April 30, 2008, to sell $16.0 million (net of April 2008 pay-offs) of lower spread earning, fixed rate single family mortgage loans with an approximate pre-tax gain to HWFG of $250 thousand. This transaction is expected to settle on May 15, 2008.

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     The loan portfolio continues to be diversified among HWFG’s business lines as shown in the following chart:

HWFG Net Loan Growth and Mix
(Dollars in millions)

	March 31, 2008						December 31, 2007						March 31, 2007
				% of						% of						% of
Loan Type	Total			Total			Total			Total			Total			Total
Commercial Real Estate	$	267.4			33.1	%	$	266.3			33.6	%	$	259.4			34.1	%
Multi-family Real Estate		88.8			10.9	%		82.7			10.4	%		77.3			10.1	%
Construction (1)		134.1			16.6	%		126.5			16.0	%		119.7			15.7	%
Single-family Real Estate (3)		128.8			15.9	%		125.5			15.9	%		114.4			15.0	%
Commercial and Industrial Loans		116.8			14.5	%		117.8			14.9	%		111.8			14.7	%
Land Acquisition and Development		44.7			5.5	%		45.3			5.7	%		51.9			6.8	%
Consumer Loans		24.7			3.1	%		24.5			3.1	%		26.3			3.4	%
Other Loans (2)		2.9			0.4	%		2.8			0.4	%		1.8			0.2	%
Total Gross Loans		808.2			100.0	%		791.4			100.0	%		762.6			100.0	%
Allowance for loan loss		(6.9	)					(6.4	)					(6.0	)
Deferred fees		(1.7	)					(1.9	)					(1.9	)
Discounts/Premiums		(0.5	)					(0.5	)					(0.4	)
Net Loans Receivable	$	799.1					$	782.6					$	754.3

(1)	Includes loans secured by residential, land and commercial properties. At March 31, 2008, we had $50.1 million of construction loans secured by single-family residential properties, $41.2 million secured by commercial properties, $42.5 million for land development and $338 thousand secured by multi-family residential properties.
(2)	Includes loans collateralized by deposits and consumer line of credit loans.
(3)	Includes $16.7 million of Loans Held for Sale.

Deposits

     Retail and commercial deposits also grew in the March 2008 quarter over the comparable periods with a full quarter of favorable results in all markets for HWFG’s Power-Up program, which combines a checking account with a required automatic transaction and a premium money market account. Retail and commercial deposits were $804.6 million at March 31, 2008 compared to $785.8 million at December 31, 2007 (up 2.4%) and $733.1 at March 31, 2007 (up 9.8%). Not included in these balances are $75.4 million and $50.5 million at March 31, 2008 and December 31, 2007, respectively, of California State deposits. The Power-Up program gained $48.8 million in deposits in the quarter improving the mix of core deposit accounts. The total cost of deposits was 4.05% at March 31, 2008 compared to 4.49% at December 31, 2007, and 4.51% at March 31, 2007.

     HWFG is also focused on developing more low and non-costing deposits through a dual pronged program: (1) a sales development and incentive program throughout its banking centers focused on calling on viable commercial and retail DDA prospects, and (2) an incentive and training program for all business and commercial real estate lenders to gather more core deposits from commercial customers in a team approach with the banking centers. HWFG is also adding remote deposit products to enhance customer convenience.

FHLB Advances

     Advances from the Federal Home Loan Bank (“FHLB”) of San Francisco increased to $232.0 million at March 31, 2008, compared to $227.0 million at March 31, 2007, or 2.2%. For additional information concerning limitations on FHLB advances, see “Liquidity and Capital Resources.”

-21-

Stockholders’ Equity

     Stockholders’ equity was $42.7 million at March 31, 2008, as compared to $55.0 million at December 31, 2007, a decrease of $12.3 million or 22.5%. Book value per share, therefore, was $6.96 at March 31, 2008 compared to $9.91 at December 31, 2007. The decrease in stockholders’ equity is due to a decrease of $9.8 million after-tax on the AFS portfolio due to the extreme widening of spreads, a decrease of $3.3 million after-tax in the market value of cash flow hedges due to lower interest rates, and a net operating loss of $3.2 million in the first quarter of 2008. Additionally, $707 thousand of dividends were declared in the first quarter of 2008. Stockholders’ equity was positively influenced by $4.3 million in capital contributions, $233 thousand of additional paid in capital from options exercised, and $89 thousand from stock compensation expensed.

     On April 23, 2008, HWFG completed its previously announced private placement of common stock, raising $4.3 million in proceeds by selling 550 thousand shares at $7.75 per share. $2.2 million of this offering closed as of March 31, 2008, and $2.1 million closed on April 23, 2008, after receiving regulatory approval for a rebuttal of control filing. This capital will be used to support the company’s capital base in the current environment and for growth of the banking franchise. HWFG is taking steps to further increase its capital base with an emphasis on strategies that are not dilutive to its book value per share. To that end, on April 25, 2008, it reached agreement to sell its real estate investment in Princeville, Hawaii for $1.2 million with an expected pre-tax gain of approximately $800 thousand and sold $16.0 million in lower spread earning mortgage loans for an additional pre-tax gain of approximately $250 thousand.

Liquidity and Capital Resources

     Liquidity—The liquidity of Los Padres Bank was 7.68% at March 31, 2008 as compared to 14.5% at March 31, 2007. 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 March 31, 2008, Los Padres Bank’s “liquid” assets totaled approximately $77.1 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 March 31, 2008, the Bank had $232.0 million in FHLB advances and had $206.2 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 $58.1 million based on excess collateral pledged at the FHLB as of March 31, 2008.

     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 annual advance notice to the Office of Thrift Supervision (“OTS”), at which time the OTS may object to the proposed dividend payments. 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 March 31, 2008, Los Padres Bank met the capital requirements of a “well capitalized” institution under applicable OTS regulations. At March 31, 2008, the Bank’s Tier 1 (Core) Capital Ratio was 6.7%, Total Risk-Based Capital Ratio was 10.2%, Tier 1 Risk-Based Capital Ratio was 9.5% and Leverage Ratio was 6.7%.

     On November 1, 2007, HWFG re-affirmed its share repurchase program of up to 200,000 shares as market conditions warrant. No shares were repurchased by the Company in 2007 or the March 2008 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, 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 funding decisions with respect

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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, 2007. There are no changes to these policies as of March 31, 2008.

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 2007 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 March 31, 2008, these prepayment assumptions varied from 3.2% to 51.3% for fixed-rate mortgages and mortgage-backed securities and varied from 3.4% to 28.7% for adjustable-rate mortgages and mortgage-backed securities.

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     The following table sets forth at March 31, 2008, the estimated sensitivity of the Bank’s MVPE to parallel yield curve shifts using the Company’s internal market value calculation which was implemented in the March 2008 quarter. 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) (1)
	-300			-200			-100			Base	+100			+200			+300
Market value gain (loss) in assets	$	33,521		$	23,144		$	11,686				($17,955	)		($39,056	)		($60,662	)
Market value gain (loss) of liabilities		(25,548	)		(17,057	)		(8,179	)			7,663			19,137			32,881
Market value gain (loss) of net assets before interest rate contracts		7,973			6,087			3,507				(10,292	)		(19,919	)		(27,781	)
Market value gain (loss) of interest rate contracts		(19,530	)		(13,673	)		(6,660	)			6,330			12,352			18,086
Total change in MVPE (2)		($11,557	)		($7,586	)		($3,153	)			($3,962	)		($7,567	)		($9,695	)
Change in MVPE as a percent of:
MVPE (2)		-18.85	%		-12.37	%		-5.14	%			-6.46	%		-12.34	%		-15.81	%
Total assets of the Bank (3)		-1.01	%		-0.68	%		-0.29	%			-0.25	%		-0.46	%		-0.56	%

(1)	Assumes an instantaneous parallel change in interest rates at all maturities.
(2)	Based on the Company’s pre-tax tangible MVPE of $61.3 million at March 31, 2008.
(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(T). Controls and Procedures

Evaluation of Disclosure 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, Chief Operating Officer and 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, Chief Operating Officer and 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.

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Changes in Internal Control over Financial Reporting

     For the quarter endedMarch 31, 2008, 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 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, Chief Operating 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 first quarter of 2008 to the risk factors discussed in the Company’s 10-K for the year ended December 31, 2007.

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

     During the first quarter of 2008, the Company completed a private placement of common shares to eleven accredited investors and directors of the Company and Bank as follows:

				Number of
		Price		Shares		Amount
Date	Title of Security	Per Share		(In thousands)		(In thousands)
March 27, 2008	Common	$	7.75		281	$	2,178
April 23, 2008	Common		7.75		269		2,085
Total					550	$	4,263

     The placement was sold on a best-efforts basis by the Company’s officers and directors, and no commissions or investment banking fees were paid for the sale of the shares. $2.1 million of this offering or 269 thousand shares were subject to regulatory approval of a rebuttal of control filing and closed on the April 23, 2008. The sale of the shares was completed in reliance on the exemption provided by Section 4(2) and Regulation D of the Securities Act of 1933. The proceeds from this offering will be used for general corporate purposes of the Company, including augmenting capital at the Company’s subsidiary Bank.

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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 Operating Officer filed herewith.
31.3	Section 302 Certification by Chief Financial Officer filed herewith.
32	Section 906 Certification by Chief Executive Officer, Chief Operating Officer and Chief Financial Officer furnished herewith.

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.
May 14, 2008	By:	/s/Craig J. Cerny
		Craig J. Cerny
		Chairman of the Board and Chief Executive Officer (Principal Executive Officer)
May 14, 2008	By:	/s/William W. Phillips, jr.
		William W. Phillips, Jr.
		President, Chief Operating Officer (Principal Executive Officer)
May 14, 2008	By:	/s/Kerril Steele
		Kerril Steele
		Sr. Vice-President, Chief Financial Officer (Principle Financial and Accounting Officer)

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